22/3/2014: Mind the Gap... Primary Balances Gap...

Here's a chart from Pictet showing precisely why all the austerity has been the case of too-little-to-date when it comes to stabilising debt ratios across the euro area:

And do note 'best in the lot' country of Ireland against the 'laggard' Italy... One wonders, how Messrs Kenny & Noonan are going to plug that gap while delivering tax cuts and jobs programmes?..

8/7/2013: IMF on Euro Area: Repetition in the Endless Unlearning of Reality

IMF released its statement on 2013 Article IV Consultation with the Euro Area

The Statement reads (emphasis mine):
"Policy actions over the past year have addressed important tail risks and stabilized financial markets. But growth remains weak and unemployment is at a record high."

So what needs to be done, you might ask? Oh, nothing new, really. Euro area needs:
-- To take "concerted policy actions to restore financial sector health and complete the banking union". Wait… err… this was not planned to-date? Really?
-- "continued demand support in the near term and deeper structural reforms throughout the euro area remain instrumental to raise growth and create jobs". In other words: find some dish to spend on stuff and hope this will do the trick on short-term growth. Reform thereafter.

Not exactly encouraging? How about this: "…the centrifugal forces across the euro area remain serious and are pulling down growth everywhere. Financial markets are still fragmented along national borders and the cost of borrowing for the private sector is high in the periphery, particularly for smaller enterprises. Ailing banks continue to hold back the flow of credit." So the solution is - more credit? Now, what did we call credit in old days? Right… debt, so: "In the face of high private debt and continued uncertainty, households and firms are postponing spending—previously, this was mainly a problem of the periphery but uncertainty over the adequacy and timing of the policy response is now making itself felt in falling demand in the core as well." Wait a second, now: more credit… err… debt will solve the problem, but the problem is too much debt… err… credit from the past…

Ok, from IMF own publication earlier this year, what happens when credit - debt - is let loose:

Source: http://blog-imfdirect.imf.org/2013/03/05/a-missing-piece-in-europes-growth-puzzle/


Just in case you need more of this absurdity: "…reviving growth and employment is imperative. This requires actions on multiple fronts—repairing banks’ balance sheets, making further progress on banking union, supporting demand, and advancing structural reforms. These actions would be mutually reinforcing: measures to improve credit conditions in the periphery would boost investment and job creation in new productive sectors, which in turn would help restore competitiveness and raise growth in these economies. A piecemeal approach, on the other hand, could further undermine confidence and leave the euro area vulnerable to renewed stress." Oh, well, 5 years ago we needed

1. 'actions on repairing banks balance sheets' - five years later, we still need them;
2. actions on 'supporting demand' - aka, no tax increases and some investment stimulus - five years on, we still need them;
3. actions on 'advancing structural reforms' and five years on, we still need them too;
4. "measures to improve credit conditions in the periphery would boost investment and job creation in new productive sectors" - wait a second ten years ago we had easy credit conditions in the periphery and they failed comprehensively to 'boost investment and job creation in new productive sectors', having gone instead to fuel property and public spending bubbles… five years since the start of the crisis, we now should expect a sudden change in the economies response to easier credit supply?

IMF is more sound on banks: "bank losses need to be fully recognized, frail but viable banks recapitalized, and non-viable banks closed or restructured". But, five years, bank losses needed to be fully recognised too and we are still waiting. And when it comes to closing or restructuring non-viable banks, pardon me, but where was the IMF in the case of Ireland when the country was forced by the ECB to underwrite non-viable banks with taxpayers funds?

"A credible assessment of bank balance sheets is necessary to lift confidence in the euro area financial system." Ok, we had three assessments of euro area banks - none credible and all highly questionable in outcomes. Five years in, we are still waiting for an honest, open, transparent assessment.

Cutting past the complete waffle on the banking union and ESM, "The ECB could build on existing instruments—such as a new LTRO of longer tenor coupled with a review of current collateral policies, particularly on loans to small and medium-sized enterprises (SME)—or undertake a targeted LTRO specifically linked to new SME lending." Ooops, I have been saying for years now that the ECB should create a long-term funding pool for most distressed banks, stretching 10-15 years. Five years into the crisis - still waiting.


On structural reforms, IMF is going now broader and further than before and I like their migration:

"For the euro area, …a targeted implementation of the Services Directive would remove barriers to protected professions, promote cross-border competition, and, ultimately, raise productivity and incomes. A new round of free trade agreements could provide a much-needed push to improve services productivity. In addition, further support for credit and investment could be achieved through EIB facilities. The securitization schemes proposed by the European Commission and the European Investment Bank could also underpin SME lending and capital market development." Do note that the last two proposals are still about debt generation (see above).

"At the national level, labor market rigidities [same-old] should be tackled to raise participation, address duality—which disproportionally hurts younger workers—and, where necessary, promote more flexible bargaining arrangements. At the same time, lowering regulatory barriers to entry and exit of firms and tackling vested interests in the product markets throughout the euro area would support competitiveness, as it would deliver a shift of resources to export sectors [ok, awkwardly put, but pretty much on the money. Except, greatest protectionism in the EU is accorded to banks and famers, and these require first and foremost restructuring]."

In short - little new imagination, loads of old statements replays and little irony in recognising that much of this has been said before… five years before, four years before, three years before, two years before, a year before… you get my point.

14/5/2013: Ending German Austerity... and then what?

Everyone is running around with the latest catch-phrase designed to phase out thought: Germany must end austerity. So, folks, what will happen should Germany really end austerity?

Whatever it might mean, suppose end of austerity implies Germany moves from the currently projected general government deficit of -0.31% of GDP to a deficit of -3.31% of GDP, thus increasing Government spending by EUR81 billion in 2013. What then?

1. Historically (since 1997 through forecast for 2018 by the IMF) EUR1 billion increase in German GDP is associated with EUR0.21 billion rise in German Current Account, although the relationship is not strong enough to call it statistically. In other words, Germans do not spend their surpluses on goods, like other economies do. They are more likely to increase their current account surpluses when income rises.
2. Also, historically, EUR1 billion in German GDP growth is associated with EUR0.67 billion rise in German investment. 
3. Furthermore, shrinking Government deficits in Germany are associated with widening of current account deficits (see chart below) and declining overall investment in the economy
4. EUR81 billion in the euro area overall context is nothing but pittance, even before it gets diluted by German own internal demand.

Note: Change in current account balance is negative when current account deficit is falling

Let's not draw many causal conclusions out of the above, but the clear thing is: Germans do not tend to spend their budget deficits on imports of goods and services at any rate worth mentioning.

Herein rests the problem for the policy idiots squad: if Germans spend EUR81 billion more on Government, short of mandating that Berlin ships cheques out to the Euro Periphery, what on earth will this end of austerity do to help Ireland, Portugal, Spain, Greece or Italy? Add German tourists' bodies on the beaches of Italy and Greece? Fly truckloads of German youths to Spain for booze-ups? Increase sales of Fado music 700-fold? Restart bungalows sales craze in Lahinch? Open German savings accounts in Cyprus? Will these end Euro area periphery crises?

Neither one of the countries in the Euro periphery makes much of what Germans want. Irish trade with Germany is robust, but it is dominated heavily by the non-Irish corporates who channel tax arbitrage via trade, leaving little on the ground in Ireland to call 'national income'. 

So what if Germany 'ends austerity'? German demand for goods and services will go up. But it will be demand for German-made and Core-made goods and services, plus stuff from Asia Pacific. It will also push German unemployment from 5.6% to 5.4% or maybe 5.3%, depending on how many more peripheral countries' emigrants Germany can absorb. 

These might be good things for Germany. But sure as hell, if German stimulus were to work like neo-Keynesianistas hope it will, pressure on ECB to keep rates low and banks liquidity ample will be reduced, while internal German rates imbalance will amplify. German bond yields might also rise, which will only add to the already hefty debt servicing pressures in euro periphery. Does anyone think it might be a good idea for ECB to hike rates then? No?

Truth is - there is no substitute for getting Euro periphery's economies in order. German stimulus or 'end of German austerity' can sound plausibly nice, but the real problem in the EU is not German sluggish demand (it is a part of German problem, to be frank, but not the major one when it comes to the Euro area as a whole). The real problem in the EU is lack of real, tangible, non-leveraged growth sources.

30/4/2013: The horrors of Euro-austerity: Part 1

The horrors of Euro-austerity are so vivid in this chart...

It is obvious (to anyone who is economically blind or illiterate in a basic Cartesian sense) that 'sustaining growth' would have required deficits of ugh... ogh... like... say 5% pa over 2009-2013 period? Or 6%? To cumulate these to over 25-30% of GDP in added debt? What could have possibly gone wrong?..

26/4/2013: Meanwhile, Patients Still Run the Euro Policy Asylum...

Headlines (via Eurointelligence.com):

• Angela Merkel: "The European Central Bank would really have to increase the interest rates for Germany";
• Angela Merkel also said that for other countries, the ECB would have to provide more liquidity for companies;
• German economics minister Phillip Rosler issued a statement to confirm that the ECB was still an independent central bank;
• ECB officials, meanwhile, played down expectations that a rate cut would have much of an effect;
• Joerg Asmussen did not rule out an interest rate cut, but was playing down expectations. He said lower interest rates could work in ways not intended by the ECB, and added that they had virtually no effect in the periphery due to the broken transmission mechanisms;
• Benoit Coeure as saying that the ECB had done what it can. It was now up to all the European institutions to find ways to solve the problem;
• Wolfgang Schauble said Italy’s problems were a lack of reforms, and that it would be wrong to blame others for their own misfortune. "... in the eurozone everybody had to solve their own problems. And that is is what Italy needed to do as well. There was no point in asking Germany to take on more debt. Everybody had to run their government in a responsible way";
• Schauble also said that it would be wrong for member states to depart from austerity path, saying the eurozone problems had nothing to do with strict budget rules, and that "somebody should tell Barroso that".

Conclusion: rest assured - the screw up known as "Euro area policy" will go on unabated no matter what JMBarosso & Co are saying.

ECB rate cut might come or it might not, but it will be minor (25bps) and one-off (with rates unchanged throughout the rest of the year) and it will do no difference whatsoever, other than fuel anti-inflationary rhetoric in pre-election Germany.

Fiscal policy will remain largely unchanged with some states (France, Italy, even Spain?) adopting an Irish-government approach to 'stimulus': find one-off non-tax, like pensions funds expropriation, to fund 'jobs creation programme', while leaving net fiscal adjustments intact. Which will, of course, amount to short-term reallocation of productive funds to unproductive GDP supports, with medium-term negative impact of tax increases and reduced confidence in economic institutions.

21/4/2014: Sunday Independent article

My article on Euro area austerity policies failure in Sunday Independent - it's not in levels of cuts, but in the lack of real change from the status quo.

25/2/2013: When 8 out of 10 economists agree?

Eurointelligence today published a neat summary of some of the prominent economists' opinions about the Euro area macroeconomic policies:


"Motivated by the recent controversy between Olli Rehn and economic analysists critical of austerity (including from the IMF), El Pais garners the opinions of 10 prominent economists on whether the European Commission is to blame for Europe's poor economic prospects. ... Some quotes:

• Paul de Grauwe says: "the EU authorities are responsible for the recession … the Eurozone's macroeconomic policy is a disaster"
• James Galbraith says: "the Commission's leadership seems to work in an alternate reality, indifferent to the consequences of its policies"
• Luis Garicano says: "Brussels is incomprehensibly dogmatic [and] neglects the probability of a serious accident"
• José Manuel González-Páramo says: "in a way we're all responsible for the recession … The Commission's proposals are advanced and forward-looking"
• Paul Krugman blogged "these people have done terrible damage and stll have the power to continue"
• Desmond Lachman says: "The Commission was very slow to draw the conclusion that the IMF did: excessive austerity with the Euro as straitjacket is counterproductive"
• Jonathan Portes says: "The optimistic conclusion is that [Rehn] is admitting the justifications for austerity are crumbling"
• Dani Rodrik says: "The Commission has been fooling itself with the illusion that the structural reforms it spouses can stimulate the economy in the middle of an activity plunge made worse by austerity measures"
• Guntram Wolff says: "Considering all the constraints the Commission is subject to, it's adopted generally adequate policies, trying to strike a balance between fiscal consolidation and supporting the economy"
• Charles Wyplosz says: "The Commission makes politically correct forecasts knowing full well they will have to appear surprised when they are not fulfilled."

Paul Krugman also labeled Olli Rehn “the face of denialism”. According to Kurgman, the recent declines in sovereign spreads was due to the LTRO and OMT, and "while unit labour costs have converged a little, they have only converged by a fraction of what needs to be done".

Kevin O’Rourke via the Irish economy blog: “You might have thought that the disastrous but wholly unsurprising eurozone GDP numbers indicate that the bloc is in a bad way, and will continue to be so until the current macroeconomic policy mix is jettisoned. Happily, Olli “Don’t mention the multiplier” Rehn has good news for us: The current situation can be summarised like this: we have disappointing hard data from the end of last year, some more encouraging soft data in the recent past and growing investor confidence in the future. Thank goodness for that.”

I find it very interesting that virtually not a single of the above quotes, save for Krugman's passing reference to labor costs, distinguishes between the necessary structural reforms and pure, brutish, line-across-the-sky cuts that have been adopted by the EU. And even Krugman's references is hardly sufficient - labor costs in and by themselves are not and should not be the target for structural reforms. Instead, market structure, institutional competitiveness, cartel-like structure of some protected sectors, legal systems, moral hazard and other aspects of the crisis should be.

Oh, and lets face it - the drive toward 'austerity' is not only the job of the EU Commission, but also of the EU Parliamentarians (link here), plus all the nation states that adopted the Fiscal Compact.

Olli is nothing more than a mouthpiece for the consensus policies that are continuing to transfer economic crisis burden from the elites to the real economy.

23/8/2012: More time for Greece is not an asnwer

As Greek PM, Samaras, heads for talks with Angela Merkel this Friday, here's why 2 more years won't work for Greece: link here.

21/7/2012: Globe & Mail July 2012: Italian dilemma

My article on Italian debt v growth dilemma for Globe & Mail: link.

7/6/2012: Sunday Times May 13, 2012

This is an unedited version of my Sunday Times article from May 13, 2012.

With Greek and French elections results out last week, the European leadership is rapidly shifting gears into neutral when it comes to austerity. Within two weeks surrounding the French elections, the Commission has issued a set of statements pushing forward its ‘growth budget’, and issued new proposals for enhancing European investment bank.

This, of course, is a classic rhetoric of damage limitation, contrasted by the reality of the currency union that is in the final stage of the crisis contagion. Having spread from economic to financial and subsequently to fiscal domains of the euro area, the cancer of Europe’s debt overhang has now metastasised to its political leadership. And the financial pressures are back on. Since the late March, credit default swaps spreads have widened for all but two core euro area states (excluding Greece), with an average rate of increase of 10.6%, implying that the markets-priced cumulative probability of the euro zone country default within the next 5 years is now, on average, close to 24%.

Next stop is a period of extended navel-gazing, with summits and ministerial dinners, contrasted by the European electorate moving further away from the centre of power gravity.

By autumn we will be either in a selective euro unwinding (Greece exiting) or in a desperate policies u-turn into mutualisation of the national and banking debts, supported by a return to high pre-2011 deficits and an acceleration of the debt spiral.

The former is going to be extremely disruptive in the short run. Portugal will be watching the Greeks closely, while Spain and Italy will be sliding into unrest. If properly managed, Greek and, later Portuguese exits will allow euro area to cut losses. With a stronger ESM balancesheet, euro area will buy more time to deal with the markets panic, but it will still require serious structural adjustments to shore up the failing currency union. Mutualisation of debt will remain inevitable, but deficits run up can be avoided in exchange for slower reduction in deficits.

The latter option of starting with mutualising debt, while allowing for new deficit financing of growth stimuli will be a road to either a collapse of the common currency within a decade or a Japan-style stagnation. The central problem is that the current political dynamics are forcing the euro area onto the path of growth stimulation amidst a severe debt overhang. The lack of real catalysts for economic recovery means that a temporary stimulus will have to be replaced by sustained debt accumulation. In other words, the political cure to the crisis a-la Hollande, not the austerity, will spell the end of the euro zone.

There are two sides to this proposition.

Firstly, the villain of the European austerity is a bogey. In 2011-2012, euro area fiscal deficits will average 3.7% of GDP per annum, identical to those recorded in 2010-2014 and deeper than in any five-year period from 1990 through 2009, including the period covering the recession of the early 1990s. The ‘savage austerity’, as planned, is expected to result in historically high five-year average deficits. At over 3.2% of GDP, 2012 forecast deficit for the common currency zone will be 6^th largest since 1990.

Instead of shrinking, euro area governments over-spending will remain relatively static under the current ‘austerity’ path. Per IMF, general government revenues will account for 45.6% of GDP in 2011-2012, well ahead of all five-year period averages since 1990 except for 1995-1999 when the comparable figure was 46% of GDP. The same comparative dynamics apply to the government expenditure as a share of GDP.

In other words, euro area voters are currently revolting against the austerity that, with exception of Greece and Ireland, is hardly visible anywhere.

Secondly, the talk about Europe’s growth stimulus is nothing more than a return to the policies that have led us into this crisis in the first place. In 1990-1994, euro area public debt to GDP ratio averaged 59%. By 2005-2009, the average has steadily risen to 71%. In 2010-2014, the forecast average will stand at 89%, identical to the ratio in 2011-2012. Euro area is now firmly stuck in the policy corner that required accumulation of debt in order to sustain economic activity. Since the mid-1990s, the EU has produced one growth policy platform after another that relied predominantly on subsidies and public investment.

By the mid-2000s, the EU has exhausted creative powers of conceiving new subsidies, just as the ECB was flooding the banking system with cheap liquidity. At the peak of the subsequent sovereign debt crisis, in March 2010, Brussels came up with Europe 2020 document – yet another ‘sustainable growth’ scheme through featuring more subsidies and public investment.

At the member states’ level, private debt-fuelled construction and banking bubbles were superimposed onto public infrastructure investments schemes and elaborate R&D and smart economy bureaucracies as the core drivers for jobs creation. State spending and re-distribution were the creative force driving economic improvements in a number of countries. Amidst all of this, euro area overall growth remained severely constrained. For the entire period between 1992 and 2007, euro area real economic growth averaged less than 2.1% per annum, while government deficits averaged over 2.5%. The only three years when public deficit financing was not the main driver of growth were the peaks of two bubbles: 2000, and 2006-2007.

In brief, Europe had not had a model for sustainable growth since 1992 and it is not about to discover one in the next few months either.

Which brings us to the core problem facing the European leadership – the problem of debt overhang.

As a research paper by Carmen M. Reinhart, Vincent R. Reinhart and Kenneth S. Rogoff published last week clearly shows, “major public debt overhang episodes in the advanced economies since the early 1800s [were] characterized by public debt to GDP levels exceeding 90% for at least five years.” The study found “that public debt overhang episodes are associated with growth over one percent lower than during other periods.” Across all 26 episodes studied, “the average duration …is about 23 years.”

Now, according to the IMF data, the euro area will reach the 90% debt to GDP bound in 2012 and will remain there through 2015. Statistically, the euro area will be running debt levels in excess of 90% through 2017. Between 2010 and 2017, IMF forecasts that seven core euro area states will be facing debt to GDP ratios at or above 90%. Of the four largest euro area economies, Germany is the only one that will remain outside the debt overhang bound. Increasing deficits into such a severe debt scenario would risk extending the crisis.

After two years of half-measures and half-austerity, the euro as a currency system is now less sustainable. The survival of the euro (even after Greek, Portuguese and, possibly other exits) will depend on structural reforms, including change in the ECB mandate, political federalisation and fiscal harmonisation beyond the current Fiscal Compact treaty.

The real problem Europe is facing in the wake of the last week’s elections in Greece and France is that traditional European elites are no longer capable of governing with the tools to which they became accustomed over decades of deficits and debt accumulation, while the European populations are no longer willing to be governed by the detached and conservative elites. Not quite a classical revolutionary situation, yet, but getting dangerously close to one.

CHARTS: 

Box-out:

This was supposed to be a boom year for car sales as the threat of getting an unlucky ‘13’ stuck on your shiny new purchase for some years was supposed to spell a resurgence in motor trade fortunes. Alas, the latest stats from the CSO suggest that this hoped-for prediction is unlikely to materialise. In the first four months of 2012, new registrations of all vehicles have fallen 8.5% year on year and 60% on 2007. New private cars registrations have suffered an even deeper annual fall, down 10.2% year on year although since the peak they are down ‘only’ 56%. The news of the motor trade suffering is hardly surprising. Unemployment stuck above 14%, fear of forthcoming tax increases in the Budget 2013, plus the dawning reality that sooner or later interest rates (and with them mortgages costs) will climb sky-high are among the reasons Irish consumers continue to stay away from purchasing large ticket items. Cyclical consumption considerations are also coming into play. Over the last 4 years, Irish households barely replaced their stocks of white goods. Given the life span of necessary household appliances, the households are likely to prioritize replacing ageing dishwasher or a fridge over buying a new vehicle. Families compression with children returning back to parental homes to live and grandparents taking over expensive crèche duties are also likely to depress demand for cars. Lastly, there is a pesky consideration of the on-going deleveraging. Irish households have paid down some €36 billion worth of personal debts and mortgages in recent years. Still, Irish households remain the second most indebted in the Euro area. New cars registrations fall off in 2012 shows that in the end, sanity prevails over vanity and superstition, at the detriment to the car sales industry. 

14/5/2012: Euro area austerity - a chart

Austerity in Europe? Ok, table below shows General Government expenditure as % of nominal GDP in 2011-2012 compared to 2000-2007 average.

Chart below shows nominal values of General Government expenditure, in billions of euros.

Chart above clearly shows that during the entire crisis, euro area General Government Expenditure dipped  only once - in 2011 compared to 2010. The 'savage' cut was €13.02bn for EA12 combined, or 0.14% of 2011 GDP. Continuing with 'savage austerity', 2012 is forecast by the IMF to post General Government Expenditure increase of €43 billion for EA12 and €43.9 billion for EA17. By the end of 2012, under 'severe austerity', euro area Governments will be spending €30 billion more than in 2010.

Things get even worse under the 'savage cuts' of 2013. In 2013, EA12 governments will be spending €66.2 billion more than in 2012 and €96.2 billion more than in 2010.

Oh, yes, and the trend continues into 2017 projections by the IMF.

In family analogy, 'Darling, with one of our jobs lost, try not to buy a fancier Gucci bag, next time you go out for groceries!' 

12/12/2011: Are debt repayments to be blamed for growth collapse?

Some of the paper have clearly reached a bizarre level of Keynesian paranoia. Behold one example - The Guardian today (link here) screaming "Debt repayment is driving the EU back to recession".

While I agree with the idea that EU (more like the Euro zone to be accurate - do note that, folks from the Guardian) is heading into another recession, I highly doubt the cause of this is 'debt repayment' (note that the tense suggests that it is currently ongoing repayment) fault. Here's why:

Table above, taken from the IMF WEO September 2011 database clearly shows that not a single euro area member state is currently repaying its debts.

And in fact, as the table below details, NOT A SINGLE euro area state will be repaying any of its debts until the earliest 2014, when Greece is expected to start paydowns on its debts (under very rosy assumptions, of course):

Interestingly, IMF expects that in 2015 and 2016 overall debt levels will continue rising in ALL member states except for Greece.

So, run by me again that headline from the Guardian?