Category Archives: ECONOMICS

WORLD ECONOMIC DOWNTURN: Yet more evidence

Shock and surprise greeted hundreds of holiday makers recently when they arrived at the airport to pick up their hire cars.  Europcar, one of the most trusted hire car companies appear to have fallen on hard times, as the quality of their fleet is called into question.

What next?

DAVID CAMERON USES VETO AND EUROPE CARRIES ON REGARDLESS

David Cameron used the diplomatic equivalent of the nuclear deterrent in his negotiations with the Euro zone nations, yet the results were less than impressive.

There has been a lot of hot air floating around the commons and else where over the last few days, however, as usual Ed Miliband is failing to make any headway over the issue.  His beloved brother however hit the nail on the head.

“This is the first veto in history not to stop something. The plans are going right ahead. It was a phantom veto against a phantom threat”

What has been revealed over the last few days is just how naive, inadequate and unbelievable has been the stance by David Cameron over the Euro zone issue.

It now transpires that there was little if any networking or laying the groundwork before the summit took place.  Indeed even up until the final moments before David Cameron had his fateful meeting, his European “partners” knew very little about the demands he was about to make.

The UK, it turns out were isolated and out of the loop before the summit even started.  There is little wonder, that the other European member states were not in a listening mood.

It appears either David Cameron and his advisers were completely incompetent, or a decision had already been made that a deal could not be brought back to the House of Commons no matter what.

What David Miliband got exactly right, is that you do not “use” your veto unless you will gain an advantage in doing so.  You can “threaten” a veto, but it is something you should not use, if you want it’s effect to benefit you.

In this case we can see exactly why the veto was so badly used.  The other 26 countries will do exactly what they like in any case.  The UK now has fewer friends or allies and very little influence on the way ahead.

EURO ZONE DEBT – are we looking at this from the wrong perspective?

The Eurozone has many problems which appear to be further highlighted with every day that passes.  The markets are getting themselves into a tizzy at every rumour or politician’s sweaty brow, while the car crash which is the Euro zone crisis continues to play out.

The problems are familiar now.  We have:

  1. Countries who should never have been allowed to join the Euro in the first place
  2. A lack of a decision making framework that would encourage financial stability
  3. 17 different economic policies
  4. 17 central banks
  5. 17 finance ministers
  6. 17 heads of government, many of which lead and have to satisfy an array of coalition partners
  7. A bureaucratic and long winded European decision making process
  8. One interest rate set for 17 different economic regions
  9. No convergence of economic indicators
  10. Fiscal divergence
  11. Different tax regimes
  12. Cultural differences regarding the role of the state
The list could go on, but really it doesn’t need to.
My opinion on the outcome of the Euro is based on all of these factors and there are 3 main options
  • Jettison the weaker economies often referred to as the “southern economies”, leaving a core Euro zone of a few northern European countries and continue tightening fiscal and political union.
  • Split the Euro into 2 currencies – a northern Euro and a Southern Euro if you like
  • Quick decision making bringing rapid convergence of fiscal, tax and political union, taking economic decisions away from the peripheral economic zones and a larger role for the President of Europe and the European Central Bank (ECB) – ensuring the knowledge that there will always be enough money to keep the Euro going
The first option appears to be by far the most likely at the moment, but is still unthinkable although the rumour went round earlier this week that Angela Merkel and Nicolas Sarkozy were considering just that.
However, maybe we have all got it wrong.
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ARE WE LOOKING AT ALL OF THIS FROM THE WRONG PERSPECTIVE? 
The Euro is meant to be one currency with the benefits and flaws that this entails.  When we look at the USA, we never really look at the micro economic factors of each state, only the USA as a whole, over 300 million people making a whole.
The Euro zone has 317 million people and 17 countries.  Our fixation has been on the debts of particular nation states, but is this the way we should be looking at it?
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If we take deficit levels, they are rising out of control in Greece and Spain, but as a whole, the Euro zone has almost half the deficit that the UK  has. The UK has a deficit of 10.4% of GDP, while Greece  has a deficit of  10.5% and Spain 9.2%.  But  the Eurozone has a deficit as a whole at 6% of GDP.
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If we look around the world we can see that the USA has a deficit of around 1.3 trillion $ which is about 8.6% of GDP.
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Debt is the next problem which contributes to the instability of the economy. Japan has an enormous debt at over 220% of GDP. The USA has 94.3% debt, Greece 142% and Italy 119%.
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Crucially the Euro zone has a debt of  85.1%. (source)
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If we were looking at the Euro zone as a whole entity rather than it’s individual parts, a bit like looking at the USA as a whole rather than it’s states, or the UK rather than it’s regions, would we be so worried?
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This perhaps indicates just how important it is to show the markets and onlookers that the Euro zone is one economic and political entity, and if people had confidence in the model of governance, then the crisis would never have got this far.
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Maybe for the sake of our sanity, we have to look at the Euro zone as a whole rather than at it’s constituent parts, or face the economic Armageddon that is surely to follow.

EURO ZONE CRISIS – GREEK DEBT, SYSTEMIC FAILURE AND POLITICAL PROCRASTINATION

Today is D Day for the Euro.  The deadline all in Europe are talking about. Yet denial is still at the forefront of European politics.

The other evening I listened in to a radio interview between commentators from Germany, France and the UK.  It was interesting in the mentality that was on show.  The French and German contributers were accusing the UK of having a “Daily Mail mentality” and saying this Wednesday is not really a deadline and everything will be fine.  They further stated that there was no way Greece would leave the Euro and the Euro will go from strength to strength even predicting that the UK would join within the next 50 years.

"I don't have a clue either Angela"

The UK contributers however, predictably had a rather different view.  Admittedly one of which was Norman Tebbit so we can guess his general view point.

However, what was quite clear from the exchange was the way the Europeans see the crisis and how “deadlines” and the word “crisis” has not really computed.

Having been through the crisis of October 2008 and the rapid re capitalisation that took place, the UK, the markets and the IMF seem to take the view that rapid action will be needed.  The European leaders within the Euro zone however, seem to see their antiquated way of long drawn out discussions eventually leading to some sort of a policy that will be ratified at some time in the future as perfectly adequate.

History however tells us something quite different.

Every time the Euro zone heads of state announce a new strategy, or policy it is quickly superseded by another crisis, or the markets take against it.  Even policies that they actually agree on take 18 months to implement like the recent 440 billion Euro bail out fund which when it was agreed was thought to be inadequate and was only passed recently into law and is out of date as a solution to an ever growing debt crisis.

It does not help that even when an agreement has been made, each finance minister for each country says something slightly different causing confusion and causing concerns in the markets.

The type of solutions now being talked about is a 2 trillion Euro bail out fund to replace the woefully inadequate  previous 440 billion Euro fund.  In addition a writing down of Greek debt, with banks taking a significant amount of the hit; re-capitalisation of the banking sector and yet more austerity for Greece.

The problem as ever will be IF this is agreed, how long will it take to pass into law and for the funds to be available.  The funds are needed NOW, but it will take a significant time to sort out.

In addition, this is just another, rather large, sticking plaster.  Systemically the Euro is failing.

The Euro needs restructuring with a much more streamlined way of taking decisions.  The simple way would be much more political union, one finance minister, and one economic policy with integrated tax and fiscal arrangements.  The chances of this happening are pretty slim, and if it was on the cards would anyone in Europe really have the appetite to do it?

The prospect of a German dominated Euro zone where everyone will have to play by their tune, fiscally, and politically will not go down well especially with the southern nations.

It is either systemic change or the splitting away of the weaker members who are debt ridden so that they can default, devalue and restructure.  This would surely help the Greeks who have no prospect of growth in their economy for a decade or more.  They do not have stagnation to worry about like the UK, but a continual downward spiral of negative growth that shows no sign of abating.

Even if this were to happen then a more streamlined system will be inevitable for the Euro zone if the Euro is to continue.

Would more pain now be better than prolonged pain for the next 10 years?  Greeks needs hope and a way forward.  The prospect of Austerity programmes on top of austerity programmes will not provide a future for new generations.

I seriously doubt that the Euro leaders can pull this one off, and the chances of the Euro zone staying in the form it is now are ridiculously slim.

What no one seems to understand is that with the debt in Europe and elsewhere that someone needs to be allowed to fail, but no one seems to get it.  Passing debt from one place to another will eventually catch up with us, and rather than sinking a few small boats we are determined to take down the entire fleet.

Passing the buck from financial institutions to states – from states to overseeing financial bodies (IMF) or larger political bodies (Euro zone) and then where?

The further problems of economic orthodoxy have also not been addressed which means that even if we do get through this crisis it will almost certainly happen again – the prospects for the Euro are . . . . bleak.

DAVID CAMERON’S EURO SCEPTIC NIGHTMARE

We have so many Deja vu moments with the current government, however, last night was perhaps one that David Cameron would have preferred had not have happened.

Cameron has nothing to hide over Europe?

The spectre that is Europe on the shoulders of any Tory leader is a heavy burden.  Sadly for the British people, it has again weighed heavily on the shoulders of yet another Tory leader.  David Cameron, known for his clever political manoeuvres in the corridors of the Tory party and Westminster decided to politically take on a fight which has left him embarrassed, undermined and left his own power within in his party dented.

Instead of allowing a free vote and playing down the significance of the outcome of any vote, he decided to take on the euro sceptics and in the process has lost two ministerial aids; suffered the biggest backbench rebellion in 30 years and opened up old festering wounds that the Tories have been trying to heal for 13 years.

It reminded everyone of the catastrophic Major years –  81 voting against the government (half of the back benchers) not counting those that abstained and has prompted the euro sceptics to ask – Is Cameron one of them?

The longer the Euro sceptics look at David Cameron and his rhetoric the more they feel that actually he will dither and give bluster, but in the end is unlikely to repatriate much power back to the UK Parliament and certainly not in this parliament.

What could force his hand however, is a) that the back benchers will now put far more pressure on him and to placate them he will have to act to stop the inevitable split and back biting that will occur and b) Any systemic Euro zone restructuring to solve the ever growing crisis WILL inevitably require changes to the European treaties.

What is curious is why Cameron bothered to risk the stoking up of the hornets nest in the guise of Tory Euro sceptics?  He showed is political manoeuvres with the Liam Fox issue, delaying taking action so he was seen to be giving him every chance so as not to anger the right wing.  He could have done the same this time but decided not to.

The art of being a leader in politics is knowing the fights to take on and when to do it.  The judgement on this occasion was most certainly wrong.

David Cameron’s position is now clear, his problems of keeping his coalition together has just taken a turn for the worse.  He has been concentrating on keeping his coalition with the Lib Dems on track, but in doing so has angered the right of his party AND the Euro sceptic wing.

He has clearly damaged himself and will find going tougher in the months ahead and the coalition has suddenly been made harder to keep together.

UNEMPLOYMENT HITS NEW HIGH OF 2.57 MILLION

Conservative ministers are out in force explaining why their economic policy is working so well, and that is why unemployment has hit a 17 year high today at 2.57million or 8% of the workforce.

What a day for the right and the left of British politics.  The same old arguments start being trotted out at these times, along with a few that we thought were dead and buried.  Not to mention some rather interesting excuses and analyses of statistics.

This morning began with the government claiming that the rising unemployment was all to do with the Euro zone problems and nothing to do with government policy.  Prior to this, all previous bad economic news was the legacy of the nasty Labour Party.

Later in the day, the government were stating that the slow down of the UK economy had only occurred in the last 3 months ignoring the fact that the UK economy has virtually not grown at all for 9 months.  Flat lining of the economy did not happen in the last 3 months.

Of course George Osborne has also blamed, the cold weather, the wrong snow, the hot weather, the royal wedding and bank holidays for economic woes over the past 9 months.  At some point you would think they would run out of excuses.

Don’t you love politicians who when they are out of power blame everything that happens on the incumbent government, and then when they get into power it is always someone elses fault.

The one thing about this recession that has been different than previous downturns over the past 30 years has been how employment has seemed to be a little more resilient.  Now though there has been a large nudge upwards in the unemployment rate and we will probably see it continue on its path to 3 million.

It is funny that this “nudge” has happened at a time when the cuts begin to “kick in”.  But maybe this is just a “coincidence”.

The pattern of unemployment is similar for youth unemployment as it is in the rest of the Euro zone now, with it reaching around 19% of those under 25 out of work.  At least we do not have the 45% youth unemployment of the likes of Spain, but as usual, it is the young (and old) who are sacrificed by an economic downturn.

David Cameron today defended the government’s strategy by saying that their economic policy is working because they have brought down interest rates to 0.5% giving the economy an advantage and being competitive.  Perhaps it was an oversight, but the interest rate in the UK has been at this level since 2009, prior to the present government coming to power.

In the Spectator, a rather skewed look at youth unemployment figures has revived the call from some to abolish the minimum wage for the sake of the under 25’s. The graph below tells the story.

The analysis of this graph by Fraser Nelson is that the reason that youth unemployment has risen in the UK to Euro zone levels is the minimum wage or the evil solialist regulation imposed by the last Labour government.

However, the minimum wage came into being in April 1999 and the rapid increase in unemployment came toward the end of 2007, at the time the Banking crisis hit, and the credit crunch began.  Matching almost to the day that the queues began outside the doors of the Northern Rock.  Another coincidence?

Like the idea that when we have a threat to national security we should put aside our objections to torture because it is inconvenient; we now have the argument that we should not pay people a low but half decent wage because the economy is flat lining.

It is unlikely to be the minimum wage causing youth unemployment to rise, but the wider problems of a debt crisis across half the industrialised world.

Like the arguments that we have a deficit problem because we spent too much, they ignore the real problem which is the collapse of tax revenue which is the real problem.

We now have to watch this space, as the IMF again reassess the UK economic plan.  They have already made noises to the effect that the UK government may have to draw back on its deficit reduction plan as the elephant in the room “GROWTH” suffers.

As unemployment creeps up, and the economy flat lines with no growth, the deficit will continue to grow and not fall despite the cuts in public expenditure.

Like a ship navigating iceberg ridden seas, the coalition has chosen to decide on the speed and course of the ship, without taking into account the changing conditions of the journey.  Simply a recipe for disaster.

I fear there are more stormy seas ahead, oh and a few more excuses.  Maybe Father Christmas will be next on George Osborne’s hit list!

Other post
Great Recession
World Economic Crises – Austerity
Recession what Recession

 

EURO CRISIS: Slovakia vote against Eurozone Bail Out Fund

The chaos surrounding the Euro zone was brought into focus yet again last night as Slovakia voted against increasing the Eurozone Bail out fund.

This latest episode may not be a definitive block on the expansion of the fund, but Slovakia have become a thorn in the side of the Euro and shows why the Euro zone is in such disarray.

The Euro zone has become the model by which no sane organisation should be run.  It’s decision making process is slow, unwieldy, and lacking focus.

Even now, the Euro zone is fighting a phoney war with itself, having problems obtaining a consensus on an increase in the bail out fund that we all know will be inadequate anyway.

The slow motion car crash that is the Euro debt crisis has fundamental problems that the leaders of Europe seem unable to grasp.

It is surely only a matter of time before the next shock appears, and the markets react.

The project for monetary union can now be seen to have been ill conceived and without the sound foundations any economy needs.  Without fiscal and political union, the currency cannot survive, and is unlikely to survive with the weaker economies largely in the south of the zone remaining a part of it.

It s no wonder that Slovakia is reticent to help fund the bail out of countries that are richer than they are, even though the posturing may well be for a domestic audience.

It is still unbelievable that with all that has happened, the leaders within the Euro zone still appear to have their heads in the sand.