Author Archives: Alex Harrowell

About Alex Harrowell

Alex Harrowell is a research analyst for a really large consulting firm on AI and semiconductors. His age is immaterial, especially as he can't be bothered to update this bio regularly. He's from Yorkshire, now an economic migrant in London. His specialist subjects are military history, Germany, the telecommunications industry, and networks of all kinds. He would like to point out that it's nothing personal. Writes the Yorkshire Ranter.

Leaking Oil Well Rocked By Massive Explosion

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So they capped the leaking oil well in the end. What about the other one? Not so much.

Back before the summer break, we’d just had the eruption of the “microparties”, and Nicolas Sarkozy had discovered that it was suddenly imperative to lock up gypsies. Everyone knew very well that the scandal would take the summer off, getting out of Paris to the sea as if it was itself a character in the story. And now, it’s back. There’s been a certain amount of fallout about the Roma, by the way; this week’s leak reveals that Brice Hortefeux’s original circular to all prefects did indeed mention them by name as an ethnic group, which isn’t meant to be something that the Republic believes in. In fact, that’s precisely what Immigration Minister Eric Besson has been saying in public – so he’s been left to protest that he didn’t get the e-mail.

This is, however, now a side issue, one with the passing summer, even though the European Commission is officially displeased. As August came to an end, a few new tarballs began to wash up on the beaches. Eric Woerth turned out to have intervened to get Patrice de Maistre, Liliane Bettencourt’s financial adviser and his wife’s employer, a Légion d’Honneur. He’d initially denied this. Then, Le Canard Enchainé ran a slightly gnomic story mentioning that one David Sénat, an official on Justice Minister Michéle Alliot-Marie’s staff, had been forced to resign.

The significance of this has just become more obvious than it perhaps was.

Le Monde opened this week by announcing on the front page that the newspaper was about to bring criminal charges alleging that persons unknown had been spying on communications between one of its reporters and a source. Communications between journalists and their sources are legally privileged in France under a measure introduced by Nicolas Sarkozy. The source, it turns out, is none other than David Sénat, and in practice, the persons unknown can only have been agents of the state.

Wham! It’s a gusher!

The UMP, through its general secretary Xavier Bertrand, responded immediately:

Pourquoi un journal comme Le Monde se permet d’accuser sans preuve, pourquoi une telle agressivité du journal Le Monde?

He also blamed the Socialists and the Communists and claimed there was no proof of anything in the story. This may not have been the best decision ever, as within the day, the Director General of the National Police confirmed in an interview with the same newspaper that the DCRI – Central Directorate of Internal Intelligence, the reorganised counter-intelligence agency – had indeed carried out an investigation into leaks to the press in which they had monitored Sénat’s office phone. To sum up: Le Monde alleged that the DCRI had been ordered to find out who was communicating with the press, had “examined” Sénat’s phone, had demanded communications data from a mobile operator, and had identified Sénat. Bertrand denied all this.

The DGPN Director then confirmed that the DCRI had been ordered to find out who was communicating with the press, had examined the phone, had demanded data from the operator, and had identified Sénat. Xavier Bertrand would therefore appear to be in a certain amount of trouble.

The only difference in their accounts is that the DGPN Director denies that they intercepted Sénat’s phone calls, only that they retrieved the call-detail records showing who he had been telephoning, when, and for how long (and also possibly from where and under which billing codes). He seems to be relying on this distinction to claim that this exercise was legal. Le Monde‘s sources, whose PGP keys are presumably getting a workout, claim that they also obtained geolocation data.

Keen and agile minds will recall that this is precisely the argument the US National Security Agency asserted in the case of STELLAR WIND, its mammoth and illegal Bush-era surveillance operation which also relied on the analysis of CDRs rather than on the interception of calls. It is a telecomms industry truth that the real business is all about signalling and billing and operations support – telephony itself is a relatively small part of the machine. This is never more true than in surveillance cases.

It does not seem to be the strongest argument ever that journalistic sources are protected as to the content of their communications but not as to the fact of being a source, but that’s a matter for the courts. The police have also claimed that they ran the idea by the national commission for the supervision of surveillance, which unfortunately denies this as well, and it seems to be confirmed that the leaks in question were ones about the Woerth-Bettencourt affair.

Who is David Sénat, anyway? A judge by training, he’s been working for MAM for years, at the ministries of Defence, the Interior, and now Justice, and also in her capacity as head of the RPR in its shadow existence as part of the UMP.

MAM considered running for president in 2007, during the period when it appeared that the traditional Gaullist wing of politics and the circle around Jacques Chirac might stand a spoiler candidate to derail the Sarkozy campaign. Not surprisingly, she’s considered much more of a conservative conservative than Sarko, and a potential future presidential candidate. Even her microparty seems designed to contrast with either Sarko’s Rolex-and-yacht look or the IT-director professionalism of someone like Francois Fillon – it’s called Le Chêne, The Oak. Feel the Burkean traditions on that. So the fact that…someone…called the spooks on her office implies a certain tension, to say the least.

Meanwhile, the “someone”? Who he? Well, the President did have the DCRI investigate the source of rumours about his wife. So he’s got form for making use of the intelligence services personally. She’s in the news as well, by the way:

..avoids charity work, held up filming on Woody Allen’s Midnight in Paris, and had three former lovers as houseguests when Nicolas Sarkozy first visited her Mediterranean villa.

Who was it who said that the cavalry lent tone to what would otherwise be a vulgar brawl?

Anyway, it’s hard to overstate and understate the importance of this story. Imagine if the Bush administration had been spying on the New York Times‘s phone calls to, say, Valerie Plame – not perhaps the biggest leap of fantasy ever undertaken – and the Times both detected this somehow, and called the FBI to 1600 Pennsylvania Avenue, under a source-protection law introduced by the same administration. On the other hand, the weirder any political scandal gets, the greater the pressure to find some sort of amicable resolution. (See the quote above.) The system, after all, must preserve itself. But the exit strategy from here is very far from obvious.

the political thought of 1890 with the genetics of 1890, in 2010

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There’s been a great deal of fuss about the Bundesbank director Thilo Sarrazin’s book, in which he argues that the “upper layers” of German society ought to be encouraged to breed for fear of Muslims, etc, etc. The SZ points out here that he confesses to just making up his numbers:


Es ging um die Frage, woher Sarrazins viel zitierte, im Brustton der Faktizität vorgetragene Behauptung eigentlich kommt, dass siebzig Prozent der türkischen und neunzig Prozent der arabischen Bevölkerung Berlins den Staat ablehnten und in großen Teilen weder integrationswillig noch integrationsfähig seien. Sarrazin gab zu, dass er keinerlei Statistiken dazu habe. Er gab zu, dass es solche Statistiken auch gar nicht gibt.

But I’m not sure if anyone has pointed out quite how strange Sarrazin’s thinking is.

Für ihn ist die Unterschicht sowieso schon lange abgeschrieben, der Genpool degeneriert. Denn bereits seit dem 19. Jahrhundert sei die deutsche Gesellschaft immer durchlässiger geworden, “auffallende Hochbegabungen” hätten damals in Preußen bereits die Möglichkeit bekommen, das Gymnasium zu besuchen. “Das bedeutet aber, dass die Entleerung der unteren Schichten von intellektuellem Potential bei uns weiter fortgeschritten ist als in Gesellschaften, deren Durchlässigkeit sich erst später entwickelte.”

He thinks, or at least claims to think, that because the German (and specifically Prussian) education system has given the lower classes the opportunity to go on to higher education since the 19th century, Germany has a problem – the masses have been emptied of “intellectual potential” too early.

What strikes me as telling here is that it’s not just that Sarrazin’s political thought is trapped in the Wilhelmine era – his understanding of genetics is, too. This post of Razib Khan’s on the great early-20th century debate between the biologists who rediscovered Gregor Mendel’s work, and the biometricians, who had been trying to link data gathered on the range of human traits with the Darwinian inheritance, explains why.

The biometricians were essentially trying to operationalise Darwinism with early statistical methods. This gave them a problem; a lot, but not all, of the variation in biological traits at least seemed to be nice and smooth, movement along a well-behaved curve. With no other model of inheritance available, they assumed that genetics was a simple process of blending – children were an average of their parents. This had wide-ranging consequences; it implied that regression to the mean would apply to people. We would all eventually be average. From there, it wasn’t hard to predict that we would all, eventually, be mediocre and that racial degeneration was inevitable.

This is one of the great intellectual accident black spots – a nauseous gap in the barrier by the roadside. Experimental work, like Mendel’s, showed that something else was happening. One of the problems was that statistics itself needed to advance to resolve the debate. There is a very good reason why Francis Galton was both an important early statistician and a eugenist, and why it would eventually be a statistician, R. A. Fisher, who demonstrated that a Mendelian process was observable in the biometric data.

But by that time, the original mistake had set off a great avalanche of analogies. Social Darwinism and everything that followed from it was out there. It’s a horrific thought that its consequences have a lot to do with statistical methods, and it’s telling that Fisher published in 1918. The important point about Mendelian genetics is that it’s discontinuous – it doesn’t blend down to the average. Variation is conserved; not only will the German working class continue to produce bright kids, the elite will occasionally toss out a Sarrazin.

Merkel’s Little Ray of Sunshine

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Remember the sunshine option? You might think it was getting some traction. Berthold Huber, the leader of IG Metall, has set some goals ahead of this year’s payround, which opens on the 27th and covers the steel industry. IG Metall is the German metalworkers’ union, which in practice represents most of the industrial economy – the wider importance of the steelworkers’ pay round is that it acts as a price-leader for the rest of the German collective bargaining year. Huber clearly reckons that Germany is recovering well enough that he can insist that the workers get a share of the benefit. Further, he wants to reintegrate some of the short-time or temporary workers, a sector that grew during the Lohnzurückhaltung years and then during the crisis.

Interestingly, someone has gone further and nailed a target to the wall. Peter Bofinger, a member of the German council of economic advisers, has named a figure of 3% earnings growth as necessary to achieve a broad-based recovery. Bofinger has appeared on this blog before; looking back, these remarks are highly telling

If the SGP is regarded as a framework that contributes to price stability, it suffers from the weak link between government deficits and inflation. This is due to the fact that a negative budgetary position can be caused by excessive government spending but also by a dismal growth performance….However, already in the 1990s it should have been obvious that the link between public debt or deficits and inflation is very weak, at least in OECD countries with relatively moderate inflation rates….Together with the depreciation of the dollar this insufficient macroeconomic stabilisation can be regarded as the main reason for the underperformance of the euro area in the last few years.

Bofinger’s words are here, in an interview with the Rheinische Post. Bofinger argues that German employees have seen no growth in their buying power in the last 10 years (the unions’ research group reckons no growth in real wages in 6 years), while exports grew by 70% at constant prices – to put it another way, there’s been a “massive redistribution at the expense of workers”. Of course, the flip side of holding down wages in a major export economy is that somebody has to buy the stuff. He further argues that the Lohnzurückhaltung has contributed to European economies drifting apart: in Der Spiegel, for example.

Anyone who sees this as a virtue must ask themselves whether Germany’s export successes would have been possible if other countries had behaved as “virtuously” as we have. It says a lot about the level of the debate that such simple and fundamental insights are apparently difficult to get across in Berlin.

(Die Zeit has an article about Bofinger and his predecessor on the council, Jürgen Kromphardt, which describes them as the last Keynesians. To read, as a period piece from the distant age of 2004.)

So what’s happening in the other superexporter? Even The Economist has not only noticed Chinese labour activism, but thinks it’s a good thing. Doug Saunders reckons that this is the only lasting gain from the boom.

That’s the theory; the practice is here.

The week-long strike at Honda supplier Atsumitec ended Thursday after workers and management agreed to a 45 percent increase in the basic wage from 980 yuan a month to 1,420 yuan.

The roughly 200 employees at the Foshan plant were, in addition, offered a 250 yuan monthly living allowance and a performance related bonus; a significant victory after management had earlier in the week threatened to fire striking workers and hire replacements if they did not return to work…. The fact that workers are asking for increases of around 50 percent, even higher in some cases, is a clear indication that wages in the Pearl River Delta have been kept far too low for far too long.

As the strikes continue, a high-level delegation from the Guangzhou Federation of Trade Unions arrived in San Francisco, the first leg of a four-city tour of the United States designed to improve relations with American trade unions and labour groups.

Delegation head Chen Weiguang was quoted by the Chinese media as saying American labour groups had already secured a commitment from Apple to improve payments to Foxconn so that wages at that company’s factories in China could be increased.

Even the People’s Daily thinks so, although I’m not sure what to make of this:

Nonetheless, even as these doubts remain over the ACFTU [the official unions, under pressure to demonstrate real representative power – not-ed], it’s not stopping in its “union-building” efforts. The Financial Times reports that it’s unionizing many large foreign investment banks, including Goldman Sachs, JPMorgan, Morgan Stanley and UBS. According to a foreign banker in Suzhou, “(t)hey are actually telling us [to establish union chapters], not asking us…the feeling from everyone was – we just got a 2 per cent tax.”

Woerth/Bettencourt: efforts to cap the well fail, storm approaches

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This week’s Canard Enchainé has a cartoon likening the Woerth/Bettencourt scandal to the Deepwater Horizon oil spill. This annoys me, as I’ve been making the same joke to anyone who will listen for weeks. So what happened? Well, just to run up to speed…

So there’s the heiress to L’Oreal, Liliane Bettencourt, the richest woman in France. (Among other things, she is the second biggest taxpayer and receives a reputed €34m in dividends a month.) She’s in her eighties, and she has a daughter. She also has a faintly boho circle of friends and a crack team of accountants. Now, she fell out with her daughter about the amounts of money she spends on her mates. The daughter sued, trying to get rid of her mother’s accountant and have mamma placed under a power of attorney. Mamma doesn’t agree, and the fact that she manages to pay the same marginal tax rate as someone on a salary of €3,000 monthly would tend to support the notion that she can well look after herself.

Then it turned out that her servants had been secretly taping conversations between her, her accountants, and various others. Sensation; one of the people involved is Eric Woerth, the former Budget Minister and now Minister of Labour. Eric Woerth’s wife, Florence, is an accountant employed by the Bettencourt family office. Further sensation.

But what were they talking about? One of the plaintiffs in the original lawsuit now gets her own back, by telling the newspapers, specifically the former Le Monde editor Edwy Plenel’s subscription-only website Mediapart. She says that Mme Bettencourt was in the habit of inviting key right-wing politicians for dinner and distributing yer actual brown envelopes stuffed with raw cash. Names include Woerth, Prime Minister Francois Fillon, and…Nicolas Sarkozy. El presidente himself.

Suddenly, no-one was talking about the family dispute any more, and a certain Macondo quality took hold. A string of efforts to cap the leaking well began.

Activating the giant shears

First of all, the UMP’s underwater robots tried to cut off the information source, encouraging legal efforts to suppress the documents of the case. That didn’t work; they were clearly “d’intéret génerale” and anyway, bits were washing up everywhere. Including in Switzerland, where it was alleged that €100,000 of the campaign money had come from. This would be highly illegal.

Top Hat

Then they tried to place a steel cap over the leak. The ex-accountant was quizzed by the police, and suddenly decided that Sarkozy hadn’t received the money and that the dates were wrong. What was wrong about them wasn’t clear, but it was certain who was at fault. Le Figaro somehow got what purported to be an extract from the transcript of the police interview, which said that Mediapart had “romanced”, perhaps a careful choice of words. (Remember that bit – it’ll come up later.)

There was only one problem; the police had already seized the bank statements, and large sums of cash had been withdrawn on each of the dates in Mediapart’s original report. Bubbles of hot air were building up beneath the cap, rendering it dangerously unstable.

A string of new leaks began to appear; a rather well connected racing stable, which had turned up just in time for its owners to benefit from a special tax break, for example. The tax break allowed those subject to France’s wealth tax to shield some of their assets by investing in small businesses. It had probably not been foreseen that such a small business might include buying horseflesh. Who changed the rules? M. Woerth, while his wife was one of the shareholders.

Actually, the affair has a curious horsey scent. Woerth is also accused of having sold a publicly owned racecourse, at mates’ rates, in his capacity as mayor of Compiégne…

There was more serious stuff, too. Bettencourt’s tax file, as one of the biggest in France, should have been audited every 3 years at least. Somehow, this had not happened since 1995 (significantly, since the end of the Mitterand presidency). The internal inquiry denied that Woerth had anything to do with it, but not many people believed this.

In the light of all this, containment efforts broke down. The accountant changed her mind again. The new line of defence was that the large cash withdrawals represented the Bettencourts’ pocket money. Even Le Figaro noted the curious coincidence that this requirement spiked by a factor of eight immediately before elections.

Top Kill

Clearly something more powerful than the underwater robot was required, and it was decided that a shot of Presidential authority might do it. Nicolas Sarkozy appeared on national television, in an awkward cross between an interview and a formal address, during which he talked a great deal about pensions. Afterwards, the semi-interviewer was accused by the France 2 journalists’ union of having done the government a favour.

Then came a new shocker – the discovery of the “microparties”. In France, it is illegal for a party to accept more than €7,500 a year from any one person or organisation. There is, however, no restriction on how many parties one candidate may be a member of. Also, someone who is a member of a party may give it as much as they like, and an association (as opposed to a party) can do as it likes and can also turn into a party at any moment. As a result, France has over 300 active political parties, many of which have no members. Inevitably, Woerth turns out to have such a personal party. The President himself has two. Valérie Pecresse has three. Laurent Wauquiez took the opportunity of an official trip to London to solicit money for his pocket party from French businessmen here.

Thick, sticky cash kept spilling from the damaged well. It turned out that Bettencourt had received €100 million in refunds over four years under a Sarkozy-initiated tax cut. Woerth was discovered to have pulled strings with the Bettencourts for his wife. The ex-accountant had been paid by both Bettencourt and her daughter. And there was that thing with the island in the Seychelles of unknown ownership.

This week’s Canard has an informative article on the Bettencourts’ tax affairs; thanks to a neat structure, the dividends from L’Oreal (a sort of feudal tribute imposed on every artificial blonde) flow into a shell company and sit there. Having been taxed as income at source, they are not then subject to further taxation. The lady draws on this company’s funds as required, and therefore manages to pay income tax only on what she spends.

Junk Shot

The situation, therefore, is grim. Sarkozy has been quoted as complaining that Woerth is “un poids, pas un atout” (a burden, not an asset) that it was “impossible de se délester” (impossible to jettison). Which begs the question, why is it impossible to get rid of him? It probably has something to do with the time he spent as the UMP’s treasurer. The president has some experience of these things – as Edouard Balladur’s campaign director in 1995, he was responsible for banking 10 million francs of campaign contributions. Ostensibly collected at campaign rallies, the only unusual feature of this transaction was that it consisted entirely of 500 franc notes. As Arthur Goldhammer says, one way of looking at Sarkozy is in terms of a swap of elites – the electorate turning to the private-sector rich rather than the civil service/industrial technocracy. “I call you…my base!”, indeed, but surely that took it a little too far.

So, what to do? Fortunately, there’s always the option of abasing yourself in a binge on racist demagoguery. So the police shot a gypsy, which started a riot.

Ce matin, au cours du Conseil des ministres, Sarkozy a donc annoncé qu’il organiserait une réunion, le 28 juillet, à l’Elysée sur « les problèmes que posent les comportements de certains parmi les Gens du voyage et les Roms » et qu’on y déciderait « l’expulsion de tous les campements en situation irrégulière ».

One of his own senators wouldn’t agree, but we’re in “don’t confuse me with the facts!” territory. After all, they also want to pass a flag-burning law, despite the fact there already is one. But sometimes, the best solution is a million gallons of old rope, balls, and toxic mud.

I mentioned that the Figaro story would come up again. Look at it closely; you’ll notice that there is no byline attached. This week’s Canard has a news-in-brief item mentioning a protest by the paper’s journalists about a story that was dubious and “part of the presidency’s communications strategy”, in connection with an unsigned article.

Germany!

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In the wake of Germany-Argentina, I think it’s fair to say that perhaps a lot of the national soul searching about the England team is wasted. Even this initially attractive analysis. The explanation is very simple: Germany are fantastic, will probably win the World Cup, will probably win the European Championship, and might win the next World Cup as well.

In many ways, they implement one of the essential, classic approaches to football – push and run.

Chris might have a point in an inverse sense; if you wanted an anti-Taylorist approach to football, Germany would do rather well. No beanpoles, stars, ball-hoggers, or goal hangers. Just eleven very good general-purpose players with a wide range of skills, operating in a plan with broad outlines and lots of scope to adapt.

J. Carter Wood reports, amusingly, on the team’s impact on sociologists; the Prenzlauer Berg blog has a practical solution.

Sense

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Roger Bootle of Capital Economics is making sense.

There are umpteen countries which are running huge current account surpluses: last year, China’s surplus was 6pc of GDP, Taiwan’s 11pc, Malaysia’s 17pc and Singapore’s 19pc. The oil producers also ran huge surpluses – 5pc in Saudi Arabia (down from a massive 28pc the year before), 16pc in Libya and Qatar, and 26pc in Kuwait. Within Europe our two big oil producers, Russia and Norway, ran surpluses of 4pc and 14pc respectively.

Among non-oil producers in Europe, Germany and Holland ran surpluses of 5pc, and Switzerland 9pc. Moreover, these countries are in general sitting on huge international reserves. This is where the money is and it is where demand should expand.

China remains the key to Asia. The Chinese government cleverly changed the exchange rate regime governing the renminbi just before the G20 summit. However, this was nothing more than a cosmetic move designed to head off criticism. The consequent rise of the currency will be minimal.

Anyway, the more important issue is the willingness of the Chinese to rebalance the economy towards consumers and away from reliance on exports…

China: internal revaluation from below

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Geoff Dyer of the FT says that Chinese workers are demanding more money, and that’s nothing but a good thing – there’s even some demographics in there, if you like that sort of thing.

Instead, the salary hikes in Guangdong this week symbolise a broader shift in favour of labour that has accelerated in recent months and is likely to carry on for a number of years. They reflect powerful demographic shifts resulting from the three-decade old one child policy, with the numbers of new potential workers entering the economy dropping quickly. Economists say China has passed or is close to hitting the “Lewis turning point”, when the pool of surplus agricultural labour tapers off, sparking big rises in industrial wages….

Booming consumption will, in turn, lead to smaller external surplus, as China imports more goods from the rest of the world and helps encourage a rebalancing of the global economy. As long as potential spikes in inflation can be controlled without too much cost, China has a lot to gain from higher wages.

China Labour Bulletin has much, much about a new wave of labour activism in China; they report on a strike at a Honda supplier and a “healthy and dynamic system of labour relations”. The people involved are now following up on their success by giving the convenor of their official, and yellow, trade union the boot.

China Media Project reports on the concept of “stability preservation through exerting pressure”, which seems if I catch their meaning to imply that the Chinese authorities at the top level are willing to tolerate the strike wave as a means of imposing a policy aim of moving to broad-based growth on lower-level governments, Party agencies, and businesses that are doing rather well under current arrangements. The mountains may be high, and the Emperor far away, but that also means the troops may be a long time in coming to save you from the next Mass-Group Incident. Do you feel lucky, punk?

And then, of course, at the Davos/Martin Wolf level of these things, the grand speak to the grand. Ahead of the G20 meeting, the People’s Bank has first suggested that it might be resuming the policy of letting the RMB rise gradually, and then walked it back. Of course, a lot of this might be the typical central bankers’ Noh theatre of allusion. But then again, Renmin tielu wei renmin – the People’s Railway is the People’s.

The same may not be true of the People’s Bank. But I’m sure I’ve seen a translated document at AFOE contributor Jamie Kenny’s place which had senior Chinese officials recommending that social conflicts should be resolved by “giving the People the People’s Currency Unit”, i.e the renminbi, or in other words, by leaning on management to give in on their demands in so far as they involve pay rather than politics.

Internal revaluation in Exportland is a viable option. Especially, it’s an improvement over more bubbles.

Scenes from an internal devaluation

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I’ve recently been in Budapest. The city was stinking hot and full of abandoned construction projects, and the Danube was over its banks, flooding the tramway tunnels beneath the approaches of the Chain Bridge, closing the roads on the riverside.

Walking the plank

There were a remarkable number of people sleeping in the streets, although at 35 degrees’ heat, you might have thought they were doing it by choice. Until the incredible assortment of biting insects sailing down the river got to you; I’m still scratching. There weren’t many more than in London or Leeds 15 years ago; in the integrated core of the Euro-Atlantic community, we arrange these things more efficiently. Thatcher never attained a one-year decline of 8% of GDP, which implies that the UK achieved a much greater return of misery per unit of economic recession.

Meta-photo

On Erzsebet tel., there’s an abandoned tube station, brand new, empty. The huge stairwell into the ticket hall has been unofficially taken over and used as a nightclub; it’s invisible from street level. I suppose it’s the Big Society, but this doesn’t work as well for cardiac surgery as it does for hipsterism.

Sudden stop

All over there are monuments to the era of EU enlargement and forex loans; huge, crystalline investment ruins in the city centre, shockingly cheap mall developments in the airport suburbs. I stay in the Kempinski, a postmodernist battleship of Zizek’s Happy 90s decorated to please a German privatisation consultant. It’s the architecture of plunk!, not relieved by the cod-jugendstil detailing on the roofline God knows how far above the street, and it has a giant circular glass atrium that renders everything under it intolerably hot.

It’s just possible to make out the outlines of the hopeful era of revolution and accession; you can just about see it, if you screw your eyes up. Back then, the privatisations and shutdowns were justified with the better times to come. And now? The dead malls are often next door to the equivalent buildings of the Communist attempt at a consumer society. There are a lot of people visibly working the streets.

The Economic Consequences of Mr. Hugh

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Edward Hugh and Paul Krugman and even Dani Rodrik are in agreement, as Ed meets the elite; although we don’t know how much Spain’s external account needs to swing towards surplus in order to get the economy growing, we know it needs to be going that way, and therefore it’s a choice between “internal devaluation” – i.e. wage cuts for everybody – of the order of 20% or else, departure from the eurozone.

I cannot support this contention.

Let’s have some axioms – things that have to be true, and which are generally accounting identities.

Number one: Exports to Mars remain a losing business. Therefore, the world economy cannot but have a balanced trade account. One man’s current account deficit is another’s surplus. This is true by definition. It is also true, but less so, of the eurozone – of course, the eurozone has a net imbalance with the world, but it is true that if a eurozone country has a current account surplus with the rest of the eurozone, a sufficient current account deficit must exist elsewhere in the eurozone to match it.

Number two: The money has to go somewhere. One man’s trade deficit is also his capital account surplus. If Spaniards want to buy more German goods than they sell Spanish goods to Germany, absent a massive extra-eurozone trade surplus, somebody must lend them the money. Similarly, if Germans want to sell more goods to the eurozone than they buy, they must do something with the surplus of euros that results.

Number three: The money still has to go somewhere. Stashing your export sector earnings in ultra-safe eurozone government bonds, like a stereotype German, is an economically identical activity to borrowing German money to spend on stereotypical Mediterranean corruption – for example having real-estate banks managed by the Church, although how DEPFA or IKB Deutsche Industriebank were any better is not obvious. Every Sparbuch is the flipside of a tax break for a mobbed-up developer setting fire to a Greek hillside. Obviously, it would be silly to hold individual German savers responsible – but the Great Banks of Frankfurt, the institutions through which the German trade surplus is recycled?

And it is no sillier than holding individual Greeks or Spaniards responsible, which is what Ed Hugh, Paul Krugman, the European Commission, the International Monetary Fund, the CEO of Banc Sabadell, etc, etc, actually propose to do.

As Ed rightly says, the real issue is “where will the growth come from?” With recovery, everything else will be surprisingly easy; his example of Finland is a case in point. Another would be the UK budget consolidation of the mid-90s, or for that matter, of the post-war era. Without it, there is arguably no point in worrying – in that case, in the fairly short term we are all dead, and default, euro failure, and an unquantifiable degree of misery are inevitable.

Unfortunately, although his analysis is correct, Ed’s prescription is very unlikely to lead to growth. What export market for Spanish goods is there that will outweigh a 20% hit to aggregate demand? Who will buy? What will they buy, that is currently overpriced by 20% divided by the percentage of marginal cost accounted for by labour? Labour is asked to fork out, but where are the guarantees that this patriotic sacrifice will achieve anything? One might well conclude that the actual content of this proposal is in the bit that is clear and well specified – the 20%.

To be more rigorous about this intellectually, think of it as follows; Spaniards suffer the 20% wage cut, and all else remains equal. We have no reason to think all else does not remain equal. No doubt this reduces the Spanish trade deficit by some number. This implies that the eurozone exporters – Exportland – see their trade diminish by the same value. The Spanish trade account is balanced, but we are all, on balance, poorer. And it is possible that the eurozone exporters will redouble their efforts to cut prices and hold onto market share – they have no reason not to, and in fact it is their core national economic strategy to export at all costs.

The only way this approach might not actually be deflationary at the eurozone level would be if it caused prices to fall sufficiently that they undercut Chinese prices; this is unlikely, and anyway would represent the export of European deflation to the poor.

So, to sum up so far, it’s just as possible to have a beggar-your-neighbour “internal devaluation” as it is to have a beggar-your-neighbour devaluation. The difference is that the “internal devaluation” option is also a beggar-yourself-and-indeed-everyone-else policy, and one that will create more actual beggars. And, in fact, beggar-your-neighbour internal devaluation accurately characterises the policy of Exportland’s economic leaders.

There is, of course, an alternative – it is the sunshine policy. Pay Germans more money – perhaps 20% more – and they can spend it, among other things, on one of Spain or Greece’s biggest exports, which happens to be sunshine. The dangerous imbalances would be reduced; demand would be created for the products of whatever new industries Ed’s new circle can think of. After all:

Put another way, thanks to the foreign funds which flowed in to finance the housing boom Spain became a major imports powerhouse, with the consequence that both the trade and the current account deficits deteriorated sharply, while a significant part of Spanish industry simply died. One of the major tasks of any recovery programme is to bring this industry back to life. In this sense what Spain’s economy needs is not rejuvenation but resurrection.

Better yet, there is a simple policy lever available to make this happen. German wages are essentially set by the annual bargaining round between IG-Metall and the Industriellenvereinigung, which acts as a price leader for the rest of the economy.

Surely, though, we need to cut, cut, and cut again to stay competitive with China? Well, this statement would be interesting if it wasn’t wildly counterfactual. At the current relative wage rates, it’s blindingly obvious that eurozone exporters are not succeeding in beating Chinese producers on price. They are doing so on their products. And, soon enough, the question will be absurd because the Chinese will themselves be looking over their shoulders – apparently, GDP per capita in Shanghai is comparable to that in Lisbon. The only future strategy is to have good products; after the bubble world of the 90s and 2000s, we’re back to the late 80s view that the future belonged to whoever had the best products and supply chains.

Some other ideas: perhaps the ECB should make it a policy objective to run over the shorts? There are surely some hints here.

Fitch, meanwhile, thinks that Spain’s creditworthiness is adversely affected by its plans for internal devaluation, but I am on record as saying that anyone whose investment decisions were guided by credit rating agencies would have lost their shirts three times over in the 2000s – once with Enron, once with the alt-telco bonds, and again with mortgage-backed securities. (I’m also the proud owner of the domain name standardispoor.com, if anyone has ideas about what to do with it.) However, our hypothetical investor would have avoided these catastrophes, because they would have had no money to lose in them, having already lost it all in Russian GKOs in 1998, Thai or South Korean corporates the year before, or Mexican government bonds in 1994.

I commend the proposal of just sitting back and being rich, as Harold MacMillan once said, to my readers, and indeed to the CEO of Banc Sabadell, who no doubt has greater expertise in this matter than myself.