Author Archives: Edward Hugh

About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

Turkey’s ‘Economic Miracle’

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Leaving aside political considerations (I would certainly fast-track Turkey’s EU accession process for many, many reasons), the economic attraction of Turkey as an EU member state is rapidly making itself felt. Just look at these numbers from Morgan Stanley’s Cerhan Sevic:

According to our estimates, Turkey?s overall productivity growth accelerated from an average of 2.1% a year in the 1990s (or an average of 3% in the 1960-2000 period) to an average of 8.8% in the last three years. The trend growth rate also increased from 2.3% in the 1990s (and 3.1% in the 1960-2000 period) to 5.8% in the post-crisis era. The productivity acceleration is even more pronounced in the business sector. The rate of non-farm labour productivity growth rose to an average of 9.5% per annum in the last three years, from 2.2% in the 1990s and 2.4% in the 1980-2000 period. The underlying trend growth rate improved from 2.4% in the 1990s to 6.3% in the last three years and 7.4% this year. Moreover, according to the State Institute of Statistics? estimates, the average annualised rate of increase in real output per person in the manufacturing sector during the 2001-2004 period has been 10.2%, compared with 3.8% in the 1990s. In other words, output per worker in the manufacturing sector has increased by a cumulative rate of 30.4%, as the trend growth rate jumped to 7.5% in the last three years.

Now with everything appearing to be so wonderfully lacklustre all over the eurozone, you might have thought an economy with an underlying trend growth rate of 6.3% and rising would be worth taking very seriously indeed.

The other interesting point would be to ask why it is that Turkey is apparently so succesful, even in comparison to the other new EU accession states (and without all the aid). I would suspect that demography has something to do with it, but then I imagine most of you could already have guessed I was going to say that :).

European Inflation: A Non-Issue?

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Inflation in the 12 countries of the zone euro slowed for the second consecutive month in July as weak consumer demand seems to have deterred companies from passing on higher energy costs.

Details released today from the EU’s Eurostat show that consumer prices fell 0.2 percent in July, cutting the annual inflation rate for the zone to 2.3 percent from 2.4 percent in June. So for the moment, no inflation scare.

The curious number from my point of view is the stubbornly ‘high’ German rate of inflation, currently around 2%. I would have expected, given everything, inflation to be below 1% by now. Instead it’s Finland who mark the bottom: 0.2%.

The big question, of course, is which way do the numbers move now. This depends on whether the current ‘soft patch’ is simply a blip, or whether, as some are suggesting, the European recovery may have already been and gone.

Federal Funds Rate: A Clarification

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Just a brief follow-up on yesterday’s post on Alan Greenspan. Sleeping on it I have the feeling that for blog posting I may suffer from the failing of trying to complicate things too much, or at least of trying to say too much at once.

Really there were two central themes, and since they are a little different from what most other commentators are saying it may be worth trying to drive them home.

The first point is perhaps best illustrated by this little extract from a Reuters article:

A Reuters poll of 20 of Wall Street’s top firms — primary dealers authorized by the Fed to deal directly in government securities markets — found all anticipate another quarter-percentage-point increase to 1.5 percent on Tuesday.

“Given the mind-set in the markets that another increase is coming, the Fed is unlikely to wish to disrupt that expectation at this stage,” said economist Lynn Reaser of Banc of America Capital Management Inc. in St. Louis, Missouri.

“There might in fact be a greater risk to the economy in the Fed’s holding back simply because to do so would raise questions about what does the Fed know about the expansion’s health,” she added.

Now Let’s be absolutely clear: this view is totally eroneous.
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Alan Greenspan’s Finest Hour?

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Really it doesn’t seem to be such a big deal, to add or not to add (0.25% to the Federal Reserve’s overnight funds rate), and in some ways probably it isn’t. But at the same time I can’t help feeling that Sir Alan faces tomorrow one of the most difficult decisions of his whole term at the Federal reserve.

In fact the problem isn’t the quarter point rise, but the vision of the future movement of US interest rates that the Fed will offer tomorrow. A quarter point more or a quarter point less isn’t going to make or break any sophistocated economy (and anyway the important issue is going to be what is termed the yield spread, crudely the difference between the overnight funds rate and the rate on five and ten year US Treasury bonds, a measure which gives a lot more accurate picture of what people will have to pay to borrow money). Ideally Greenspan shouldn’t raise the rate at all tomorrow, but he has now probably boxed himself in too tightly to have the benefit of this leeway. Beyond this he needs to give a clear indication that there will not be any need for a vigorous raising of rates, not now, and not for some time to come.
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We The Consumer

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As if the Italians hadn’t got enough to worry about at the moment (what with the latest round of economic data being predictably poor : growth is slowing down, industrial production is falling, consumer confidence is plumbing the depths). Now comes news that the Italian government is heading for conflict with some leading European airlines (and later with the UK and German governments, and then Brussels presumeably). The reason for the problem: their prices are too low, and Alitalia can’t compete.

Italy has ordered leading European airlines, including British Airways and Germany’s Lufthansa, to stop offering lower fares than Alitalia, the struggling majority state-owned Italian flag carrier, on competing long-haul services.

The move by the Italian government comes as it seeks to prevent Alitalia collapsing into bankruptcy by agreeing an emergency state-guaranteed ?400m ($493m) loan to the airline.

But it has sparked a fierce protest by BA to the European Commission and has triggered a row with the UK government.

The UK transport department said the Italian government had been told ?in strong terms? that BA should be allowed to continue with its fare offers.

Lufthansa said it was in talks with Italian authorities after it had been told to raise its fares to Alitalia’s levels.

So much for the white heat of structural reform!

Watch Your Piggy Bank!

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Interesting piece in the FT today about the imagined consequences of the new German “Hartz IV” laws. These laws will among other things reduce non-means-tested unemployment benefits to one year’s duration. The measure forms part of the package of labour market ‘structural reforms’, and personally I see little to argue with here.

The interesting part relates to the perceived consequences:

Last week in the eastBerlin suburb of Hellersdorf a man forced three youngsters at gunpoint to take off their clothes, burn them, and dance around an improvised bonfire. The incident may have looked perplexing, but local reaction quickly blamed the usual suspect: the reform of Germany’s unemployment laws.

“When the new rules about unemployment benefits take effect, incidents like this will multiply,” a resident told the Berliner Zeitung daily. “I’ll have to get a pit-bull.”

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Anyone Feel Like Hiking?

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At the time of writing the Monetary Policy Committee of the Bank of England is busy deliberating as to whether to raise the base lending rate (currently at 4.5%). The consensus view is that the rate will go up a quarter point. Others speculate on a half percent rise (the National Institute of Economic and Social Research – NIESR – is even advocating this). Of course there is always the possibility that the rate will remain unchanged.

Whatever the speculation about the final decision, there is little mistaking the key factor in the decision: the Uk housing market. The centre of debate is really whether the UK housing market has peaked, or whether more rate raising is needed to bring the market back into line with reality. This is a classic bubble bursting situation.
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Who is Elga Bartsch?

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Apart from the fact that she is German, aged 37, and works for Morgan Stanley, perhaps, until recently, little more of any importance would have been known about her. But you try a ‘search news’ click on Google, and you will see how many times the name of ‘our Elga’ shows up in connection with what we might choose to call the ‘German disease’. (In reality the German economy has expanded by an average of only 1.2 percent every year since 1992, which is the same as the Japanese one – and less than half the growth achieved in the U.S. and the U.K. over the same period – so why don’t we say Germano-Japanese disease? This might help us get a bit nearer to the underlying causes). The reason for this: Elga is fast becoming the best known champion of the view that the key problem facing the Germany economy is the high cost of German labour.

“The reason that we go more to India and those countries is we get highly skilled young people in a flexible labor market for cheap prices,” said Henning Kagermann, 56, chief executive officer of SAP, in an interview at the Cebit fair in Hanover, Germany. “This is highly competitive against our home market.”
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A Tale of Two Search Engines

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With Google all set to start their IPO this Wednesday, many analysts are busy scratching their heads trying to work out whether the numbers add up.

One little detail that is exercising their minds is the recent fate of the once acclaimed Lycos. Terra Lycos announced this week that it will sell U.S.-based Web portal Lycos, which it bought just four years ago in a deal variously valued at between 7 billion and 12 billion dollars, to South Korea’s largest Internet company – Daum – for just $105 million.
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Italy: Pay Now Live Later?

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The Italian government appears to be making plans to get to grips with the mounting burden of its debt. This is a move which is being widely welcomed. Under the latest plan, the deficit is forecast to be 2.7% in 2005, down from the 2004 target of 3.2% of GDP.

Without the changes, experts were suggesting the deficit could rise as high as 4.4% next year.

Apparently the only remaining tricky problem appears to be that of the promised tax cuts. Bloomberg today cites Bank Governor Antonio Fazio as joing the ranks of those questioning the viability of these cuts:

Bank of Italy Governor Antonio Fazio urged Prime Minister Silvio Berlusconi to focus on lowering debt and eliminating bureaucracy to boost economic growth rather than making tax cuts the country can’t afford.

Berlusconi’s government Thursday approved plans to cut taxes and adopt deficit reduction measures worth 24 billion euros ($29 billion) in 2005 to keep Italy’s budget from breaching European Union limits. The document didn’t say how 13 billion euros ($15.6 billion) in promised tax cuts for 2004 and 2005 would be funded.

As is not uncommon I have a different question: what will happen to economic growth in Italy if these cuts are implemented. Italy’s economy is projected by the IMF to grow at a rate of 1.2% this year. The previous two years were also extremely ‘lacklustre’. So the problem is that if you can only obtain a growth crawl when you are increasing the deficit, what are you likely to get when you start reducing.

Of course the attempts to get to grips with the problem – however inadequate they may be – are to be welcomed, but what will be the consequences? That is the uncomfortable question which noone seems to be facing up to at the moment.