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".

Locking Swords

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I’d simply love to be a fly on the wall in London this weekend. The G7 finance ministers are about to meet the central bankers, and as in by now well known, these two groups haven’t exactly been hitting it off too well lately, at least, and better said, in Germany and Japan they haven’t.

In particular I would like to hear John Snow’s contributions. Snow notoriously is banking on growth in Europe and Japan to ease the US out of its trade imbalance. But being pro-growth in the present context would seem to imply a stance on interest rates. The central bankers are worried about global liquidity and the danger of US yield curve inversion ( and here, for a very interesting discussion of the topic – certainly the best I’ve seen – from the Morgan Stanley GEF team). So one group want to put rates on hold, while the other wants to raise them, Snow is in the middle, but will he come off the fence?

Brad Setser has a post which has some relation to this.

Brad seems to take the view that a big part of the explanation on global imbalances is the US fiscal deficit. I beg to differ. Indeed I think Brad is in danger of putting himself on the wrong side of an old (1930s) argument that probably he wouldn’t want to be on the wrong side of.

Let me explain: the important thing to watch is the global economy (not the local examples, US, Germany, Uk, China etc – Hat-tip to Andy Xie hear although I don’t have the direct link handy). Now what is important is the global equilibrium, in terms of the sustainable global growth rate. Now……. simply applying a restrictive fiscal policy and a tighter monetary one in the US would bring the budget into balance and the external trade deficit down, but what would happen to the level of employment (in the US and globally)? What would be the knock-on consequence for growth in China? Would this be a ‘better’ equilibrium than we have now, would it be more sustainable? Somehow I doubt it. And I think that is why we need to address this issue globally.

Which takes me back to being a fly on the wall in London……

The Most Bizarre Monetary Policy DecisionOf Recent Times?

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This was Wolfgang Munchau writing in the Financial Times a week ago:

“The pre-announced interest rate rise that the European Central Bank is due to agree this Thursday must rank as one of the most bizarre monetary policy decisions of recent times. The economic recovery in the eurozone remains fragile, as last week’s German confidence indicators have shown. Even the ECB’s own forecast for headline inflation is relatively optimistic, while core inflation remained unchanged at 1.5 per cent in October.”

and he issued a warning:

“It is still not too late to propose ECB reform as part of the next treaty revision. For as long as EU leaders maintain the status quo, they have the central bank they deserve.”

Central bank independence seems to be once more ‘a l’ordre du jour’, and the ECB may well live to find to its cost that there is one thing worse than actually playing the game, it’s playing the game and losing. Now why?
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Orange Market Status

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The European Union has agreed to accord Ukraine market economy status, a move that recognises Ukraine’s reform programme and will obviously mprove the trade relations with the 25 EU member nations.:

The agreement, which will help Ukraine’s steel producers gain access to European markets without being subjected to anti-dumping measures, was announced at a meeting in Kiev between Tony Blair, the British prime minister, Jose Manuel Barroso the European commission president, Viktor Yushchenko, president of Ukraine, and other EU and Ukrainian leaders.

The End of the Dolce Vita?

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Are the good times and the good life still going to continue to roll in the Italy of the twenty first century? This is the core question the Economist’s Europe editor John Peet asks in the latest Economist Survey: Italy, Addio, Dolce Vita. As Peet says:

Italy is approaching a crunch. Rather like Venice in the 18th century, it has coasted for too long on the back of its past success. Again like Venice, it has lost many of the economic advantages which underpinned that success. For Venice, it was a near-monopoly on trade with the East that paid for the creation of its beautiful palaces and churches; today’s Italy has benefited hugely from a combination of low-cost labour and a switch of workers away from low-productivity farming (and the south) into manufacturing (mostly in the north). But such good things invariably come to an end.

Italy badly needed a dose of pro-market reforms, liberalisation, privatisation, deregulation and a shake-up of the public administration, all of which Mr Berlusconi had promised. He even pledged to cut taxes. A majority of Italian voters, backed by much of Italian business, were willing to overlook both his legal entanglements and his conflicts of interest and give him a chance to reform the country. But as the next election approaches, very little of what he promised has been delivered, so many of his erstwhile supporters are feeling disillusioned.
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Angela Merkel’s Best Foot Forward

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Angela Merkel sets an ambitious and optimistic note in her opening speech, going back to the ‘postwar reconstruction’ theme raised in her election campaign. Fine words, and why not, but unfortunately it will need more than good intentions to get to grips with Germany’s present day problems:

Angela Merkel on Wednesday called for a “second reconstruction” of Germany, by recalling the efforts deployed to rebuild war-torn Germany in the 1950s and reconstruct the former Communist east after reunification, in her eagerly-awaited first speech to parliament as chancellor.

“This land has great possibilities – Germany is full of opportunities,” Ms Merkel told the house. “I am looking forward to unleashing this dormant energy.”

Planting The News?

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Wow! The FT today has a very long and extensive story about how the US military have been ‘placing’ stories in the Iraqi press. While I don’t disagree with the observation by one commentator in that “I don’t think that there’s anything inherently evil or morally wrong with it” in a war situation, I do agree with another Pentagon spokesman quoted who argues that it is more than just efficacy which is at stake:

“Here we are trying to create the principles of democracy in Iraq. Every speech we give in that country is about democracy. And we’re breaking all the first principles of democracy when we’re doing it,” said a senior Pentagon official who opposes the practice of planting stories in the Iraqi media.

All this takes me back to my Afoe post last week about alleged suggestions that it might be a good idea to bomb the Doha headquarters of the Arabic satellite TV channel al-Jazeera. The point is, you don’t bomb people just because you disagree with their opinions. That in fact is terrorism, not anti-terrorism, and if you want a free and independent pressthen that is what you have to accept, that it won’t necessarily agree with, or support you. The big danger is that the official Iraqi press loses credibility through this kind of thing, and as a consequence the fragile Iraqi democracy also loses credibility.

Morocco’s Offshoring Advantage

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Following up on my Euromed post on Afoe, I see McKinsey have a report of Morocco’s potential as a services outsource base for the Spanish speaking and Francophone parts of the EU (registration required, but easy and worthwhile IMHO):

Morocco’s appeal includes wages for white-collar workers that are half those in France, a relatively high proportion of university graduates, and many citizens who speak French, the second language in the central region of the country. Furthermore, the cost and quality of its already respectable telecommunications infrastructure are set to improve further with the expected entry of Spain’s Telefónica as a second fixed-line operator. The country’s nascent offshoring sector, with an estimated current turnover of €85 million, includes some 50 mostly small providers that will employ a total of about 10,000 people by the end of 2005. Still, Morocco has captured almost half of the fledgling market for call centers serving French-speaking companies. In addition, Telefónica has established a captive call center in northern Morocco, where Spanish is the second language.

Against All Advice

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Well, despite the fact that the eurozone finance ministers aren’t on board, and that the OECD doesn’t approve, Trichet and company will undoubtedly go ahead tomorrow with the first refi rate rise in 5 years. (I think important issues are involved here, so I’ll try and write something more substantial for Afoe tomorrow, when the decision is announced.):

Europe’s finance ministers on Tuesday delivered a last-ditch plea to the European Central Bank not to raise interest rates, amid fresh international criticism of the bank’s hawkish stance.

Jean-Claude Juncker, Luxembourg’s prime minister, claimed inflation was under control and warned the bank that a rate rise could hit growth in the 12-country eurozone. Simultaneously, the Organisation for Economic Co-operation and Development said it believed a rate rise was premature.

Incidentally, the IMF, in the person of Rodrigo Rato, is also contrarian, so this is very much ‘go it alone’ stuff from Frankfurt: ‘into the valley of death, rode the 600’.

Riding The Euromed

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I used to think that Euromed was simply the name of a train which rides the Barcelona-Valencia run. I was wrong. It is also the name colloquially being given to the Euro-Mediterranean Partnership (aka the Barcelona Process) which was infact launched in Barcelona in 1995. As the blurb tells us, the Euro-Mediterranean Partnership comprises 35 members: 25 EU Member States and 10 Mediterranean Partners (Algeria, Egypt, Israel, Jordan, Lebanon, Morocco, Palestinian Authority, Syria, Tunisia and Turkey). In addition Libya has observer status since 1999.

Well, the parties are back in Barcelona this weekend, and of course the meet has been getting a fair amount of press coverage.
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What A Surprise!

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The results of the latest GfK’s consumer confidence survey are just in. The results are hardly a surprise. (Btw there is a good discussion of consumption in Germany in this post and comments):

Consumer confidence in Germany, Europe’s largest economy, fell for a second month in three as Chancellor Angela Merkel’s government decided to raise sales tax.

GfK’s confidence index, based on a November survey of about 2,000 people that aims to forecast household spending one month ahead, fell to 3.1 from last month’s revised 3.3 reading, the Nuremberg-based market-research company said in an e-mailed statement today. GfK reiterated its forecast that private consumption won’t increase more than 0.2 percent this year.

Higher energy costs are leaving German shoppers with less money to spend in the holiday season while the prospect of a sales tax increase and an 11.6 percent jobless rate dent sentiment. With the European Central Bank poised to raise interest rates as soon as this week, increased borrowing costs will also crimp spending.

Incidentally Wolfgang Munchau in the FT today states that the recent announcement by Jean-Claude Trichet that the ECB was going to raise eurozone rates “must rank as one of the most bizarre monetary policy decisions of recent times”!

Who am I to disagree.