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".

Lost In Translation?

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Interesting piece in the FT this morning about Jack Lang, French PS politician, and possible presidential hopeful in 2007. Before going further I should perhaps point out that the only thing I really know about Lang is that when he was the Culture Minister, back in the 80’s, he opened a small museum dedicated to my preferred contemporary French poet – Ren? Char – in Char’s home town of L’Isle sur la Sorge. This fact may cloud my vision somewhat.

Lang is, one would have thought, the most improbable of Presidential candidates. Nonetheless, as the FT points out, he is definitely out in front as the most electable PS politician in the recent Paris Match (ifop) poll, pinning Sarkozy down to a fairly assailable 52% of the voting intentions in a head to head with him.
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Christian Noyer: Much Ado About Nothing?

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The euro fell briefly below $1.19 yesterday. There is nothing surprising or exceptional about that, the common currency has been drifting steadily downwards against the dollar for a number of, by-now, pretty well known reasons – better economic performance in the US, a growing interest rate differential between the ECB and the Fed, political issues following the referendum noes, and an incapacity to decide what to do with the SGP. Yesterday however, an apparently new element was introduced: Christian Noyer, and his appearance before the Foreign Affairs Committee of the French National Assembly.

That this should have caused a stir surprises me. Christian Noyer is Governor of the French national bank (and not simply, as much of the press report, an ECB governing council member). It is therefore perfectly logical that when asked whether any country could leave the eurozone, he should reply in the affirmative. EU member states are, as Noyer says, still sovereign nations. He would therefore have been lying to answer ‘no, it is impossible’. Curiously, the other part of M. Noyer’s recorded testimony, that any exit would put in question continued membership of the EU is far more debateable, yet seems to have attracted far less attention.

Membership of a currency union is (or should be) an economic, not a political decision. Decisions on entry or exit should therefore be taken on economic grounds, and discussions of the issues involved should be possible without an atmosphere of emotional hysteria. Of course, if your currency falls simply because someone states the obvious (I mean the information content *is* zero), then this may indicate that there is a rather deeper problem knocking around somewhere or other.

Update: Jean-Claude Trichet yesterday defended the current ECB TWIRP stance (two per cent interest rate policy) before the European parliament?s monetary affairs committee and understandably rejected a call for an annual evaluation of the benefits of the common currency for zone-member citizens.
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Forthcoming German Elections?

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Apparently there are still constitutional doubts about the validity of Scr?der’s election call:

“I have my doubts whether the chancellor convincingly demonstrated that his coalition is no longer stable or has lost its ability to rule,” Karin Grasshof, a retired Constitutional Court judge, told Bild am Sonntag newspaper

Any of our German readers able to clarify what the real extent of these doubts are?

Fitch and Sovereign Debt

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Sorry if I’m belabouring a rather obscure and generally ‘non-sexy’ issue: government debt in the eurozone. If I am doing this it is because I think something important is happening. I missed this point during the week.

Fitch Ratings on Wednesday lowered to negative its credit rating outlooks for Italy and Portugal ? both among the three weakest countries in the eurozone ? amid concerns about their deteriorating public finances.

The negative outlooks could herald future credit rating downgrades, adding to concerns about economic divergence within the eurozone.

That’s the second time in a week (See the S&P post) that a ratings agency has done this to eurozone government debt. There are three economies in the ‘particularly at risk category: Italy, Greece and Portugal. They are ‘at risk’ not simply because they have substantial debt and/or deficits, but becuase they have this *and* important structural economic problems about the kinds of economic activities they engage in, they have a lack of international competitiveness that a drop in euro value of the order of magnitude we are seeing won’t resolve, that they are going to be forced to reduce their deficits during an ongoing economic ‘growth slowdown’, and that given their ageing populations their mid-term fiscal outlook is between poor and not-sustainable. Maybe we aren’t noticing much evidence of it yet, but the landscape beneath our feet is changing, even while we talk.

Incidentally, Italy has found another big one-off:

Italy’s government will raise as much as 4.1 billion euros ($4.9 billion) selling up to 10 percent of Enel SpA, Europe’s fourth-biggest utility, in the world’s largest share sale so far this year, the Finance Ministry said.

Italy will sell Enel shares at 7.18 euros each to institutions, Finance Ministry Director General Vittorio Grilli said at a press conference in Rome today. That’s 0.7 percent below Enel’s closing share price yesterday. Shares will be sold to individual investors at 7.07 euros each.

The thing is, you can try selling-off the furniture when you have problems paying the mortgage, but you can’t keep doing it forever.

Sovereign Bond Yields

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The FT this morning discusses the state of the bond markets for the ‘weaker’ eurozone economies: Italy, Greece, Portugal. As expected interest differentials between government debt in these countries and German debt is widening, but only slowly. Italy is being evaluated at present as the weakest member. As the FT points out the temperature of the water will be tested again this week when Portugal issue a new batch of debt:

“The expected launch next week of a new 10-year benchmark bond by Portugal, whose credit rating was recently downgraded by Standard & Poor?s, is set to test investors? appetite for debt issued by weaker eurozone members.

Portugal, which on Friday appointed bankers to manage the syndicated bond sale, will be competing for demand against France, which enjoys the highest credit rating available and plans to auction a new 10-year bond of its own next week.

Bond spreads of Portugal, Italy and Greece – the three weakest countries in the eurozone – widened marginally on the back of this. On the week, the spreads of bonds of Portugal, Italy and Greece, widened by just 1.3bp, 0.5bp, and 0.5bp, to stand at 8.3bp, 21.5bp, and 24.5bp, respectively against Bunds.

But they have been widening for several months. Spreads of Italian 10-year paper, for instance, have doubled from 11bp to 21.5bp against the Bund in the last four months.“

Euro Breaks $1:20 Barrier

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I’ve been reasonably quiet about the evolution of the euro during the last couple of weeks. The movement has been a pretty volatile tug-of-war between the general downward drift, and resistance to change. Today there seems to have been a decisive push on one side (maybe because it was a Friday afternoon on a holiday weekend), and the currency seems to have decisively broken the $1:20 level.

There are various reasons why this might have happened, in particular the Federal reserve quarter point rise yesterday plus good manufacturing data and consumer confidence readings for the US economy. And this despite a little bit of rather better news on the eurozone economy front (here, here) . As I have been saying, this is going to be an assymetric process: good news on the US front, or bad news on the eurozone one will always dominate given the underlying fundamentals, and the weaknesses revealed by the constitution votes and the dithering on the SGP. Next frontier: $1:15 probably, but I have no idea how long it will need to get there. It depends on the flow of news. Meantime the fall has pluses and minuses. It will help exporters, but the rise in oil prices will be compounded, and this will only hinder any possible revival in domestic demand.

This piece is a fair and reasonable assessment of the state of play to date.

The UK’s EU Presidency

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Well, it’s July 1, so the UK is now officially the holder of the rotating presidency. Yesterday Jack Straw outlined the UK government’s priorities to an enthralled House of Commons:

Mr Straw told the House of Commons that Britain would ?work hard to reach an agreement on future financing by the end of the year?

The foreign secretary said that another key area of concern for the UK presidency was Turkish membership of the EU, acknowledging that the issue was ?controversial? in many parts of Europe. Mr Straw said: ?The British government remains strongly committed to Turkey joining the EU.?

Let the games commence!

The Dangers Of A Housing Boom

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Last year 700,000 new homes were built in Spain. A record number, and one which seems disproportionately high for Spains real future housing needs. In all likelihood the Spanish property market will one day crash, and prices drop considerably from their current highs. But what if they don’t? What if we ‘merely’ get a soft landing. This is a question the FT puts today in the US context, but what it says may be even more applicable to Spain. The economy is driven by the construction and property sector, simply slowing-up is going to have repercussions.

As property values have soared so has the level of interest in working in real estate. The number of realtors in the US has jumped by 45 per cent over the past four years to 1.1m, and many have left blue-chip companies or even delayed college to join the property jamboree. More joined the profession last year than at any time since records began in 1975.

Add in jobs in residential construction, furniture and DIY stores and mortgage finance, and the buoyant property market emerges as the main driver of employment growth over the past four years. Economy.com, the consultancy, estimates that about a third of the 2.6m jobs created in that period were in housing-related sectors.

This raises the question of what happens to these workers when the housing market cools.

German Deficit Continues Above 3%

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German Finance Minister Hans Eichel said today that the German deficit would be over the 3 percent limit for the fourth consecutive year this year, and would remain there at least till 2007.

The latest data, from a meeting with state finance ministers, projected this year’s deficit to reach 3.7 percent. In addition, the country is projected to maintain a deficit of 3.4 percent in 2006 and 3.1 percent in 2007, the finance ministry said. On Wednesday, the IMF said as part of its regular review that it expected Germany’s budget deficit this year to be 3.8 percent of
GDP this year.

Italy Given Two Years To Correct Deficit

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As indicated earlier in the week, the EU Commission has given Italy two years to correct its deficit.

“The European Union on Wednesday gave Italy until the end of 2007 to cut its budget deficit in line with euro-zone rules. The EU head office said Italy has been violating the budget rules underpinning the common currency by running deficits above 3 percent of its gross domestic product in 2003 and 2004 and is set to do so this year and next. But due to weakness in the euro-zone’s third-largest economy, the head office said it will give the country two years instead of just one to bring the deficit back in line.”