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".

FDI in France and Germany

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John Snow obviously had had sight of the document ( and here pdf ) when he went round lecturing us that Europe may become a non-favoured environment for US FDI:

“Foreign investment in France and Germany fell sharply in 2004, reinforcing concerns that inflexible labour practices and weak domestic demand are driving investors elsewhere.

In France, inward investment almost halved from $43bn (?35.44bn) to $24bn, according to figures released yesterday by the Organisation for Economic Cooperation and Development, the group representing the world?s most industrialised countries“.

But as much as the facts, the reasons behind the facts are interesting.

“Mark Zandi, chief strategist at Economy.com, the consultants group, said the data showed US companies the main source of direct investment funds in 2004 were spending their cash piles mainly on Asian investments.

?US companies are attracted to Asia partly because the currencies remain competitive, but also as low cost bases for production destination and as growing markets in their own right,? he said.”

Actually there is little realistic way that the EU or the US can reasonably expect to compete with China for FDI on China’s own terms, we both have to find another way.

Have We Got It Wrong On China?

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Politically incorrect as ever, Samuel Brittan asks an interesting question in today’s FT: have we got it wrong on China. Have Western leaders so obsessed themselves with the need to lecture China on what they should be doing with the Renminbi that we are missing a historic opportunity to put pressure on them about human rights and democracy issues?

“Western statesmen have every duty to remind Chinese leaders of their still appalling human rights record ? from the Tiananmen Square massacre to the occupation of Tibet and the continued veneration of Chairman Mao, who has been exposed as a killer on the level of Hitler and Stalin.

Unfortunately, they have gone quiet on these issues and have instead lectured the Chinese on the need to revalue the renminbi. It is not as if China were making a mess of its economy. On the contrary, it has a higher growth rate than any country in the Organisation for Economic Co-operation and Development. And, far from appealing for handouts from the west, it is one of the main sources of the financial inflows sustaining the US economy“.

In Lira, or in Euros?

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Even if it is a debatable question whether or not the Iraq war is bogged down in a quagmire, Italy’s economy evidently is. And no-one has even gotten round to offering a plan ‘b’, not even Tony Blair himself. So the silence is deafening, and this simply leads to increased speculation. Berlusconi only pronounced publicy on the issue last Tuesday, nearly three weeks after Maroni’s referendum call. Latest on the list of those taking a long hard look is Bloomberg’s Mark Gilbert, who has dug out an old paper by legal expert on international financial systems Hal Scott.

The key points:

“Countries have kept their own payment systems, government debt instruments, central banks, and the lion’s share of their foreign-exchange reserves,” wrote Hal Scott, professor of international financial systems at Harvard Law School, in a 1998 paper. “It is almost as if the EMU countries have hedged their bets on EMU by retaining the key institutions needed to re- establish their own currency and monetary policies if need be.”

Scott’s paper, titled “When the Euro Falls Apart,” went on to ask “would foreign law, if applicable, such as the law of the U.S. or Germany, enforce the re-denomination or provide instead that the contracts must be honored in euros or are breached if not honored in euros? This is far from clear given the lack of precedents.”
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Iraq’s Legacy

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This issue has, I think, been obvious for some time now.

“A new classified assessment by the Central Intelligence Agency says Iraq may prove to be an even more effective training ground for Islamic extremists than Afghanistan was in Al Qaeda’s early days, because it is serving as a real-world laboratory for urban combat.

The assessment, completed last month and circulated among government agencies, was described in recent days by several Congressional and intelligence officials. The officials said it made clear that the war was likely to produce a dangerous legacy by dispersing to other countries Iraqi and foreign combatants more adept and better organized than they were before the conflict.”

Which makes the problems raised in this post all the more preoccupying.

More Bad News From Italy

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Italy’s crisis rumbles on, and I don’t expect it to get much better any time soon. This week we learn that Italian retail sales fell sharply in April,

After adjustment for seasonal factors, retail sales in April were down 0.8 percent on the previous month ? the steepest month-on-month fall since May 2004. Compared with a year earlier, sales were 3.9 percent lower – the sharpest decline in the series? history.

and that consumer confidence in Italy fell in June to its lowest since last September:

The ISAE institute reported that its consumer sentiment index fell to 102.9 in June, from 104.3 in May. The index has now fallen in six of the past eight months.

ISAE noted that the index measuring expectations about the general economic situation declined to its lowest level for ten years, largely due to concerns about job security.

Also Italy posted a trade deficit with non-EU countries of 487 mln eur in May compared with a 109 mln surplus a year earlier:

Exports rose 10.3 pct year-on-year in May to 10.647 bln eur, while imports rose 16.6 pct to 11.134 bln.

In the five months to May, the trade deficit widened to 5.225 bln eur from 1.732 bln, as exports rose 7.6 pct and imports increased 15 pct.

Spanish Hotel Prices

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Hotel prices in Spain remained in May at 2004 levels according to a National Statistics Institute (INE) report today. This could be a significant reading if price inflation in fact is disappearing from the sector. As the report notes, most of the recent increase in business has come from Spanish nationals.

Spain is running a large trade deficit. Tourism is one of the key ‘exports’. The combination of a high euro, and continuing domestic inflation has been hitting this badly. The non-increase is obviously a measure of the pain reading. Hotel and tourism prices have been rising at an annual rate of 5% plus since the start of the century.

Myths And Reality

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The FT has a timely piece on the supposed ‘anglo saxon model’. Stereotypes are just that, stereotypes, and more often than not they obscure more than they illuminate:

“Britain’s “Anglo-Saxon model” is believed to have produced filthy hospitals, long queues, a collapsing pension system and draconian welfare-to-work programmes that produce high levels of poverty and inequality.

The truth is more nuanced“.

On The Button

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The Economists ‘Buttonwood” gets right to the point. Talking of the problems of funding acquired pension liabilities, he notes:

“There are a couple of weird circularities here. Most of the burden of filling these gaps will fall on the companies themselves, which will depress their profits. That, in turn, will depress share prices, which will make it harder to achieve adequate investment returns. And if asset managers turn en masse to bonds with long maturities to match their assets and liabilities more precisely, which is necessary especially for older plans, that will raise bond prices, depress bond yields and increase the present value of assets they must hold?again, widening the pensions gap. .”

The solution to this conundrum – both in the public and the private pensions sector – is by no means obvious.

France: INSEE To The Rescue

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Just days after new French finance minister Thierry Breton suggested that French growth would be around 2% for 2005, France’s principal statistical agency, INSEE, point out that this is virtually unachieveable given what we already know about growth this year. 1.5% is the INSEE forecast, and even this figure they say has downside risks.

Meanwhile apparently, down at the commission they have M. Breton in their beady eye.

Let’s Get Down

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The global interest rate cycle seems to be about to peak (of course at the ECB and in Japan it never really got started). The only thing which is surprising about this, is that anyone should be surprised. I am also convinced that Greenspan is nearly done at his end, and pretty much agree with Bill Gross, who “sees the Fed raising the rate on federal funds twice more, stopping at its August meeting at 3.5%”. I think one more quarter point is pretty much guaranteed (too much of a shock to the system if he doesn’t), the second one will be more debateable, just look what happened to the US bond market yesterday.

The Fed is really pretty much at the mercy of the ECB. Evidence for this? Well look at the impact of the Riksbank decision earlier in the week. I think you have to go back quite a distance to find a time when the financial world was waiting with baited breath to hear the latest prouncement from Sweden’s central bank governor. Or again, the entrails scrutiny on the BoE monetary policy committee minutes.

This process should have been fairly predictable, and once the Frankfurt/Washington consensus comes out of denial (that what is happening actually *is* happening) we can get down to the much more interesting little detail about *why* it is happening.

As Gross says “disinflationary forces are winning out”, now why would this be?