Category Archives: A Few Euros More

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Sobering News

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First off, Dave at MacroBlog has a good summary of the core of the economic policy programme adopted by the new German government. He also has some to-the-point comments about ECB credibility issues

But the big news today must surely be the surprising state of the European consumer . Perhaps the most indicative reading on the situation comes from a report from business consultants Deloitte which states that spending on xmas gifts is expected to fall this year by an average 3 per cent (year-on-year) across nine European countries. Revealingly they find that 49 per cent of Europeans believe their economies are currently in recession.

Now that German domestic consumption is declining comes as no surprise. Economic theory offers us sound explanations as to why this might be the case, nonetheless the pace at which this decline is progressing is pretty striking:

Third quarter growth figures for Europe’s largest economy released yesterday showed that after five years of stagnation, Germany’s economy is locked in a schizophrenic phase. On the one hand the country’s robust exports, which rose 4.7 per cent from the second quarter, are finally translating into stronger investments, up 2.2 per cent.

But consumption, an essential ingredient of a healthy recovery, fell for the third consecutive quarter, pressed by high unemployment, stagnating disposable income and a broader crisis of confidence.

Hanging as a twin threat over this one-legged recovery are the prospect of an imminent rise in eurozone interest rates and Ms Merkel’s pledge to cut spending and raise taxes to restore the country’s public finances by 2007.

However, the recent news from France does come as a surprise. Economic data from France had been rather more encouraging lately, and thus the fact that French consumer spending on manufactured goods declined for a second successive month in October – down by 0.6 percent from September, when it fell a revised 0.3 percent – does come as something of a surprise, and is probably like a bucket of icy water over in Brussels and Paris, and, possibly more importantly, over at the ECB in Frankfurt.

It was only last Monday that Morgan Stanley economist Eric Chaney was taking IMF chief Rodigo Rato to taskfor the latter’s argument that “it would be good to see more internally driven recovery” before starting to normalise interest rates. Chaney took the opportunity to make a full-frontal-assault on what he calls “the legend that only exports explain euro area growth”.

“Since 2003, the contribution to growth of external trade has been constantly negative or null for the euro area, while almost constantly positive for Germany. The French GDP data out on November 18 are confirming this once again: French final domestic demand was up 0.9% in Q3 (3.5% SAAR), driven by strong consumption (0.7%Q despite a sharp drop in food consumption) and even stronger corporate capital spending (1.1%Q). ”

Now normally I would be agreeing with him, since as he says the ‘legend’ is derived from the fact that many analysts take Germany as a proxy for the euro area, and this can be deeply misleading. But this latest round of data counsel caution (and maybe some of that caution could have been reflected in Jean-Claude Trichet’s performance last Friday, at least if the Central banker’s job is to stay ahead of the curve it could have been). Lesson: don’t make yourself a hostage to fortune if you don’t want to end up being hoisted on your own pettard. (And Btw: Touché Señor Rato).

To Raise Or Not To Raise?

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European Central Bank (ECB) president Jean-Claude Trichet’s indication last Friday that eurozone interest rates are about to rise continues to make waves.

Yesterday the EU Observer had a piece indicating the Eurozone finance ministers were not amused, and today we have a retaliatory piece were Trichet explains theat the ECB is the ‘listening’ people bank, which is simply responding to citizen concern about ongoing price rises.

The FT made clear yesterday that the decision to raise just now was not going down well in Berlin, where the incoming government now faces the prospects of introducing a strict fiscal policy at a time of monetary tightening, and when the impact of the recent oil price rise is likely to be pinching the already pinched pocket of the German consumer.

Meantime, as the FT today explains, Trichet is feeling the heat, since he has come out and stated that the ” European Central Bank has no plans to implement a series of interest rates rises” (ie no US-style measured pace).

Plenty of material here for an Afoe post if I find the time later today.

It’s A Flat World, Or Is It?

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Thomas Friedman’s The World is Flat, a personal account of the challenges and benefits of globalisation, has just won the inaugural Financial Times and Goldman Sachs Business Book of the Year Award.

But Stephen Roach, writing in yesterday’s Morgan Stanley GEF, doesn’t agree. For him the world is ‘hardly a flat one‘.

With all due respect to Tom Friedman, there’s nothing flat about this unbalanced global economy. The image of a “flat world” is most appropriate for the endgame of globalization. In my view, that ideal state is decades into the future — if that. In the meantime, the global economy is distinguished far more by its disparities and tensions — and how the resulting imbalances are likely to be vented in world financial markets

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Hollywood’s Big Loss

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No more free money from Germany.

Even though its focus may be far removed from the geopolitics of Europe, Hollywood has reason to be concerned with the recent results of the German elections. The newly designated Minister of Finance Peer Steinbrück announced on Nov. 12 that he was retroactively eliminating the part of the tax code that allows German investors in media funds to defer their taxes. This German tax shelter, as I have previously pointed out, provided Hollywood with an El Dorado of easy cash for the past quarter-century and allowed studios to increase their earnings without any risk. Now it is dead.

I love Edward Jay Epstein’s columns.

Denationalise Tamiflu Immediately!

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The title is really an ironic (if somewhat affectionate) reference to this post from Brad DeLong. Reading the news this morning, it seems that Tamiflu may not be such an unambiguously good thing as it was being made out to be:

Roche, the Swiss pharmaceutical group, on Thursday moved to reassure investors after US regulators said they would on Friday examine reports of up to 12 deaths and 75 cases of children who suffered health problems after using Tamiflu, the company’s anti-flu drug.

The US Food and Drug Administration said it was in “active communication” with regulators in Japan, the country with the widest use of Tamiflu for regular seasonal flu treatment, and where all the deaths and most of the other incidents of side-effects occurred.

I think a number of points could be made here. Firstly in this game there will be no free lunches. There are risks one way and there will be risks the other. Individuals may have to take decisions based on the best available information. Secondly, at the end of the day Tamiflu is not going to be virus-specific for any possible variant of avian flu simply because we don’t yet know the variant, so forward planning and risk assessment is inherently a complicated business here.

Lastly, when Brad said this: ” Low-probability but high-payoff projects are likely to be underfunded by the government–but properly funded by private companies willing to roll the dice. However, these ex ante considerations vanish ex post when an epidemic threatens…”, ( maybe I would say better rather than properly, but that’s a detail) – he was both right and wrong, IMHO, since the real issue which lies behind the argument is the moral hazard one. If you let the market regulate drug development, but then when you have a drug which is a big winner you immediately take it over, it isn’t clear that the market will work as well as you want it to next time round. On the other hand, governments can’t just stand back in the face of a real and present danger to their citizens. So I guess the only answer is negotiation and consensus, and maybe this consensus would include compensating those companies who are given the green light to go ‘full speed ahead’ if it turns out that – post ante – that decision was a bad one.

All in all a complex situation where prudence is indicated.

No Smoke Without Fire?

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Does this add a new dimension to the term “laying down a smokescreen“?

The British military uses white phosphorous in Iraq but only to lay smoke screens, the government said Wednesday, after allegations that U.S. troops used the incendiary weapon against civilians during the battle of Fallujah last year…

“In the British army, we only use white phosphorous as a cover, as a smoke screen,” Defense Secretary John Reid told reporters at a NATO training exercise in Germany.

Signs Of The Times

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Well, for once some news is good news. Also, it seems to confirm what I always suspected: people and cultures do change, they do ‘move on’, even if sometimes it seems they do so impossibly slowly.

Change in Northern Ireland may be so slow it appears imperceptible, but the writing is on the wall for one of the most negative of its cultural traditions — murals glorifying paramilitary violence. Often covering entire side walls of buildings, they are a common sight in working class areas of large towns, acting as a territorial marker, badge of victory or mark of sorrow in a country still deeply divided along religious and national lines.

However, with the Irish Republican Army pledging to end its armed campaign against British rule and some paramilitary groups loyal to Britain also committing to end violence, the menacing paintings that for decades symbolized the province’s conflict are slowly being replaced.

Where once masked gunmen and shadowy assassins loomed from building walls, pictures of sports stars, authors and landscapes are beginning to spring up — most recently in pro-British “unionist” or “loyalist” areas where armed groups are starting to stand down…..

A portrait of Belfast-born writer C.S. Lewis, author of the Narnia stories, now graces a wall in east Belfast, a pro-British area, as does a painting of George Best, Northern Ireland’s favorite soccer-playing son.

Children Of The World Unite!

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Or should that be children of the world connect (to each other) using your new – Nicholas Negroponte facilitated – 125 dollar laptop. This initiative to bring cheap and abundant computing and connectivity to the world’s children seems absolutely terrific. Obviously, and at one foul swoop, the global playing field is going to become a lot flatter. If all this works, and gains enough traction to become unstoppable even in those countries who will surely resist, then the biggest digital divide of the future will surely be an age-related one.

The laptop can be powered either with an AC adapter or via a wind-up crank, which is stored in the housing of the laptop where the hinge is located. The laptops will have a 10 to 1 crank rate, so that a child will crank the handle for one minute to get 10 minutes of power and use. When closed, the hinge forms a handle and the AC cord can function as a carrying strap, according to Negroponte. The laptops will be ruggedized and probably made of rubber, he said. They will have four USB (Universal Serial Bus) ports, be Wi-Fi- and cell phone enabled and come with 1GB of memory. Each laptop will act as a node in a mesh peer-to-peer ad hoc network, Negroponte said, meaning that if one laptop is directly accessing the Internet, when other machines power on, they can share that single online connection.

The lab will initially target Brazil, China, Egypt, South Africa and Thailand, according to Negroponte, as well as the U.S. state of Massachusetts, which has just committed to equipping every schoolchild with a laptop. Negroponte hopes to start mass production of some 5 million to 15 million laptops for those markets towards the end of 2006. Come December 2007, he estimated production of the laptops at between 100 million and 150 million, three times the number of annual shipments of commercial laptops.

Kurdish TV in Denmark

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One of the many reasons I continue to support the Turkish EU accession process is because I think it will be good for human rights and democracy in Turkey, and good for the Kurds. This latest spat between Turkish prime minister Tayyip Erdogan and his Danish hosts, is simply another good example of this at work. The pressure is constantly on Turkey.

Turkish prime minister Tayyip Erdogan boycotted a joint press conference with the Danish leader in protest at the presence of a Kurdish TV station on Tuesday (15 November), highlighting European values on free speech.

“There is a fundamental difference between Turkey and Denmark in matters of freedom of expression,” the Danish prime minister Anders Fogh Rasmussen said at the press conference his Turkish counterpart avoided.

The Turkish prime minister was visiting the Danish capital Copenhagen as the first stop in a tour around EU capitals to discuss the prospects of Turkey’s EU membership. Mr Erdogan stayed away from the press conference in protest at the presence of a journalist from the Danish-based TV channel Roj TV.

Turkey has repeatedly urged Denmark to close the channel, which sends news, entertainment, debate and children’s’ programs to Kurds in Denmark, arguing it is financed by the Kurdish rebel party, the PKK, which is on the EU’s list of terrorist organisations. Danish police are investigating the station, but have not found evidence of links to forbidden organisations so far.

Source: EU Observer

UK Growth and Inflation News

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The UK economy is still very much hanging in the balance between going up and going down IMHO. The latest BoE growth estimates, coupled with not especially good employment numbers, and indications that inflation may be coming down (and hence interest rates may follow) has caused a noteable pressure on the pound sterling. BoE governor Mervyn King has put it like this: there are “substantial risks” both to the outlook for inflation and growth. The risks are “broadly balanced” so that the eventual outturn is ” just as likely to be stronger or weaker than the forecast”.

Inflation in the UK has fallen for the first time in more than a year, increasing the chance that the next move in interest rates will be down. The annual consumer price index, which is the Bank of England’s target measure, fell from 2.5 per cent in September to a weaker-than-expected 2.3 per cent in October, according to official figures.
Source: Financial Times

Unemployment in the UK continued to rise in October, but there was little evidence of inflationary pressure on pay as the growth in average earnings and bonuses fell slightly, according to official figures published on Wednesday. The claimant count, which measures unemployment as those out of work and claiming benefit, increased by 12,100 to 890,100 in October, the ninth consecutive month it has nudged higher.
Source: Financial Times