Category Archives: Economics: Currencies

Inverse Nixon Theory

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It’s been said in the past – indeed, it used to be conventional wisdom – that unlikely right-wing governments were more likely to make peace, because they enjoyed credibility and a tough reputation. More obviously, conservatives long enjoyed a reputation for “fiscal credibility”, which supposedly helped them to control inflation by giving the impression that they would either be willing to sit on the money supply, or trade-off unemployment for inflation along the Phillips curve.

Curiously, with what is commonly taken to be a swing to the Right in Germany and France, we’re seeing the opposite. One of Angela Merkel’s first acts on taking office was to announce a future rise in consumption taxes, which isn’t very much different in terms of public perception to cutting them in the meantime. Nicolas Sarkozy has since announced that he’s going to have a pause in the reduction of the national debt – read, reflate the economy somewhat. Specifically, as he’s promised to hand out a €20 billion “fiscal shock”. But nobody appears to be very worried. It’s a big contrast to five minutes ago, when modalities of the Eurosystem’s breakdown were a regular topic on AFOE..

Compare the keenness of the Schröder, Jospin, and de Villepin governments to stick to the script of the Stability Pact, come what may. (No, de Villepin wasn’t a social democrat, but Sarko certainly campaigned as if he had been.) There’s a non-trivial argument that the pact was a serious economic mistake. It would certainly be interesting if it only survived because the Left was paranoid about seeming over lefty, and especially if the continental economy’s uptick had something to do with the Right being able to let it ride.

The Disunited States: America’s Collapse?

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Gideon Rachman of the FT gives a sound thrashing to Mark Steyn and the other participants in a conference on “The Collapse of Europe” somewhere in Florida California. It’s always good to see the racist buffoon Steyn getting fisked, but there’s a deeper point here. What if it was the United States that was threatened by “collapse”?

After all, it is a society that faces some grave problems. Oil-intensity of GDP is surpassed only by China among industrialised economies, meaning that the US has a lot of distance to make up on its competitors on the way towards sustainability. The long-term population shift into Florida and the South-West was famously the result of air conditioning, which doesn’t look such a cracking idea any more. The Western states have always had problems with water, which so far have been coped with. Will they always be, especially with reduced snowpack in the Rockies hitting water supply and hydroelectric generation?

The economy, meanwhile, faces gargantuan twin deficits and a dollar sustained by the conditional support of the People’s Bank of China. In the event of a devaluation, how quickly can resources shift into exporting and import-competing sectors? Gigantic sums – hundreds of billions of dollars – are projected to be necessary to restore the US Army after it finally leaves Iraq.

But perhaps the most worrying feature is the increasingly vicious political polarisation, and its corollary, the increasing efforts each side of the partisan divide makes to withdraw into its own version of reality. We mentioned the re-direction of resources into the tradable sector of the economy, but will those resources be available in a nation of creationist “science” fairs? Solutions like this one aren’t for duffers. More importantly, the same distinction late Pentagon strategists like Thomas Barnett make between the “integrated core” and the “nonintegrating gap” was making itself plain in the US. (What else, after all, does the famous and prescient “United States of Canada/Jesusland” map illustrate?) Can a society include Intel ISEF and the Christian Soda Volcano show without tearing itself apart?

Similarly, exactly the same trends were making themselves felt demographically as in Europe, with a low birth rate among the existing population being masked by immigration, which is bitterly – and violently – resented by some sections of society. Perhaps they realise that, in the long run, immigration only strengthens the remaining outward-looking sections of society. US publicists boasted that Muslim immigrants to the United States were “more integrated” than in Europe, but on closer inspection this simply meant that nothing bad had happened yet.

These problems tested the constitutional fabric to the limit – consider the ugly confrontation between Alberto Gonzales and Thomas Comey by John Ashcroft’s hospital bed. Comey found it necessary to have his FBI security detail ordered to resist Gonzales’s Secret Service guards by force if necessary. By 2007, was it already too late for the United States to avoid its second Civil War? Even though the outbreak of violence on the California-Nevada line was unexpected, the forces that led to it had been around for years, and it is a truism that nobody ever realises it is happening to them until it happens. Hence the scenes of people going about their business as foreign nationals were evacuated on the EU amphibious assault ships.

It is certainly no more ridiculous than “Eurabia.”

French Candidates: What is this EU thing anyway?

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Why do the leading candidates in the French presidential election seem to have utterly strange European policies?

Take Nicolas Sarkozy. He supposedly believes in “rupture” with old ways and a dash for a new free-market, hard-nosed, toughness cult future. And Euroscepticism is at the heart of this. But at the same time, he has promised to restore le productivisme – that is to say, the maximisation of volume – as the guiding principle of the Common Agricultural Policy.

That’s not free-market, tough, eurosceptic, hard-nosed, liberal, or anything else, except for pure clientele politics. Better yet, it’s the kind of clientele politics that uses other people’s money. Yawn. Not that the peasants’ representatives believes in it – one of them recently said that “there are no cloned Chiracs available”.

Fascinatingly, he’s also now blaming the European Central Bank for its exchange rate policy – as is Ségoléne Royal. Sarko thinks the trouble at Airbus is all down to the bank’s “policy of over-valuation against the dollar.” Sego apparently asked for Angela Merkel to help change the ECB’s charter so that “its sole objective would not be the exchange rate.”

One problem – the exchange rate is not the objective of the ECB. The ECB does not target the exchange rate. This is, of course, all part of the game with the straining “Bretton Woods II” arrangement between the US and China pushing the adjustment burden our way. But – the ECB does not stock and does not sell exchange rate targets.

The Plot!

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I’m not sure what Jerome is driving at here. It seems quite clear that, by promising a further referendum on whatever arises from Angela Merkel’s efforts to revive the Constitution, Ségoléne Royal is taking quite a risk, not least by betting on her ability to get the Laurent Fabius fanclub on side. I wouldn’t bet on a remixed Euroconstitution passing a referendum in France, but perhaps the argument is that the “non de gauche” was really a generalised protest vote and once the Left is back in power, the poison will have been drained from the issue.

Instead, the collectif antilibérale over there seem to think the whole thing is a British plot to get the Germans to stop the French from reviving the constitution, which is now a key document of multipolarity, solidarity, republicanism, laicité and other agreeable qualities. It used, of course, to be an Anglo-Saxon liberal conspiracy to subvert the French welfare state, but presumably that portion of the statement is no longer operative. Anyway, it’s not the French government that is reviving it, it’s the Germans. And it’s not the Left that is reviving it, but the Right, which begs the question why he is so annoyed by the possibility of its non-revival.
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A Fistful of Evro?

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I see from EurActiv that the Bulgarians are runing into some linguistic trouble over the single currency:

The country has expressed concern over the differences between Bulgaria’s Cyrillic and the EU’s Latin alphabets, in response to renewed European Central Bank (ECB) demands that ‘euro’ be spelled and pronounced with a ‘u’ and not a ‘v’ as Bulgarians wish (‘evro’).

(Strictly speaking of course the argument is whether or not the Bulgarians should be allowed to continue calling it the “евро”, not the “evro”, as nobody plans to use the Latin alphabet for the word.)

Nobody seems to have noticed that in Greek the word ευρώ is also pronounced “evro”. Those who are more familiar with ancient rather than modern Greek (which is probably the majority of those outside Greece who have bothered to think about this issue) will have assumed that the word is pronounced with only one consonant rather than two.

Anyway, it’s not as if other languages are uniform. If that Latvians can say “eiro” and the Maltese “ewro”, the Bulgarians should be allowed their spelling, and not be made to go down the road of the Slovenes, who are forced to use “euro” officially but continue to use “evro” unofficially.

Wikipedia has a page about this. (Of course.)

Visit Hungary Now!

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Because they devalued the forint this summer, so everything is now about 7% cheaper.

Well, they didn’t actually devalue it. No. I mean, that would imply there had been a… devaluation. Ha ha, how silly. No, what happened was that the Bank of Hungary moved the band in which the forint was allowed to float freely. Whereupon the forint freely floated down from around 250/euro to more like 275/euro. So, it was a sudden fast downward change in the value of the currency caused by central bank action. Which is not a “devaluation” at all.

(The forint lost about 10% of its value in a month; you can see the graphic here. It has since clawed back about a third of that loss. Still, a Euro will go about 7% further than it would in May, and about 10% further than in March.)

Nobody seems to have paid much attention, but I think there are some points of interest here.
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The “Teuro” Dissected

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Did prices really go up when the Euro arrived? The public mind, or at least the dominant media discourse, says they did. The inflation indices say they didn’t, or at least the prices that did go up were outweighed by the ones that went down. This paradox may have been solved. Erich Kirchler, of Vienna University’s Institute for Economic Psychology, tells Der Standard how.

Kirchler formed three representative groups of volunteers, and showed them prices in Schillings, then in euros. One group’s price was exaggerated by 15%, one reduced by 15%, and a control group saw correctly converted prices. All three groups were convinced the prices had risen…yes, including the second group. When he repeated the experiment with wages, rather than prices, the guinea pigs were convinced the opposite was the case.

He theorises that two well-known cognitive biases are at work – irrational perception of risk (the difference between accepting €10 now, or a 90% chance of €90 later) and the salience heuristic (unrepresentative but extreme events are over-perceived).

I was in Austria for the introduction of cash Euros, and I recall not so much that prices went up, as that the standard sums of money one withdraws from ATMs (20, 50, 100 etc) were suddenly considerably more and hence it was easy to spend more. Everyone was convinced that prices went up, though. And the German-speaking press had been hammering the word “Teuro” (roughly: “dearo”) into the meme-pool for months before the switch. (Especially, of course, Bild Zeitung and the execrable Krone..)

Why France MUST Reform – MUST, I Tell You!

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Since the withdrawal of the CPE and the resulting collateral damage to Dominique de Villepin, not to mention Nicolas Sarkozy’s unexpected appearance as a unity figure at the height of the crisis, it’s rapidly being promulgated as conventional wisdom that France “is ungovernable”/refuses to “reform”/cannot be “reformed”. There is only one problem with this discourse, very popular in anglophone leader columns and the like, which is that it’s nonsense.

It’s quite often been raised here on AFOE that the French economy isn’t actually in trouble. Growth, although not great, is ticking along, inflation is controlled, unemployment is higher than the UK but lower than Italy or Germany, and the demographics (as Edward Hugh will no doubt point out) look a lot better than many other countries. Certainly, there’s more youth unemployment than one might like, but almost all the figures for this are wildly misleading. The percentage rate of unemployment in the 15-24 years age group looks scary high, but is actually a very small percentage of that group–because most of them are in education or vocational training of some form and hence not part of the labour force. Unemployment as a percentage of the age group is rather lower than the national rate and not much different from that elsewhere in Europe. (Le Monde ran a useful little chart of this in a supplement yesterday that doesn’t seem to be on the web.) Much – indeed most – of the difference in employment growth between France and the UK in recent years has been accounted for by the UK government going on a hiring binge.

So why the crisis atmosphere? More, as ever, below the fold..
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Es Lebe Das Exportventil!

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Chris “Stumbling and Mumbling” Dillow has a very interesting post on signs of German economic recovery. Interestingly, the bellwether Ifo confidence index has shown a dramatic uptick, reaching its highest level since 1991. Dillow proceeds to examine its correlation with the DAX stock market index.

Now, as Chris points out, DAX-constituents are likely to be the most globalised German businesses. The DAX tracks the Ifo with about a three month lag. This all suggests that a) the most globalised German businesses are feeling chirpy, as you’d expect in an economy struggling to raise domestic demand that trades with several raging boomers, and b) that some things never change.

Back before the Second World War, before the Nazi seizure of power, there was something known as the Exportventil in German. This means something like “export safety valve” in translation. What it meant in practice was that German industrialists believed that exporting was a hedge against the economic and political instability at home, and duly specialised in exporting as much stuff as possible. That is pretty much exactly opposite to what you’d expect – after all, you normally assume that German businesses know more about Germany than Country X and therefore face lower risks at home, not to mention the foreign exchange risk involved.

There were good reasons for this, though – economic conditions inside Germany were dire, the devaluation of the mark was helpful – and alternatively you could price your products in hard currency and thus protect yourself against the hyperinflation. It also helped that you had a stream of foreign-denominated revenue, which meant you could borrow in the US. The downside of the Exportventil, though, was that German businesses were highly operationally geared with respect to world trade, and German banks tended to have long-term German assets and short-term US and sterling liabilities.

The onset of the great depression, of course, slashed demand for German exports – and the beggar-your-neighbour policies drained world trade of liquidity, which hit the Germans twice as hard because of export dependence. So the safety valve turned out to be more of a seacock that let more water into the ship. Germany, however, still seems to love exporting – which perhaps explains the strong “home bias” that Chris claims to have identified.

In a tangential theme regarding historical legacies and the way things don’t change, check out this post at Veronica Khokhlova’s. Seems the Ukrainian electoral map divides along the ancient border of Kievan Rus..