On the face of it Hungary’s situation is pretty dire. As I keep reminding readers of this blog, even Angela Merkel recently claimed that “you cannot compare the dire situation in Hungary with that of other countries” as if the worst off you could be was where Hungary is now, effectively turning Hungary into the benchmark case for economic “badness” (at least as far as the EU goes, Ukraine is obviously “another country” in this respect). I cannot agree. As I have suggested time and again on this blog, although Hungary’s situation leaves little to be envious of, it is not as bad as some are making out in the current “demonisation” process, nor are the other Eastern Economies (even those in the Eurozone as I argue here in the cases of Slovakia and Slovenia) really as sound as some have been making out. Indeed in my view the Hungarian economy is not the worst case in the EU27 (I would rather suggest that either Bulgaria or Romania will be battling it out soon enough for that dubious honour). Obviously Hungary is in the midst of a major correction, and has been for nearly three years, but during that time Hungary has made considerable progress along its appointed road, and now has an industrial export sector which no one should be sneezing at. The problem is simply that Hungary (for reasons to be explained below) is now an export dependent economy, and such economies are among the worst affected in the short-term by the present slump in European (and global) economic activity.

This simple fact was brought home only last week by January’s export figures, which show the dramatic nature of the recent decline in Hungary’s external trade, since both exports and imports were down at a rate of around 30% year-on-year. The decrease was slightly higher for exports than for imports, and consequently the trade balance was once more negative. Exports were down by 31% compared with January 2008, showing the extent to which Hungary’s export driven economy has been affected by the recession in the rest of Europe.

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“Most other countries in the region are faring much better, though….Like Slovenia, which joined two years ago, Slovakia can enjoy the full protection of rich Europe’s currency union, rather than just the indirect benefit of being due to join it some day.”
The Economist

“Saying that the situation is the same for all central and eastern European states, I don’t see that……you cannot compare the dire situation in Hungary with that of other countries.”
Angela Merkel

“Happy families are all alike; every unhappy family is unhappy in its own way”
Tolstoy

Slovenia’s economy contracted for the first time in more than 15 years in the fourth quarter of 2008, and is almost certainly heading for quite a deep recession as a construction boom came to an end while demand dropped for exports to other economies in the European Union. Gross domestic product shrank 0.8 percent year on year following a revised 3.9 percent expansion in the previous quarter. More astonishingly, quarter on quarter GDP contracted a seasonally adjusted 4.1 percent. Only Estonia and Latvia contracted at a faster rate.

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The Swiss central bank cut its interest rate close to zero today and started buying foreign currencies to stem the franc’s appreciation in the face of a deepening recession and a looming deflation threat (Hat Tip`MacroMan). The result was pretty predictable, the franc plunged the most against the euro since the single currency was introduced, dropping as much as 3.2 percent after the announcement, and hitting 1.5304 per euro at one point. Heady days ahead folks, fasten up your safety belts for what is now bound to be a bumpy ride. Central banking has never been so interesting.

With Switzerland’s economy set to shrink between 2.5 percent and 3 percent this year, according to SNB forecasts, and prices about to decline by at least 0.5 percent this year (with inflation “very close to zero” in 2010 and 2011) the bank is obviously very worried about following Japan into the deflation hole, and is determined to at least go down fighting. Dropping your currency violently is one of the best know remedies to fight deflation (see Lars Svensson – various, and now Deputy Governor of the Riksbank – if you have any doubt), that and pumping liquidity hard and fast into the system. But what if the UK, the US, the Eurozone and Japan all want to “ward off deflation” in the same way? Won’t we be back to the 1930s. Exactly. So someone has to play the part of the “big man” here, and take deflation firmly on the cheek. I don’t exactly see the candidates lining themselves up right now, although China is stepping up to the plate at the moment (more out of fear of what would happen if they devalue I think, than out of conviction it is a good policy for them). Will the eurozone be next? Watch Jean Claude Trichet’s after-the-rate-meeting April comments for the next episode in this thrilling story.

The economic situation has deteriorated sharply since last December, and there is a risk of negative inflation over the next three years. Decisive action is thus called for, to forcefully relax monetary conditions. Against this background, the Swiss National Bank (SNB) is making another interest rate cut and acting to prevent any further appreciation of the Swiss franc against the euro. To this end, it will increase liquidity substantially by engaging in additional repo operations, buying Swiss franc bonds issued by private sector borrowers and purchasing foreign currency on the foreign exchange markets. The SNB is lowering the target range for the three-month Libor by 25 basis points, narrowing it to 0–0.75%, with immediate effect. It will use all means at its disposal to gradually bring the Libor down to the lower end of the new target range, i.e. to approximately 0.25%. Thus, the Libor now has a narrower target range of 75 basis points, compared with 100 previously.
SNB Statement

Update Friday

It seems over at the Financial Times they broadly agree with the above interpretation, since in an article in today’s edition headed “Swiss action sparks talk of ‘currency war’” by Peter Garnham you can find the following:

Analysts said the move was likely to increase talk that countries were set to engage in a bout of competitive devaluation.

“Let the currency wars begin,” said Chris Turner at ING Financial Markets.

Countries around the world faced with the constraint of zero interest rate levels might feel it was acceptable to intervene to weaken their currencies in order to ease monetary conditions, he said, adding that other export-dependent economies such as Japan would “probably be at the head of the queue”.

Michael Woolfolk at Bank of New York Mellon agreed.

“Market intervention by a major central bank such as the SNB opens up the door for other central banks, namely the Bank of Japan, to follow suit,” he said. “The yen is widely perceived in Japan to be overvalued.”

The IMF, 3 days ago, to Switzerland —

Under the current circumstances, direct foreign exchange intervention should be aimed only at countering disruptive short-term pressures on the currency.

This followed an acknowledgment that monetary policy measures were probably headed towards zero interest rate and quantitative easing type measures.  So what did the Swiss National Bank do today?  The expected monetary policy easing, plus a blatant direct foreign exchange intervention —

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Well sometimes it never rains but it pours, and as far as Germany is concerned, economically speaking (and my condolences to each and every German for yesterday’s tragedy) more than a “rainy season” what we seem to have is a monsoon, with a torrential downpour one day after the next. The lastest piece of bad news comes on the export front, with German exports dropping for a fourth consecutive month in January, as what is still Europe’s largest economy fell ever deeper into what is now its worst recession in 60 years. Working day and seasonally adjusted sales abroad fell 4.4 percent from December (when they dropped 4 percent). According to provisional data from the Federal Statistical Office, Germany exported goods to the value of EUR 66.6 billion and imported commodities to the value of EUR 58.1 billion in January 2009. Exports were thus 20.7% down in January when compared with January 2008, and imports were 12.9% down.

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Ireland’s PM Brian Cowen today updated the Dail (lower house) on the still deteriorating state of the economy.  One thing his remarks unintentionally highlighted is the problems that governments create for themselves when they are sitting on their internal economic projections which they treat as confidential but then still demand that everyone needs to contribute to the “debate” over how to mitigate the crisis.  Anyway, the Opposition did coax him into revealing the GDP growth decline forecast for 2009 and he helpfully revealed the rate of downward revision —

It was said at budget time [October] it would be in the region of 2%, it was said in January it would be approximately 4% and the indications are now that it could be 6% or 6.5%.

So the revision is about minus 1 percentage point per month, which is probably on a par with former Baltic Tiger levels.   And senior policymakers still hint that the domestic banking system is a very fragile state.  So those green shoots of recovery, ends of tunnels or whatever are not being sighted in Ireland yet.

Incidentally, Cowen also recently cited Canada as his preferred model for financial sector regulation.   Various things contribute to Canada’s relatively less severe manifestation of the crisis.  The IMF helpfully points to one of them —

Complementing monetary policy, the floating exchange rate policy has also served Canada well, serving as a shock absorber. The recent depreciation of the exchange rate, which has occurred in line with the decline in commodities prices, will dampen disinflationary pressures and support activity.

Not an option that Ireland has.