The Great Debate UK
A two-speed economy for Europe’s youth
By Kathleen Brooks. The opinions expressed are her own.
A new dimension to the currency crisis is upon us. First there was the two-speed growth – with richer, predominantly Northern European economies performing well while the weak south was on the cusp of recession. But in recent months an even more worrying divide has started to emerge in youth unemployment.
In Spain the number of under 24-year-olds out of work is 50 percent, in Italy nearly a third of young people are without a job and in France the figure is a quarter.
However, in Germany youth unemployment is expected to sink to record lows over the coming months and is currently well below 8 percent.
If you are a young person in Germany your prospects for work and the future are brighter than they have been for generations. But for their peers in Spain things have never been worse.
So what is Germany doing right and can Spain learn a few lessons? In an article written for the Centre for European Reform, John Springford lays the problem out clearly. In EU countries where rates of unemployment are high levels of participation in higher education and vocational studies is approximately 40 percent. In Germany, Norway, the Netherlands, Denmark and Finland, where youth unemployment is fairly low, rates are closer to 60 percent in some cases.
Education and training is key to reducing youth unemployment. Not only does it help deal with young people when jobs are not plentiful, but it also boosts skill levels and could increase productivity in the long-term while also avoiding a “lost generation” of young adults who become reliant on benefits.
Spain, Italy and Greece are miracles waiting to happen
By Laurence Copeland. The opinions expressed are his own.
Last November, at the time of the Chancellor of the Exchequer’s Autumn Statement, the two men in charge of our fiscal and monetary policy together delivered the gloomiest peacetime message in our history. Those of us who have been pessimistic all along were totally outflanked.
The governor of the Bank of England was absolutely right to decry the sudden vogue for technocracy. As he says, the problems in Europe are not fundamentally about a shortage of liquidity, as many commentators suggest and as politicians are only too happy to agree. They are at root about solvency, about the ability and the willingness of countries like Greece to pay their debts, and as such they are political problems which require political solutions. It is simply wishful thinking to imagine that an economics PhD somehow provides access to the secret of how to balance the books of a society which has long been living beyond its means, as have the majority of euro zone members. If it is hard for a Government with a sound electoral mandate to deliver painful medicine, it is likely to be even harder for one with no mandate at all.
Far from being evidence of maturity, the way the political class in Greece and Italy has given way to technocrats is a total abdication of responsibility. What needs to be done to transform the prospects of Greece and Italy, Spain and Portugal involves no rocket science. No advanced macroeconomic theory is needed to get the basics right: to cut Government spending, introduce honest tax collection (especially in Greece and Italy), privatise and deregulate transport systems and utilities, and most importantly to allow labour markets to function properly so as to reduce unemployment to a minimum, rather than to maximise it, as they do at the moment.
If this prescription sounds familiar, so it should. Britain’s situation in 1979 was not unlike that of the ClubMed countries today, with the sole, critical difference that we had been able to print our own money – which we did aplenty in the 1970’s, generating inflation as high as 25 percent by the middle of that awful decade. In the end, the situation was salvaged not by an economist, but by Mrs Thatcher, armed with nothing better than the Micawberish economics of her father’s Grantham grocery.
By contrast, Italy had a professor of economics, Romano Prodi, as Prime Minister from 1996 to 1998 and again from 17 May 2006 to 8 May 2008, but he achieved very little in the way of reform.
Look at the first two columns in the table below, which give indicators of the scale of economic distortion: the Transparency Index, which focuses mainly on the extent of corruption, and the World Bank’s Ease of Doing Business Index, which attempts to measure the freedom of the corporate sector to fulfil its function of creating wealth and jobs. No West European country should ever be outside the top 30 on either index, and the rankings for Greece and Italy – behind many Third World countries (and not only in SE Asia) – ought to have shamed them and the E.U. into action a long time ago.
The euro zone marriage is over
By Laurence Copeland. The opinions expressed are his own.
Under the Arc de Triomphe, tourists can gaze up at the engraved list of Napoleon’s great victories: Austerlitz, Jena, Wagram… Perhaps a similar triumphal arch should be built in Brussels to commemorate the string of victories won by a tiny band of heroic Eurocrats over the mass of their combined electorates: Rome, Maastricht, Lisbon, Wroclaw, and now Berlin, where, to nobody’s surprise, the integrationists in the Bundestag have easily seen off the opposition to their plan to bolster the EFSF. Cue the now-familiar backslapping in Europe after each of their knife-edge victories over the forces of democracy.
The starting point for these Eurocrats/integrationists is that the popular will is simply an obstacle on the road to the ultimate destination of a United States of Europe. Whenever they encounter one of these inconvenient roadblocks, they fume, argue among themselves about the merits of alternative routes until they finally swerve triumphantly round the obstacle, congratulating each other for their ingenuity and skill.
The trouble is that this game gets more dangerous at each stage. In the present case, it is reported that three out of four German voters is opposed to supporting Greece and co., and they’ve not even started paying for it yet. Moreover, it is not as though the largesse is going to create a reservoir of gratitude alongside the Mediterranean – far from it. Judging by reactions in Greece, the outcome will be a legacy of bitterness for decades to come.
It is important to realise that arguments about the cost of saving the euro zone are ultimately sterile, because under current conditions there is no limit to the commitment that the Germans are being asked to make – a point which is not lost on people in Germany. The €440bn additional funding for the EFSF sanctioned by the Bundestag is simply a first instalment, sufficient to cover the cost of propping up the bond markets on the assumption that it will prevent contagion from the Greek imbroglio – which, of course, there already is aplenty. It is several months too late to stop the panic spreading beyond the original porcine four – Portugal, Ireland, Greece and Spain – to engulf Italy and even to some extent France. Back-of-the-envelope calculations (which is as much as it is worth doing) suggest that the amount needed could be of the order of €2 trillion or more, equivalent to about 80 percent of Germany’s national income.
This may seem an enormous sum of money, but it is merely the downpayment on a potentially unending stream of subsidies in the nightmare transfer union scenario, as the Greeks slide back into their old, profligate ways, the Spanish continue to resist labour market reform, and the Italians replace the Berlusconi government with an administration stuffed with ageing ex-Communists.
How long will the Germans carry on financing this orgy? Like a bishop at a Berlusconi bunga-bunga party, they will either explode in a destructive rage or find the temptation to join in irresistible.
completely agreed with these arguments. I would add one distinction to the mix: most people belief of the efficacy of fiscal stimulus is based on the 30s. These were times when governments were worth 30% of the economies. Nowadays, governments such as France are worth 56% of the economy. The game has changed and they cannot go on expanding from that. (but as the article says, the political will to unfurl government is not there. people on the continent are simply not ready.)
from The Great Debate:
Europe’s Lehman moment
By Jeffry A. Frieden The opinions expressed are his own.
Europe is in the midst of its variant of the great debt crisis that hit the United States in 2008. Fears abound that if things go wrong, the continent will face its own “Lehman moment” – a recurrence of the sheer panic that hit American and world markets after the collapse of Lehman Brothers in October 2008. How did Europe arrive at this dire strait? What are its options? What is likely to happen?
Europe is retracing steps Americans took a couple of years ago. Between 2001 and 2007 the United States went on a consumption spree, and financed it by borrowing trillions of dollars from abroad. Some of the money went to cover a Federal fiscal deficit that developed after the Bush tax cuts of 2001 and 2003; much of it went to fund a boom in the country’s housing market. Eventually the boom became a bubble and the bubble burst; when it did, it brought down the nation’s major financial institutions – and very nearly the rest of the world economy. The United States is now left to pick up the pieces in the aftermath of its own debt crisis.
Europe’s debtors went through much the same kind of borrowing cycle. For a decade, a group of countries on the edge of the Euro zone borrowed massively from Northern European banks and investors. In Spain, Portugal, and Ireland, most of the borrowed money flooded into the overheated housing market. “At the height of the building boom,” Menzie Chinn and I write in our new book, Lost Decades: The Making of America’s Debt Crisis and the Long Recovery:
One Spanish worker of every seven was employed in housing construction. Half a million new homes were being built every year—roughly equal to all the new homes in Italy, France, and Germany combined—in a country with about 16 million households. The amount of housing loans outstanding skyrocketed from $180 billion in 2000 to $860 billion in 2007. Over the ten years to 2007, housing prices tripled,second only to Ireland among developed countries; by then, the average house in Madrid cost an unheard-of $400,000. (pp. 49-50)
Greece was a different story. It borrowed, as we write, “mostly to finance a continual budget deficit and an American-style consumption boom.”
Greek borrowing went beyond the sensible: at its peak, in one year Greece borrowed an amount equal to nearly 15 percent of GDP, so that more than one euro in seven spent locally was borrowed from abroad. By 2009, the country’s eleven million people owed more than $500 billion to foreigners, more than the foreign debts of Argentina, Brazil, and Mexico combined (with thirty times the number of people and ten times the economic output of Greece). (pp. 186-187)
I agree with some points and disagree with others.
The disagreements concern whether the analogies are the relevant ones.
There are important differences between the 1980s in Latin America and Europe today. The most important is that this will be a repeated game. No one expected the US government to bail out the Brazilians in 1999 or the Argentines in 2001. The current situation is more analogous to the founding of the US. The Federal government initially consolidated both state and national debt under Hamilton. The states naturally expected future bailouts. Congress did manage to say no in the 1840s, which led to several defaults, but this is a precedent no northern European wants to repeat.
The situation in Europe is also more complex than the US prior to Lehmann. As you indicate, two countries within the Euro had property bubbles (as did one European country outside the euro–the UK). These states, however, are probably going to be fine–Ireland is now ahead of schedule on its consolidation, and Spain’s debt to GDP ratio is 20 points lower than the German one. There are of course risks, but the real problem cases are the states that have had chronic public debt problems. Greece was on the way to default prior to euro entry; the only question was at what level of debt-to-GDP would markets pull the plug. Italy has managed to stabilize its debt at a high level the past fifteen years, but it has not taken any steps to build it down. But one needs to look at why this has been the case to proscribe solutions. Clearly, structural reforms that increase potential growth top the list.
Finally, I am nervous about the “Lehmann” precedent being used every time someone–be it a country or firm–needs a bailout. I would like to see the counter-factual even in the Lehmann case.
But you are absolutely right that both creditors and debtors need to pay, and will pay. Some delay is warranted–the EFSF needs to pass in the eurozone countries, and before that happens markets will remain nervous. After that, I hope they reach a consensus on a rescheduling of Greek and maybe Portuguese debt. They also need to signal that the EU will not simply bail out states in the future to avoid Lehmann moments–that is textbook moral hazard. Put another way, they need to get from the equilibrium that emerged under Hamilton to the equilibrium today at the American state level (the federal level is another ballgame). This is going to be really tricky, and how to do it would be another response. But they do need to settle on who bears the costs when as you wrote.
Thanks for your post! –Mark Hallerberg, Hertie School of Governance, Berlin
Why is the West bankrupt?
By Laurence Copeland. The opinions expressed are his own.
The UK, USA, the PIIGS (Ireland and Italy are together in the same stye), France is in poor fiscal shape – OK, Germany is ostensibly living within its means, but it looks a lot less solvent when you remember that it has underwritten the rest of the euro zone (in large part, to protect its own irresponsible banks). In any case, as I have argued in previous blogs, this or a future German Government is likely to cave in to the pressure from its own electorate and from inflationist economists at home and abroad to join the party and spend, spend, spend. Only Australia and Canada, riding high on the commodities price boom, and a handful of small countries, look stable.
Where will it all end?
With inflation, almost certainly, but beyond that, it is hard to say. However, there is one prediction I would offer for the medium to long term outcome, and it applies not only to the euro zone, but to Britain and America too – in fact to the whole of the comfortable, complacent industrialised world – and it is this.
We are living through the death throes of an ideal, a dream which has turned into a nightmare – it is the end of the social democratic welfare model.
I am referring to the whole panoply of benefits (entitlements, as they are called in America), labour market regulations (employment protection, minimum wage legislation, limits on the length of the working week etc. etc.) and other social democratic devices intended to inflate like airbags to protect us all from shocks from any possible direction. The whole edifice built up in Western countries to shelter us from the need to earn a living is now clearly unsustainable. We can no longer afford a regime which allowed, indeed encouraged us to live permanently beyond our means both as individuals and as a society.
Two aspects of the current crisis make this apparent. First, and most obviously, we are all more or less like Greece – our debts may be proportionately smaller, but they are still crippling. Our pensions regime may be less egregiously wasteful than Greece’s, but they are still more generous than we can afford. As for healthcare and care for the aged, they are a crippling burden and demographic pressures will make them impossible for any country to sustain at anything like present levels.
“The asians are now living the period of the Victorian eras. We (asians) sell our souls to survive. We accept low wages so that have a chance to earn a living. But eventhough our wages are low, we save for the next generation.” syching
syching, selling your soul to survive is not something americans will do without a revolution first. We, as a nation, are getting pretty fed up with a corporate run government, and we’re getting fed up with being forced to compete with foreign, communist government supplied labor too.
If you want to help, quit selling your soul.
Another day, another crisis
By Laurence Copeland. The opinions expressed are his own.
Here we go again – the same sickening feeling, as stock markets reel amid a flight to “safety”. For months, there have been worries about contagion from the Greek imbroglio, and now the nightmare seems to be coming true, as one after another the weak European economies are put to the sword.
First came Greece and Ireland, then Portugal, now it’s the big league – Spain and, even bigger, Italy (and don’t forget Belgium, an accident waiting to happen for many years now, not very important in pure economic terms, but psychologically significant as the home of the whole sorry euro disaster).
In the table below, you can see how much Governments were being forced to pay for borrowing on the markets yesterday (July 11). The rates quoted for Greece, Portugal and Ireland imply that borrowing in the bond markets is for all practical purposes out of the question for those countries, as that has been the case for some months past, but the new development is that Italy and Spain are now being forced to pay 6 percent for 10-year loans, a premium of more than 3 percent compared to Germany.
Trichet’s United States of Europe?
By Kathleen Brooks. The opinions expressed are her own.
Another week another round of EU officials proposing solutions to the Greek insolvency problem.
First there was the President of the European Council Jean Claude Juncker who suggested that bond holders could be tempted into rolling over their maturing debt and buying more Greek bonds as long as a few sweeteners like higher coupon or interest rates were thrown in.
But while this will plug short-term financing needs it is still only adding more debt to Greece’s enormous debt pile and not dealing with the core problem: the financial malaise at the heart of the euro zone that allowed Greece to get away with a flagrant breach of fiscal rules for years.
It came down to Jean-Claude Trichet, whose tenure as President of the European Central Bank (ECB) comes to an end in October, to suggest a long-term solution that would hopefully avoid another debt crisis, but would also require a degree of economic centrality never imagined by the euro zone’s founding fathers.
His idea is for a euro zone-wide Ministry of Finance that would have three critical powers. Firstly, it would be in charge of ensuring adherence to fiscal and competitiveness policies, secondly, it would control the region’s financial sector and thirdly it would centralise representation of the currency bloc in international financial institutions like the International Monetary Fund (IMF). “Would it be too bold?” the Frenchman shrugged as he spoke of his dream at a ceremony in Germany where he picked up the highly coveted Karlspreis.
While Trichet didn’t go as far as to suggest his ministry should control state budgets or issue debt, it is still an extremely interesting idea that – if implemented – could re-invigorate the currency bloc. Firstly, fiscal integration is often considered the missing piece of the united Europe puzzle. Without actually controlling states’ revenues and expenditure directly, Trichet’s plan would give the EU direct powers to alter the course of national economic policy. For example the central ministry would have if it thought they could jeopardise the financial health of the member.
“A centralised financial power representing the currency bloc would rival the U.S.’s economic might.”
Why is this always so important to these people?
Defining a post-crisis reputation for brand Ireland
– John Keilthy is Managing Partner of ReputationInc Ireland and is a former business journalist and director and chief operating officer of NCB Group. Andrew Hammond is a Director in ReputationInc’s London office and was formerly a UK Government Special Adviser. The opinions expressed are their own. –
In recent weeks, the focus for Ireland and indeed the world’s financial markets has been on devising a plan to remedy the country’s precarious banking and fiscal affairs.
With the basis of an agreement having been reached with the IMF and the EU around initiatives to help restore Ireland’s financial credibility internationally, there is now a need to focus attention on restoring the nation’s reputation.
The economic and financial problems that the country faces are still daunting. However, the nature of the crisis is, in truth, much broader and more serious in as much as the entire foundations of Ireland’s nation brand have also been undermined.
The concept of nation brands is founded on the realisation that, in an ‘overcrowded’ global marketplace, countries are, in effect, competing not just for the favour of investors and the wider financial community, but also for other globally focused stakeholders such as tourists, media, skilled employees, regulators and NGOs.
Thus, economic and financial fundamentals, such as a country’s fiscal position, tax regime, trade balances and business climate are only the most obvious elements of what drives international prosperity, with wider competition between countries, such as that for global talent, also key. In this ultra-competitive environment, reputation can be a prized asset (or potentially a significant liability) with a direct effect on future political, economic, social and cultural fortunes. Successful countries identify their image and key strengths, and prioritise the appropriate policies to strengthen such attributes.
Countries with a range of branding problems right now, such as Ireland, Greece, Israel, and China, face an uphill battle changing the perception others have of them. However, history has shown that reputation can be recreated and once again become a key driver of not only national pride, but also economic success and what flows from that in terms of wider social and cultural benefits.
from MacroScope:
Europe’s over-achievers and their fall from grace
Ireland's fall from grace has been rapid and far worse than that of its counterparts, even Greece. But life in the euro zone has still been one of profound growth, as it has for most of the other peripheral economies.
Take a look first at the progress of PIGS (Portugal, Ireland, Greece and Spain) GDP since 2007 when the global financial crisis took hold. In straight comparisons (ie, rebased to the same point) Ireland is far and away the biggest loser. Portugal is basically where it was.
But now take the rebasing back to roughly the time that the euro zone came together. First, it shows that Ireland's fall is from a very high place. The decade has still been one of profound improvement in cumulative GDP even with the last few years' misery. But it is front loaded.
Perhaps most interesting, however, is what the second graph (courtesy Reuters' Scott Barber) says about the PIGS and the euro experiment. Despite major financial and market crises, Greece, Spain and Ireland have all seen their economies accumulate at a higher rate than the euro zone average. Only Portugal has been below average -- a perennial slow grower.
Could any of this outperformance have been attained outside the euro zone? Probably not. But the question now is whether the current troubles are going to wipe out everything that has been achieved.
from Breakingviews:
Four events Spain doesn’t want to happen
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
LONDON -- Spain is feeling the heat in the debt markets. Fears of contagion explain why it paid a much higher yield on short-term treasury bills than the same issue from last month. The country may avoid a debt crisis if it stays its course. But an unexpected event throwing doubt on the true state of the country's finances could precipitate the mother of all bailouts. Here are four of the unpleasant surprises that could trigger a meltdown.
* A Spanish lender in dire straits. One of the most pressing problems for Spanish banks is access to long-term funding. Spanish lenders lend more than they gather in deposits, which makes them dependent on wholesale financing. True, banks and savings banks have sharply reduced dependence on the European Central Bank since the peak in July, thanks to improved access to the short-term repo market. But only the larger lenders have been able to borrow in the longer-term wholesale funding after the publication of the stress tests. A large number of the cajas, the savings banks, have been shut out, and the system as a whole faces massive refinancing needs in the next two years. Some institutions have already exhausted their allotment of state guarantees for senior debt. The brutal deposit war is a sign that Spanish banks are worried about their reliance on wholesale markets.
* A big region going bust. The state of Spanish regional and municipal finance remains a serious source of worry. Madrid, for example, is months behind on its bills, and the central government has so far rejected the mayor's pleas for further debt funding. Catalonia recently issued a one-year bond to retail bank clients. Some economists believe regions could improve access to markets with more transparency. But an unexpected hole leading to a regional insolvency could trigger markets panic.
* Any whiff of wavering in the government's commitment to structural reform: Spain found it hard to come up with a credible turnaround plan, including the beginning of structural reforms that might favour growth. Any hesitation, particularly on pensions financing, wouldn't go down well with the markets.
* A severe economic slowdown. The government will have to make more budget adjustments next year if its optimistic growth assumptions fall short, as looks likely. But Spain couldn't afford a serious slump, if the global economy were to stall, or if new unpleasant surprises were on the horizon.
