Showing posts with label euro. Show all posts
Showing posts with label euro. Show all posts

Saturday, November 20, 2010

Dermot, Dermot, Helmut, and Helmut


The prospective disintegration of the Eurozone highlights all the old problems with single currency areas.

For years the Euro's one-size-fits-all monetary policy set interest rates far too low for countries like Ireland and Spain, inflating monstrous property bubbles that have now exploded with such disastrous consequences.

And throughout the periphery, cheap credit financed massive consumption growth, generating totally unsustainable current account deficits. Going into the Crash, Zorba and Pedro were ramping up their consumption by 4-5% pa , producing current account deficits in excess of 10% of GDP. Dermot went absolutely bananas, jacking up his spending by a roaring 20% in just three crazy plastic-fueled years.

Meanwhile staid and steady Helmut barely increased his spending at all (up by just 0.4% pa over the 5 years pre-Crash). He kept his nose pressed firmly to the grindstone, and with peripheral Europe's consumers frantically upgrading to Mercs and BMWs, the German current account surplus ballooned to 8% of GDP (2007).

But now the music has stopped, Helmut finds himself facing a horrible HORRIBLE reality. All that money he deposited in his local bank was lent to Zorba, Pedro and Dermot to buy needless luxuries. And it now looks like the money will never ever be repaid. Even worse, he himself may need to prop up spendaholic Z, P and D for years to come.

It is surely obvious to everyone that the single currency has shackled poor industrious Helmut to a bunch of wastrel low-productivity untermenschen fellow Europeans. What a schmuck Helmut must be.

Yes, yes, we can all see that now. It's obvious.


Well, it turns out that not all Helmuts have done quite so badly out of the Euro as our Helmut.

For example, the Helmuts who produce those Mercs and Bimmers have done very well indeed. They have benefited from having a currency weighed down by inefficient free spending Zs, Ps and Ds, rather than being strapped into the ever-appreciating Deutschemark.

Because the Euro has done wonders for Germany's exporters. Since the Euro's launch back in 1999, Germany's competiveness has improved by around 10% - a huge relief after the worsening of competitiveness over the previous decade.

But in sharp contrast, the Euro has been a disaster for exporters from the PIIGS - their competiveness has worsened by over 15%. Indeed, relative to the German export powerhouse, their competiveness has worsened by more like 25% - in just 10 years.

Here's the chart (it shows relative unit labour costs, the standard measure of international competiveness; a higher figure denotes that a country's export costs have risen relative to its competitors, making the country less competitive):

So all those Helmuts who are in the export business have done pretty well out of the Euro. Whereas any exporters among the Zs Ps and Ds have been absolutely stuffed.

The picture in Ireland casts futher light on this. We posted the Irish Daily Star's yesterday, but it bears closer scrutiny:

It seems the real Irish winners from the Euro experiment were not the Dermots in the Limerick street at all (at all)*. Sure, they gorged themselves on flat screen tellies from Taiwan like the best of them, but they're now stuck in Limerick facing the the bill. No, if reports are to be believed, the real winners - the ones who made big money in the boom and have largely kept it - are the "gouger-politicians, their wanker-banker buddies and their dodgy developer chums".

Which highlights a very important point - one we have made on BOM before. When you hear people arguing for this or that economic or financial policy as being in "the national interest", you really do have to ask how they will benefit themselves? (Yes, that does include Tyler).

Because no policy is going to benefit everyone equally, and although economic theory says that the winners can be made to compensate the losers, political reality says that's rarely the case in practice.

The Euro is a classic case in point. The winners of this hare-brained experiment have been the federalism industry, German exporters, and cheap money speculators of one kind or another. The losers have been European taxpayers, and all those now living in peripheral areas that are now so uncompetitive they face years of wage cuts and falling living standards to put things right. If they ever can be.

Things would be even worse for the PIIGS if they pulled out?

Don't be daft. Even if the Germans and others do promise massive fiscal bailouts from here to eternity, shackling themselves to the Deutschemark will ensure they never ever become competitive. They will never ever stand on their own feet again.

A bit like say, the North East of England - shackled to the Pound and consigned to perpetual welfare dependency.

* Apologies for lame at all at all commentary on Ireland. Mrs T is half Irish and Tyler simply can't resist it.

Wednesday, November 17, 2010

Whose Debts Will We Take Over Next?

PIIGS stuffing

It sounds like George has buckled and that we're now in for £7bn of the Irish bail-out:
“Ireland is our closest neighbour. And it's in Britain's national interest that the Irish economy is successful and we have a stable banking system. Britain stands ready to support Ireland.”
Did he have a choice?

In the circs, probably not.

Take a look at the handy chart above. It's taken from last week's IMF report on the UK economy, and it shows UK banks' exposure (aka loans) to Ireland along with their exposure to three of the other PIIGS. As we can see, they are in for well over £100bn to the Emerald Isle, and getting on for £300bn to the group as a whole (ex Italy).

In theory of course, we should be able to say to the banks, that's your problem mate - you lent the money on all those housing estates in the peat bogs, now you can reap the rewards.

But in practice, we're stuffed. Post-Crock, we rediscovered the fact that taxpayers have to protect retail bank depositors here at home. And that means guaranteeing retail banks. Which as things stand, means guaranteeing all UK banks.

But let's hope George is at least insisting on some pretty tough conditions - no backsliding on spending cuts and close IMF monitoring.

We've only got to look at Greece to understand what could lie ahead in Ireland. Their existing government is going down, and its successors will look for every opportunity to backtrack and obfuscate. We must not accept that.

Who's next?

Well, as the chart shows, UK banks have chunky exposure to Spain, and if you're going to do Spain you might as well chuck in Portugal. We Northern Europeans will soon be on the hook for the whole lot.

It doesn't bear thinking about, but here's a small suggestion - when it comes to the crunch (ie outright default) HMG should do a debt for villas swap. Hard-pressed UK taxpayers could then be offered cheap villa holidays in the sun to take their minds off their 70% tax rates.

Apart from that, Tyler can see no light in the Euro-gloom.

Tuesday, November 16, 2010

Ver Are You All Coming From?

From Smurfland ver ve belong.

Spot the difference between these two entertainers from Belgium:

Many years ago, Mrs T took the junior Tylers and friends for a birthday treat to see the Smurfs Show. The show was bad. Very bad. In fact, it was so bad the theatre gave a full refund to the entire audience. The entire audience of about 30, that is.

The Herman van Rompuy Show is a very similar offering - amateurish, Belgian, and incomprehensible. The only difference is that there are no refunds.

There is a well rehearsed theory that the EU is the Fourth Reich in disguise. But just clock Herman's performance in the midst of the biggest EU crisis ever - he's making it up as he goes along.

The Euro is bust. The one-size-fits-all currency doesn't fit, and in one way or another it will have to be dismantled. The PIIGS will have to be cut lose and the Euro shrunk back to its Germanic core.

Even the Smurfs would have understood that.

The Real Question - Who Pays?

A seriously bum rap

Here's what's supposed to happen: you borrow some money, and then you repay it. And the emphasis is on the word "you".

Now, what's so hard about that? The practice has been around for centuries, and nobody can honestly claim ignorance of the rules.

Yet somehow, when borrowers decide they can't make their repayments, it's rarely seen as their fault. Instead, the blame is landed on the lender, either for making it too easy to borrow in the first place, or for demanding repayment in times of difficulty. Tyler has never thought it fair that poor old Shylock loses his ducats because some smart-ass amateur lawyer gets the borrower off on a technicality, especially when Shylock would still have had to honour his own debts to his depositors. But you're meant to cheer.

And so to the current Irish crisis.

The Irish have borrowed A Lot of money. Their citizens borrowed a lot to buy property, their government borrowed a lot to... ummm... spend, and their banks borrowed a lot to punt around, largely on property loans. Their external debt is now a staggering 1300% of GDP, most of it now effectively nationalised through the government formally guaranteeing its banks' debts.

Here's how it ramped up during the go-go years to reach its current €1.74 trillion (chart is in millions of Euros, taken from the highly informative Ireland After NAMA):

So who's to blame?

Well, yes, the Irish of course. For borrowing so much. Obvious.

But Tyler is just listening to J Humphrys summarising the situation for BBC R4 Today: "...the vultures are circling Ireland... the country may be forced to hold out the begging bowl... the vultures may then turn their rapacious attention elsewhere..."

Those greedy flesh-ripping lenders - why does anyone put up with them?

But what's the real question beyond the tabloid emotion? The real question - as we all surely understand by now - is who's going to pay? Not just for Ireland's debts, but for Greece, Portugal, Spain, Italy, etc etc.

As regular BOM readers may recall from this blog, traditionally there have only ever been four options for governments with too much debt. Let's review them to see who actually ends up paying:
  1. Repayment - ie the government runs budget surpluses. Taxpayers pay.
  2. Default - most likely in the form of a partial default via debt restructuring (aka haircuts, debt for equity conversions, or coupon conversions). Lenders pay. 
  3. Inflation tax - where debt is denominated in fixed money terms (as most is), governments can work off their debts by engineering inflation - effectively a gigantic stealth tax on debt holders. Lenders pay, including anyone who has been foolish enough to save their nest egg in a building society account.
  4. Growth - GDP growth is the holy grail of indebted governments. Growth makes a given amount of debt less significant relative to GDP and tax revenues with each passing year. It's a get-out-jail free card for both the borrower and the lender.
But this is where Ireland and the others have a problem. Because they're members of the Euro, and that pretty well nukes options 3 and 4. As everyone in the real world always understood, the Euro makes it impossible for individual members to crank their own printing presses. Ireland and the others can't impose an inflation tax, and can't depreciate their currencies to stimulate growth - they're locked in.

Which means the only options are either to repay - whatever the tax and spending implications - or to default.

Now, the average Irish/Greek/Portuguese/Spanish citizen is going to opt for default - no question. But sadly, the lenders aren't nearly so keen. And since the lenders largely comprise banks based in other member states of the EU (including Britain), those members are not keen either.

Which is why Ireland and the others' membership of the Euro has brought a fifth option into play - transfer the debt to taxpayers in other countries.

And that's precisely what is being done with the EU's €750bn bail-out package, agreed during the Greek crisis in May. Taxpayers elsewhere are being forced to guarantee up to €750bn of loans to basket cases like Ireland.

Fortunately, the UK's share of these guarantees is limited, because - thank God - we aren't members of the Euro (keeping us out was one of only two useful things G Brown ever achieved). But even so, it could still be well over £10bn (including both our €8bn share of the European Financial Stabilisation Mechanism and our €4bn share of increased IMF lending).

But spare a thought for the German taxpayer. They've always run a tight Lutheran ship in terms of their own borrowing, but now they're being called upon to guarantee tens of billions of Euros in loans to the wild free spending PIIGS. And they will note that the EU's announced €750bn bail-out fund only covers a fraction of the total external debt of the PIIGS, which comes in at over €5 trillion.

Of course, at the level of the entire Eurozone, there IS an alternative. As several commentators have argued over the last few days, the European Central Bank could fire up the presses. It could flood the world with Euros just as the Fed is flooding the world with dollars. It could do so until Euro inflation - currently around 2% - takes off.

But if you're a normal everyday punter in Germany, why would you feel any better about that? You almost certainly never wanted the Euro in the first place, and went along with it only because you were assured it would be the rock solid Deutschemark by another name. How are you going to react when your Euro savings are obliterated simply to shore up the PIIGS?

At the end of the day, a bout of Euro inflation looks increasingly likely - all the other options are simply too hard for Europe's rulers to swallow. German taxpayers are going to be left feeling just like these American furry animals feel about the Fed's antics on the dollar printing press (HTP JWK):

PS If by any slight chance anyone is reading this thinking the inflation storm won't affect us, today's re-acceleration of UK inflation to 3.2% - above market expectations - is an excellent reminder of reality.

Saturday, May 22, 2010

He Is Heavy. And He Ain't My Brother.

1. The beer case for welfare

2. The power of real brotherhood

Listening to the appalled German taxpayers wailing over Merkel's Greek Euro bailout, you can only thank your lucky stars we had the quite marvellous Mr Gordon Brown to keep us out. If it had been left to Bliar, Clarke, St Vince, and the BBC, we'd now be in the Euro and as stuffed as those North Rhine Westphalians.

German taxpayers have also worked out something their politicos won't yet admit - any bailout will simply be good money chucked after bad. There isn't a prayer the Greeks will suddenly become good Lutheran hausfraus, tightening the family belt to live within budget.

And remember this - German taxpayers have recent experience of just how expensive this kind of support can be. The cost of German reunificiation is now put at 1.3 trillion Euros, which was getting on for one year's GDP when the Wall came down. That was much more than originally suggested by the politicos, and in one way or another, most of it came from West German taxpayers.

There was considerable anger about that as well. The industrious Wessies were not at all happy to find themselves milked for years to support the idle Ossies.

But of course there was one gigantic elephant size difference from the present situation - the Ossies were fellow Germans (or as the Major would put it, fellow members of the Master Race). There was a powerful bond of history and culture. They were brothers.

We're not in that situation here. Northern European taxpayers are not going to stand funding a permanent welfare regime for the South. Yes, of course, the political euroclass are wedded to ever closer union, and may even welcome the idea of binding in the PIGS via permanent welfare dependency. But sooner or later, their taxpaying voters are going to rebel. And as things look today, that might be sooner rather than later.

Which brings us to the fascinating session Tyler had with a group of Tory activists last evening. It was a political discussion group, and on the table was the small matter of how we're going to solve our own fiscal crisis.

We spent an hour and a half running through all the main options, and you know the one that generated most interest?

No, it wasn't abolishing quangos. Or cutting public sector pensions (although that did feature). Or scrapping the NHS supercomputer. Or even leaving the EU (although that too did feature).

The single most popular idea was fundamental reform of the £200bn pa welfare system (that's reform as in cutting expenditure). Discussants raised all the various issues we've blogged so often here on BOM - benefits that are so high they are a disincentive to work - even in a high employment town in Surrey - the unfairness of benefit families being able to furnish themselves with 50 inch plasmas that their working neighbours cannot afford, the housing priority given to people who won't help themselves, the ludicrous overpaying for private rental property via housing benefit (the local premium is reckoned to be c20%), etc etc.

Most of all there was a feeling that those who work hard and pay their taxes are being taken for a ride. Nobody minds helping those who genuinely cannot help themselves, but we've drifted far beyond that. As one member of the group explained, benefits are far too high because we've been duped by a bunch of self-serving left-wing politicos who, once real poverty had been conquered in the 50s, invented the concept of relative poverty to save their own political skins. And he should know- he was once a member of the Communist Party.

Who then is my brother?

Well, my brother is my brother, obviously. And most of us feel a natural and strong obligation to help a real brother in trouble.

But the Greeks?

Well, no not really. Sure, they're perfectly nice people, and if they got whacked by a natural disaster, we'd all put our hands in our pockets - there but for the grace of God, etc. But a fiscal crisis caused by years of living too high on the hog, maxxing the credit cards and fiddling the bank statements? That's not something Tyler feels terribly inclined to help with. Lessons have to be learned.

The Germans? Well, we laughed as we listened to some stern looking German politico last night warning that if we don't help them with the bailout costs, it will be the worse for us if we ever need help. We were remembering the last time we wanted their help during the 1992 currency crisis and how they told us to get stuffed (even though as things turned out they actually did us a gigantic unintended favour - see this blog).

Once again, the Germans are perfectly reasonable people, they make excellent cars, and they are people with whom we can very confortably do business. But when it comes to subsidising them, they ain't any brother of Tyler.

Which just leaves those we subsidise and support here at home. Are they our brothers? And even if they are, are we really helping them by incentivising them to spend all day having kids, drinking loss-leading lager, and watching Trisha on the 50 inch?


But probably not that tricky.

What we desperately need is that much promised root and branch reform of welfare, now being steered along by Iain Duncan Smith. Not only should it reduce the weight of all our brother support, but crucially, it must provide some real incentive for the brothers to rise from their butts.

PS Yes, I am quite aware that this kind of thinking is what got the nasty party its name, and I'm not imputing any of these views to party members past or present. Other than Tyler and the Major, that is.