We kick off another week with some thoughts from the EconoMonitor community. Here is what’s on the minds of some of the EconoMonitor bloggers. We would love to hear what’s on your mind.
Every Nation for Herself
-Daniel Alpert (Dan Alpert’s Two Cents)
Going into this week, there are few options in Europe that yield stability in the sense of a “breather” that would permit an orderly reassessment. The best thing we have going now are weekends – and this one saw the G8 leaders enjoying each other’s company at Camp David but producing nothing substantive. Will that be an even bigger letdown to the markets than if they hadn’t met at all?
The Wealth of Nations, the nations of the developed world, has shockingly proven less and less an engine for economic growth and dominance, and increasingly more and more a source of demand to be poached by enormous, exogenous populations that emerged into nearly unrestrained competitiveness with many sectors of the world’s most advanced economies that contain only one-fifth the teaming and aspiring inhabitants of the BRIC nations and the satellites thereof. A microcosm of that same phenomenon has been played out in the Eurozone between Germany and its small band of surplus cohorts. While the U.S. is locked into an involuntary currency union with China, the Europeans have walked the plank together voluntarily. And now that they find themselves in roiling seas, it is – in the absence of a complete union – every nation for herself.
The “Hanseatic” view of the problem is that of a lack of fiscal union – an obvious flaw that all were well aware of, but even the states of the U.S. do not have complete fiscal union. What we do have in the U.S. is an effective transfer union. And without that, monetary union is – in my view – merely hope winning out over economic practicality.
The way I see it, in Europe we either lose governments or banks – can’t save both. The transfers necessary to save the banks (both north and south) will enrage many constituencies in the north who have been told by their politicians – in essence – over our dead bodies will we force you to send money to those imprudent and lazy folks down south. Of course the transfers, and the € printing/devaluation that will accompany them, are necessary – and therefore the adults in the room will eventually blink. So I’m not betting on those of the present European governments that have not already been unseated.
The sad thing is that this will be done willy-nilly so there is a substantial likelihood that Eurozone leaders and the ECB will repeat the mistakes the U.S. made when it rushed to bailout the banks. They will not strip bank shareholders/bondholders of that which they no longer truly own economically. There will be little/no banking reform – and cleansing – during the panic that is not unlikely to ensue over the next few months or weeks. Ultimately – the bankers’ bankers at the ECB will preach fear, and by doing so will protect their northern banking dependents and, perhaps, those of Italy. We will see played out the prospect of a central bank eventually refusing to provide liquidity to institutions it deems too weak in Greece and elsewhere, without an alternative monetary authority to seize, recapitalize and restructure them…and if there is no money to do so coming from the burghers of the Eurozone, we all know where that will lead.
Of course, with respect to Greece, the problem might be solved by dressing Alexis Tsipras in a “hoodie” and taking the entire nation public. $104 billion would do wonders!
On the Dark Side of the Moon
-Edward Hugh (Don’t Shoot the Messenger)
Well, I spent this weekend trying hard not to think too much about what is going to happen to Greece after the next elections, or how the German voting public will react to having to stump up the 75 billion Euro share of the total Troika exposure of 300 billion Euros Commerzbank analyst Christoph Weil estimates they will be in for if Greece is forced into default.
Instead I passed my time reflecting on another topic, namely whether instead of doing economic analysis what I am actually practicing is a form of astrology. This issue arose during the week after I answered a couple of brief questions about Catalonia at the end of a 45 minute programme on the Euro I did here last Tuesday with Jonathan Tepper. Would Catalonia, I was asked, be subjected to an intervention from Madrid over its ability to operate within this year’s agreed deficit limit (it will be remembered that the issue of regional financing in Spain has become a huge issue in the ongoing Spanish crisis)? Yes, I replied. So when will it be, came the second question. In November, I said. At which point the show ended and the furor began.
Most notably at the hands of Columbia economics professor Xavier Sala i Martin, who accused me of practicing one of the “esoteric arts”, and demanded to know which econometric equations I had made use of in arriving at my conclusion.
Now I think these accusations are interesting, since I feel they represent a major misunderstanding of what exactly it is applied macroeconomists do, while at the same time they seemingly fail to grasp the vital distinction the late Sir Karl Popper made between science and pseudo-science.
When well known macroeconomists like Paul Krugman, Joseph Stiglitz, Nouriel Roubini, Ken Rogoff, Simon Johnson and Marty Feldstein make a judgment (let’s say “the Euro is doomed” – curious how the global applied macro first team speak with one voice on this), they don’t do so on the basis of a detailed set of econometric equations and the application of a complex model, they do it simply based on ability, experience and a set of rule of thumb techniques. “Boo” shout the microeconomists, who are obsessed with the power of partial analytics. But these very same econometric methodologies have well known limitations, which are just, well, obvious to most applied macro people.
Take the case of nonperforming loans in the banking sector. In the spring of 2010 José Viñals performed an analysis for the IMF WEO using historical times series for Spain to carry out an econometric regression, on the basis of which he informed the world that NPLs in the Spanish banking system would likely peak in the third quarter of that same year. At the time I wrote to the IMF Mission Head for Spain explaining how I thought Viñals was getting it wrong. In March this year NPLs in Spain hit their highest level since the summer of 1994, and they are still rising.
But Sala i Martin’s statement also reveals a lack of understanding about how science works. On the Popperian view, our theoretical understanding of the world advances on the basis oo practitioners advancing bold predictions which are falsifiable. In fact, being absolutely honest, last Tuesday I wasn’t even practicing Popperian science, I was simply using common sense, and a bit of macro know how. Catalonia is seriously structurally underfunded since it puts far more in the Spanish national kitty than it gets back. Some put the estimate as high as 8% of GDP. In the good times, the Catalan government could get by through borrowing into the future, but in the epoch of economic depression and swinging cuts this is just impossible. In 2010 the target was 2.4% and the deficit was 4.2%, in 2011 the target was 2.6% and the outcome was 3.7%. This year the target is 1.5%, and the outcome will be……
As for November, well you need to read the terms of the new Financial Stability Law, and think about what the central government will need to do before year end to maintain some semblance of international credibility. They will obviously have to get tough with a number of regional governments to keep Brussels and the markets off their backs, and moving against Catalonia will be very popular in the rest of Spain. Speaking of which, the EU inspectors are flying into Madrid tomorrow to find out why last year’s deficit was suddenly revised upwards on Friday, just after the markets closed.
Industrial Policy back in vogue in Turkey
-Emre Deliveli (The Kapalı Çarşı: Emre Deliveli’s blog on the Turkish economy)
One of the big themes of Turkish economic policymaking in the past year or so has been industrial policy (another is making a finance center out of Istanbul, but more on that later). The idea is that economic success stories such as Ireland (no kidding!), Korea, Israel, Taiwan and the like have all prospered through very active industrial policy, and Turkey has not really had a coherent and active one until now.
The government recently unveiled the outline of the new investment incentives scheme, which is supposed to decrease poverty and inequality, increase competitiveness, foster innovation, decrease the current account deficit and make all Turks invincible- in all playing fields if you know what I mean. OK, not that final one. Anyway, I am not going to discuss the merits and shortfalls of the new scheme; I will have a detailed post at my blog on that in the next 24 hours- suffice it to say for now that I am not the only skeptic. But I do have a word or two on some of these objectives.
First, it is important to note that at least a couple of percentage points or so of the 10 percent (of GDP) current account deficit is the result of deliberate policy choices. Neither the government nor the “independent” Central Bank wanted to put on the brakes. Second, Turkey is really taking a competitiveness beating because of the persistent inflation differential between itself and peers. Just have a look at the CPI-based real effective exchange rate (REER) and the exchange rate basket:
REER is the IMF way, i.e. a downward move is an appreciation! And no: The mirror shape is no fluke! Anyway, I elaborate on these points at my latest Hürriyet Daily News column.
Corruption in Russia gets Personal
-Ed Dolan (Ed Dolan’s Econ Blog)
It is no news that business and politics are closely tied in Russia, or that Russia is corrupt, but sometimes something personal comes along that drives it home more clearly than all the statistics from Transparency International. I spent much of the 1990s teaching at a Russian business school. Today, I learned some interesting news about one of my former superstar students. After finishing our pre-MBA program, “V” went on to earn a Wharton MBA. He then went back to Russia and worked his way up to be a top manager at Alpha Group, one of the leading financial firms in the country. Now I read that the shareholders of Alpha Group have forced “V” to resign. Why? Because of his friendship with Alexei Navalny, the well known blogger and leader of anti-Putin protests in Moscow. Faced with the choice of his job or his friendship with Navalny, “V” made the right choice. He is now is now executive director of Navalny’s Fund for the Struggle Against Corruption. Readers of Russian can find the whole story here.