Oh, I Believe In Miracles……..
-Edward Hugh (Don’t Shoot the Messenger)
Never was a truer word spoken, even in jest.
When Mario Draghi clarified for the journalists who assembled before him at last week’s ECB press conference what the expression “The euro is irreversible” actually meant, he replied it “means we are not going back to the drachma, the lira” etc. While some may have noted nothing remarkable in the statement, finding it perhaps almost trite, or commonplace even, I thought to myself, “hmmm, now that’s an interesting choice of countries”.
The conclusion which I for one drew from this observation was that he was trying to tell us the ECB was not (for the moment at least) contemplating any move to cut off Emergency Liquidity Assistance (ELA) access for the Greek banking system. I mean, you would hardly boost the credibility of the institution you represent by saying no one is going to a certain place and then in September sending someone directly there.
And since shutting off access to Eurosystem backed ELA would be the only effective way of driving a Greece that didn’t want to go out of the Eurosystem, I also got the impression that what we are going to see in September is likely to be some further attempt to throw a lifeline to the struggling country, at least as far as the EU is concerned. In terms of practicalities the latest round of cuts will be formally accepted, and applauded, while money will be sent into the country, via the backdoor. Using Francoise Hollande’s EU growth stimulus programme, perhaps, be this in the form of EU structural funds or long maturity low-interest loans from the European Investment Bank.
Well, now that the some of the details of what was discussed at the ECB meeting have started to be leaked to the press I am pleased to see that my initial hunch was not such a bad one.
Mario was not making some sort of idle, throw away comment, for he knew of that about which he spoke. In the proximate future Greece will not be going back to the Drachma. Nor will it be introducing a second non-convertible currency, since it already has the ability to generate resources on its own account a highly convertible one. Not only are the ECB’s Governing Council not planning to cut Greek banks off from the Eurosystem, if a report this weekend in the German Newspaper Die Welt is to be believed, they have even agreed to increase their credit limit.
Until last week the Bank of Greece was only authorised to accept Greek government T-Bills up to a limit of 3 billion euros as collateral for accessing ELA. As of last Thursday, however, that quantity has been increased to 7 billion euros, giving the government effectively another 4 billion euros with which to pay employee salaries, pensions, etc. Greek banks buy the T-Bills at government auctions, and take them to the national central bank to use as collateral for borrowing, in much the same way commercial banks in Portugal, Spain, or Italy use the ECB. The difficulty in the Greek case is the country’s credit rating does not enable the ECB to be used as counterparty in these financing operations.
Now I don’t know how long it will take the mainstream Euro Crisis pundits to catch up with what has been obvious to me (and among others Willem Buiter) for months now (over a year in fact, at least since Ireland first started accessing ELA and de facto printing its own euros). The reality is that despite the many evident parallels Greece is NOT Argentina. The country can print its own Euros. Argentina could never print dollars, in fact it had to buy or borrow them in order to keep pace with citizen demands for converting all the pesos it was printing. Greek banks simply access German deposits via Target2 to cover their own lost deposits as they move to Cyprus, as long as the collateral lasts that is. But then there is ELA. In addition Greece can get direct access to fund transfers via the EU structural funds programme, while Argentina never had any such bilateral relation with the US. Details don’t solve the big picture problems, but they do matter here.
So while there is no denying the multitude of structural similarities with the Argentina situation – macro imbalances, a structurally distorted economy, no relief through devaluation due to the presence of a de facto peg, a very deep recession as a consequence – there are a host of details which differ. Monetary Union is not simply a currency peg, and this makes many of the key calculations about what to do and when different.
Naturally, none of this is to say that the end of the story won’t be the same, but we aren’t there yet, there is still some life in the process, and we can’t rule out miracles – not “miracle” recoveries of course, we are unlikely to see one of those, but miraculous conversions of the Saul of Tarsus kind, one of which could just happen one day when you least expect it somewhere along that Autobahn which runs between Frankfurt and Berlin.
TEN BILL10N: Return of the Population Bomb?
-Ed Dolan (Ed Dolan’s Econ Blog)
A generation ago—no, two generations ago, already—Paul Ehrlich scared us all out of our wits with his book, The Population Bomb. It turned out to be a bomb that we gradually learned to live with. Yes, it exploded—the world’s population did double between 1960 and 2000, the shortest doubling time in human history. No—it didn’t kill us. As University of Michigan professor Donald Lam told us in a 2011 presidential address to the Population Association of America, the shift from large families making low investments in their children to small families making high investments in their children is a fundamental dimension of economic development that gives us reasons to be optimistic about the future.
Now the population bomb is back, this time in the unlikely form of a sold-out, one-man play, entitled TEN BILL10N, at London’s Royal Court theatre. I haven’t seen the play, but I would like to comment on the reviews, which, after all, are likely to be as influential as the play itself.
The thesis of the play seems simple enough. In the words of actor/scientist Stephen Emmont, “We’re f**ked.” Emmont, a professor of computational science at Oxford, goes on to tell his audience how we will be done in by the twin forces of overpopulation and climate change. More people eat more food, growing more food means more deforestation and transportation, more of those mean more CO2, more CO2 means more unstable weather, and so on.
The reviewers, including those in the Guardian (two reviews), the Independent, the Financial Times, and the New York Times, all take the play’s message pretty much at face value. More than that; they report being shaken by it. So, are we doomed? Or is a world population of 10 billion something we can handle? Here is what I think (condensed from a longer discussion in my book, TANSTAAFL.)
- Without adequate policies—ones that insist that polluters and resource users pay in full for all environmental impacts–our planet faces steady environmental degradation even without runaway population growth.
- Population, at the margin, is not environmentally neutral. More people increase the urgency of adopting sound environmental policies. Past, smaller populations could find harmless places to dump their wastes; future, larger populations will not be able to.
- There is a need to act but no need to panic. The fearsome total of 10 billion or so people by the end of the 21st century is projected to be the all-time peak. Demographic changes already in place guarantee that will be the case, barring an unexpected reversal of the near-universal trend toward smaller families. Given sound environmental policies, 10 billion people should be able to live together in a sustainable manner.
In short, we have the tools at hand to confound the mindless linear extrapolations that reviewers of the play found so frightening. I don’t know about the play itself, but there is no mention in any of the reviews of elasticity of demand, substitution in production or consumption, prices, or any other element of economic thinking. If we take those into account, the outlook changes.
True, the rational pessimist in me recognizes that market-based environmental policies are not politically popular. Too often that leaves us a choice between environmental policies that are wildly suboptimal (which only adds to their unpopularity), or no policies at all. The lure of the free lunch is strong, even when it is free only in the short term, at the expense of our own descendants.
On the other hand, I am optimistic in the belief that market forces are not imaginary. They saved us in the past from the disasters we faced when we ran out of whale oil to light our homes and charcoal to fuel our blast furnaces. If we allow them to operate, they can save us again. Yes, that would mean unpopular measures like carbon taxes, highway user fees, and establishing property rights for ocean fisheries, but all of these have worked where tried. It is about time for each of us to take responsibility for our planet.
Is Turkey’s Current Account Adjustment Coming to a Halt?
-Emre Deliveli (The Kapalı Çarşı: Emre Deliveli’s blog on the Turkish economy)
Not if you’d look at the latest trade statistics. After all, at $ 7.2bn June trade deficit came in much lower than expectations of $ 7.9bn. But as they say, the devil is in the details, and the details paint a rather ugly picture.
The first thing to note is that the fall in the deficit is due to the sharp decrease in imports. Since the Turkish growth model is dependent on external financing, the imports figure might be hinting at a slowdown, and as I argue in a recent post, other indicators are pointing in this direction as well.
Well, then you might tell me this development is at least good for the adjustment. But I am not sure how the recent plunge in the Central Bank’s effective funding rate (see the end of that same post) as well as the capital inflows since June ($14bn of hot money plus $5-6 syndicated loan & bond issues) will feed into the economy and the lira.
Besides, preliminary exports from the Turkish Exporters Association contracted 5.6 percent in July. And that is not surprising, given Europe is still more than half of Turkey’ export market (share of exports to EU is 41 percent). An appreciated lira, reheating economy and weak external demand is probably the worst possible combination for the current account.
Moreover, as I argue in my latest Hürriyet Daily News column, tourism is not doing well, as evidenced from the most recent official figures as well as my observations from the field. The contribution from tourism is likely to be smaller than expected in July and August if I am right.
Finally, loyal readers would know that gold exports to Iran have recently started playing an important picture in Turkey’s trade picture. For that reason, my friend Murat Üçer of Turkey Data Monitor and GlobalSource Partners has developed the concept of “core exports and imports”, similar to core inflation, where he excludes gold as well as energy exports and imports.
Click to enlarge
He argues that the core deficit, seasonally adjusted, has stabilized around $6bn per month, which may mean that the pace of the current account adjustment may slow in the second half of the year. Also interesting to note is that exports look to be oscillating around $11bn per month (the data in the graph are not seasonally-adjusted)- showing that the surge in exports in the last few months was mainly coming from gold exports. BTW, you can also see the drop in imports in June.
Bottom Line: If imports are pointing to a slowdown, this is adjustment-positive, but tourism and export developments as well as the possibility of a strong recovery fueled by low interest rates and capital flows should not be overlooked, either.