If you look at the labour market in Spain you would think that it resembles the German economy 10 years ago when Gerhard Schroder was its leader. Schroder was responsible for labour reforms that ignited the German economy into one of the strongest in Europe.
Spain is relaxing labour laws and cutting public spending and there are some positive signs here in that labour unit costs are falling as result of greater productivity. However German’s vocational education sector was a significant factor in its improved performance as the education and training system is more job orientated. Furthermore, with austerity measures in place and more to follow – pressure from the EU to introduce yet another sales-tax rise – Spain will find it hard to generate any sort of growth. But if it does grow will it generate any reduction in unemployment? Because of labour reforms some economists now believe that only 1.5% growth is required to bring about net job creation rather than 2.5% as previous.
David A. Rosenberg an economist with Clusken Sheff in Canada, has likened the world economy to that of a car being driven by a drunk – that is the car is moving back and across the centre line just missing the ditches on the side of the road. Currently he sees the car in the middle of the road although he questions as to whether this is due to the driver becoming more sober or steering towards the ditch on the other side.
Recently the US stock market (Dow Jones Industrial Average) went above 14000 for the first time in more than five years for the following reasons:
1. Better job figures – employers added 157,000 jobs in January and hired more workers in 2012 than had previously been thought. See chart below.
2. Corporate earnings have been stronger than expected,
3. US Federal Reserve has indicated that it will keep interest rates at near zero levels as well as continuing their policy of monthly $85 billion purchases of bonds and mortgage-backed securities, which injected $3 trillion into the banking system last week.
This third point is particularly important. In the New York Times, Rosenbery stated that he didn’t see the US economy in a recession as yet but could quickly go in that direction. “Anemic growth is my baseline scenario.” Also how long can the US Fed keep propping up equity markets and pumping money into the system? The conditions in Europe are not much better – unemployment rose to record levels in December last year and currently stands at 26.8% in Greece and 26.1% in Spain. Add to that the austerity measures which have impacted greatly on overall aggregate demand and the consumer slowdown in Germany, the eurozone area has its problems. So the car might be in the middle of the road right now but it might not take too much for it to deviate from a safe path.
The race for countries to devalue their currency (make their exports more competitive) has led to massive increase in monetary stimulus into the global financial system. We are all aware of the three rounds of Quantitative Easing from the US Fed and the indication that they would keep the Fed Funds Rate at virtually zero until 2015. To add fuel to the ‘dim embers’, in 2013 the US is going to inject US$1 trillion into the circular floe. However in China they have also embarked on some serious stimulus:
* More infrastructure development – US$60bn
* Additional credit – US$14 trillion in extra credit since 2009 (equal to entire US banking system)
Nevertheless even with all this artificial stimulus there might be some short-term growth but I can’t see it being sustainable when you consider the extent of global deleveraging. Also IMF figures show that the world saving rates are on the increase (* forecast):
With increased saving rates accompanied by significant austerity measures in many parts of Europe where is the consumer demand going to come from? Unemployment in Spain is 26% and predicted to hit 30% this year- more worrying is 50% of those under 25 are unemployed. Spanish protesters chanted “We don’t owe, we won’t pay” in a march against austerity. So in the US we have massive fiscal stimulus but across the water in Europe it’s all about “tightening the belt” and cutting government spending. Neither seems to be working and are we just putting off a significant downturn for a later date?
After a year in operation the Danish government recently announced that it was to abolish its tax on saturated fats. The idea behind the Fat Tax was to increased the price of unhealthy foods and therefore reduce consumption and improve the health of the population. However in practical terms the tax was a nightmare to administer as it not only targeted chips, burgers, hot dogs etc but also high-end food including gourmet cheeses. According to some critics this was to the worst example of the nanny state. The Economist reported some of the problems:
* Bakers were concerned with fat content in their cakes.
* Pig farmers said their famous bacon would cost more than imports.
* Independent butchers complained that supermarkets could keep their meat prices down as they could spread the cost of the tax across other goods.
* The tax applied on meat was imposed by carcass not per cut, which meant higher prices for lean sirloin steak as well as fatty burgers.
* Before the tax was imposed there was significant hoarding especially in margarine, butter and cooking oil
However there was also a surge in cross border shopping and a study estimated that 48% of Danes had done shopping in Germany and Sweden – sugary drinks, beer, butter etc were no doubt high on the shopping list.
Here is a clip from PBS on the German economy as to why it is has been so successful.
* The secret to Germany’s success seems to be evident in small-to-medium-sized family firms that manufacture some highly specialized and indispensable piece of equipment. The Germans like to say, we make the thing that goes inside the thing that goes inside the thing.
* With just a quarter of America’s population and a quarter of its GDP, Germany exports more than the United States in total
* Germany have 1 percent of the labour force of the world, and 10 percent of the world exports.
The table below from the Australian Markets Weekly (Published by National Australia Bank) shows the fiscal position of euro-zone and other developed nations. As you can see the PIIGS (Portugal, Ireland, Italy, Greece, Spain) of the euro-zone countries have very high gross debt to GDP levels except for Spain. Japan has the highest but is also the only economy involved in fiscal loosening – see column 4. Notice the severity of tightening in some euro-zone countries as austerity measures start to be implemented. It does seem a little strange that Australia’s tightening in fiscal policy is greater than that of the UK and the US and not that far from the IMF‟s estimate of “austerity” announced for Italy.
The memo items are also of interest in that they show the nominal GDP, debt and budget balance in $USbn. In nominal GDP you have USA, China, Japan, Germany as the leading economies by output levels. China overtook Japan this year.
Western European economies went back into recession (defined as two consecutive quarters of negative GDP) as the injection of demand into the circular flow was more than offset by public austerity programmes in certain countries. The conditions in the Euro-zone don’t seem to be very conducive to any sort of recovery – contractionary fiscal policy is prevalent in many countries and a lack of confidence across the region stifles any upturn.
Greece is still has serious concerns over any recovery – IMF boss Christine Lagarde stated that Greece should be given “a bit more time”.
“This is what I have advocated for Spain, Portugal and what we are advocating for Greece. An additional two years was necessary for the country to actually face the fiscal consolidation programme that is considered.”
However there is still some more hardship to come before any sort of economic recovery. I was surprised at the German growth levels over the last tow quarters. Quite like this graph showing annual GDP in the Euro-zone.
Here is a great image from The Economist showing the competitiveness and GDP per person. New Zealand comes in at 25th in Global Competitiveness ranking – see red arrow on graph. Notice that Switzerland is the top country followed by Singapore with Finland in third place. Amongst the emerging economies China is top with Brazil in second place.
The most striking fall is the United States, which has dropped in the rankings for four years in a row. It is now seventh. The rankings are based on criteria such as institutions, infrastructure, financial systems, flexible labour markets, economic stability, innovations and public services. Plotting the scores against GDP per person reveals an unsurprising correlation: competitiveness brings wealth, but rich countries can most easily afford to provide the conditions for it. They can squander competitiveness too.
In Unit 5 of the Cambridge AS course unemployment is a significant area of study. It is also important that you are up to date with current trends worldwide. In the OECD the average unemployment rate was 7.9% whilst the eurozone area showed 11.1%. There are two main features of this unemployment – youth unemployment and those who are long-term unemployed. The graph below shows figures that range from 4.4% in Japan and 24.6% in Spain.
This is a major problem especially for those that are unskilled and looking for employment in blue collar jobs. These countries with high youth unemployment have experienced long-term consequences, particularly for those with limited education. Brian Gaynor in the New Zealand Herald mentioned some consequences of youth unemployment from various sources. They include:
* Being unemployed young resulted in lower earnings by 8.4% – 13% in future years.
* A 1% increase in US unemployment resulted in a 6-7% decrease in the wages of college graduates.
* Youth unemployment raised the probability of unemployment in later life
* Loss of earning up to 21% at age 41 for workers who experienced unemployment in early adulthood.
* Unemployment in early 20’s affected earnings, health and job satisfaction up to two decades later.
According to the OECD and since the GFC the rise in numbers who have been unemployed for over one and two years are as follows:
1 year – 1.6% to 2.9%
2 years – 0.9% to 1.5%
One of the major issues that a lot countries face is the number of baby boomers that are remaing in the workforce after 65 and the impact this will have on youth unemployment. Furthermore, it is interesting to note from the OECD that labour’s share of national income in its 34 countries has declined from 66.1% to 61.7% in the last 10 years. According to Brian Gaynor the decline in labour’s share is due to a number of factors:
* Greater productivity gains
* Increased mobility and transfer of low-skilled activities from developed to emerging countries
* Weaker trade unions – impacts bargaining powers
* Privatisation – newly privatised companies are more profitable and have fewer employees
Minimum Wage Increase?
The OECD argue against a higher minimum wage as it will increase prices. Also in the long-term firms respond by increasing productivity levels beyond the wage rise which leads to a decline in labour usage and therefore a greater emphasis on capital.
From Felix Salmon of Reuters – this astonishing GIF comes from Nanex, what we see here is relatively low levels of high-frequency trading through all of 2007. Then, in 2008, a pattern starts to emerge: a big spike right at the close, at 4pm, which is soon mirrored by another spike at the open. This is the era of traders going off to play golf in the middle of the day, because nothing interesting happens except at the beginning and the end of the trading day. But it doesn’t last long.
By the end of 2008, odd spikes in trading activity show up in the middle of the day, and of course there’s a huge flurry of activity around the time of the financial crisis. And then, after that, things just become completely unpredictable. There’s still a morning spike for most of 2009, but even that goes away eventually, to be replaced with sheer noise. Sometimes, like at the end of 2010, high-frequency trading activity is very low. At other times, like at the end of 2011, it’s incredibly high. Intraday spikes can happen at any time of day, and volumes can surge and fall back in pretty much random fashion.
The Wolfson Economics Prize was awarded to the person who is able to articulate how best to manage the orderly exit of one or more member states from the European Monetary Union. Roger Bootle and his colleagues from Capital Economics in London won the £250,000 prize. Their main proposal was a Northern Monetary Union not including France as the economic climate there has resembled the peripheral economies – current account deficit as opposed to Germany’s significant surplus and its primary budget deficit which resembles that of Greece. However, France would form a Southern Monetary Union. There was also the option of all those not in the Northern Monetary Union reverting back to local currencies like the pre-euro environment. Below is a flow chart to outline his plan.
The high levels of unemployment have led one European leader to suggest leaving the country. According to the FT in London, Portugal’s prime minister, Passos Coelho, has indicated to the younger generation that if they can’t find any work they should “leave their comfort zone” by going overseas. Some from the political left have suggested that although there is a lot more freedom since the dictatorship ended in 1974, this has not translated into opportunities for employment. When Portugal joined the euro in 1999 they became a net importer of migrants but last year it is estimated that 150,000 emigrated overseas and a significant number of them being graduates. As with a lot european countries inflexible labour laws which make it costly to dismiss older workers mean that companies are less likely to employ younger workers. However changing the labour laws to make it easier to get rid of workers isn’t going to go suddenly create more jobs.
In Ireland, since the GFC in 2008, 250,000 people have left the country. What’s more worrying is that the youth unemployment (18-24 year olds) has risen to approximately 33% and that is not taking into consideration those who have emigrated. However to any government youth emigration has some benefits:
1. There is less need for social welfare support
2. It reduces the chances of social unrest which generally tends to originate from the younger members of the population.
When the financial crisis hit Latvia in 2008 what followed was a huge budget deficit that needed to be rectified. In stepped the IMF and the European Union to assist but, unlike Greece, the Latvians didn’t hold back with severe austerity measures. Since then the Latvian economy has returned strong growth levels as it climbs out of the trough of the cycle.
What were the conditions in Latvia after the 2008:
1. It lost over 20% of its GDP in two years
2. Unemployment reached 20%
3. Emigration rose as this is in a country with a declining population
4. Levels of productivity are low
So why the Baltic states growing so much faster than those in the Mediterranean?
1. According to The Economist the Baltic states are in catch-up phase
2. Their competitiveness can be regained by pushing down wages and prices by devaluation.
The IMF’s Nemat Shafik compared such a process of internal devaluation to painting a house – “If you have an exchange rate you can move your brush back and forth. If you don’t have an exchange rate you have to move the whole house.”
Interestingly enough the IMF think that deficits should be cut by a gradual process in the medium-term. Latvia believed that deep fronted-loaded austerity was the best way to achieve confidence from the markets. But with more flexible labour markets the Latvians were able to reduce wages compared with their Mediterranean colleagues. Furthermore Keynesian stimulus in northern countries had the benefit of stimulating demand in Latvia.
What is there to be learnt from Latvia
1. Low debt – debt-burden is about 45% of GDP, less than half that of Greece and Italy before the crisis.
2. International lenders need to be under no illusions – if a country can’t repay its debts it must face early restructuring. Latvia was actually allocated more money than it needed.
3. Banking union – a European-level system to regulate and restructure and refinance struggling banks.
Ben Cahill of Senior College put a cartoon on the Tutor2u blog about the role Angela Merkel has in determining the destiny of Greece. The cartoon below has Merkel showing the Greeks to their only option ie. the labyrinth to be consumed by the minotaur. What she basically saying to the Greeks is that you have no choice but to stick to the reform measures and strict austerity measures. Furthermore one could say that after the soccer quarter-final on Friday “One gone, one to go”.
This cartoon also reminded me of book that I recently read called the Global Minotaur by Yanis Varoufakis. The Minotaur is a tragic mythological figure. Its story is packed with greed, divine retribution, revenge and much suffering. It is also a symbol of a particular form of political and economic equilibrium straddling vastly different, faraway lands: a precarious geopolitical balance that collapsed with the beast’s slaughter, thus giving rise to a new era.
According to the myth’s main variant, King Minos of Crete, the most powerful ruler of his time, asked Poseidon for a fine bull as a sign of divine endorsement, pledging to sacrifice it in god’s honour. After Poseidon obliged him , Minos recklessly decided to spare the animal, captivated as he was by its beauty and poise. The gods, never allowing a good excuse for horrible retribution to go begging, chose an interesting punishment for Minos: using Aphrodite’s special skills, they had Minos’s wife, Queen Pasiphae, fall in lust with the bull. Using various props constructed by Daedalus, the lengendary engineer, she managed to impregnate herself, the result of that brief encounter being the Minotaur: a creature half-human, half-bull (Minotaur translates as ‘Minos’s Bull’, from the greek taurus, ‘bull’).
When the Minotaur grew larger and increasingly unruly, King Minos instructed Daedalus to build a labyrinth, an immense underground maze where the Minotaur was kept. Unable to nourish itself with normal food, the beast had to feast on human flesh. This proved an excellent opportunity for Minos to take revenge on the Athenians whose King Aegus, a lousy loser, had had Minos’s son killed after the young man won all races and contests in the Pan-Athenian Games. After a brief war with Athens, Aegus was forced to send seven young boys and seven unwed girls to be devoured by the minotaur every year (or every nine years according to another version). Thus, so the myth has it, a Pax Cretana was established across the know lands and seas on the basis of regular foreign tribute that kept the Minotaur alive.
Beyond myth, historians suggest that Minoan Crete was the economic and political hegemon of the Aegan region. Weaker-city states, like Athens, had to pay tribute to Crete regularly as a sign of subjugation. This may well have included the shipment of teenagers to be sacrificed by priests wearing bull masks.
Returning to the realm of the myth, the eventual slaughter of the Minotaur by Thesus, son of King of Aegeus of Athens, marked the emancipation of Athens from Cretan Hegemony and the dawn of a new era.
Aegeus only grudgingly allowed his son to set off to Crete on that dangerous mission. He asked Theseus to make sure that, before sailing back to Piraeus, he replaced the original mournful black sails with white ones, as a signal to his waiting father that the mission had been successful and that Theseus was returning from Crete victorious. Alas, consumed by the joy at having slaughtered the Minotaur, Theseus forgot to raise the white sails. On spotting the ship’s black sails from afar, and thinking that his son had died in the clutches of the Minotaur, Aegus plunged to his death in the sea below, thus giving his name to the Aegean sea.
This suggests a tale of a hegemonic power projecting its authority across the seas, and acting as custodian of far-reaching peace and international trade, in return for regular tributes that keep nourishing the beast from within. The role of the beast was America’s twin deficits, and the tribute took the form of incoming goods and capital. Its end came from the collapse of the banking system. The book is well worth the read and not too long either.
Below is a very good video from The Economist on the impact of Greece leaving the Euro. Thanks to John Wilson of AGS for sharing this on twitter.
A hat tip to A2 student Georgia Harrison for this clip from the European Parliament – Nigel Farage MEP, Leader of the UK Independence Party (UKIP) gives his view of the whole euro debacle. Some very valid points to a rather stunned audience. Here is part of his speech. Worth a look.
A hundred billion [euro] is put up for the Spanish banking system, and 20 per cent of that money has to come from Italy. And under the deal the Italians have to lend to the Spanish banks at 3 per cent but to get that money they have to borrow on the markets at 7 per cent. It’s genius isn’t it. It really is brilliant.
Here is a really good graphic from the Wall Street Journal. Moody’s Investors Service has been reviewing since February 2012 the credit ratings of more than 100 European banks for possible downgrade. The graphic below tracks Moody’s long-term debt ratings for the largest of these banks. Banks are sized by total assets. Shading indicates the bank’s credit rating — the deeper the red, the lower the rating. Click the link below to go to the website.
Finance can be a bewildering world. The mashinations of big business and government as they dice with huge amounts of money involves jargon and financial terminology that make the mind boggle. Here are some of his explanations:
Bankia – a bank in Spain which requires a bailout as it indulged in too much speculation in the Spanish real estate market or what is know as banky panky.
Capitalisation – using upper-case letters in an email expressing your rage a the lack of money in the bank’s reserves
Fiscal Compact – a rather shoddily built container where Europe hopes to have its make-up. If you examine it too deeply, the foundation falls out. However if you don’t have it, you’ll be going out without your face on. And things could get ugly.
EFSF – European Finance Sometimes Fails – a whip round for people in your social circle when they are in trouble.
ESM – Even Spain Might – if bigger friends get into trouble you are going to need a bigger whip round.
Eurobonds – the friends you make among opposing fans at the European Football Championship. These realtionships eventhough they are soaked in beer and you can’t speak the other person’s language can be very intense. These bonds stand a better chance of lasting than the actual eurobonds.
LTRO – long-term refinancing operation – the distribution of large sums of money to badly behaved recipients regardless of whether they deserve it or not. A bit like being a parent.
Maastricht – a previous European Treaty requiring financial discipline with regard to government deficits. Unfortunately it was ignored and so was called the “Mass Not So Strict Treaty”. So now Europe needs another agreement called the Stability or “Much Mass Stricter Treaty”.
Turning a corner – what an Irish economy does before something even worse happens – usually the reappearance of Greece.