Wednesday, March 31, 2010

El Paro: Desanimados o Simplemente "Missing" (Dos)

Según un articulo reciente en este mismo diario, el Gobierno Español ha decidido abrir la puerta de salida a los trabajadores inmigrantes que se encuentren parados para que regresen a sus países de origen. Y para que esta oferta no se quede corta de demanda, el Ejecutivo parece dispuesto a ofrecer ayudas económicas de hasta 2.600 euros por familia, más el pago del billete para viajar.

Como indica Expansión, en estos momentos el 30% de la población extranjera afiliada a la seguridad social (o más de 600.000 personas) sobrevive sin rentas del trabajo, mientras que para cerca de 300.000 la caducidad de su seguro de paro es cuestión de semanas. Entonces hace falta encontrar alguna solución u otra, y con urgencia. Pero la pregunta que esta nueva política de respuesta pone de relieve es lo siguiente: ¿es conveniente que las personas con capacidad de trabajar, al faltar el trabajo, salgan del país? Como voy a explicar más abajo, mi opinión es que esta solución sería un desastre para el país.

Ciertamente, señales de que algunos estaban marchando han ido apareciendo cada vez con más frecuencia en los últimos meses.

En primer lugar, el saldo migratorio ha ido bajando constantemente (ver gráfico abajo).




Según el ultimo informe del INE, en su Población "nowcast", en septiembre del 2009 , 9.048 personas más entraban en España (incluyendo nacionales y extranjeros) . Tal cantidad puede exagerar el número significativamente por dos razones básicas. En primer lugar sólo se sabe si un inmigrante ha dejado realmente el país, cuando no renueva su permiso de residencia, cosa que sólo se hace cada dos años, y por lo tanto hay una demora considerable. Por otro lado, los nacionales solo constan cuando emigran definitivamente, pero de estas personas indudablemente hay bastante pocas: los que simplemente se van a buscar trabajo, sin planes que vayan más lejos ¿quién los contabiliza a ellos?

¿Los desanimados, dónde están?

Otra indicador que puede resultar interesante en este sentido es el desfase entre el número de personas que pierde su trabajo, y el total de parados. Yo, personalmente, he quedado sorprendido por el de hecho de que el número de parados no ha subido tanto como esperaba. También parece que los técnicos del INEM han tenido la misma sensación, porque han ido constantemente modificando sus datos de parados, estacionalmente corregidos y depositados en Eurostat, desde Semana Santa del 2009. El último ejemplo ha sido la revisión que han hecho de la tasa de desocupación de diciembre que ha bajado de un 19,5% a un 18,9% al terminar el EPA por el cuarto trimestre.







Por supuesto, el paro ha ido subiendo, y seguirá subiendo, pero no tan rápido como yo, personalmente, tenía previsto, y aunque todavía creo que superará las previsiones tanto del mismo Gobierno como del Banco de España, no creo que no llegamos al lindar del 25% que inicialmente tenía previsto. Pero la razón por la que no llegaremos no es ninguna buena noticia.

Tal y como destacan en su último informe del mercado laboral IESE-Adecco, en el último trimestre del año pasado era la caída de la población activa - del 0,4%, la primera caída en 30 años y provocada por el desaliento entre los desempleados - lo que impide que el número de personas sin empleo llegue a los 4.500.000 de parados.



Según el informe de no haberse contraído la población activa, los desocupados sumarían 100.000 más al final de año, con lo que se hubiera alcanzado fácilmente la cifra de 5 millones si la población activa hubiese mantenido una evolución normal. “El resultado del desánimo en la población es la moderación en el incremento de parados”, indica el informe de IESE-Adecco.

Pero la parte mas interesante de ese discurso son las razones que dan. Según IESE-Adecco este "desánimo" ocurre por dos principales motivos. Por un lado, una parte de quienes pierden su empleo no inicia la búsqueda de otro y, por otro, personas que desearían trabajar no comienzan a buscar empleo. "Tales comportamientos pasan a ser comprensibles por el desánimo y las malas expectativas en el contexto actual", dice el informe. Pero luego matizan: "Para ser más precisos, el efecto desánimo coexiste con otros dos movimientos, aún poco visibles pero ya en marcha: inmigrantes que retornan a sus países, efecto retorno, y españoles que deciden probar suerte en el mercado laboral de otros países de la UE, efecto salida”.

Según el informe, el hecho sobresaliente en 2009 es el descenso de la población económicamente activa, algo que no había ocurrido en las tres décadas anteriores - en los últimos doce meses, se ha producido un descenso de 92.300 personas activas. Y en el último trimestre, y por cuarto trimestre consecutivo, el número de puestos de trabajo perdidos interanualmente ha superado el millón, concretamente, 1.210.900 ocupados (descenso de un 6,1%). Específicamente, a lo largo de los últimos doce meses se han perdido 819.900 empleos adultos (descenso de un 4,5%) y 391.000 ocupaciones juveniles (bajada de un 23,5%). Es decir, 1 de cada 3 puestos de trabajo perdidos estaba ocupado por un menor de 25 años, y el número de jóvenes ocupados (ahora 1.273.000) es el más bajo en al menos 40 años (ver gráfico). Esta situación se repite en todas las Comunidades Autónomas analizadas.



Por lo tanto, desde septiembre de 2007, momento de máxima ocupación, han perdido su empleo 1.864.700 personas, lo que equivale al 9% del total de ocupados de aquella fecha. Es decir que, hasta ahora, la crisis ha quitado el empleo a 1 de cada 11 personas ocupadas.

Al mismo tiempo el numero de afiliados de la seguridad no deja de bajar. En términos desestacionalizados, el desempleo se ha situado en 4.015.625, lo que supone 59.088 parados más que el valor desestacionalizado del paro registrado en febrero. Por otra parte el numero de los afiliados a la Seguredad Social en marzo - en términos desestacionalizados - ha caido en 34.660 trabajadores - de 17,747 millones a 17,712 millones - en comparación con febrero.

Según las previsiones de IESE-Adecco, en junio próximo, el porcentaje de personas activas sin empleo será de un 19,2% - un incremento interanual de 1,3 puntos porcentuales. De confirmarse esta previsión, desde junio de 2007 se habría acumulado un incremento en la tasa de paro de 11,3 puntos porcentuales. No obstante, el informe argumenta que si la población económicamente activa volviera a expandirse de modo parecido a como lo hizo hasta marzo de 2009, la tasa de desocupación podría ser hasta 2 puntos porcentuales mayor a la cifra antes indicada - y una parte significativa de esta diferencia puede llegar por parte de las personas que, simplemente, ya no están aquí.

Es por eso que yo destacaría dos "grupos de riesgo". En primer lugar, la mano de obra inmigrante, mayoritariamente ligada al sector servicios y la construcción, ambos muy golpeados por la crisis, cuya tasa de paro ha llegado hasta el 29,7%, frente a la del 16,8% de los nacionales. Y en segundo lugar, jóvenes con menos de 30 años, y sin contrato de larga duración. En ambos casos, un estancamiento del mercado laboral durante mucho tiempo puede producir la consecuencia indeseable de que se vean forzados a marchar del país, en busca de su futuro.



Mantener La Población Activa: Factor Crítico En La Recuperación

La economía es una ciencia compleja, donde todo depende del punto de partida y de su trayectoria, lo que quiere decir que es difícil predecir, muy a menudo, y que los resultados producidos son sustancialmente diferentes a los que esperaría una persona aplicando una postura de "sentido común".

Así, por ejemplo, podría parecer, a simple vista, que con la tasa tan alta de desempleo que tenemos y la gran cantidad de emigrantes, con una vuelta de los emigrantes, a su país de origen, habría bastante menos desempleo.

No obstante, a pesar de esa conclusión inicial, un análisis más detallado, revelaría que se trata de un proceso de razonamiento falso, ya que si la fuerza de trabajo disminuye, habrá menos personas en la mano de obra para pagar las futuras pensiones, menos personas trabajando para producir las exportaciones que el país necesita para pagar su deuda externa. También, menos población para comprar y alquilar casas, lo que haría mucho más difícil estabilizar el mercado de vivienda y frenar la morosidad de forma que los bancos quedasen solventes. Así que, si se deja que las personas se marchen del país, los españoles corren un mayor riesgo de tener que trabajar mas años, por una pensión reducida, además de precipitar una verdadera situación explosiva en sus bancos.




Según un estudio reciente de la Fundación de Estudios de Economía Aplicada (Fedea), las malas perspectivas que ofrece la economía española pueden convertir España en un país sin inmigración. Las estimaciones detalladas de llegadas de inmigrantes para los próximos años que hace el informe indican claramente que los ritmos serán menguantes: este año llegarán 285.000 nuevos inmigrantes; serán 203.000 los recién llegados en 2011; 128.000 en 2012; 61.000 en 2013... Y en 2014 la recepción de inmigrantes queda prácticamente en nada, con sólo 3.000 nuevos extranjeros.

Pero, por las razones dadas antes, yo temo que la situación puede llegar a ser mucho peor. Creo que el saldo de inmigrantes puede ser incluso negativo este mismo año y que la falta de perspectivas de trabajo puede hacer que nos enfrentemos a una bajada sustancial de la población activa en los próximos años, sobretodo si añadimos el número de jóvenes autóctonos que no tendrán más remedio que salir en búsqueda de su futuro.

Es evidente, que la burbuja inmobiliaria ha producido muchas consecuencias indeseables, entre las que se encuentra la subida dramática de la población, sin tener un modelo económico capaz de ofrecer puestos de trabajo adecuados y sostenibles. Pero lo hecho, hecho está. Si ahora mismo España hace marcha atrás, se puede producir una situación infinitamente peor, y algunas regiones del país podrían quedar como Alemania del Este u otras partes de Europa Oriental. Por eso y por muchas otras razones, es de primera importancia poner en marcha una política económica que pueda producir crecimiento de empleo de forma urgente, ya que, en la situación actual, semejante caída de la población lejos de ser deseable seria una catástrofe y podría precipitar España hacia una espiral descendente, que una vez iniciada seria difícil de detener.

Monday, March 29, 2010

Friday, March 26, 2010

From A Greek Debt Crisis To A Eurozone Structural One?

When we look back five years from now, will we see this week as marking a turning point in the short, but far from uneventful, ten year history of Europe’s common currency? Certainly recent comments by the deputy governor of the People's Bank of China have made evident what was already implicit: the dependence of EU sovereign debt on sentiment in global markets, especially in Asia and the Americas. Simon Derrick, chief currency strategist at Bank of New York Mellon even went so far as to say the trauma of recent days might well signal the point that we stop talking about a “Greek debt crisis” and start talking about a “Eurozone structural crisis” . And while Herman Van Rompuy, president of the European Council, was telling us on the one hand that the eurozone will never let Greece fail, Jane Foley, research director at Forex.com busied herself explaining, on the other, that any involvement of the International Monetary Fund in helping Greece to stabilise its fiscal position only heightens the risk that the country might one day end up leaving the eurozone. So just where are we at this point?

Basically it is important to recognise that the current crisis has placed the spotlight on the severe institutional weaknesses which lie underpin the common currency, and it is just these weaknesses which are leading so many commentators to now ask themselves whether it might not have been easier to implement political union in Europe before embarking on such an ambitious monetary experiment.

These weaknesses became even more clear on Thursday when Jean Claude Trichet went very public in making clear that he personally is totally opposed to IMF participation in any Greece "rescue". “If the IMF or any other authority exercises any responsibility instead of the eurogroup, instead of the governments, this would clearly be very, very bad,” he said on France’s Public Senat television. And this on the same day as Angela Merkel and Nicolas Sarkozy were publicly celebrating the triumph of the "Franco-German" entente. Clearly there are still many rivers left to cross before we can say we have reached the other side in this particular structural crisis.

Basically the issues facing Greece are now not primarily fiscal ones. The issue is how to get growth back into the economy fast enough to stop deflation and the economic contraction taking away all the good work acheived through fiscal cutbacks, and how to finance Greek borrowing at a rate of interest which stops the level of indebtedness spiralling upwards out of control.

The Economist magazine have done their own calculation on this, and they estimate that a loan of €75 billion rather than the currently rumoured €25 billion will be needed and that the country is likely to need five years (rather than three) to get its deficit down below 3% of GDP. They also assume that Greek GDP will be 5% below its current level by 2014. And these are not unrealistic expectations.



One of the key issues facing Greece at the moment, with large parts of its outsanding debt needing to be refinanced, is just what rate of interest (or extra spread) will have to be paid on any loan (I deal with this question in this post). This is almost a key question, since it can become a "life or death" issue in determining whether or not the country will be forced into default. But here both the EU and the IMF have a problem, since if the Euro Group countries make a loan at a level near to the the current price charged for German debt (which is what should happen if we argue Greek debt carries no additional risk since we are all guaranteeing it), then other countries who are currently paying more (Spain, Ireland, Portugal, Austria etc) may ask why they also could not have such favourable treatment. On the other hand, asking the IMF to make a cheaper loan causes problems, since it could be seen as subsidising Europe in sorting out its problems, and this might not be easily understood in Emerging Economies where there are evidently many more needy cases than Greece's to think about.

The bottom line is that there is no easy answer here, and Europe is struggling to convince the rest of the world that it has both the will and the instruments to effectively tackle the problem of maintaining a single currency in a diverse group of countries. Herman Van Rompuy said on Friday there was no danger of Portugal being sucked into the same sort of debt whirlpool as Greece, and that Portugal would not be the next country to be sent over to Washington in search of a helping technical hand from the IMF. Which raises the question: if it won't be Portugal, who will it be?

Wednesday, March 24, 2010

Why Not Unravel The IMF Too While We're At It?

If you're really good at making a pigs ear of things, why not join the EU? Of course, this is not meant as a piece of solid advice, rather it is a cry of frustration at being impotently forced to watch so many things done so badly, each in turn, and one after the other. Southern Europe's problem is essentially a competitiveness problem, and not a fiscal one, and if many states have been having growing difficulty with their negative fiscal balances, this is a symptom of the problem, and not its cause. Even in the worst of cases - countries like Greece and Portugal - the rising recourse to fiscal outlays has been a response to lack of "healthy" growth, and the root cause of this continuing difficulty in generating real growth has been the underlying lack of competitiveness, and the inability to export your way out of trouble once the burden of debt starts to rise, so simply pruning the fiscal side isn't going to cure the problem, and by now that simple point should be obvious, I would have thought.

Naturally a lot of attention in the Financial Markets has been focusing on whether or not the Euro is about to unravel. Even the ever so prudent Ralph Atkins winds up his mamoth "Defiant Berlin" review with a quote from Jörg Krämer, chief economist at Commerzbank in Frankfurt: says the next few years may see the eurozone becoming more of a “transfer union” – in which better performing countries have to help out weaker members. “That could mean Germany says, ‘we are no longer willing to support the weaker parts of the EU’, and the Greeks say that they are not prepared to have policy dictated by the Germans,” he adds. “The risk cannot be totally excluded of a eurozone break-up within 10 to 15 years – and this is a consequence of widening eurozone divergences.” To which Atkins adds "If that risk rose, Europe would be facing a very different ballgame".

To some extent I cannot help feeling that a congenital inability to take bite the bullet type decisions is resulting in an ongoing process of passing the buck ever onwards and upwards. The latest exemple here is the issue of IMF involvement in the Greek adjustment process. Now, as with any issue, there are good reasons and there are bad reasons why IMF involvemnet might be considered desireable. Among the good reasons are the vast experience and technical expertise of the fund, or the fact that representatives of the IMF might find it easier to say "no", given that the underlying sovereignty issues are not exactly identical.

But among the bad reasons would be the idea that the IMF could fund any eventual Greek loan more cheaply. As far as I can see, a lot of the EU interest in having an IMF loan to Greece stems from the need to make the rate of interest applied cheap enough to bring the spread down. This is an important concern, since it is not obvious why a country which is making its best effort to put things straight should need to be paying an exorbitant charge over the money it borrows while it does this. Earlier this week European Central Bank President Jean-Claude Trichet spoke out strongly against offering the kind of low-interest loans for which the Greek government has been pressing - “There shouldn’t be any subsidy element, no concessionary element” in any eventual loan to Greece, he told members of the Economic and Monetary Affairs Committee of the European Parliament. And maybe this is thye ECB position, but evidently the Eurogroup of countries themselves could do this, so why don't they?

Well, one of the reasons lying behind all the reluctance we are seeing may not be the issue of the German constitution, or the question of changes to the Lisbon Treaty, since perhaps Europe's leaders are simply worried that if they make a cheap loan to Greece, then Spain, Portugal, Ireland, Italy, Austria, Slovenia and Slovakia may all soon argue they also need one.

My view is that this is an issue where the EU itself needs to bite the bullet, and make large changes, ones which lead, as Wolfgang Munchau has been arguing, to much closer political union. If we need the IMF in Greece, and I think we do, it is for its proven capacity to implement programmes, and its extensive technical resources, NOT for the money.

Indeed the Indian economists Subroto Roy just raised a very important issue in this regard on my Facebook. If IMF funds are used to bailout Greece, wouldn't that be a bit like the poor pampering the rich. Shouldn't IMF money be being used for other things? Shouldn't the IMF have other priorities? Evidently stabilising Europe is important, but shouldn't the EU be doing that? As Roy asks, what happens if...

"the US, Britain, ANZ and everyone else in the IMF who is not in the Eurozone.... (decide to)... legitimately ask why the effective subsidy of Greece by its Eurozone partners should be transferred to the rest of the world ... (after all) .... the Europeans have enough clout in the IMF to, say, insist some of their own IMF-directed resources be directed towards Greece specifically, which would spell the unravelling of the IMF if it became a general habit."

Exactly.

On a slightly different, but somewhat related topic, I basically agree with a lot of what Martin Wolf wrote in his Excessive Virtue piece in the FT yesterday. As Martin points out, in saying "nein" to those who suggest that its economy should become a little less competitive what the German government is effectively saying is that the eurozone must become some kind of greater Germany - a huge export machine which generates a massive surplus with the rest of the world, a surplus which enables the highly indebted countries to pay down their debts. But, as Wolf argues, this policy would have profoundly negative implications for the entire world economy.

He cites the German secretary of state Ulrich Wilhelm, who, in a letter to the FT, argues that:

“The key to correcting imbalances in the eurozone and restoring fiscal stability lies in raising the competitiveness of Europe as a whole. The more countries with current account deficits are able to increase their competitiveness, the easier they will find it to decrease their public and foreign trade deficits. A less stability-oriented policy in Germany would damage the eurozone as a whole.”

This worries Wolf, who argues that Mr Wilhelm is inviting everybody to join a zero-sum world of beggar-my-neighbour policies in which every country tries to grab market share from the rest (strange how all of this sounds very similar to the way things wound up back in the 1930's, now isn't it?). As he suggests, at a time of generalised global weakness, this is a self-defeating recommendation for both the eurozone and the world. If we take a look at Japanese exports, which after an initial surge, are basically now near enough to being stationary, it is obvious that deficient aggregate demand in Europe is now part of the problem:




And obviously with all the fiscal pruning and "good housekeeping" we are now about to see, this problem is set to get worse, not better. Being well apprised of the problem Wolf then goes on to put forward an alternative:

"An alternative solution might be to help the world absorb larger export surpluses from the eurozone, the US, Japan and the UK. True, no sustainable exit from the present quagmire can be envisaged without increased net capital flows into emerging countries. It also seems evident that this is where the world’s surplus savings ought to end up. But it is going to take time and much reform to make this happen."

Really, I entirely agree, but a quantum leap in thinking is necessary here. If the books are to balance - and if we want growth and pensions in the OECD then they have to - what we need to do is help cheaper finance reach those countries with capacities to grow and absorb exports, while the EU sorts out the financing (but not necessarily the disciplining) of its own members. That is, if cheap loans need to be provided to anybody it is to those in need in the Emerging Countries, and not to Europeans who have spent their way into difficulty.

In fact, in my New Year questions to Paul Krugman I raised some sort of similar point, but unfortunately his response was not exactly positive.

E.H.: One of the standard pieces of economic observation about countries recovering from financial crises is that their recoveries are export driven. This has now almost attained the status of a stylised fact. But as you starkly ask, at a time when the financial crisis is generalised across all developed economies - whether because those who borrowed the money now have difficulty paying back, or those who leant it now struggle to recover the money owed them - to which new planet are we all going to export? Maybe we don’t need to look so far afield. Many developing economies badly need cheap and responsible credit lines, and access to state-of-the-art technologies. Do you think there is room for some sort of New Marshall Plan initiative, to generate a win-win dynamic for all of us?

P.K.: Um, no. Not realistically as a political matter. We’ll be lucky if we can get the surplus developing countries to spend on themselves. My guess is that our best hope for recovery lies in environmental investment: taking on climate change could, in terms of the macroeconomic impact, be the functional equivalent of a major new technology.

So the solution to our problems is not politically realistic. And meantime we keep trying to play around with policies which simply won't work. It is now pretty clear to me at least just how so much valuable time was lost back in the 1930s, thrashing around playing with solutions which didn't, and wouldn't, work. As Krugman himself likes to say, "history has a habit of repeating itself, the first time as tragedy, and the second time as yet another tragedy".

Hungary urges Europe to help Athens

Hungary urges Europe to help Athens
By Stefan Wagstyl, East Europe editor

Published: March 23 2010 18:43 | Last updated: March 23 2010 22:14


Hungary, the first European Union country to seek International Monetary Fund support in the crisis, has backed moves to allow Greece to follow suit.

In an interview with the Financial Times, Gordon Bajnai, prime minister, urged EU leaders to give Athens “breathing-space” and help it access IMF loans. Speaking before a European summit where Greece tops the agenda, Mr Bajnai said: “From the position of ‘been there, done that, got the lousy T-shirt’, I can say that Greece does need the sort of solidarity that Hungary has received.”

The Hungarian leader was referring to a combined IMF/EU $25bn (€18bn, £17bn) rescue package that Budapest secured in 2008 which was followed by similar deals for other troubled east European economies.

Mr Bajnai said if the EU could not itself help Greece, Athens should go the IMF. “If the European Union doesn’t have the institutions at the moment ready to provide that assistance, if there is no immediate political agreement on establishing those institutions or even on a co-ordinated effort [inside the EU], then Greece will be better off having the IMF.”

The premier said Hungary’s experience showed that countries which embarked on crisis-driven reforms, as Greece was doing, needed time to restore financial confidence. “Confidence is like the air. As long as you have confidence you don’t realise how important it is. When you miss confidence or you miss air then you start to choke. That is what is happening with Greece.”

The prime minister, who has spearheaded IMF-backed economic reforms, said Hungary had lessons for Greece. First, reforms must be big enough to be convincing. “You have to cut deep enough. Like the surgeon in the battlefield who can’t be compared to the plastic surgeon who is measuring every millimetre. The surgeon in the battlefield has to cut deep enough to make sure the wound is not killing the patient.”

Next, reformers should begin with big changes, so they could use their initial political capital. They should set “measurable targets” and subject them to external scrutiny. Finally and most importantly, reformers should secure “basic social acceptance”.

Greece had passed all these tests except the last, said Mr Bajnai. But it was easier to win public support in Hungary, where there were 1.7m foreign exchange loans covering homes, cars and electronic equipment. Hungarians saw “the fundamentals of their lives were at stake” if confidence fell and the currency collapsed. Eurozone residents were not so exposed to such fears – making life harder for their politicians, said the Hungarian leader.

Mr Bajnai was brought in as a technocratic prime minister after the failure last year of a centre-left Socialist government. He is standing down after next month’s parliamentary election, which is expected to see victory for the opposition centre-right Fidesz grouping. Mr Bajnai does not expect the new government to make radical economic changes.

Challenges on growth and jobs

Hungary fell into economic trouble before the global crisis, owing to mounting budget deficits and spiralling government debt. Public confidence collapsed after Ferenc Gyurcsany, the Socialist former prime minister, admitted lying about the economy to win the 2006 election.

Hungary secured a $25bn rescue from the European Union and the International Monetary Fund in 2008 linked to tough reforms, including pension and welfare cuts, increases in retirement ages and reductions in labour taxes, combined with a swingeing fiscal reform that saw the budget deficit drop from a 9.2 per cent peak in 2006 to 3.9 per cent last year.

Mr Gyurcsany quit last spring, giving way to Gordon Bajnai’s technocratic administration. Recovering global confidence helped lift Hungary from the financial danger zone: Budapest stopped drawing down IMF loans last July and returned to the market. But challenges remain, including generating growth, cutting social spending and persuading more people to work – the current employment rate is just 56 per cent, low by EU standards. Gross domestic product, down 6.3 per cent last year, is forecast to grow slightly this year and by 3-4 per cent in 2011.

Europe: Defiant in Berlin
By Ralph Atkins in Frankfurt
Published: March 23 2010 22:17 | Last updated: March 23 2010 22:17

http://www.ft.com/cms/s/0/b95fe7f8-36b7-11df-b810-00144feabdc0.html

“I am a Bayern Munich fan. During the group phase of the Champions League, when Bayern had twice looked really bad against Olympique Lyon, I thought that if only Lyon would play a little less well, Bayern would have an easier time. But this is not the basis on which we can build a competitive system.”

Like a football manager, Wolfgang Schäuble, Germany’s finance minister, is reluctant to give rivals an edge. With Germany among the 16-country eurozone’s best performing economies as the region emerges from recession, he sees little reason to cede its advantages as a star striker.

But while such an attitude might be right on a sports pitch, Mr Schäuble’s comments in the Bundestag, or lower house of parliament, have been creating exasperation elsewhere in Europe. As the aftermath of the financial crisis moves into a new phase in which concern focuses more on the wider real economy and public finances than on banks and other stricken sectors, Germany faces accusations that it is no longer a team player.

Angela Merkel, chancellor, will arrive at Thursday’s European Union summit in Brussels under pressure not only over Berlin’s reluctance to help Greece, the fellow eurozone member where worries about public finances have been most acute. With the eurozone facing its most tumultuous period since the single currency was launched in 1999 – and one that could determine its fate – Germany is being called on to take a lead in boosting growth across the region.

After intensive fitness training in the years prior to the global crisis, German exporters were quick to benefit from the economic upswing that followed. But with the government also keeping a firm hand on the budget, and the country’s consumers as cautious as ever, domestic demand has not kept pace – meaning the impulse to European growth has been small. Mr Schäuble’s speech followed a Financial Times interview in which Christine Lagarde, France’s finance minister, went public with her criticism, asking whether countries running large trade surpluses – for which read her eastern neighbour – could not “do a little something”.

Until late last year, eurozone membership was a source of comfort, especially for smaller countries, which were sheltered from exchange rate crises. European solidarity – the dream of much of the continent’s political class since the second world war – appeared to have become a reality, even though it remained a monetary and not a political union. Now, the debate over Germany has exposed a potentially disastrous flaw in the 11-year-old eurozone.

For the weaker performing countries – particularly in southern Europe – monetary union has become a straitjacket. Greece’s travails have heightened the risks of a eurozone break-up. Given the scale of the task in matching Germany’s success, the danger is that the tensions will only grow worse.

With currency devaluation not an option, Germany’s stubbornness leaves other countries no option but to follow its competitiveness-focused strategy and binding fiscal rules. “If you don’t, you are raising your hands and saying, ‘I want to get out of the euro’,” says Jacques Delpla of the Conseil d’Analyse Economique, which advises the French government.

That is not how it is seen in Germany. It is a country whose successes were hard won. In the first half of the last decade, the Social Democrat-led government of Gerhard Schröder faced social unrest as it forced through structural reforms to curb public spending and boost labour market competitiveness. Now, many Germans argue, it is other countries that need to make changes.

Analysts also dismiss calls that Germany could change its behaviour overnight. “We are not living in a centrally planned economy,” says Jörg Krämer, chief economist at Commerzbank in Frankfurt. “Germany cannot change its model, because it is the model of millions of individuals and companies.”

Germans also reject the idea that they failed to shore up domestic demand. During the worst periods of the economic crisis, subsidies for short-time working prevented a steep rise in unemployment. Berlin’s pioneering “cash-for-clunkers” subsidies for new car sales, copied by the US among other countries, meant that even though the German economy overall contracted by 5 per cent last year, consumer spending actually rose. Real personal consumption was up by 0.3 per cent, compared with a 0.6 per cent fall in the US. Germany’s trade surplus declined significantly last year. “Germany was able to serve as an important buffer for world demand,” argued Axel Weber, Bundesbank president, in a speech in Denmark on Monday.

To strengthen their defence, German policymakers also point out that even Europe’s largest economy cannot transform the region’s prospects alone. Stronger German growth would boost demand for imports from France, say, lifting the French economy as well. But such gains are likely to be modest. According to the London-based National Institute of Economic and Social Research, whose economic model is widely used in Europe’s finance ministries and central banks, a 1 per cent increase in German gross domestic product lifts French GDP by just 0.2 per cent in the first year. Even then, there would be a downside. Faster growth in Germany would almost certainly lead to interest rates rising faster.

The European Central Bank’s view is that in the first decade of monetary union, the bloc’s biggest member was making up for the competitiveness it had lost in the years after the unification of east and west Germany in 1990. Jean-Claude Trichet, ECB president, told the European parliament on Monday that Germany’s trade surpluses were also a way of saving to pay for a rapidly ageing population.

Thus faster German growth would heighten the ECB’s fears of higher inflation. Even if the ECB held back, market interest rates would probably rise. For the French Treasury, higher borrowing costs would more or less wipe out the beneficial effects on revenues of stronger German growth, according to the NIESR model. “Even in a monetary union, you have to put your own house in order. You can’t expect others to do it,” says Ray Barrell, its director of forecasting.

As a result, eurozone countries’ economic fates lie in their own hands. The risk is of a damaging beggar-thy-neighbour contest to deflate costs (with Germany winning on penalties).

“Other countries are forced to reduce their wages, which means Germany will lose competitiveness. So what are the Germans going to do?” asks Paul De Grauwe, professor of economics at Belgium’s Leuven university. “Their model, which they are so proud of, will dwindle ... Too many countries want to build their model on export surpluses – and that is not a model that will lead to domestic demand and growth.” Worse, the pressure from financial markets created by the crisis over Greece may force other governments to slam the brakes on spending just when their economies are at their weakest, thus further undermining recovery prospects.

Is it really all doom and gloom? Not necessarily. Germany’s economy might adjust automatically. Mr Delpla at the Conseil d’Analyse Economique points out that as a result of wage moderation, corporate profits have risen to about 40 per cent of GDP – much higher than most European countries. Some kind of rebalancing appears inevitable, as “German trade unions will become angry about not seeing their wages go up”, he says.

Mr Weber argues that Germany’s past export success was “boosted by strong but ultimately unsustainable global economic growth” that is unlikely to be repeated, adding: “German enterprises will naturally have to focus more on the domestic market than before.”

Elsewhere, prices may fall, helping other countries regain competitiveness. “It will be cheaper for a German to go on holiday in Greece or buy a house in Spain,” says Mr Delpla. The ECB and European Commission are keen that eurozone countries seize the moment to embark on labour market reforms that increase cost efficiency and flexibility.

The worry is that inflexible European economies will take too long to adjust, risking social conflict and political tensions. Germany’s experience in the past decade shows it can take years to restore competitiveness within Europe’s monetary union, in which exchange rates are fixed – and the global environment at the time was much more favourable.

Germany’s lead might, moreover, simply prove too great for others. Until last year, when pushed sharply higher by the collapse in production, its unit labour costs had barely risen in a decade. Over the same period, these had risen in Spain, Ireland and Greece by 25 per cent or more. Even France showed a nearly 20 per cent increase.

“The magnitude [of the adjustment needed] is so big that it is going to be extremely long and painful – especially if we are in a very low-inflation environment,” says Jean Pisani-Ferry of the Brussels-based Bruegel thinktank. “If German wages are frozen, it is almost hopeless what you can achieve in a country like Spain.”

Fragile economic growth could also exacerbate weaknesses in the eurozone financial system. For the first decade of the euro, sluggish growth in Germany meant eurozone interest rates were set at a level that now seems to have been too low to prevent house price bubbles in countries such as Spain and Ireland. Now, the situation has reversed and, in setting interest rates for the region as a whole, any rises risk squeezing the weaker countries even more. Monetary union means “you have to set interest rates for the average – but the average is purely some statistic. There is no reality behind it,” says Mr Pisani-Ferry.

Mr Krämer at Commerzbank says the next few years may see the eurozone becoming more of a “transfer union” – in which better performing countries have to help out weaker members. “That could mean Germany says, ‘we are no longer willing to support the weaker parts of the EU’, and the Greeks say that they are not prepared to have policy dictated by the Germans,” he adds. “The risk cannot be totally excluded of a eurozone break-up within 10 to 15 years – and this is a consequence of widening eurozone divergences.”

If that risk rose, Europe would be facing a very different ballgame.

Shopping list of boosts

Berlin could boost demand in several ways. Tax cuts would put more money into the hands of consumers – as would higher public or private sector wages. Germans could also be persuaded to save less, although it is not clear how. Besides, any fiscal recklessness might simply scare them into saving more.

José Manuel Barroso, European Commission president, this week told the Financial Times that – rather than massive state spending – pension reforms, more e-commerce and relaxed shop opening hours could be used to stimulate demand. But when shop hours were liberalised in 2003, consumer spending barely moved that year or the next.

The other side of the surplus

Reeling from a double blow, Spain struggles to regain balance:

It is an ingenious scheme. Using a combination of windmills and water pumps, El Hierro, one of Spain’s Canary Islands, is destined by 2011 to produce all its own electricity with a €64m renewable energy project backed by the state, writes Victor Mallet.

The regional government is also trying to attract biotechnology investment and call centres. “The idea is to diversify the economy, to change the economic model based on construction and tourism,” says the archipelago’s investment promotion agency.

Such efforts are being replicated all over Spain in an attempt to rebalance the struggling economy. Having become too dependent on the income and low-quality jobs generated by the home construction and tourism industries, it is suffering from a double blow: the collapse of its domestic housing boom combined with the global economic crisis.

The Socialist government of José Luis Rodríguez Zapatero, prime minister, is preparing a “sustainable economy law” designed to wean the country off old industries and promote innovation, high technology and renewable energy.

But with many countries with lower costs doing the same, economists doubt Spain will be able to transform its economy fast enough to avoid a prolonged period – perhaps five years or more – of sluggish growth and painful adjustment as it tries to regain the competitiveness lost over the past decade of wage rises.

It has its advantages, not least a new transport infrastructure; a handful of globally competitive companies such as Inditex, the clothing company that owns the Zara brand; and some of the world’s best business schools.

But it also has an inflexible labour market; an unemployment rate of nearly 20 per cent – one of the European Union’s highest; and an onerous bureaucracy that deters entrepreneurs. Education is in dire need of reform. Nearly a third of Spaniards aged 18-24 have completed only compulsory schooling up to the age of 16, double the EU average. Only Malta and Portugal are worse. That is why it could take years to turn the economy around, even if the government can restore foreign confidence by cutting the budget deficit as planned from more than 11 per cent of gross domestic product last year to 3 per cent in 2013.

Spain, says one senior civil servant, has a “crisis with special characteristics” because the need for urgent domestic reforms has coincided with the global downturn. “We are correcting things in the most adverse conditions imaginable,” the official says.

German focus ‘will shift to domestic market’
By Ralph Atkins in Frankfurt
Published: March 22 2010 23:30 | Last updated: March 22 2010 23:30

http://www.ft.com/cms/s/0/1a10d038-35fc-11df-aa43-00144feabdc0.html


Germany is unlikely to repeat its past export-led success and will have to focus more on the domestic market, its central bank president argued.

In the latest attempt to counter criticism of the country’s lopsided growth model, Axel Weber, Bundesbank president, argued that prior to 2008 German exports had been boosted “by strong, but ultimately unsustainable, global economic growth”.

In a future world environment “characterised by a less steep but hopefully healthier expansion, German enterprises will naturally have to focus more on the domestic market than before”, he said in a speech in Copenhagen.

His comments followed criticism last week by Christine Lagarde, France’s finance minister, that countries running large trade surpluses such as Germany were not doing enough to support growth across Europe. Her comments have riled German politicians, who have also appeared isolated within the 16-country eurozone over their reluctance to back financial aid for Greece.

German exports allowed the country to exit recession last year in advance of other large industrialised economies, with its companies reaping the benefits of years of wage moderation and structural reforms before the global financial crisis.

Mr Weber said policymakers would be “ill-advised” to conclude from Germany’s past performance that there was “the need for actively propping up domestic demand, for example via encouraging higher negotiated wages”. In fact Germany had served “as an important buffer for world demand at the height of the financial crisis via its still robust private consumption as well as large fiscal stimulus packages”.

The Bundesbank president added that attempts by politicians to co-ordinate an economic adjustment within Europe would be “neither necessary nor helpful”.

His case received backing from Jean-Claude Trichet, European Central Bank president, who told the European parliament in Brussels that there was no case for criticising countries running trade surpluses. The ECB president added the eurozone overall was in balance and had not contributed to “a disequilibrium at the global level”.


Excessive virtue can be a vice for the world economy

By Martin Wolf
Published: March 23 2010 20:19 | Last updated: March 23 2010 20:19

http://www.ft.com/cms/s/0/924b4cc0-36b7-11df-b810-00144feabdc0.html


Germany says “nein”. That is the most important conclusion to be drawn from the debate on eurozone economic policy. What the German government is saying is that the eurozone must become a greater Germany. But this policy would have profoundly negative implications for the world economy.

This week’s letter to the FT from Ulrich Wilhelm, state secretary and government spokesman, and last week’s article by my friend, Otmar Issing, former board member of the European Central Bank, are significant not only for what they say but for what they do not say.

The point they make is that Germany will not risk undermining its competitiveness. The point they do not acknowledge is that the world economy has a difficult adjustment ahead, to which the eurozone and Germany need to contribute.

On the first point, Mr Issing is quite clear: “Following years of divergence between unit labour cost and losses in competitiveness in a number of countries, the idea is gaining ground that the economy with the biggest surplus, Germany, should help by raising wages in the interests of deficit countries and the community as a whole.” On the contrary, he insists, wages even in Germany are still too high, given the elevated unemployment.

I find it hard to disagree. Many countries entered the currency union without recognising the implications for labour markets. Rather than the reforms membership requires, they enjoyed a once-in-a-lifetime party. The party is over. With German unit labour costs stagnant and the euro still strong, labour costs in peripheral European countries must fall sharply. These countries have no alternative, within the currency union they chose to join.

On the second of the two points, however, Mr Wilhelm offers a disturbing paragraph: “The key to correcting imbalances in the eurozone and restoring fiscal stability lies in raising the competitiveness of Europe as a whole. The more countries with current account deficits are able to increase their competitiveness, the easier they will find it to decrease their public and foreign trade deficits. A less stability-oriented policy in Germany would damage the eurozone as a whole.”

I find it impossible to agree. What is fascinating about these remarks is that there is no mention of demand. Mr Wilhelm is inviting everybody to join a zero-sum world of beggar-my-neighbour policies in which every country tries to grab market share from the rest. At a time of global weakness, this is a self-defeating recommendation for both the eurozone and the world.

More precisely, what Germany wants to see is a sharp cutback in fiscal deficits throughout the eurozone. With the fiscal deficit contracting and output weakening, the way out for each country would be via falling relative unit labour costs and higher net exports. If successful, this would shift each country’s economic weakness to other eurozone countries or, more likely, to the world, via a bigger eurozone net export surplus.

According to the Organisation for Economic Co-operation and Development, the eurozone’s general government fiscal deficit will be close to 7 per cent of gross domestic product this year. Assume that this is to be cut swiftly to 3 per cent, while private sector financial surpluses remain close to 7 per cent of GDP, as is now implicitly forecast. Then the current account of the eurozone would need to improve by about 4 per cent of GDP. That would be about $600bn, or not far short of 1 per cent of world GDP.

Where does Germany think the offsetting shifts into greater external deficits might occur? This policy would surely make the post-crisis adjustment challenge for erstwhile deficit countries, including, not least, the US and UK, unworkable. Would an open world economy survive?

Maybe I am too pessimistic about the implications for demand of the envisaged fiscal tightening. Perhaps in some countries increasing the credibility of the fiscal position would stimulate private spending. Yet, overall, the eurozone would probably experience renewed demand weakness at home or export such weakness abroad.

Might an aggressive monetary policy make the difference? The ECB has been successful in sustaining rapid growth of narrow money during the crisis, more so, in fact, than the Federal Reserve and the Bank of England. But the growth of broad money has collapsed. Moreover, the aggressive monetary policy has failed to halt a sharp fall in nominal GDP, which shrank by 2 per cent in the year to the fourth quarter of 2009 inside the eurozone (see charts).

Unfortunately, monetary policy seems to be pushing on a string. It has made banks profitable and bankers richer, with modest benefit for the real economy. That is unlikely to change soon.

An alternative solution might be to help the world absorb larger export surpluses from the eurozone, the US, Japan and the UK. True, no sustainable exit from the present quagmire can be envisaged without increased net capital flows into emerging countries. It also seems evident that this is where the world’s surplus savings ought to end up. But it is going to take time and much reform to make this happen.

Let me make clear what I am saying and what I am not saying on the role of Germany in the eurozone and the eurozone in the world.

I am not saying Germany is at fault for making first-rate manufactured products. It is an admirable achievement. I am not saying Germany should make its workers uncompetitive or accept much higher inflation, either.

I am saying that Germany’s surpluses were made possible by other countries’ deficits, and so German stability by other countries' instability. I am saying that part of Germany’s net exports were illusory, paid for by excessive borrowing, often financed by Germans. I am saying that if peripheral Europe is to improve its external accounts, either Germany must offset some part of this, or the current account of the eurozone itself must shift towards surplus, with adverse impacts on the fragile world economy.

In short, economic policy is about more than competitiveness. When the world is trying to struggle out of a deep recession, demand matters, too. As the world’s fourth-largest economy and the core of the eurozone, Germany has a role to play in rebalancing global demand. I appreciate that this is a difficult challenge. It must be met, all the same.

BERLIN—Emergency aid for Greece should come from both the International Monetary Fund and bilateral negotiations with euro-zone partners, German Chancellor Angela Merkel said Thursday.

Ms. Merkel said in an address to Germany's lower house of parliament before leaving for a summit of European Union leaders in Brussels that she would make her case there that, "in an emergency, such aid must be awarded as a combination from the IMF and collective bilateral aid in the euro zone."

She also said that after the Greece's woes have abated, the 16 nations sharing the euro must pursue tough new measures and sanctions to prevent such crises in the future. "We've seen that the euro-zone's current instruments are inadequate," Ms. Merkel.

Ms. Merkel said she supported proposals by Finance Minister Wolfgang Schäuble, including a European Monetary Fund and the power to exclude profligate members from the common currency bloc—both drastic new measures that would require a lengthy ratification process and the approval of all 27 EU member states.

"I will also champion the necessary treaty changes," Ms. Merkel said.

Ms. Merkel said she hoped to work particularly closely with French leaders in designing a dual-track aid mechanism for Greece, and stressed that she didn't believe Greece's finances had deteriorated to the point where it needs such aid immediately.

Ms. Merkel's reluctance to finalize an aid package for Greece and the tough conditions laid out by her government this week on any future assistance have put her at odds with other powerful EU members such as France, where a decisive, EU-led effort was preferred.

"A good European isn't necessarily one who helps quickly," Merkel said Thursday. "A good European is one who respects European treaties and nations' rights, and helps in a way that the stability of the euro is not damaged."

Efforts to reach a common strategy for Greece will be at the center of an EU summit Thursday and Friday.

Jean-Claude Juncker, the head of the official group of finance ministers from the euro zone, said he expects aid for Greece to be a mix of loans from the International Monetary Fund and bilateral credits from individual euro-zone members.

Mr. Juncker is prime minister of Luxembourg, and also head of the Euro Group, which is the body that brings together finance ministers from the 16 countries that use the euro.

Mr. Juncker was speaking to reporters ahead of the EU summit in Brussels.

"I expect that the disagreement can be overcome," Juncker said. "My opinion is there will be a mix" between IMF and bilateral aid.

French officials are said to be trying to organize a meeting of leaders from euro-zone member states on the sidelines of the broader EU meeting, but it was still unclear Thursday morning whether that meeting would take place.

Greece is burdened by deep budget deficits and faces some €22 billion ($29.32 billion) on debt redemptions over the next two months. Its treasury also is paying interest rates more than three percentage points above Europe's benchmark borrower, Germany.

An aid package would be aimed at lowering those premiums by restoring investor confidence in Greek debt, allowing the government to refinace itself at lower cost.

Greek Prime Minister George Papandreou has asked euro-zone partner countries to give assurances that they would arrange standby credit facilities, declaring that asking for help from the IMF was another option.

"There is absolutely no reason that any rescue package must involve the IMF," a senior official in the Greek government said Thursday. "Most EU members, the [European Central Bank] and the [European] Commission agree that a solution must come from Europe alone."

Euro-zone finance ministers last week agreed that potential aid for Greece should be "bilateral" funding from other euro-zone countries.

IMF money wasn't mentioned, but in recent days Ms. Merkel has pushed for an IMF component of any aid package. The German public overwhelmingly opposes helping Greece, making aid a tricky political issue for Ms. Merkel at home.

China comments add to sovereign debt fears

By Jamie Chisholm, Global Markets Commentator.

Published: March 25 2010 08:54 | Last updated: March 25 2010 13:43

13:40 GMT: Growing concerns about sovereign debt found a significant mouthpiece on Thursday, when a senior Chinese central banker warned that the Greek crisis was just the beginning.

“We don’t see decisive actions telling the market we can solve this,” Zhu Min, a deputy governor of the People’s Bank of China, was reported as saying.

His comments caused the euro to dip to a new 10-month low versus the dollar, and encapsulated a nagging worry among investors that high levels of government indebtedness is one of the main risks facing the global economy.

However, the FTSE All-World equity index rose 0.6 per cent and some benchmark stock indices hit fresh cycle highs as investors chose to welcome news of a restructuring of Dubai World’s debt and some mildly encouraging US jobs data.

The euro later recovered some poise after the european central bank bent its collateral rules to help Greece, but the timing of Mr Zhu’s statement is particularly pertinent and suggests a fiscal focus will dominate markets for the short term.

Of immediate concern is the eurozone. A two-day summit of European leaders convenes on Thursday and investors need to hear that they have been able to knit together a safety net for Greece, lest it has trouble rolling over the €20bn of debt maturing over the next couple of months.

A downgrade of Portugal’s debt on Wednesday and the subsequent tumble in the euro should concentrate minds, but traders do not expect a clean and decisive outcome.

Indeed, Simon Derrick, chief currency strategist at Bank of New York Mellon, thought that Mr Zhu’s comments “might well signal the point that we stop talking about a “Greek debt crisis” and start talking about a “Eurozone structural crisis” instead”.

But there is a potentially more important issue emerging. The poor reception given to the auction of $42bn of US five-year notes on Wednesday points to fatigue among buyers of US government debt. If this continues, yields will rise, but not for the good reason – faster growth – but for the bad reason – too much supply. This could knock the nascent economic recovery and hit asset markets, particularly cycle-peak equities, hard.

And who buys most of the US debt? Why, Mr Zhu and his colleagues of course.

● US Treasuries continued to struggle following their pummelling on Wednesday. Yields on benchmark 10-year notes had jumped 15 basis points after the soft auction of five-years, but on Thursday a bit of “bargain hunting” quickly evaporated and yields rose another 1 basis point to 3.86 per cent. This kept yields above equivalent swap rates, signalling investors remain wary of government debt. The auction of $34bn of seven-year debt will be keenly watched later on Thursday.

UK government debt fell back as investors absorbed the implications for supply of the government’s Budget. The yield on the 10-year note rose 5 basis points to 4.01.

Greek debt was still unloved despite the ECB’s helpful move. The yield on 10-year bonds rose 7 basis point to 6.39 per cent, while the cost of insuring against default by Athens, as measured by credit default swaps, was little changed at 327 basis points.

Portuguese 10-year notes saw their yield rise 5 basis points to 4.38 per cent.

● The euro hit a new 10-month low of $1.3285 in Asian trading following Mr Zhu’s comments, but later rose 0.1 per cent to $1.3334. The dollar, which had bounced by more than 1 per cent on a trade-weighted basis on Wednesday, succumbed to some profit taking and was down 0.2 per cent to 81.84.

Sterling enjoyed a small bounce following better-than-forecast retail sales for February. The pound was up 0.2 per cent to $1.4904 and gained 0.1 per cent versus the euro to 89.42.

● US and European equity markets were blissfully unperturbed by the debt market troubles. In New York, the S&P 500 rose 0.7 per cent at the opening bell to a fresh 19-month high as traders hoped a slight improvement in initial jobless claims pointed to a strong non-farm payrolls number next week.

The FTSE Eurofirst 300 added 0.8 per cent and the FTSE 100 in London climbed 0.7 per cent to hit a new 22-month high above 5,700. A more stable euro and news of the restructuring of Dubai World’s debt appeared to help sentiment. The Dubai stock market jumped 4.3 per cent, but cynics noted a lack of detail in the Dubai World proposal.

● The FTSE Asia-Pacific index fell fractionally as bourses in the region noted the drop on Wall Street overnight. Shanghai lost 1.2 per cent and Hong Kong 1.1 per cent, though Tokyo managed to advance 0.1 per cent as the yen’s fall to a two-month low versus the dollar helped exporters.

● Gold was firmer after dropping sharply in the previous session to six-week lows as the dollar rallied. The precious metal rose 0.5 per cent to $1,092, but many traders thought it looked vulnerable to a fall through the bottom of its recent $1,080-$1,140 range.

IMF aid could push Greece out of eurozone

By Jane Foley

Published: March 24 2010 15:19 | Last updated: March 24 2010 15:19

The likely involvement of the International Monetary Fund in helping Greece to stabilise its fiscal position heightens the risk of the country leaving the eurozone, says Jane Foley, research director at Forex.com.

She says that for Greece, IMF involvement would mean it could attract funds at a cheaper price than on the open market. But for the European Union, it involves the indignity of admitting it does not have an adequate system to deal with fiscally errant members.

“One of the attractions of EMU membership for many countries was the ability to service debt at German-like yields. Greek yields are now substantially higher than those of Bunds – so Greece may be more likely to take the usual IMF course of devaluation.

“While Greece’s near-term funding needs may be nearer to being resolved, a wide-ranging set of uncertainties connected with the outlook for EMU are still in place,” Ms Foley says.

“The failure by key members to agree on how to deal with Greece highlights how inadequate EMU’s system of fiscal controls are. Furthermore, the decision by Fitch to cut Portugal’s sovereign credit rating highlights that Greece is not the only crack in the system.

“This is the lowest point for EMU since inception yet there is a tangible risk that the outlook for the system may deteriorate further and this should ensure the euro stays under pressure,” she says.

Tuesday, March 23, 2010

German focus ‘will shift to domestic market’

German focus ‘will shift to domestic market’

http://www.ft.com/cms/s/0/1a10d038-35fc-11df-aa43-00144feabdc0.html

By Ralph Atkins in Frankfurt
Published: March 22 2010 23:30 | Last updated: March 22 2010 23:30
Germany is unlikely to repeat its past export-led success and will have to focus more on the domestic market, its central bank president argued.

In the latest attempt to counter criticism of the country’s lopsided growth model, Axel Weber, Bundesbank president, argued that prior to 2008 German exports had been boosted “by strong, but ultimately unsustainable, global economic growth”.

In a future world environment “characterised by a less steep but hopefully healthier expansion, German enterprises will naturally have to focus more on the domestic market than before”, he said in a speech in Copenhagen.

His comments followed criticism last week by Christine Lagarde, France’s finance minister, that countries running large trade surpluses such as Germany were not doing enough to support growth across Europe. Her comments have riled German politicians, who have also appeared isolated within the 16-country eurozone over their reluctance to back financial aid for Greece.

German exports allowed the country to exit recession last year in advance of other large industrialised economies, with its companies reaping the benefits of years of wage moderation and structural reforms before the global financial crisis.

Mr Weber said policymakers would be “ill-advised” to conclude from Germany’s past performance that there was “the need for actively propping up domestic demand, for example via encouraging higher negotiated wages”. In fact Germany had served “as an important buffer for world demand at the height of the financial crisis via its still robust private consumption as well as large fiscal stimulus packages”.

The Bundesbank president added that attempts by politicians to co-ordinate an economic adjustment within Europe would be “neither necessary nor helpful”.

His case received backing from Jean-Claude Trichet, European Central Bank president, who told the European parliament in Brussels that there was no case for criticising countries running trade surpluses. The ECB president added the eurozone overall was in balance and had not contributed to “a disequilibrium at the global level”.

ECB On Greek Bonds

ECB signals Greek bond concession
By Kerin Hope in Athens and David Oakley in London
Published: March 22 2010 18:53 | Last updated: March 22 2010 19:52

http://www.ft.com/cms/s/0/c1620610-35dc-11df-aa43-00144feabdc0.html

Greece was on Monday night offered a significant concession by the European Central Bank, which indicated for the first time that it might continue providing liquidity against Greek bonds, even if the country was downgraded further by ratings agencies.

Jean-Claude Trichet, bank president, said his “working assumption” was that Greece would not face problems. But in a noticeable softening of the ECB’s stance, he added that if that assumption was “too optimistic . . . then we would look at the situation”.

His comments, in an appearance before the European Parliament, referred to ECB plans to return at the end of this year to a minimum A-minus rating for assets it accepts as collateral in its liquidity operations.

Exclusion from the system, which has acted as a life-support for the eurozone banking system, could prove catastrophic for Greece. Currently only Moody’s would give it the required rating. Previously the ECB has stuck strictly to the line that there would be no exceptions.

Mr Trichet also strongly rejected the idea proposed by Angela Merkel, Germany’s chancellor, that reform-unwilling countries could be expelled from the eurozone. “The euro area is not à la carte. We enter the euro area to share a common destiny,” he said. Exiting the eurozone was legally “impossible”, Mr Trichet added.

The comments, highlighting his belief in driving ahead Europe’s economic integration, came as the Greek central bank called for swift implementation of the government’s latest fiscal package, to restore confidence and reduce the high cost of borrowing.

“A prolonged effort will be needed to break a vicious circle [of rising budget deficits and public debt] that has been pushing the economy into decline,” the Bank of Greece said in its annual report on monetary policy. It said the economy would shrink by “around 2 per cent” this year on top of a 2 per cent contraction in 2009.

“Policy measures must be implemented fully and without delay ... to restore confidence and have a favourable impact on the cost of borrowing,” it said.

The Greek bond markets also came under pressure on Monday amid growing worries that Germany will balk at plans to offer explicit financial support.

Mr Trichet said Greece could be helped if necessary via a set of emergency loans from other eurozone countries, on the condition that there were no subsidies involved and on the basis that there was a threat to the whole eurozone. But he said European Union fiscal rules should be strengthened to boost the “peer pressure” on underperforming eurozone members.

The extra premium Greece has to pay over Germany to borrow rose to the highest level since the end of February. Concerns are also spread into Greece’s equity markets, with the Athens stock exchange falling 2 per cent on Monday.

Friday, March 19, 2010

China’s exports powerhouse lifts wages

China’s exports powerhouse lifts wages

By Enid Tsui in Hong Kong

Published: March 18 2010 10:30 | Last updated: March 18 2010 10:30

http://www.ft.com/cms/s/0/46551990-325c-11df-bf20-00144feabdc0.html

Guangdong, the province that produces about a third of China’s exports, on Thursday announced plans to raise its minimum wage more than 20 per cent, fuelling inflation fears and dealing a blow to manufacturers emerging from the global credit crisis.

The province, which borders Hong Kong and forms part of the manufacturing powerhouse known as the Pearl River Delta in southern China, was not the first to introduce a mandatory wage rise this year, but the increase was sharply higher than the 13 per cent introduced by Jiangsu province last month.


The local government said the move was necessary to attract labour to work in local factories and improve the lives of low-income earners. The minimum wage increase of 21.1 per cent will take effect on May 1.

It added that wages were set to reflect rising inflation and the region’s acute labour shortage – a problem that is paralysing plants rushing to complete an unexpected surge in orders after Chinese new year in February.

One factory owner on Thursday said the move would bring limited benefits to business.

“A lot of our workforce traditionally come from the poorer regions in western China, but factories are moving out there to take advantage of cheaper wages and lower taxes. Those workers who used to come here can now find work close to home. I don’t think we will see many of them moving back here,” said Au Yiu-chee, a Hong Kong owner of a textile factory in Dongguan.

He said he had about a third of the workers required to complete an order due in May from a European brand. His workers receive the current minimum wage of Rmb740 plus an output-based commission, which took their monthly pay to about Rmb2,000.

Guangdong exported $53.3bn of goods in January and February, 22.1 per cent more than the same period last year.

The province, once the preferred location of manufacturers chasing low-cost labour and dubbed “the world’s factory floor”, now competes with cheaper industrial bases in China and other parts of Asia.

“Factory owners around here certainly did not expect the government to suddenly pull up wages by so much. This is crazy. How can we compete for orders when our rivals in Cambodia are offering much lower prices?” Mr Au said, adding that the spectre of a renminbi appreciation made the wage increase doubly worrying.

On Thursday a trade association in China published a survey of 1,000 businesses showing that exporters in labour-intensive sectors – mostly original design manufacturers making products to order for international brands – had profit margins as low as 3 per cent. The China Council for the Promotion of International Trade added that a renminbi appreciation would force many exporters to close.

Labour representatives, however, said the government had to bring wages up to a realistic level.

Geoffrey Crothall, spokesman for the China Labour Bulletin, a non-government organisation, said he had expected wages to increase just 10-15 per cent. He said the fact that Guangdong had introduced a higher-than-expected minimum wage meant the government was concerned about the ability of enterprises in the delta region to function without a steady flow of workers.

While there were fears that higher wages would feed wider inflation – China’s consumer price inflation reached a 16-month high in February – existing wages were below the cost of living.

According to official data, nearly 9m people in Guangdong worked in the manufacturing industry in 2008, but that did not take into account the massive population of migrant workers, which swells the province’s working population.


Chinese province raises wages 13%
By Tom Mitchell in Hong Kong and Geoff Dyer in Beijing

http://www.ft.com/cms/s/0/fa86afe4-1418-11df-8847-00144feab49a.html

Published: February 7 2010 19:17 | Last updated: February 7 2010 19:17

A decision by the province that is China’s second-biggest exporter to raise minimum wage rates has heightened expectations that other provinces and cities will soon follow, just as the central government’s attention is shifting from economic stimulus to rising inflation.

Eastern Jiangsu province, which exports more than Brazil and South Africa combined, raised its monthly minimum wage rate 13 per cent to Rmb960 ($140) last week. It was the first time the rate had been adjusted in two years.

The potential round of minimum wage increases comes amid signs that inflationary pressures are picking up in the Chinese economy after a rapid recovery in the second half of 2009, fuelled by a huge government stimulus programme. Government officials are debating whether to slow the pace of new loans and begin appreciating the currency to dampen inflationary expectations.

“This could be a red flag about wage inflation,” says Arthur Kroeber, editor of China Economic Quarterly. “Inflation in China is becoming systemic because of rising wages caused by a tighter labour market.”

In the immediate aftermath of the global financial crisis last year, local governments were reluctant to raise wage rates and put extra strain on already struggling factories. But now that officials are confident the worst is over for China’s export sector, they are more willing to address workers’ concerns.

“The economy is picking up again,” said Geoffrey Crothall, of the Hong Kong-based China Labour Bulletin. “Inflation and basic cost of living are increasing. It’s clearly in local governments’ interests to make some accommodation.”

Jiangsu’s adjustment of the highly symbolic minimum wage also reflects growing competition among different regions to attract migrant workers after the Chinese new year holiday next week. Neighbouring Shanghai is expected to raise its rate by double-digits on April 1.

Beijing and cities in southern Guangdong province, the country’s biggest exporter, are considering adjustments. Deputies to Guangdong’s people’s congress have even suggested linking minimum wage levels to the consumer price index.

The consumer price index rose from 0.7 per cent in November to 1.9 per cent in December, which some economists believe is the start of a concerted rise in inflation. However, some analysts said the sharp jump in inflation could have been the temporary result of severe winter weather on vegetable prices and that inflation for January, which will be announced this week, will have moderated.

An estimated 20m migrants did not have jobs to return to after the country’s biggest holiday last year, as overseas retailers ran down their stockpiles and factories closed. But after orders began to recover during the summer, most migrants seeking work in coastal manufacturing zones were able to find jobs and local officials began to fret about incipient labour “shortages”.

“We have trouble getting staff because other factories keep popping up and offering workers as many hours as they want,” said one manager, whose Guangdong factories supply Walmart and other brand-name retailers. “Workers don’t want to waste time sitting on their butts when they could be making more money at another factory.”


Labour shortage hits China export recovery
By Tom Mitchell in Shaoguan

http://www.ft.com/cms/s/0/d813512a-223b-11df-9a72-00144feab49a.html

Published: February 25 2010 18:50 | Last updated: February 25 2010 18:50

An export recovery in the world’s most populous country is running up against an unexpected constraint – manpower.

With Chinese exports back to their early 2008 levels, factory owners are worried about their ability to service a surge in orders now that a new manufacturing cycle has begun after the lunar new year holidays.

The problem is particularly acute in southern Guangdong province and its Pearl river delta manufacturing heartland near Hong Kong, the region known as “the workshop of the world”.

Guangdong accounts for a third of China’s exports and would rank as one of the world’s 10 largest exporters if it were a country in its own right. But the province’s ability to attract and retain migrant labour from China’s vast interior is slipping.

“Labour availability is tight right now in Guangdong compared to other regions,” said Paul Hussey, chief executive of Strix. The Isle of Man company, which dominates the global market for thermostatic controls on electric kettles, maintains most of its manufacturing operations in the provincial capital, Guangzhou.

Quantifying labour shortages is extremely difficult given large variances by region, industry and skill level. Recruiters for Galanz, the world’s largest manufacturer of microwave ovens, were this week offering production line workers a relatively robust monthly base wage of Rmb1,700 ($250). Skilled technicians in much greater demand were commanding 65 per cent more.

In Dongguan, a manufacturing centre near Guangzhou, the local government estimates that there is now just one worker for every two jobs. At the height of the crisis, which for Chinese manufacturers came last spring, local officials calculated there were four workers competing for every three jobs.

Beijing’s successful economic stimulus programme has contributed to a coastal scramble for labour, by increasing investment and employment opportunities elsewhere.

“Fiscal stimulus has spurred jobs growth in the interior provinces,” Ben Simpfendorfer, Royal Bank of Scotland economist in Hong Kong, said.

In December, China unveiled the world’s fastest passenger train service between Guangzhou and the central city of Wuhan, covering 1,100km in just three hours. The Harmony Express line has reduced travel time between Guangzhou and Shaoguan, an industrial backwater in Guangdong’s remote mountain region, to just 40 minutes, anchoring local workers closer to home.

Thursday, March 18, 2010

Iberian pork barrels: Empty Since 2007?

El Tribunal de Cuentas denuncia que el Gobierno ocultó 12.157 millones de deuda

http://www.eleconomista.es/economia/noticias/1989252/03/10/El-Tribunal-de-Cuentas-denuncia-que-el-Gobierno-oculto-12157-millones-de-deuda.html

Falta de homogeneidad en los estados contables; no presentación de cuentas de entidades, consorcios, fondos, fundaciones y del sector público empresarial; valoración indebida de las participaciones en las sociedades mercantiles del Estado; elaboración inadecuada de los inventarios y no inclusión de deudas no vencidas. Estas son algunas de las irregularidades que el Tribunal de Cuentas ha detectado en la declaración remitida por el Gobierno sobre la ejecución presupuestaria del Estado en el año 2007.

El presidente del Tribunal, Manuel Núñez, presentó en el Congreso el informe del organismo fiscalizador sobre la Cuenta General del Estado correspondiente a ese ejercicio, en el que refleja que el endeudamiento total de la Administración del Estado al final del año 2007 se elevaba a 338.238 millones de euros, con una ligera disminución del 1,1% respecto al año precedente. No obstante, denuncia que en esta cifra no se ha incluido la deuda no vencida que el Ministerio de Defensa mantenía con la empresa Navantia por 11.594 millones de euros.

Como tampoco se incluyen las deudas que mantiene el Estado con el Administrador de Infraestructuras Ferroviarias (Adif) por 225 millones, con Renfe por 81 millones y con la Sociedad Estatal de Infraestructuras del Transporte Terrestre por 257 millones. En total son 12.157 millones los que el Gobierno ocultó o dejó de contabilizar.
Anticipos a las autonomías

El informe del Tribunal empieza denunciando que las cuentas "se han confeccionado de forma incompleta", al no haberse integrado en ellas nada menos que las correspondientes a cinco organismos autónomos, tres organismos públicos, cinco consorcios y un fondo carente de personalidad jurídica, además de las cuentas anuales de 24 empresas públicas y las de 12 fundaciones. Un incumplimiento de la Ley General Presupuestaria, ante el que el Tribunal resalta que ha reclamado "formalmente a la Intervención General del Estado y a las propias entidades la remisión de las cuentas no rendidas", sin que haya obtenido respuesta hasta la fecha.

Respecto al activo circulante, en la rúbrica de "otros deudores" figuran, entre otros, pagos pendientes de aplicación por 5.919 millones de euros, entre los que se incluyen los anticipos a las comunidades autónomas a cuenta de la liquidación definitiva de los tributos cedidos. Hecho ante el que el Tribunal objeta que, con independencia del respaldo legal que pudiera amparar este procedimiento contable, "tales anticipos no representan créditos, sino gastos del Estado, cuyo registro como tales, por el retraso en la liquidación definitiva, se desplaza a ejercicios posteriores, lo que afecta, como es natural, a la representatividad de la contabilidad presupuestaria y patrimonial".

En relación a la cuenta de resultados, el informe de fiscalización resalta que la cuenta consolidada del resultado económico patrimonial del sector público administrativo presentó un saldo positivo imputable al ejercicio de 43.342 mi- llones de euros que, teniendo en cuenta las observaciones puestas de manifiesto por el Tribunal, pasaría a ser de 41.115 millones.

La insolvencia financiera de la Junta le obliga a devolver La Breña II al Estado

MANUEL CONTRERAS.
SEVILLA
Actualizado Lunes , 08-03-10 a las 10 : 42

http://www.abcdesevilla.es/20100308/sevilla-nacional-cordoba-cordoba/insolvencia-financiera-junta-obliga-201003072229.html


La Junta de Andalucía negocia con el Ministerio de Medio Ambiente la cesión de la gestión de los pantanos de La Breña II —el segundo más grande de Andalucía— y El Arenoso, al considerar la entidad bancaria que financió parte de las obras que la administración andaluza no ofrece suficientes garantías de pago.
El coste total de las obras de La Breña II ascendía a 201,4 millones de pesetas, de los cuales la mitad se sufragaron con fondos Feder y fondos de la administración y la otra mitad era financiada por los usuarios. El 2 de agosto de 2007 la entidad financiera irlandesa DEPFA Bank suscribió un crédito por 37,7 millones de euros con la sociedad estatal Aguas de la Cuenca del Guadalquivir S.A. (Acuavir) que permitía adelantar parte del dinero de los usuarios, que la administración recuperaría posteriormente mediante el cobro de un canon a los regantes.
En en el momento de la firma del crédito, la cuenca del Guadalquivir era competencia de la Confederación Hidrográfica del Guadalquivir (CHG), dependiente del Ministerio de Medio Ambiente. No obstante, posteriormente la cuenca andaluza fue transferida a la Junta de Andalucía, operación que se hizo efectiva el 1 de enero de 2009. El traspaso de competencias de la CHG a la Junta de Andalucía implicaba la subrogación del citado crédito, pero la entidad bancaria consideró que el índice de riesgo de la Junta de Andalucía es superior al del Estado —en base a las clasificaciones del Banco de España—, por lo que se negó a subrorgarlo y exigió la renegociación del mismo.
Las dudas sobre la solvencia de la Junta de Andalucía fueron expuestas por DEPFA Bank en otoño de 2008, nada más conocer que se había alcanzado un acuerdo en la Comisión de Transferencias sobre la cesión de las cuencas andaluzas a la administración autonómica. Tras la negativa del banco a subrogar el crédito, la Junta intentó en primera instancia que el Estado asumiera el pago del crédito aunque la administración andaluza mantuviera la gestión, a lo que el Ministerio se negó. Posteriormente rastreó el mercado financiero para intentar contratar un crédito puente con otra entidad, pero tampoco tuvo éxito.

Finalmente, Acuavir y la entidad bancaria acordaron desbloquear la situación mediante el traspaso de la titularidad del pantano de La Breña II y El Arenoso a la administración estatal. Así, el pasado mes de septiembre se firmó un protocolo entre DEPFA Bank y Acuavir que incluye como requisito indispensable la entrega por parte de Acuavir a DEPFA Bank de una copia del Real Decreto publicado en el BOE por el que la CHG, dependiente del Ministerio de Medio Ambiente, asumiese la titularidad de ambos embalses, su explotación y los compromisos financieros suscritos para las obras de construcción.

Dicho protocolo fijaba el 15 de diciembre de 2009 como fecha límite para cumplir el acuerdo, incluyendo la publicación en el BOE del Real Decreto, un plazo que no se pudo cumplir, dada la complejidad de la negociación y su posterior tramitación administrativa.

Acuavir planteó recientemente a DEPFA Bank una prórroga para la ejecución del citado protocolo, propuesta que fue aceptada por la entidad bancaria. Aunque el Ministerio confía en un próximo acuerdo con la Junta para recibir la titularidad de los pantanos, la complejidad de la operación pone en peligro la viabilidad de la sociedad estatal.


Forget Greece: Italy derivatives bomb also ticking

(Reuters) - Financial markets are gripped by the role derivatives have played in Greece's debt crisis, but Italy also has a derivatives time bomb, and hundreds of cities are in the 24 billion euro blast zone.

http://www.reuters.com/article/idUSTRE62A2SB20100311

Many local governments eager to cut financing costs for years rushed to sign up for complex derivatives contracts, even when the terms were in English. But some cities, facing big losses when interest rates go up, are now trying to pull out of derivatives and suing the international and local banks that arranged the deals.

In a test case, a judge in Milan will decide in coming weeks whether to try 13 people and four banks -- UBS (UBSN.VX), Deutsche Bank (DBKGn.DE), Germany's Depfa and JPMorgan Chase & Co (JPM.N) -- on aggravated fraud charges. The case stems from a derivatives swap over a 1.68 billion euro ($2.28 billion) 30-year bond, the biggest issued by an Italian city.

Milan, Italy's financial capital, is facing a 100 million euro loss on the deal, city officials say. Milan is also suing the banks for 239 million euros in overall liabilities.

In the southern region of Puglia, prosecutors are seeking to bar Merrill Lynch, a unit of Bank of America Corp (BAC.N), from government contracts for two years. The move stems from derivatives losses from 870 million euros in regional bonds.

JPMorgan, UBS and Deutsche have denied wrongdoing, and Depfa has declined comment. Merrill has not commented.

MAKE THE SWITCH

Almost 500 small and large Italian cities are facing mark-to-market losses of 2.5 billion euros on the contracts, according to the Bank of Italy. Analysts say that figure will balloon when interest rates go up.

Most of the contracts involved switching fixed rates on loans to variable ones with banks.

"With the economic crisis, the problem has been lessened a bit (with lower rates) ... But in fact with a rate rise it becomes an even worse problem," said Fabio Amatucci, an expert on local government finances at Milan's Bocconi University.

The European Central Bank is expected to start hiking rates at the end of this year or early next year.

U.S. and European officials are looking into how U.S. investment bank Goldman Sachs Group Inc (GS.N) may have helped Greece disguise the size of its budget deficit through the use of cross-currency derivatives in 2001.

The Italian deals differ somewhat from the Greek case since the instruments were usually for switching rates on loans, but Italy stands out because of the vast number of cities, regions and public entities -- even a theater association -- that turned to them from 2001 to 2008.

The Bank of Italy put the notional value of derivatives contracts at 24.1 billion euros in June 2009. However, Il Sole 24 Ore business newspaper on Thursday cited Treasury data to put the overall figure at 35.5 billion euros -- a third of local governments' debt -- when wider criteria were used.

Although central bank figures show 467 local governments had derivatives contracts at the end of September, Amatucci believes the real number could be around 3,000 as more deals emerge.

The government banned new contracts in 2008 pending new rules. Economy Minister Giulio Tremonti has said there is "no effect" from derivatives held by local governments.

LOOSEN UP

Local governments rushed into derivatives in part because they helped ease the rigidity of a 2001 law that bars taking on new debt except to finance investment.

But another big draw was the upfront payment many cities got in advance for signing revamped agreements, usually done without a bidding process, analysts said.

Renegotiated deals shoved back payment and costs in a "political manipulation" of signings, said Giampaolo Gialazzo with the Tiche consultancy in Treviso.

Revised deals also carried increasingly restrictive terms and higher costs for municipalities and other local governments.

"Greece did nothing more than get itself money right away and then pay it back slowly. Local administrations in Italy did the same thing," said Massimiliano Palumbaro with CFI Advisors in Pescara.

Pescara, a southern Italian city, itself took out a total of 108 million euros in interest rate swaps and is suing UniCredit SpA (CRDI.MI) and BNL, a unit of France's BNP Paribas (BNPP.PA), over them. UniCredit had no comment, while BNL had no immediate comment.

When rates are low, as they were when many contracts were agreed, local authorities using a variable rate could find their costs shrinking. However, when rates rose, officials would find themselves owing more money.

Milan has argued, as have many other local administrations, that the contracts were murky, carried hidden costs and banks had failed to explain them.

However, a source close to the issue said Milan could not argue that it was ignorant about derivatives since the 2005 swap replaced a contract that had been renegotiated repeatedly.

The city also has wide securities markets experience given its joint control of listed utility A2A (A2.MI), the source said.

With banks putting in place a complex deal that had to be overseen for 30 years with hefty back-office costs, "the city could not expect that the banks were going to take that position for free," said the source.

Despite the court cases, Milan is still interested in derivatives. The city council said on Wednesday it was studying a switch from a variable rate on the contract to a fixed one.