Showing posts from March, 2016

A plan to turn the Euro from zero to hero

Guest post by Ari Andricopoulos
It is difficult to read the history of inter-war Europe and the US without feeling a deep sense of foreboding about the future of the Eurozone. What is the Eurozone if not a new gold standard, lacking even the flexibility to readjust the peg? For the war reparations demanded at Versailles, or the war debts owed by France and the UK to the US, we see the huge debts owed by the South of Europe to the North, particularly Germany.
The growth model of the Eurozone now appears to be based largely on running a current account surplus. Competitive devaluation is required to make exports relatively cheap. While this may have been a very successful policy for Germany during a period of high economic growth in the rest of the world, it cannot work in the beggar-thy-neighbour demand-starved world economy of today.
As I've explained elsewhere, reasonably large government deficits are very important for sustainable economic growth. However, in the Eurozone this …

The unaffordable George

On March 16th, George Osborne unveiled his shiny new Budget. Full of populist tax giveaways to help "hard working people", it was the sort of budget that we might expect from a Chancellor riding the crest of an economic recovery. UK plc is growing well, profits are rising and the Board can afford to increase the dividend.

But this is not the current economic situation. Far from an economic recovery gathering pace, the latest figures from the OBR show that UK plc is slowing. In its March 2016 Economic & Fiscal Outlook, the OBR trimmed its GDP growth forecast for the next few years:

Not only has it trimmed its forecast down to 2% pa, it has also indicated considerable uncertainty. There is even a not-insignificant chance of a recession in the Chancellor's Fiscal Mandate year of 2019-20.

From the Chancellor's perspective, growth below 1% - or even a recession - might be welcome, since it would enable him to justify breaching his fiscal surplus target. The biggest ri…

Understanding balance of payments crises in a fiat currency system

It's weird. Whenever I say that floating exchange rates can't absorb all shocks and that balance of payments crises can happen even in fiat currency systems, I am accused of gold standard thinking. Gold standard? Me? Perish the thought. I am the world's biggest fan of fiat currencies. And of floating exchange rates, too. But that doesn't mean I regard them as a panacea.

Firstly, about gold standards. Under a strict gold standard, the quantity of money circulating in the economy is effectively set externally. The domestic money supply can only grow through foreign earnings, which bring gold into the country. I have said a "gold standard", but the same is true of any FX reserve-backed fixed exchange rate system such as a currency board: gold is really only a universal FX reserve. The domestic money supply grows as the supply of FX reserves rises, and falls as the FX reserve supply falls. It isn't strictly true to say that a trade surplus is necessary for t…

A German spring

The sun is shining, the daffodils are flowering. Blossom is on the trees. The dark days of winter are behind us: in front of us lies a bright, glowing spring. Black zeros reap golden rewards, it seems.

What is all this about? German industrial production has suddenly bounced back from recent falls, rising by 3.3% month-on-month in January 2016. The German statistical agency DEStatis reports that there are particularly strong performances in construction, capital and consumer goods production:
In January 2016, production in industry excluding energy and construction was up by 3.2%. Within industry, the production of capital goods increased by 5.3% and the production of consumer goods by 3.7%. The production of intermediate goods showed an increase of 0.4%. Energy production was up by 0.1% in January 2016 and the production in construction increased by 7.0%. According to Dominic Bryant of BNP Paribas (quoted in the FT), Germany is "booming". And in the same FT piece, Pantheon M…

The Great Scandinavian Divergence

From @MineforNothing on Twitter comes this chart:

Now, we know Finland is in a bit of a mess. A series of nasty supply-side shocks has devastated the economy. When Nokia collapsed in the wake of the 2007-8 financial crisis, ripping a huge hole in the country's GDP, the government responded with substantial fiscal support. This wrecked its formerly virtuous fiscal position: it switched from a 6% budget surplus to a 4% deficit in one year, and although its deficit has improved slightly since, it is still outside Maastricht limits. Because of this, the current government - under pressure from the insane Eurocrats - is implementing fiscal austerity to bring the budget deficit back below 3% of GDP. For an economy which has suffered a serious reduction in its productive capacity, this is disastrous. The austerity measures will neither reduce the deficit nor restore the economy. On the contrary, they will cause the economy to shrink and consequently - through simple arithmetic - increase…