Wednesday, December 15, 2010

Today’s press announced that Germany’s industrial sector recorded a 12.1% increase on the previous year, outperforming most of the other Eurozone peers, and was boosted by another rise in business morale, as ZWE indicator of economic sentiment climbed 2.5 points in November.


Many countries, especially Ireland, Portugal, Greece, Italy, have particularly strong problems with their finances, facing difficulties raising money to fund their state budgets. Spain is currently in the news due to Moody’s, a rating agency, threatening to downgrade the country’s creditworthiness again (currently at Aa1). For Spain, the main trigger is to recapitalise its struggling banks and to coordinate cost cuttings with the regional governments (Spain being a federal state, the central government has not as much influence as it would wish for).


Nevertheless they start to take drastic measures to improve their own finances, cutting costs and dressing up for international investors. Huge efforts are on their way to bring their first fruits and as soon as the reforms are confirmed and the budgets back to normal the formerly falling countries will be back on a growth path.


The strong recent German economic performance supports German government but could lead to a phase of a slower path of reform. As the economy seems to outperform most of its peers, we are less likely to see any unpopular cost cutting measures. It is simply not in the blood of a politician to start painful measures when most of the population is doing well (unemployment being on the lowest level since years). And as the polls are currently rather gloomy for the current conservative government (forecast to lose their majority in parliament if there would be an election next Sunday), the chancellor will probably scale back some reforms in order to improve the negative image and gain some ground for the next elections.


One might think that the Euro is currently the biggest problem but as in any crisis of confidence, and I believe that it is only a crisis of confidence, as soon as reforms start to show their merits, and as soon as the panic calms down and investors get back to normal, the Euro will recover. Additionally, a weak Euro helps most of the Eurozone members to boost their exports and thus stimulate their economy artificially.


The real risk for Europe is that in a couple of years, Germany is the sick man of Europe again due to the lack of significant reforms and cost cutting measures undertaken by the federal government. As Europe’s largest economy, a struggling German would be another drawback for the Eurozone’s economy. It is therefore right to refuse the euro bond idea as it would increase refinancing costs for the German government, but refusing euro bond is one thing, necessary and painful reforms are another thing, yet to be undertaken.

Sunday, July 18, 2010

The financial crisis seems to be over and many research institutes, like the Deutsche Bank think tank, even consider the crisis as one of the less expensive ones when solely looking at government spending. Most of the rescue funds have been used as a guarantee. Guarantees which finally weren’t needed to the extend governments initially feared. Thus, the crisis wasn't as disastrous as expected. The Economist in its July 10 issue even expects German GDP to rise by some 4% in the second quarter 2010. The unemployment rate is lower than in 2007 (The Economist - July 10 2010 - Lemon aid - The euro-area economy). The picture is gloomier elsewhere. The United States haven’t managed to keep unemployment low but here as well we see positive signs. Don't even talk about China, the seemingly almighty economic champion. Should we lean back and enjoy the recovery?

Well you might enjoy it for a certain time but the next crisis is already coming. The strong connection between countries and markets increases contagion. Any little bushfire in the most remote area might burn our house down at any time.

Best example is the last crisis which has been a local American housing problem but spread over to one of the most global crisis ever (I am just saying global, not the worst). The continuing globalization has its merits and should not be stopped – contributing to the development of each participant - , but we need to be aware that when markets can infect other, seemingly non-correlated, markets, we need official bodies that can govern and control the impact.

A G20 summit is not enough and the IMF has not enough power. The World Trade Organization has limited powers and struggles even to resolve the most basic topics such as the hidden – and illegal - support from the US and Europe to their big aerospace companies (Boeing and EADS).

You would think that Europe is a good example for an effective international co-operation. But when it comes to economics, Europe is deeply divided and has no apparent plan. Europe struggles as much as other countries to find a middle way between free markets and regulations. When it comes to monetary policy Europeans are hopelessly divided (especially France and Germany).

With such an “economic government” we will certainly see some more crisis and those crises will be even more severe. We probably need two or three deep recessions, which bring us close to a war, to change the international bodies, to implement effective regulation and supervision.

So lean back, but keep on growing your own food and buy a house, so that, during the next decades, you’ll have at least something to eat and a roof over your head.