The Absolute Return Letter March 2011

Nýjasta bréfið frá Niels C. Jensen hjá ARP - mars 2011

. . . In reality, though, the Irish have a stronger hand than generally perceived. With their banks sinking faster than other European investors can offload their exposure to Ireland, what would Ireland actually lose from calling the EU’s bluff and let bondholders take a haircut? Perhaps even walk away from the euro and go back to the punt? Usually, one of the strongest arguments against leaving a currency union is the inevitable run on the banks. But if the bank run is already in full bloom, that argument loses much of its power . . .

. . . After all, the EU’s main concern is not Ireland. No, what the EU is desperate to maintain is the illusion that the EU’s banking sector in general, and Germany’s in particular, is sound and healthy. In reality, the German landesbanks, together with the Spanish cajas and the Austrian banks, are amongst the weakest in Europe in terms of their capital base, and the German banks have plenty of exposure to Ireland . . .

Sækja bréfið (PDF) hjá Absolute Return Partners LLP

German Economic Policy and the Euro 1999 - 2010

The aim of this paper is to assess to what extent Germany - whether by accident or design - has been a beneficiary of the Euro era, and what negative impact, if any, there has been on the Eurozone’s smaller economies.

Analysis shows that trade imbalances within the Eurozone centre upon Germany, the most important economy, and by far the largest exporting nation. Germany has substantial trade and current account surpluses with the other Eurozone members. In the last three recorded years for example, it was €114.3 billion in 2007, and €104.5 billion and €79.7 billion in the recession years of 2008 and 2009 respectively.

This situation is greatly exacerbated by the ECB’s exchange rate policy which (wittingly or not) favours German interests. This is because, at the outset, the German people gave up their beloved D-Mark under an implicit agreement that EMU would never lead to inflation in their country. For this reason the European Central Bank tightens monetary policy whenever the German economy is in danger of over-heating, regardless of the needs of the Mediterranean economies.

When the Euro was founded in 1999, it was fondly assumed that with Germany’s exchange rate ‘irrevocably fixed’, then there would be no more periodic crises such as those which repeatedly afflicted the ERM between 1979 and 1992. The ruling elite, now in total control, could sit back smugly anticipating economic convergence and the facilitation of political union, however ill-defined this concept is and no matter how unwanted.

It was never going to happen like this. Rather, German exchange rate policy, within the Euro, represents the most lethal danger to the survivability of the Single Currency. The fundamental reason for this is stark in its simplicity.

The Bruges Group - krækja:  German Economic Policy and the Euro 1999 − 2010 | PDF-skjal

Europe’s growing prosperity gap Outside the Box - MarketWatch

"The Franco-German plan, which would force members of the European Union to coordinate many social and economic policies like retirement ages and debt limits that have traditionally been dictated by individual nations, was immediately panned by the zone’s smaller countries. France and Germany have since signaled a willingness to address some of the concerns of their European brethren.

As they work out the details, European leaders must recognize that simply restoring the balance sheets of the continent’s ailing economies will not save the euro zone. If EU policy makers are to have any hope of preserving the common currency, they must also address Europe’s prosperity gap."

Krækja; Europe’s growing prosperity gap Outside the Box - MarketWatch

Open Europe blog: Studying the cost of Greece leaving the euro

"The 'European Economic Advisory Group', CESifo, is a joint venture by two of Germany's most respected research institutions. Earlier in the week, it published an interesting report examining the various potential policy responses to the eurozone crisis.

One of the authors is CESifo Director and heavyweight economist Dr. Hans-Werner Sinn (pictured). When he speaks, Germany listens.

Here are some of the key points in the report:

On establishing a permanent "transfer union" - in which taxpayers in stronger economies subsidise weaker countries, such as happened between Western and Eastern Germany - the report notes:

The persistent flow of public funds has in the end helped eastern Germany only a little, if at all. It has made it another European Mezzogiorno – a region stuck in a low-development equilibrium.

(...)

Whether the EU budget should be expanded for this purpose is a distributional question that will have to be decided by the political process. Politicians should not overlook, however, that there is the risk of Greece becoming addicted to the transfers, since it seems to have become addicted to the capital flows of the past.

It warns against the harmonisation of wages across the EU, citing regional differences in Italy as an example:

The Italian Mezzogiorno has been caught in such an equilibrium for half a century and more. Its GDP per capita is about 60 percent of that of the rest of Italy and does not show any sign of convergence. In Italy, the causes for this situation can be sought in a common wage policy, mainly dictated by the conditions of the North, which has always resulted in wages that were way too high for the South and resulted in persistent mass unemployment.

The under-development has forced the state to help out with transfers from the North. These transfers have provided an alternative income source in the South to which the political system and the economy have grown accustomed, perpetuating the situation, as it seems, even more.

They also explore the alternative to a transfer union - devaluation . . . . .

Lesa áfram - krækja: Open Europe blog: Studying the cost of Greece leaving the euro

Bein krækja á skýrslu CESifo; Skýrsla CESifo

How Germany Became the China of Europe - TIME

"Some 80% of Germany's trade surplus is with the rest of the European Union. The more German industry excels, the more other Europeans feel that Germany's success comes at their expense, cracking open schisms within the euro zone just when the region can least afford them. 'There is frustration with Germany,' says André Sapir, a senior fellow at Bruegel, a Brussels-based think tank. 'Germany is moving ahead, but what are they doing for the rest of Europe? . . .

Krækja: How Germany Became the China of Europe - TIME

AFP: Europe races to meet 'Mad March' debt deadline

"Eurozone paymaster Germany won't guarantee its backing unless Berlin wins concessions on how other nations govern their finances first. Germany, supported by France, wants to reform everything from pensions to business taxation across the 17-nation eurozone in particular. . . .

Krækja: AFP: Europe races to meet 'Mad March' debt deadline

The Euro Zone's Bumpy Road to Recovery - WSJ.com

"In the pre-euro era, they would devalue their currencies to make German goods dearer and their homemade stuff cheaper. That was then and this is now. No such mechanism is available to struggling Greece, Ireland, Portugal, Spain or Italy—they gave up the ability to revalue their currencies when they ditched them in favor of the euro." . . .

Krækja á grein Irwin Stelzer á Wall Street Journal: The Euro Zone's Bumpy Road to Recovery - WSJ.com:

Þjóðverjum hefur fækkað um 630 þúsund manns á fjórum árum

2010-árbók hagstofu Þýskalands er komin út.

Öldrunarhagkerfi

Mynd 1; úr árbókinni: þýski aldurspíramídinn er smám saman að snúast á hvolf og er svo étinn upp innanfrá af mannfjölda sem er af erlendu bergi brotinn. Framtíðarspá hagstofunnar gerir ráð fyrir að aðeins 60-65 milljón manns búi í Þýskalandi árið 2060.

Mynd 2; úr mannfjöldaspálíkani þýsku hagstofunnar. Forsenda: frjósemi 1,2 lifandi fætt barn á hverja konu fram til 2060 (fertility rate). Fólksfækkun: 18 milljón manns frá 2005 til 2060.



Graf 3; Sögulegt frjósemi þýskra og japanskra kvenna (fertility rate) frá 1960 til 2008. Fjöldi lifandi fæddra barna á æfi hverrar konu.

The Low fertility trap

Þekkið þið þessi einkenni?

eftir Edward Hugh

1. Ongoing weaknesses in domestic consumer demand
2. absence of housing booms (since 1995 in the European cases)
3. Comparatively high rates of personal saving, which then begin to decline
4. Increasing structural dependence on exports for growth
5. Lack of attractiveness as a destination for migrants
6. An increasingly flat wages curve (across time) despite demographically driven labour market tightening
7. Growing government deficit issues and dilemma's about how to fund
8. health and pension systems, with a tendency to try and load the cost onto the tax system rather than reducing provision. Lesa áfram 

Lýsing: Low Fertility Trap
Skilgreining: PDF og glærur

Skrif Edwards Hugh

How low can fertility fall?

- The possible ‘low fertility trap’ hypothesis

- Observation that countries that fell below fertility level of 1.5 children have not recovered.

- Negative demographic momentum: Because of past low fertility there will be fewer potential mothers in the future.

- Economics: Gap between aspirations for consumption and expected income widens for young people due to negative consequences of ageing (cuts in social security systems, possible economic stagnation)

- Ideational change: Young people are socialized in an environment with few children and this may result in lower ideal family size in next generation.

• The Low-Fertility Trap (AFOE)
• Population, The Ultimate Non-renewable Resource

Germany must choose EMU fusion or fission - Telegraph

"German Chancellor Angela Merkel is teasing Europe and deluding herself.
For all her fiery language in defence of the euro - as if a currency trading so high against the yuan, dollar, and sterling could be under meaningful external attack - Chancellor Angela Merkel has not yet agreed to pay one cent in help to crippled debtor states. Nor has she faced up to the elemental question hanging over monetary union.

Her own Bundesbank argued years ago that EMU is unworkable without fiscal union, and it has been vindicated by the events of the past two years. Either creditor states agree to an EU treasury, 'Transferunion' and debt pool, or EMU will be subject to unending stress and ultimately fracture or shrink to a viable core, or so goes the argument."

Germany must choose EMU fusion or fission - Telegraph

WestLB plan would have 'drastic effect' on Irish subsidiary - The Irish Times - Thu, Feb 17, 2011

"Like many other Landesbanken, WestLB struggled to justify its existence in the past decade after Brussels removed its right to borrow money on preferential, state-backed triple-A terms.

Before losing this state guarantee – the central pillar of all Landesbanken operations – WestLB and others made large speculative investments, including subprime loans, through their Dublin-based operations."

WestLB plan would have 'drastic effect' on Irish subsidiary - The Irish Times - Thu, Feb 17, 2011

For Germany's Banks, a Grim Future - NYTimes.com

"The woes of WestLB, which has received $11 billion in taxpayer support since 2009, are symptomatic of a larger problem in the German economy. Many of its biggest banks are still on government life support after making bad lending bets during the bubble years. And with their access to cheap capital long gone, their prospects of becoming profitable again are dubious."

For Germany's Banks, a Grim Future - NYTimes.com:

WestLB Likely to Be Broken Up as No Buyer Is Found, FTD Reports - Bloomberg

"WestLB AG will probably be broken up and sold in parts, as no buyer for the bank as a whole can be found, the Financial Times Deutschland reported today, citing unidentified people in the financial industry."

WestLB Likely to Be Broken Up as No Buyer Is Found, FTD Reports - Bloomberg:

Diplomacy is a stock set to soar - Editorial, Opinion - Independent.ie

"There was something of the 1930s surrounding the language used to describe the new German/French-sponsored 'pact for competitiveness'. In fairness, this may not constitute a 'Pact of Steel', but they do appear to be determined to rule the continent by stealth."

Sadly, when it comes to Ireland, this may not be a happy experience. Our politicians may be talking bravely about sticking up for Ireland, but nothing captured the reality of our status more than a recent vignette at an EU ministerial meeting after a Greek delegate dared to differ with some German proposal. The German representative walked haughtily across the room, bent down, berated the Greek for his cheek in even daring to have a view and, having silenced him, stalked back to his chair.

Such now is the reality of 'partnership' in Europe. . . . .

[..]

As Germany returns to old habits it is starting to look as though we need to build a modern league of small nations to curb the imperial ambitions of Frau Merkel and her devious French collaborationists. If this is to be achieved, however, Foreign Affairs will need a politician with guile and a silky political touch, who, behind the velvet glove of humorous quips retains something of the night around his persona.

Öll greinin: Diplomacy is a stock set to soar - Editorial, Opinion - Independent.ie

Deutsche Welle - EU debt crisis drags on

"'Europe today is treading water,' the Council on Foreign Relations' Kupchan said. 'There is a widespread perception - often unstated - that the foundations of the [European] Union are shifting. And that the traditional core tenets of the construction of Europe are now being called into question.'"

Krækja