Airtime: June 22 2010 | 10 01 00 ET
FT Deutschland quotes Angela Merkel as saying that Obama’s criticism of the EU’s consolidation policy was “wrong”, and that since the eurozone as a whole had a balanced current account with the rest of the world, there was no problem. Germany would stick to the agreement to expand the economy in 2010, and to consolidate from 2011 onwards. The article says Merkel thus risks a clash with Obama at this week’s G20 summit in Toronto.
In a separate comment, Peter Ehrlich writes that the Europeans will not get anywhere with any of its demands, including a financial transactions tax. The G20 is not a large EU because the legal superstructure is largely absent. So this is just power politics, and this is not an area the European excel in. read more
ON JUNE 19th the People’s Bank of China (PBOC), the country’s central bank, said it would increase the “flexibility” of China’s currency, thus interrupting the weekends of analysts, policymakers and journalists, who have been watching and waiting for this decision for months. As a small mercy to foreigners, the PBOC posted an English version of its announcement on its website. But that didn’t make its precise intentions much clearer. What, one wonders, does the PBOC mean by its pledge to keep the “RMB exchange rate basically stable at an adaptive and equilibrium level”? read more
Discussions about the current-account imbalance within the Eurozone have focused on the under-competitive periphery and super-competitive Germany. This column suggests that the argument ignores one powerful way that Germany lowered its relative unit labour costs. German firms offshored parts of their production to the new member states in Eastern Europe, Russia, and the Ukraine. read more
China is getting its exchange-rate adjustment whether it likes it or not. While Chinese officials continue to mull the right time to let the renminbi rise, manufacturing workers are voting with their feet – and their picket lines.
Honda has offered its transmission-factory workers in China a 24% wage increase to head off a crippling strike. Foxconn, the Taiwanese contract manufacturer for Apple and Dell, has announced wage increases of as much as 70%. Shenzhen, to head off trouble, has announced a 16% increase in the minimum wage. Beijing’s municipal authorities have preemptively boosted the city’s minimum wage by 20%.
The result will be to raise the prices of China’s exports and fuel demand for imports. The effect will be much the same as a currency appreciation.
China should count these wage increases as a measure of its success. Higher incomes are an entirely normal corollary of economic growth. read more
Paul Krugman about what he thinks is the real motivation of "deficit hawks":
"Suddenly, creating jobs is out, inflicting pain is in. Condemning deficits and refusing to help a still-struggling economy has become the new fashion everywhere, including the United States, where 52 senators voted against extending aid to the unemployed despite the highest rate of long-term joblessness since the 1930s.
Many economists, myself included, regard this turn to austerity as a huge mistake. It raises memories of 1937, when F.D.R.’s premature attempt to balance the budget helped plunge a recovering economy back into severe recession. And here in Germany, a few scholars see parallels to the policies of Heinrich Brüning, the chancellor from 1930 to 1932, whose devotion to financial orthodoxy ended up sealing the doom of the Weimar Republic.
But despite these warnings, the deficit hawks are prevailing in most places — and nowhere more than here, where the government has pledged 80 billion euros, almost $100 billion, in tax increases and spending cuts even though the economy continues to operate far below capacity. read more
Guardian: Strikes in China signal end to era of low-cost labour and cheap exports; China's rulers make statements supporting workers rights as series of high-profile strikes suggest economic turning point, June 17, 2010
The Chinese Communist party called on employers to raise salaries and improve training for workers today, as Toyota became the latest foreign firm to be hit by a wave of high-profile strikes.
The People's Daily, the mouthpiece of the ruling party, warned that the country's manufacturing model faced a turning point as demographic and social changes slowed the influx of low-cost labour from the countryside.
Coming a day after the premier, Wen Jiabao, made similar comments, the editorial suggests the authorities may be encouraging businesses to restructure the economy by putting less emphasis on cheap exports and more on higher-value goods and domestic consumption.
For most of the past 30 years, China's economic growth has been fuelled by low-cost migrant labour. This has helped raise national competitiveness, attract foreign investors and keep consumer prices lower across the world. But members of a new generation of migrants are less willing to endure hardship and many have successfully gone on strike to demand better conditions. read more
Locke, Richard M., Qin, Fei and Brause, Alberto, Does Monitoring Improve Labor Standards?: Lessons from Nike (July 2006). MIT Sloan Research Paper No. 4612-06. Available at SSRN: http://ssrn.com/abstract=916771
"Considering that the latest financial crisis in Spain is triggered by uncertainty over the economic impact of the announced austerity programme, the European Commission now wants the Spanish government to do even more. On top of the €11bn cuts already announce, Brussels wants the Zapatero government to nail down another €8bn to achieve the total structural adjustment of 1.75% next year. Of those, €5bn will comes from the central state, and another €3bn from the regions. The goal is to reduce the deficit to 6% in 2011. El Pais reports that of the €11bn specified so far, roughly over half came from the central government through the reduction in wages, while the rest came from the region which are already raising taxes. The paper quotes finance minister Elena Salgado as saying the purpose was to regain the confidence of the markets. (We think the up-front austerity programmes are the reasons the market have lost the confidence.) The European Commission has also asked Spain to implement labour market and pension reforms."
Source: EuroIntelligence (see link above)
Airtime: Jun. 16 2010 | 10 01 00 ET
"The positioning of certain industries within the four quadrants is not too surprising given the nature of the most recent recession. For instance, construction and related industries are deep in the continued job-loss quadrant. In contrast, the temporary help sector has behaved procyclically. Jobs in federal government and health care have continued to grow, with the former boosted by temporary hiring of census workers. Of the 79 industries examined, about a third of them have landed in a different quadrant compared with the 2001 recession."
Source: Excerpt from the article linked to above
There is an ongoing debate among global policymakers about when and how fast to exit from the strong monetary and fiscal stimulus that prevented the Great Recession of 2008-2009 from turning into a new Great Depression. Germany and the European Central Bank are pushing aggressively for early fiscal austerity; the United States is worried about the risks of excessively early fiscal consolidation.
In fact, policymakers are damned if they do and damned if they don’t. If they take away the monetary and fiscal stimulus too soon – when private demand remains shaky – there is a risk of falling back into recession and deflation. While fiscal austerity may be necessary in countries with large deficits and debt, raising taxes and cutting government spending may make the recession and deflation worse.
On the other hand, if policymakers maintain the stimulus for too long, runaway fiscal deficits may lead to a sovereign debt crisis (markets are already punishing fiscally undisciplined countries with larger sovereign spreads). Or, if these deficits are monetized, high inflation may force up long-term interest rates and again choke off economic recovery. read more
The crisis has now reached a new dramatic momentum, as Spain is now effectively cut off from international capital markets. El Pais has some interesting statistics showing the reliance of the Spanish banking system on the ECB. While Spain’s share in the ECB is 9%, Spanish banks now accounts for 16.5% of direct ECB borrowing. The amounts borrowed represent a 26.5% increase over May.
The paper quotes the chairman of BBVA as saying that for the majority of companies and financial firms, the international capital market was closed. He said that the country urgently needed to tackle three issues simultaneously: sustainability of public finances, growth, and financial sector reform. read more
The 19th football World Cup kicks off this week. This column studies the achievements of the national teams of Belgium, Brazil, England, Germany, Italy, and the Netherlands since 1960. It finds that while home advantage, skill, and luck play their part, in the dying moments of a game national identity can step forward as well. read more
French and German banks have lent nearly $1 trillion to the most troubled European countries and are more exposed to the debt crisis than the banks of any other countries, according to a new report that is likely to add pressure on institutions to detail their holdings.
French banks had lent $493 billion to Spain, Greece, Portugal and Ireland by the end of 2009 while German banks had lent $465 billion, according to the report by the Bank for International Settlements, an institution based in Basel, Switzerland, that acts as a clearing house for the world’s central banks. read more
French, German Banks Still Exposed to Debt
This is a rare one newspaper-only scoop. Frankfurter Allgemeine reports this morning that EU officials will start talks about a bail out for Spain, citing unnamed sourced in Berlin. The paper said the situation had deteriorated so much that they did not want wait until the EU summit on Thursday. It also said neither the European Commission nor the ECB excluded an aid package. The paper quoted Spanish officials as denying that they are about to ask for EU aid, and immediatedly pointed out that Greek officials made the same claims before. The trigger is the freeze in the inter-banking market last week as the markets have lost confidence in the Spanish banking sector. read more
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