Tuesday, March 23, 2010

On Iran's nuclear ambitions

One thing that puzzles me about Iran's nuclear ambitions is that it just doesn't make sense - except as a kind deterrent for a US intervention. Iran is stronger than any of its neighbors and its only neighbor with a nuclear bomb is Pakistan - what doesn't seem a threat. On the other hand it is not improbable that Saudi Arabia would see an Iranian bomb as an excuse to build its own one. And I don't think anyone in Iran or elsewhere would be happy when the country that gave us 9/11 would have its own bomb.

Given this situation I think a solution should be possible.

Iran centrifuge magnet story technically questionable: this article questions the recent claims by the Washington Post that Iran's attempt to buy ring magnets in China is a proof of continuing nuclear ambitions. The magnets have many other uses.

Germany is a bigger problem than Greece

At the moment all the attention in the eurozone goes towards Greece and its financial problems. For good reason: they cooked the books and they are now faced with a financial situation where they need help from the IMF or whoever.

However, as many people have noticed, Greece is just one of many euro states with troublesome finances: Portugal, Spain, Italy and Ireland are only in a little bit better state and may well face similar problems in the future.

The problem of all is the trade unbalance inside the euro zone. When the euro was introduced Germany was a country with slowly rising wages and conservative finance and a steadily appreciating currency. The Southern European countries on the other hand had fast rising wages and a freely spending government that they regularly had to compensate for by devaluing their currency. Unfortunately both continued to behave the same: the Germans frugally, the Southerners profligate. As a consequence an enormous gap has risen in competitiveness between the south and the north. And that result in a huge export surplus for Germany and import surpluses for those other countries.

It is easy to blame the south, as Germany likes to do, but Germany has done its own part to make the gap bigger. It started a policy of wage and budget cuts at the moment when the differences were already very big and it even continues to do so today. Even more explicit: German leaders claim that Germany has the right to have a huge trade surplus because it needs to save for its ageing population. Never mind that China, Japan and Southern Europe have an ageing population too and that if they all saved like Germany there wouldn't be enough people left to consume and the world would face a 1930 style contraction.

The German solution to the crisis is that the rest of Europe must be just as frugal as it is. Now the Greek budget deficit was excessive so I don't mind some sobriety. But part of the Greek problem is that it is in a currency union with Germany and that Germany keeps making budget cuts too. So Greece is fighting to reach a moving target. It would be much easier if Germany became a bit more free-spending and met Greece in the middle. It would not only help directly: it would also result in a lower euro and that too would make it easier for Greece to be competitive.

Germany nowadays likes to publish opinion polls that show that a majority of the German population is against a bailout of Greece. But aid doesn't make sense without a solution for the trade gap. The German population is just saying that given the German attitude in the eurozone they don't have faith that rescuing Greece will work.

Germany would hate to see the euro weaken. But it is perfectly possible for countries with a weak currency to be competitive.

I don't see much difference between China's policy of a predatory low currency and Germany's policy. If Germany still had the mark its currency would have risen considerably because of its trade surpluses and that would have led to a reduction of those surpluses. Now Germany is profiting from a rather low euro due to the problems of other EU states.

In this context is may be interesting to speculate what would happen when the eurozone fell apart and Germany (with possibly a few other countries) would have its own currency. In that case that currency would rise to reflct Germany's economic power. As a consequence Germany's trade surplus would be sharply reduced. Germany would find itself in the same position as Japan in 1985 or the US in 1930: the only way to reduce unemployment is to stimulate internal demand. Keeping this in mind it becomes clear how ridiculous Germany's claim is that it is entitled to huge trade surpluses.

Germany likes to point out that it already has a large government budget deficit and that it wouldn't be fair to ask it to enlarge that even further. This too misses the point. The problem with Germany (and China) is that it produces too much and consumes too little. Having government budget deficits is a very rude way to solve that - and it works only temporary. A real solution will mean policies that discourage saving by the population and promote consumption. It may well include policies of how people can save for their pensions.

As the situation is now Greece is just a footnote: it doesn't matter that much whether it gets help from the IMF or some European club. But the huge and growing German trade surpluses within the eurozone are a serious problem. If Germany is not prepared to recognize that it is a problem and if refuses to recognize that a solution of the present situation must be found somewhere in the middle I am pessimistic on the euro. It will probably survive the Greek crisis, but within a year or so other countries will get the same problem and then the euro will have to dissolve.

Google's miscalculation in China

Google keeps challenging China with its threat to withdraw. I am amazed what they want to achieve with that. As far as I can see China is following a very nationalistic economic policy at the moment aimed at acquiring technology and they will be very happy when Google leaves and makes place for Chinese companies. It saves them the trouble of harassment.

China is nowadays following a policy of “indigenous innovation” that will require government procurement to favour products that include Chinese intellectual property. The policy is still a proposal but some local government are already implementing it. A good example was the recent transfer of the production by Wärtsilä - a ship propeller- and auxiliary-engine factory - from the Netherlands to China (more elaborate information is unfortunately only in Dutch). Pressure from China was hereby explicitly mentioned as one of the reasons.

All this makes me look incredulously at Google. My estimate is that even if China agrees with them on the need for a more free access to information they will wait until Google has left before they implement it.


Postscript: China has moderated its “indigenous innovation” poicy. The article sees a pattern: "Over the past decade, the government launched several initiatives aimed at strengthening local companies and bolstering government control, but watered them down after an outcry from the foreign business community."

Friday, March 19, 2010

To pension or not to pension

Some countries are very careful about saving for pensions for future generations. Other countries have a "pay-as-you-go" system where nothing is saved and persions are paid by the next generation.

Until now it was fashionable to paint the first type of countries as responsible and the last type as irresponsible. However, the recent fracas about the trade surpluses of China and Germany puts this saving in new light. It looks like the world cannot sustain it if every country would save for their pensions - it will result in too much saving and too little consumption. And with the ageing of the world population this problem is only becoming more acute.

It looks like we will soon have to tell countries that it is irresponsible when they save too much because it harms the rest of the world.

Wednesday, March 17, 2010

The bad role of multinationals

Some decades ago it was fashionable to vilify multinationals for their sometimes dubious actions in the developing world. But now it may be time to have a good look at their role in the developed world.

Inside Europe the multinationals have been a major force behind the common currency. They like to say that that will result in major savings. What they don't mention is that those will be their savings and that it will increase their competitive position towards local companies. What they don't say either is that it may be harmful for the countries involved. Even before the present problems with the southern flank of the eurozone it was clear that the EU countries outside the eurozone had higher growth figures than those inside the zone.

In international trade multinationals have a similar dubious position. With their international branches they are optimally configured to profit from international trade. But when China calls on US multinationals to fight against a necessary chance in exchange rates we are definitely facing a situation where the interest of the multinationals is not the same as that of society.