Why the economic crisis continues

As I have said before I think that uneven trade balances are the greatest threat to the world economic system. China's pegged currency makes sure that it has a trade surplus while the US has a trade deficit. And inside the EU the German trade surplus is linked to the trade deficit in Greece, France and some other countries. At some point the deficit countries will run out of money and the surplus countries will have to adapt. But that is very difficult. The 1930s crisis was mainly about the fact that surplus country the US could not adapt to the fact that the world no longer could or would accept its excessive exports. Similarly Japan has never really recovered from the the Louve and Plaza agreements in 1985 when the West no longer accepted its pegged currency and the resulting trade disbalances.

But at the moment the West is still in denial that there is a problem at all. While the West is digging itself in mountains of debt Asia is running high growth figures. It looks like we still have to wait another few years before this situation meets its inevitable end. Maybe the US will roll over and let Asia rob its prosperity. But the more probable scenario is that at some point it simply will say "no".

For those who like a crisis there is already the Greek debt crisis. Europe keeps increasing the stakes: first it offered only to finance Greece until the end of the year. Then it offered to do it for three years. And now we have a 750 bln euro package that aims to take care of all the excessively endebted EU members. But still there is no policy to repair the trade disbalances inside the EU, so the problems will continue.

In the mean time the europhiles inside the EU keep saying that with a stronger Europe the Greek debt crisis would not be such a problem - just as the Californian debt problem is not considered a big problem in the US. What they often forget is that what makes the difference is not power but money. California is not a big problem because Americans pay most of their taxes to the central government who redistributes in the form of social benefits and orders for companies. To get a similar effect in Greece one would need to have the EU pay out things like unemployment benefits. But given the level of corruption at the moment with EU benefits that will only work when the EU takes also care of the distribution of those unemployment benefits. Related to that you would need European courts to handle complaints by people who think they have been treated unfair by that agency and you would need European police to enforce their verdicts. To summarize: it would be a very big step. Do we really want that?

But even if we want that it would be difficilut to implement given the differences in wealth inside the EU. Romania is much poorer than Germany. When you would give them the same level of benefits it would have a destabilizing effect in Germany - just like happened in Eastern Germany after the reunification. But when you have different levels you get the question which levels should be used. Greece is an expensive country - but mainly because it is living above its means. Should you reward that?

Eastern Europe keeps lending in euro's

The New York Times has an article about how East Europeans keep lending in euro's instead of the local currencies. The article focusses on Hungary and Romania, but I suppose it applies to other countries too.

Some highlights:
- In Hungary, foreign-currency loans slipped to 63 percent of all loans at the end of 2009
- After the currencies sank last year defaults rose, but only a bit. For example, nonperforming loans at Erste Bank grew to 8.5 percent in Eastern Europe. By comparison, bad loans in Erste Bank’s home country, Austria were 6.3 percent.
- Economists consider it dangerous for governments now to stop those loans. I beg to disagree.

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."