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.
Tuesday, March 23, 2010
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.
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."
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.
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.
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.
Friday, February 26, 2010
Answers to Jakob Finci
Jakob Finci is the head of the small (500 people) Jewish community in Bosnia. As a neutral ethnic group he would be positioned nicely for a mediating position and indeed he used that position during the war to evacuate some 300 people from Sarajevo. However, in practice he has adopted the Bosniak position. Of course it is not unwise for a small community to attach itself to the largest and most powerful ethnic group. But that makes him less suitable as a mediator - as is visible in his initiatives:
- one of his initiatives is a truth commission. However, he fails to mention that unlike the situation in for example South Africa the political situation in Bosnia is not resolved. Without such an agreement the commission will have the same problem as the ICTY in The Hague: each party is sorry for the war crimes that have been committed by their side, but they consider them as "collateral damage" in a justified war.
- a more recent initiative by Finci was his complaint at the European Court of Human Rights about the fact that the Bosnian constitution by reserving some state positions for members of the three main ethnic groups is discriminating against Roma and Jews. I found this initiative rather phony: even if the constitution allowed the highest positions to those groups it is very unlikely that they would actually get them anytime soon.
But Finci has a point that the ethnic restrictions shouldn't be forever. During the war you couldn't be neutral and many people who did feel neutral - often because of mixed marriages - ended up as refugees in the West. Dayton reflected that situation. But this is not a desirable solution for peace time. But what Dayton wants to achieve with those ethnic rights is securing minority rights and that is very much a valid principle in peace time too. The obvious solution would be to connect the political minority rights to territorial entities. In order to achieve this the Federation would have to be split into a Bosniak and a Croat part. When that was done all the veto and representational rights of the ethnic groups could be converted in rights for the three entities.
Bosnia now has a law that it needs to repair in order to satisfy European requirements. My suggestion would be to keep the requirement for a Croat and to replace the requirements for a Muslim and a Serb by requirements that one president will be appointed by the parliament of the Federation and another by the parliament of the RS.
- one of his initiatives is a truth commission. However, he fails to mention that unlike the situation in for example South Africa the political situation in Bosnia is not resolved. Without such an agreement the commission will have the same problem as the ICTY in The Hague: each party is sorry for the war crimes that have been committed by their side, but they consider them as "collateral damage" in a justified war.
- a more recent initiative by Finci was his complaint at the European Court of Human Rights about the fact that the Bosnian constitution by reserving some state positions for members of the three main ethnic groups is discriminating against Roma and Jews. I found this initiative rather phony: even if the constitution allowed the highest positions to those groups it is very unlikely that they would actually get them anytime soon.
But Finci has a point that the ethnic restrictions shouldn't be forever. During the war you couldn't be neutral and many people who did feel neutral - often because of mixed marriages - ended up as refugees in the West. Dayton reflected that situation. But this is not a desirable solution for peace time. But what Dayton wants to achieve with those ethnic rights is securing minority rights and that is very much a valid principle in peace time too. The obvious solution would be to connect the political minority rights to territorial entities. In order to achieve this the Federation would have to be split into a Bosniak and a Croat part. When that was done all the veto and representational rights of the ethnic groups could be converted in rights for the three entities.
Bosnia now has a law that it needs to repair in order to satisfy European requirements. My suggestion would be to keep the requirement for a Croat and to replace the requirements for a Muslim and a Serb by requirements that one president will be appointed by the parliament of the Federation and another by the parliament of the RS.
Monday, February 22, 2010
The Greek money problem
EUObserver has a nice blog post by Roberto Foa that punches the myths about the threat of a Greek collapse:
- countries can leave and return to a monetary union without major problems: in Africa's CFA franc zone that has repeatedly happened.
- countries can go broke without endangering their currency. No one supposes that the US guarantees all the countries that use the dollar.
- several solutions are possible. What makes the Greek situation seem difficult is that some europhiles are blocking an IMF bailout while there is not (yet) sufficient support for an European bailout.
The only real problem is for the eurocrats. Greece shows the limits of their "ever closer union". I think it will be good to give up that myth and to start instead working on what is really needed in Europe. We have seen enough dysfunctional rules whose only reason of existence seems to be to carry more power to Brussels.
- countries can leave and return to a monetary union without major problems: in Africa's CFA franc zone that has repeatedly happened.
- countries can go broke without endangering their currency. No one supposes that the US guarantees all the countries that use the dollar.
- several solutions are possible. What makes the Greek situation seem difficult is that some europhiles are blocking an IMF bailout while there is not (yet) sufficient support for an European bailout.
The only real problem is for the eurocrats. Greece shows the limits of their "ever closer union". I think it will be good to give up that myth and to start instead working on what is really needed in Europe. We have seen enough dysfunctional rules whose only reason of existence seems to be to carry more power to Brussels.
Sunday, February 21, 2010
To stimulate or not to stimulate
Economists all over the Western world are divided: should we keep stimulating our economies or shouldn't we do so. The fans of the continuing of the easy money claim that when we stop our economies might yet fall into a crisis. They like to point to Roosevelt's effort to end stimulation in 1937 after which the crisis promptly came back. But their adversaries like to point out that the fate of Greece might also happen to the US or the UK. Some day there might be no more money to borrow and then they would face a really big crisis.
I believe it depends on the situation. Some general rules are:
- it is crucial to keep the country from becoming too endebted. So when a country is running trade deficits and has a negative balance of payments - like the US now - it should devalue its currency. Living above your means doesn't work.
- you cannot trust on export alone. China and Japan now are very similar to the US in the 1930s. They are dependent on export for growth. But you can only export so much before the rest of world runs out of money. If that happens your growth model runs into a wall.
- when there is unemployment government may inject extra money in the economy. This is basically a matter of distribution within a country. When the producers have too much money and the consumers too little the goal is to give the consumers more money. In the short term a stimulus is the best way to achieve that.
I think there are three possible situations:
- producers and consumers are rather in balance. In that case a stimulus will get the economy running again. The cost of the stimulus will soon be made up by additional tax receipts and less unemployment benefits.
- there is too much money with the consumers and too little with the producers. This is the 1970s scenario. A stimulus only leads to stagflation. The solution is to direct more money to the producers - as Thatcher and Reagan did with tax cuts.
- there is much too much money with the producers and too little with the consumers. This is the case with export dependent countries like China and Japan and the US in the 1930s. In this case a stimulus has only a temporarily and weak effect. Economists like to say that the government should just stimulate more, but there are both practical and political limits to how much a government can spend. Japan has now spent so much that its government debt is now above 200% of GDP. That is a major distortion. What is needed are more structural reforms that bring more money to the consumers. In the US it was the war economy of the 1940s that finally brought that restructuring. To accomplish a more consumption oriented economy in peace time one might consider the following measures: policies that favor the poor over the rich (the rich tend to save more), policies that aim for full employment (that leads to upwards pressure on the wages of the poor and so to less inequality) and discouraging saving for the old day (it is much better when people build a house that will serve as their old age reserve; a property bubble however will destroy this way out).
My conclusion is that we in the West need to undo what Reagan and Thatcher did. Not because what they did was wrong, but because what they did has gone too far and we need to bring the balance back towards the consumers.
I am rather pessimistic about China despite its foreign currence reserves. Its policies for fighting the crisis have resulted in bubbles. It looks like China is going the way of Japan after the Plaza Accord. The Plaza Acord forced Japan to revalue its currency. China is not yet facing such pressure but it is clear to everyone that China no longer can keep growing by increasing its exports. Its reaction to that is a very similar real estate bubble like Japan created. The one thing ibn favor of China is that its government seems prepared to make unpopular steps to puncture bubbles.
I believe it depends on the situation. Some general rules are:
- it is crucial to keep the country from becoming too endebted. So when a country is running trade deficits and has a negative balance of payments - like the US now - it should devalue its currency. Living above your means doesn't work.
- you cannot trust on export alone. China and Japan now are very similar to the US in the 1930s. They are dependent on export for growth. But you can only export so much before the rest of world runs out of money. If that happens your growth model runs into a wall.
- when there is unemployment government may inject extra money in the economy. This is basically a matter of distribution within a country. When the producers have too much money and the consumers too little the goal is to give the consumers more money. In the short term a stimulus is the best way to achieve that.
I think there are three possible situations:
- producers and consumers are rather in balance. In that case a stimulus will get the economy running again. The cost of the stimulus will soon be made up by additional tax receipts and less unemployment benefits.
- there is too much money with the consumers and too little with the producers. This is the 1970s scenario. A stimulus only leads to stagflation. The solution is to direct more money to the producers - as Thatcher and Reagan did with tax cuts.
- there is much too much money with the producers and too little with the consumers. This is the case with export dependent countries like China and Japan and the US in the 1930s. In this case a stimulus has only a temporarily and weak effect. Economists like to say that the government should just stimulate more, but there are both practical and political limits to how much a government can spend. Japan has now spent so much that its government debt is now above 200% of GDP. That is a major distortion. What is needed are more structural reforms that bring more money to the consumers. In the US it was the war economy of the 1940s that finally brought that restructuring. To accomplish a more consumption oriented economy in peace time one might consider the following measures: policies that favor the poor over the rich (the rich tend to save more), policies that aim for full employment (that leads to upwards pressure on the wages of the poor and so to less inequality) and discouraging saving for the old day (it is much better when people build a house that will serve as their old age reserve; a property bubble however will destroy this way out).
My conclusion is that we in the West need to undo what Reagan and Thatcher did. Not because what they did was wrong, but because what they did has gone too far and we need to bring the balance back towards the consumers.
I am rather pessimistic about China despite its foreign currence reserves. Its policies for fighting the crisis have resulted in bubbles. It looks like China is going the way of Japan after the Plaza Accord. The Plaza Acord forced Japan to revalue its currency. China is not yet facing such pressure but it is clear to everyone that China no longer can keep growing by increasing its exports. Its reaction to that is a very similar real estate bubble like Japan created. The one thing ibn favor of China is that its government seems prepared to make unpopular steps to puncture bubbles.
The quest for a new Thatcher
I am not a fan of Thatcher. In many ways I found her too extremist. But I admire her for how she took on the Miners Union. That union more or less had Britain captive to its demands. It took Thatcher a hard fight to defeat it: for months there was not enough coal and the country was seriously hurt. But Thatcher didn't give up and in the end she won. It didn't make her popular either: before the Falkland War her popularity was low. Yet now many see her as a visionary.
Reagan did something similar when he broke the air traffic controller's strike by firing the strikers. In his case there was less upheaval. But when the air traffic had become paralized or the strikers had somehow managed to keep their jobs Reagan would have been seriously humiliated and would have had to struggle not to become a lame duck. A good example what can go wrong is Hillary Clinton. After her failed attempt to introduce universal health insurance she didn't play a political role for quite some time.
I would like to see more such visionaries. Take California. In California the teachers union CTA is what the Miners Union was to the UK. Going far beyong simply defending the basic interests of the teachers it paralizes the education system, blocks reforms, has achieved very poshy working conditions for teachers and tries to influence subjects that have nothing to do with eduction. Schwarzenegger has had some struggles with the union but he never really has tried to break their power. Such would be a hard fight and schools might be closed for months. But it would be the beginning of the end of the political gridlock that paralizes California's politics.
Obama is in the same position. His country is just as much the hostage of special interest group as California. But in his case these are the most difficult ones: financial. Yet it can be done - as Roosevelt demonstrated some 75 years ago. Obama has the right ideas how to attack the crisis and to reform the financial sector. But until now he hasn't picked his fight.
There is one thing that a courageous leader should keep in mind: voters won't appreciate it - at least not immediately. Voters look at results and the immediate results of a struggle are strikes and breakdown of services. It is only later that the economic benefits become visible. After she broke the power of the miner's union Thatcher was highly impopular - until the Falklands War saved her.
Reagan did something similar when he broke the air traffic controller's strike by firing the strikers. In his case there was less upheaval. But when the air traffic had become paralized or the strikers had somehow managed to keep their jobs Reagan would have been seriously humiliated and would have had to struggle not to become a lame duck. A good example what can go wrong is Hillary Clinton. After her failed attempt to introduce universal health insurance she didn't play a political role for quite some time.
I would like to see more such visionaries. Take California. In California the teachers union CTA is what the Miners Union was to the UK. Going far beyong simply defending the basic interests of the teachers it paralizes the education system, blocks reforms, has achieved very poshy working conditions for teachers and tries to influence subjects that have nothing to do with eduction. Schwarzenegger has had some struggles with the union but he never really has tried to break their power. Such would be a hard fight and schools might be closed for months. But it would be the beginning of the end of the political gridlock that paralizes California's politics.
Obama is in the same position. His country is just as much the hostage of special interest group as California. But in his case these are the most difficult ones: financial. Yet it can be done - as Roosevelt demonstrated some 75 years ago. Obama has the right ideas how to attack the crisis and to reform the financial sector. But until now he hasn't picked his fight.
There is one thing that a courageous leader should keep in mind: voters won't appreciate it - at least not immediately. Voters look at results and the immediate results of a struggle are strikes and breakdown of services. It is only later that the economic benefits become visible. After she broke the power of the miner's union Thatcher was highly impopular - until the Falklands War saved her.
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