Posts Tagged ‘exchange rates’

Italy’s economic woes

Wednesday, June 20th, 2018

Martin Wolf’s Wednesday column provides an excellent explanation this week of why Italy is in trouble. Italy should never have joined the euro. In theory, countries can avoid devaluation by increasing productivity and lowering wages. In practice, this is politically difficult. In the case of Italy, it is impossible. If Italy had kept the lira, it could easily devalue its currency and regain competitiveness with other countries of the euro zone (primarily Germany). (more…)

Trump’s pick for commerce secretary is a mercantilist!

Sunday, November 27th, 2016

Donald Trump is expected soon to confirm Wilbur Ross as commerce secretary. Mr Ross (born 1937) is a billionaire investor who specializes in leveraged buyouts and restructuring distressed businesses. I learned, reading this weekend’s Financial Times, that he is also a vocal proponent of mercantilism.

The starting point of any trade deal, Mr Ross told the FT this month, should be to ensure that each side share its estimates of the effects on its own industries and jobs. ….

It is time to focus on deals which make sense, he says. That does not include the North American Free Trade Agreement of 1994, for example, which appeared to flip America’s trade surplus with Mexico into a deficit. Nor the Trans-Pacific Partnership, a sweeping 12-nation accord that has yet to be ratified, but which Mr Trump has promised to scrap.

“One thing I disliked about [Hillary] Clinton is that there was only one trade deal she voted against — the Central American Free Trade Agreement. That’s crazy, since the only deal we have a trade surplus from was CAFTA!” he says. [Emphasis added.]

Ben McLannahan  and Laura Noonan, “Wilbur Ross tries to turn round US heartland“, Financial Times, 26 November 2016 (metered paywall).

Mr Ross does not use the term, but this is mercantilism, pure and simple. For those unfamiliar with the doctrine, here is a succinct definition, from Wikipedia:

Mercantilism includes a national economic policy aimed at accumulating monetary reserves through a positive balance of trade, especially of finished goods. …. High tariffs, especially on manufactured goods, are an almost universal feature of mercantilist policy.

Much of Adam Smith’s Wealth of Nations (1776) is an attack on mercantilism. Nearly all modern economists accept Smith’s dictum “Consumption is the sole end of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer”.

An important quirk of protection, an earlier FT article notes, is its adverse effect on exports (and smaller effect on imports) because of changes in the exchange rate.

Janet Yellen, the Fed chair, and the president-elect are cut from different cloths but both have expressed concern about the impact of dollar strength on US companies ….

The quandary for Mr Trump is this, said [Deutsche Bank’s Alan] Ruskin. A tilt to protectionism may help the trade balance by suppressing imports but “it would be damning” if an overly strong dollar ended up hurting exporters and boosting imports.

Roger Blitz, “Donald Trump and the dangerous allure of a strong dollar“, Financial Times, 25 November 2016 (metered paywall).

For more on the relationship between trade balances and “competitiveness”, I recommend one of Paul Krugman’s best essays, written long ago, without jargon. Spoiler alert: No relationship exists.

Most people who use the term “competitiveness” do so without a second thought. It seems obvious to them that the analogy between a country and a corporation is reasonable and that to ask whether the United States is competitive in the world market is no different in principle from asking whether General Motors is competitive in the North American minivan market.

In fact, however, trying to define the competitiveness of a nation is much more problematic than defining that of a corporation. The bottom line for a corporation is literally its bottom line: if a corporation cannot afford to pay its workers, suppliers, and bondholders, it will go out of business. So when we say that a corporation is uncompetitive, we mean that its market position is unsustainable — that unless it improves its performance, it will cease to exist. Countries, on the other hand, do not go out of business. ….

One might suppose, naively, that the bottom line of a national economy is simply its trade balance, that competitiveness can be measured by the ability of a country to sell more abroad than it buys. But in both theory and practice a trade surplus may be a sign of national weakness, a deficit a sign of strength. For example, Mexico was forced to run huge trade surpluses in the 1980s in order to pay the interest on its foreign debt since international investors refused to lend it any more money; it began to run large trade deficits after 1990 as foreign investors recovered confidence and began to pour in new funds. Would anyone want to describe Mexico as a highly competitive nation during the debt crisis era or describe what has happened since 1990 as a loss in competitiveness?

Paul Krugman, “Competitiveness: A Dangerous Obsession“, Foreign Affairs, 73:2 (March/April 1994), pp. 30-31.

Here is a link to an ungated version of the paper.

China’s currency and economic reforms

Saturday, August 15th, 2015

It is difficult to keep up with rapidly changing economic policies in China. Jamil Anderlini’s column on a key player in this unfolding drama is a must-read. Here is an excerpt. Click on the link below to read the full article (free registration required).

In the early 1980s, a promising PhD student from a prominent political family caught the eye of China’s most senior Communist leaders by urging them to lift price controls and allow imports of televisions.

Three decades later Zhou Xiaochuan, China’s longest-serving central bank governor, is still convincing the country’s authoritarian leaders of the merits of economic reform. In persuading them this week to devalue the currency, he may have pulled off the crowning achievement of his long career — by preparing the way for a free-floating renminbi that can challenge the US dollar as the world’s reserve currency.


“It is clear he [Mr Zhou] sometimes pisses people off, including President Xi,” says Christopher Johnson, a former senior China analyst at the CIA now at the Center for Strategic and International Studies in Washington. “But he has never been so important or so powerful. He is going to retire soon so has nothing to lose and he is absolutely determined to achieve the market reforms he has committed most of his life to.”

Jamil Anderlini, “Zhou Xiaochuan, Beijing’s central radical banker“, Financial Times, 15 August 2015 (metered paywall).

Zhou Xiaochuan (born 1948) received a PhD in Automation and System Engineering from Tsinghua University in 1985. He became governor of the People’s Bank of China in December 2002.

Jamil Anderlini is chief of the FT’s Beijing bureau.

democracy within a monetary union

Monday, August 10th, 2015

FT columnist Martin Sandbu argues that democracy is compatible with monetary union, even though the eurozone elite believes it is not.

In Greece, opinion polls have been remarkably consistent about two things: most Greeks want to keep the euro as their currency, and most also reject the policies imposed by the creditor institution ….

Yet untold numbers of independent observers have uncritically bought into the “no alternative” [to austerity] rhetoric, without realising that if true, it is a terrible indictment of monetary union. The euro’s goal was to smooth cross-border trade and investment and reinforce the political bonds that prevent a return to past enmities. It was not to remove any choice over the economic models under which different nations wish to live.

The fact that alternatives exist is cause for relief, but also for despair. By pretending they do not — and in Greece, trying to make this true by closing down the banking system rather than forcing its restructuring — Europe betrays its own values. One of the most precious was articulated by Voltaire: to defend someone’s right to express, and to live by, a view one deeply disagrees with.

Martin Sandbu, “Democracy at the heart of fight for Greece“, Financial Times, 10 August 2015 (metered paywall).

One alternative is for Greece to default on its debt, while keeping the euro as its currency. Defaults on municipal bonds are common within at least one large currency union – the United States of America. None of these sub-national governments have been expelled from the US dollar monetary union. Similarly, Greece might conceivably pursue lax fiscal policy, default on some portion of its public debt, and pay a price in terms of higher interest rates on bonds it issues in the future. There is no reason for yields on Greek debt be the same as yields on German debt simply because the two countries happen to be in the same monetary union.

the pain in Greece

Monday, July 20th, 2015

FT columnist Wolfgang Münchau thinks that Grexit -a Greek exit from the eurozone- will eventually happen. The cost, however, will be extremely high because Prime Minister Alexis Tsipras dismissed his finance minister at the worst possible moment.

[Alexis Tsipras] should never have hired Yanis Varoufakis as his finance minister. Or he should have listened to him, and kept him on. But instead the Greek prime minister chose the worst of all options. He followed Mr Varoufakis’ advice of rejecting the offer of the creditors — until last week. But having done this, Mr Tsipras committed a critical error by rejecting Mr Varoufakis’ plan B for the moment when the country’s banks closed down: the immediate introduction of a parallel currency — IOUs issues by the Greek state but denominated in euros. A parallel currency would have allowed the Greeks to pay for their daily transactions when cash withdrawals were limited to €60 a day. A total economic collapse would have been avoided.

But Mr Tsipras did not go for this, or indeed any other plan B. Instead he capitulated … [by accepting] another very lousy bailout deal. ….

Can Mr Tsipras still avert disaster? If there is a snap election in the autumn, he might well win it and then revive Mr Varoufakis’ parallel currency idea at some point. But I think the parallel currency moment has gone with the man. My hunch is that Mr Tsipras will run a rabble-rousing political campaign, with a lot of rhetoric against the creditors but then agree to whatever the creditors are demanding, and follow the programme to its dramatic climax.

Wolfgang Münchau, “Grexit remains the likely outcome of this sorry process“, Financial Times, 20 July 2015 (metered paywall).

the third Greek bailout: two views

Monday, July 13th, 2015

Two FT columnists offer very different views on the deal agreed upon by government leaders on Monday, at 6am, following 17 hours of heated discussions. Who capitulated, Greece or Germany? Martin Sandbu supports the prevailing wisdom (capitulation of Greece). Gideon Rachman argues that it was Germany who capitulated.

At least Alexis Tsipras avoided having to send Greece’s fairest one hundred maidens in tribute to Berlin. Apart from that, the Greek prime minister has had to concede on pretty much everything the other members of the euro demanded. ….

Greece capitulated because the European Central Bank forced it to do so. In flagrant defiance of its treaty obligation to support the general economic policy of the eurozone — which includes since June 2012 a requirement to separate the health of the banking system from the solvency of sovereigns — the ECB forced a shutdown of the Greek banking system and made clear it would only let it function again once a deal on sovereign finances had been struck.

This has established beyond any doubt that the independence of the eurozone’s central bank from politicians is nothing of the sort. Far from being independent, the ECB does governments’ bidding. But its dependence is selective — and that is something that should worry the citizens of eurozone nations beyond Greece.

Martin Sandbu, “Three unedifying lessons of the Greek deal“, Financial Times online, 13 July 2014 (metered paywall).

Europe woke up on Monday to a lot of headlines about the humiliation of Greece, the triumph of an all-powerful Germany and the subversion of democracy in Europe.

What nonsense. If anybody has capitulated, it is Germany. The German government has just agreed, in principle, to another multibillion-euro bailout of Greece — the third so far. In return, it has received promises of economic reform from a Greek government that makes it clear that it profoundly disagrees with everything that it has just agreed to. The Syriza government will clearly do all it can to thwart the deal it has just signed. If that is a German victory, I would hate to see a defeat. ….

[O]rdinary Germans, Dutch, Finns and others … have every right to feel aggrieved. When they joined the euro, they were told that there was a “no bailout” clause in the treaty setting up the single currency. That was meant to reassure taxpayers that they would never have to pay the bills of other eurozone countries.

Gideon Rachman, “Germany’s conditional surrender“, Financial Times online, 13 July 2015 (metered paywall).

My own feeling is that the entire eurozone will suffer from the fallout of this crisis. The dream of a single European currency – the euro – is in danger. The euro from the beginning was a political project that made no economic sense. Without political will, the project is doomed to fail.

Greece’s creditors are divided

Friday, July 10th, 2015

It is not at all clear whether Greece’s latest offer will be accepted, or rejected. FT columnist Wolfgang Münchau explains.

Alexis Tsipras has achieved something that has eluded him in the past five months: he has managed to split the creditors. The International Monetary Fund insists on debt relief. The French helped the Greek prime minister draft the proposal and were the first to support it openly. ….

What he [Alexis Tsipras] is now proposing is, economically, not fundamentally different from what he, and the Greek electorate, rejected in Sunday’s referendum — but it works politically for him. ….

The Dutch, like the Germans, are extremely hostile. Would the Finnish accept a third programme? The Baltics? The Slovaks? ….

Both her [Angela Merkel’s] own Christian Democratic Union and the Social Democratic party, part of the governing grand coalition, would prefer Grexit. A deal would be very hard to sell for both of them.

Wolfgang Münchau, “Do not take this deal for granted — if Greece’s creditors want it to fail, they will find a way“, Financial Times, 10 July 2015 (metered paywall).

An additional problem, Mr Münchau notes, is that the Greek economy is in worse shape now than it was two weeks ago. Banks are insolvent. Capital controls and withdrawal limits have caused most economic activity to grind to a halt.

austerity in Greece

Wednesday, July 8th, 2015

Oxford economist Simon Wren-Lewis writes that Greece’s post-2008 experience  illustrates what – for mainstream economists – is obvious: austerity is bad for growth.

[Germany has] created a fantasy story about Greece. … an image of Greeks as a privileged and lazy people ….

So powerful has this fantasy become, it is now driving German policy (and policy in a few other countries as well) in totally irrational ways. In particular, Germany refuses to discuss debt relief with Greece, yet seems quite happy to see Greece leave the Eurozone, the inevitable consequence of which would be that Greece would obtain much greater debt relief through default. …. What is driving Germany’s desperate need to rid itself of the Greek problem?

One possible answer is that Germany finds the truth about Greece too upsetting, too challenging. …. For many outside Germany what has happened to Greece as a result is hardly surprising: austerity is contractionary, and austerity on steroids is ruinous. Yet Germany is a country where the ideas of Keynes, and therefore mainstream macroeconomics in the rest of the world, are considered profoundly wrong and are described as ‘Anglo-Saxon economics’. Greece then becomes a kind of experiment to see which is right: the German view, or ‘Anglo-Saxon economics’.

The results of the experiment are not to Germany’s liking. Just as ‘Anglo-Saxon economics’ would have predicted, the results for Greece under the Troika have been a disaster.

Simon Wren-Lewis, “Why Germany wants rid of Greece“, Mainly Macro, 7 July 2015.

“Mainstream” (“Anglo-Saxon”) macroeconomics is neither radical nor new. It goes back to Irving Fisher and JM Keynes in the 1930s, and Milton Friedman in the 1950s. Today, it is standard textbook economics, taught in most of the world to undergraduates in first-year and intermediate courses.

Grexit by stealth

Tuesday, July 7th, 2015

In Berlin, the belief is hardening in official circles that no deal can be reached with a government led by Mr [Alexis] Tsipras [the Greek prime minister]. …. The talk … is not about compromise, but about how to organise post-Grexit humanitarian relief. The idea that Greece would remain in the euro is considered somewhat quaint. ….

My overall conclusion is that if Grexit were to happen, it would happen by stealth. The Tsipras administration one day introduces a euro-denominated liquidity instrument. If the banking system deteriorates further, the government will have to print so many of the new IOUs that they would change hands on the grey market for a discount. Eventually, the central bank will control the supply of that shadow currency. It may never become legal tender, but if there are not enough euros in circulation, it will become Greece’s de facto currency.

Wolfgang Münchau, “A stealthy route to Grexit“, Financial Times, 7 July 2015.

German journalist Wolfgang Münchau (born 1961) is is a co-founder and director of Eurointelligence, an internet-based service for financial news and analysis of the euro area.

after the Greek referendum

Monday, July 6th, 2015

Don’t expect changes, writes FT columnist Tony Barber.

August 1914 was a descent into hell. May 1945 was an escape from hell. July 2015, the month of a surreal Greek referendum that had no clear question and an answer whose meaning is disputable, will go down in history as a continuation of hell — for Greece, and for Europe. ….

Mr Tsipras and his ruling Syriza party were too cunning to phrase the referendum question as “in or out of the euro”, a wording that would have permitted Greeks to understand that what was really at stake was their modern European identity. As a result, the outcome does not resolve the fundamental conundrum: that most Greeks want to stay in the eurozone but detest the austerity that has bled them dry since 2010.
[Emphasis added.]

Tony Barber, “No vote widens fissures in society knocked senseless by slump“, Financial Times, 6 July 2015 (metered paywall).