Jacob Christensen

Compared to the latest strange twists in the Euro-crisis, Rufus T. Firefly almost comes out as a competent and reliable leader. So, can we find any political logic in all of this?

First, experts tell us that the Euro-zone problems caused by Greece and Italy are different by those caused by Spain, Portugal and Ireland. The economic crises in the latter three countries are basically due to the effects of the EMU creating low rates not only in Germany but in the entire Euro-zone. Low rates mean cheap money and that has meant property bubbles. Once they burst, the economies of Spain, Portugal and Ireland were thrown into a deep recession.

So the question here is if creating a European monetary zone was a good idea if the national economies are not (or cannot be brought) in tune.

Greece and Italy are different creatures altogether. Here the fundamental problem is that the countries lack good economic governance. This is putting it mildly: We could also say that the political economy in both countries rest on clientilism and that neither country has a functioning tax system. There are degrees of Hell here: Greece is probably in a worse state than Italy while the Italian economy for obvious reasons are much larger than the Greek.

So the question here is why the two countries were admitted to the EMU in the first place? Political prestige – both on the side of the EU and the individual countries – has a lot to do with it.

Second, what do you do when you find yourself in quicksand up to the neck? The issue here is that the creation of the EMU and the adoption of the Euro in PolSci lingo is path dependent: Getting in may be difficult and expensive but the costs of leaving may be almost prohibitive both politically and economically. Which goes a long way towards explaining why European leaders face some major problems in finding a solution to the Greek (and Italian) mess.

But wait: It gets worse. Remember that political leaders operate on multiple levels – the European and the national. So long as political leaders can and will deliver on the agreements made on the European level, negotiations are complicated. European leaders know and accept that agreements may be due to national votes (or in some cases referendums) and this is more or less elegantly taken into account at negotiations.

But what happens when a national political leader throws a bomb and announces a referendum after an agreement has been reached? This is changing the rules during the middle of the game and more than likely to make other EU leaders angry, disillusioned or both. There may – theoretically – be a rationale on the national level: Papandreou is effectively facing a vote of no-confidence in parliament and could react by taking his case to the nation.

The problem here is that referendums are usually extra veto points, especially when we are dealing with measures that are unpopular with the electorate (We will leave aside that the Greek economic policy has been unsustainable in the long run: The Greek electorate are not exactly used to having to relate to responsible economic policies). If – as we expect – he loses the referendum, he will be dead politically and the hope of Greece gaining a stronger position at a renegotiation (which I would suspect will motivate a lot of Greek voters) looks rather unrealistic. And even if he wins the referendum, Papandreou is likely to be met with suspicion in Brussels – after all, he was the man who changed the rules of the game during the previous match. How can we be sure that he will not engage in another round of match-fixing the next time?

And in the meantime, time flies and if there is anything the Eurozone does not have then it is time. If Papandreou sticks with his plan, we should expect speculative attacks against the Euro – and to be perfectly honest, I would also expect rounds of shenanigans from the Italian government. All stuff designed to undermine economic stability in the Eurozone.

Very bad news indeed. We may need the Marx Brothers for relief.

Interpreting statistics is always tricky but today’s numbers for the Danish economy in the first quarter of 2011 were probably not what the government had hoped for. The seasonally adjusted GDP per capita shows a slight fall compared with 2010. The fall is not extraordinary if we look at developments over a 20-year period but obviously the government could have hoped for a stabilisation of Danish economy – especially as Europe and the US show a slightly different pattern. It could be a blip which will be reversed in the next quarters or it could point to continued slow growth.

The numbers for employment (the curve shows the number of employed) gives reason for more concern as Denmark sees a continued decline in employment from the climax in late 2008. There are no signs of a recovery on the labour market.

Source: Statistics Denmark.

Prompted by an observation by a Twitter follower, I made some graphs using Statistics Denmark’s very useful databank.

First, the – seasonally corrected – share of unemployed (insured and non-insured):

That Denmark received a nasty wake-up call in the second half of 2008 is pretty obvious. The rise in unemployment stopped in mid-2010 but gross unemployment is still at a high rate. (Gross unemployment includes people in different kinds of activation measures)

Next: Unemployment in different age-groups.

25-29-year-olds have been hit hard by the economic crisis (and economic historians and economists have pointed to a generational effect here: Graduates and skilled workers who get a bad start to their adult working-lives may pay a penalty for the rest of their careers). It is not quite 1987-1994, but it should give cause for concern. And politically speaking, the 25-29-year-olds may prove to be a difficult group for the government to appeal to in the coming election campaign.

Finally, a breakdown of data after geography:

Bornholm is a small region which is heavily dependent on tourism. More interesting is Western Zealand, Funen and Norther Jutland which qualify as the weakest regional labour markets in Denmark. And despite all talk about Copenhagen as the economic motor of Denmark, the City of Copenhagen still has a high level of unemployment while the commuter areas of Northern and Eastern Zealand have low unemployment. (Actually, Western Zealand is also a large commuting area these days – something which only underlines the weakness of the local labour market)

No, no real link between the two. Or perhaps?

Matthew Yglesias considers the outcome of Chrysler filing for Chapter 11:

Looks like Chrysler will wind up in a pre-packaged bankruptcy before becoming a firm jointly owned by Fiat, the United Auto Workers, the United States of America, and Canada.

Robert Reich is skeptical of the idea of bailing out US companies, because – well, what is a US company these days:

Besides, as I’ve said before, the “American auto industry” shouldn’t be defined as auto companies whose headquarters are in the United States. The true “American auto industry” is Americans who make automobiles. At the rate the Big Three are shrinking even as they’re bailed out, foreign automakers with American plants may soon employ more Americans than the Big Three do. The Big Three have gone global anyway.

And just by accident those links appeared along with a link to a lecture at the LSE about Friedrich Engels. You know, the guy with the really big beard who played Chris Lowe to Marx’ Neil Tennant.

With capitalism in crisis, the shadow of Karl Marx is looming large. But what about the co-author of The Communist Manifesto? In advance of a major new biography, The Frock-Coated Communist, Tristram Hunt explores the life and work, the personal contradictions and ideological breakthroughs, of Friedrich Engels. Cotton-lord and communist, Engels was the man who turned Marxism into a political force – and whose vision was then brutally betrayed in the 20th century. Tristram Hunt is an historian, broadcaster and a lecturer in British history at Queen Mary, University of London.

Right-click on the link to download the lecture.

Update: Tristram Hunt also has a column on Mr. E for May Day.

Willem Buiter:

[China] badly needs an unfunded pay-as-you go social security retirement scheme to boost consumption by the old. China’s fiscal position is such that the country could introduce the benefit (pension) part of the social security scheme for a number of years without having the social security tax in place!

The rest of his blog post isn’t for the faint-hearted. And that’s without mentioning the swine flu.

Barry Eichengreen and Kevin O’Rourke looks at the present situation compared with the post-1929 crisis:

To summarize: the world is currently undergoing an economic shock every bit as big as the Great Depression shock of 1929-30. Looking just at the US leads one to overlook how alarming the current situation is even in comparison with 1929-30.

The good news, of course, is that the policy response is very different. The question now is whether that policy response will work.

The response of Danish voters? In short: Let’s repeat the mistakes of the 1930s.

There are explanations for this self-defeating position, but it still means that politicians have a big task ahead of them if they don’t want to wreck the global economy.

As the FAZ notes:

[Die schwedische Krona] durchbrach ihren langjährigen Aufwärtstrend gegen den Dollar und wertete inzwischen 35 Prozent gegen den Dollar ab. Inzwischen sind 9,05 Kronen nötig, um einen Dollar erwerben zu können. Noch im April des vergangenen Jahres waren dafür gerade einmal 5,85 Kronen nötig gewesen.

[...]

Gegen den Euro ist der Kurs in den vergangenen Monaten von 9,28 auf zuletzt 11,47 Kronen je Euro gestiegen.

According to the Danish Central Bank, the SEK – DKK exchange rate today is 65,06 DKK – 100 SEK. I’m just noting this because I still have stocks and bonds locked in Swedish pesetas, so besides the crash on the stock exchanges, my savings are also taking a hit due to the massive effective devaluation of the Krona. The good news is that a) I – unlike a lot of Danes – have received my wages for February, and b) my Danish bank account is 4000 DKK up compared with last month (yes, I know that I should allow for the 28 days of February compared with 3 days in January), even though the HR office forgot that I’m working 100% and not 80%.

Holy cows! The SEK was between 0,80 and 0,75 DKK during my time in Sweden. Needless to say, we Danes are heading east in huge numbers.

Yahoo Currency Converter.

“This sector” is the US auto industry and the warning comes from James Hamilton.

What are the chances of Volvo PV and SAAB Automobile surviving 2010? And what about the long-term effects on Swedish manufacturing? Västra Götaland is likely to be in for a very bumpy ride in the coming years.

The latest VoxEU column by Willem Buiter and Anne Sibert on the rotten state of Iceland:

Early in 2008 we were asked by the Icelandic bank Landsbanki (now in receivership) to write a paper on the causes of the financial problems faced by Iceland and its banks, and on the available policy options for the banks and the Icelandic authorities.

The OUCH! part comes at the end:

Iceland’s circumstances were extreme, but there are other countries suffering from milder versions of the same fundamental inconsistent – or at least vulnerable – quartet:

(1) A small country with (2) a large, internationally exposed banking sector, (3) its own currency and (4) limited fiscal spare capacity relative to the possible size of the banking sector solvency gap.

Countries that come to mind are:

* Switzerland,
* Denmark,
* Sweden

and even to some extent the UK, although it is significantly larger than the others and has a minor-league legacy reserve currency.