Atlantic Review - International Economics

FT: "Speed of European Response Leaves US Trailing"

nospam@example.com (Joerg Wolf) — Fri, 03 Oct 2008 10:22:00 +0200

I thought I would never read a headline like this in an Anglo-American newspaper. It was the headline for the "European View" column by Paul Betts in the Financial Times on Tuesday:

In the past 48 hours, various European countries have scrambled to put together bail-out packages for troubled financial institutions in Germany, the UK, France, Belgium, Ireland and Iceland. And while this is by no means the end of the story, it has demonstrated that the European authorities and individual national governments can move very quickly to try to stem a growing crisis of confidence in the European financial system.

In the past 10 days, the conventional wisdom was that Europe would never be in a position to act as swiftly to rescue its financial industry with a comprehensive plan such as Washington's $700bn (?498bn) troubled asset relief programme. Yet the plan has yet to be approved, with all the political modifications demanded by US lawmakers. No evidence has so far emerged that Europe will need to orchestrate a similar plan of such magnitude.

Of course, as Peer Steinbrück, Germany's finance minister, has noted, Europe is not so much seeing a little light at the end of the tunnel but rather the headlights of an oncoming train.

Financial Crisis: "Trans-Atlantic Sniping"

nospam@example.com (Joerg Wolf) — Sat, 27 Sep 2008 11:52:27 +0200

President Bush cited an influx of foreign money into the United States as one of the root causes of the tight credit market and urged European and Asian policy makers to follow the US plan of large-scale bailouts of the financial system. This call was generally rebuffed. German Finance Minister Peer Steinbrück described the financial market crisis as "above all an American problem."

Steinbrück predicted that "the US will lose its status as the superpower of the world financial system." Instead European banks and sovereign wealth funds will have an increased role in a multipolar financial world.

The New York Times concludes from these transatlantic disagreements that "Trans-Atlantic sniping over the global financial crisis intensified." Wow, that's harsh words. Real snipers kill. If someone just disagrees with you, he does not kill you. You just gets a slight dent in your bloated ego. Apparently some people can't stand having folks on the other side of the Atlantic disagree with them. Pride goes before a fall (Hochmut kommt vor dem Fall) and sometimes even after the fall. Well, perhaps the NYT is just trying to sell more copies and more ads...

The article is discussed on my other site "Atlantic Community." We also present several expert opinions on the bailout plan and reform of the financial system and ask our members and all of you: How to Respond to the Financial Crisis?

Financial Turmoil: Merkel Blames the United States and Britain

nospam@example.com (Joerg Wolf) — Sat, 20 Sep 2008 18:36:11 +0200

DW World:

Chancellor Angela Merkel has revived Germany's campaign of a year ago for global regulation of financial markets to prevent another crash like the past week's. [She] criticized the US and British governments for obstructing Germany's efforts in the first half of 2007 to bring greater transparency to the markets.

Yep, it is "We told you so"-time again.

• Germany's state-owned KfW lender is called the 'dumbest' bank for transferring 300 million euro to Lehman Brothers on the same day it declared insolvency, reports the IHT.

• SuperFrenchie concludes from the US response to the market turmoil: The United Socialist States of America (USSA)

US Dollar Rallies

nospam@example.com (Joerg Wolf) — Sun, 10 Aug 2008 09:13:34 +0200

Telegraph:

The psychology of global markets has shifted hugely over recent days as it becomes clear that Europe, Australasia and parts of Asia are sliding into recession. The US dollar has launched its best rally in half a decade, reflecting a recognition that half the world is in even worse shape than the US. In fact, America is the only G7 country to eke out modest growth this summer.

India on Doha

nospam@example.com (Nanne Zwagerman) — Thu, 07 Aug 2008 13:41:09 +0200

The new Atlantic Media Network blog has a very useful press roundup on the Doha round collapse, focused on the question who 'did it in'. They quote papers from both sides of the Atlantic on the matter.

The coverage alternates between blaming India and China (India foremost) and choosing the safe, neutral storyline by claiming that they are 'asserting' their newfound power.

One perspective that certainly needs to be added is that of India itself. Here are three stories from the Times of India:

'Do As the Americans Did' is a leader by Arun Maira that focuses on India's need to build up its economy and the associated need for protection. The United States focus as a case study in this matter, as its strongest period of growth (1890-1910) happened at a time when it was protectionist, and Europe was more liberal. Maira claims that 'healthy' free trade must be the end point of an evolutionary process.

'Save Doha' is the paper's editorial. It comes down to the point that India's and China's demands for the threshold for a safeguard mechanism were too protectionist, but that the EU and US could have found a middle point for a compromise. "The world", the paper concludes "can't wait till Indian agriculture is ready to face global competition, of course. But neither can the world ignore India and China's concerns."

'Playing to the Gallery' is another leader, by Narendar Pani. He compares the single-issue focus of the current commerce minister with that of the former, Murasoli Maran, who categorically opposed labour standards at the WTO ministerial in Seattle, 1999. According to Pani, this has led to the BBC arbiting over labour standards instead of the WTO, as western firms are mindful of public pressure. The obstruction back then has turned out to have mainly symbolic consequences and Pani expects similar results from India's current obstruction.

Is the Doha Round No Longer Relevant?

nospam@example.com (Nanne Zwagerman) — Mon, 28 Jul 2008 12:44:41 +0200

A short commentary on the Doha Round of WTO negotiations:

The talks being held at this time in Geneva are not making enough progress. The latest compromise text that had been drawn up by Pascal Lamy is opposed by India, and the U.S. is also blaming China for going back on earlier promises, as the Associated Press reports.

[Tuesday Update: The talks have now collapsed in what the Telegraph calls a 'blow to globalisation']

One fascinating element of the talks is the emergence of a core group of 7 WTO members who consulted closely on the new deal. Here's an excerpt from the Bridges daily updates:

Seven of the world's largest trading powers emerged front and centre in the struggling talks at the WTO on Wednesday, meeting all afternoon and late into the night in an attempt to find a way out of the impasse in governments' push for breakthrough deals on agricultural and industrial goods trade. [...]

Australia, Brazil, China, the EU, India, Japan, and the US were discussing non-agricultural market access (NAMA), agricultural market access, and trade-distorting farm subsidies, a source said.

This provides a useful mirror for the current balance of power in the world in the trade arena. The absence of Canada is notable. Keep in mind that Russia is not (yet) a WTO member.

Continue reading "Is the Doha Round No Longer Relevant?"

Germany's Federal Minister of Economics Visited Baghdad

nospam@example.com (Joerg Wolf) — Mon, 21 Jul 2008 20:54:43 +0200

Do we have to apologize to The Wall Street Journal for not covering this?

The most remarkable aspect about the German economics minister's trip to Baghdad Saturday [July 13, 2008] was how unremarkable it was. The "surprise visit" by Michael Glos to Iraq, which only last year was deemed irrevocably lost, hardly made the front pages even in his own country. "The security situation has improved," Mr. Glos said, "and democracy is progressing." [...] "I have numerous companies with me," Mr. Glos told a German radio station from Baghdad. "They are practically the advance party for others who will hopefully soon come to Iraq to participate especially in the privatization."

How to Make the G8 More Effective?

nospam@example.com (Joerg Wolf) — Sat, 19 Jul 2008 13:20:00 +0200

The G8 used to be criticized as an evil capitalist group of powerful countries that determines world politics and economics without legitimacy like the UN. There has not been much of such criticism at this year's summit in Japan.

This time, lack of effectiveness was the most common criticism. The G8 is increasingly seen as a Western talking shop that is doing photo-ops with rock stars and third world leaders, but fails to act on its past promises on development aid and is increasingly incapable to shape international economic affairs.

Besides, Senators McCain and Obama recently had a dispute as to whether Russia should be excluded from the Group of Eight.

Consequently, there have been several reform proposals to make the G8 more effective:

L20: upgrade the existing G20
G13: G8 + the "outreach 5"
G9: leading market democracies
G3: US, EU & China
G3: US, EU & Japan

The Atlantic Community explains these proposals and asks: "Should the G8 be enlarged to include new major international players or contracted to ensure effectiveness?" If you register on Atlantic Community, then you can vote on the above options.

The Impact of the Oil Shock: Trade Networks Shrink

nospam@example.com (Editors) — Mon, 07 Jul 2008 07:10:00 +0200

This is a guest blog post by Donald Stadler, an American living and working in London:

Washington Post economics columnist Robert Samuelson recently wrote a piece about the trade impact of the oil shock on the US, quoting economist Jeffrey Rubin of CIBC World Markets, who predicts that oil will go to $225 a barrel/$7 a gallon before this is finished.

Apart from the obvious impact on per-liter fuel prices in Europe (I have heard of diesel prices as high as £1.99 a litre in the UK), there are some interesting side effects on world trade.

The bottom line is that shipping cheap manufactures thousands of miles make much less sense than it has this past decade. Since 2000 the cost of shipping a 40 foot shipping container from East Asia to the US has gone from $3000 to $8000, and if oil prices go to $200 a barrel this will go to $15,000 per container.

Some production will be brought back to the US and Europe, and other production will go from Asia to nearby low-wage countries like Mexico (for the US) and Poland/Bulgaria/Romania, and perhaps Russia and Turkey (for the EU). This may be good news for factory workers in Italy and in depressed areas of Germany and the UK.

Continue reading "The Impact of the Oil Shock: Trade Networks Shrink"

High Demand Or Rather An Oil Bubble?

nospam@example.com (Sonja Bonin) — Fri, 23 May 2008 17:02:11 +0200

A tip from our reader Don has led us to an article in the London Times. In it, economics columnist Anatole Kaletsky argues that the astronomical oil price is not caused by economic fundamentals like supply and demand,

but rather the product of a typical financial boom-bust cycle, which could be deflated - especially with some help from sensible political action - as quickly as it built up. [...]
In the late stages of financial bubbles, it is quite normal for prices to become completely detached from economic fundamentals. House prices in Florida and Spain kept rising even after property developers built far more homes than they could possibly sell. The same thing happened in credit markets: mortgage securities kept rising even while banks created “special purpose vehicles” to acquire vast “inventories” of bonds for which there were no genuine buyers - and dozens of similar examples can be cited from the bubbles in internet stocks and Japan. Similarly, the International Gold Council reported this week that gold demand for commercial uses and investment fell 17 per cent in January, just as the gold price surged through $1,000 for the first time.
Now consider the situation today in oil markets: the Gulf, according to Mr Rothman, is crammed with supertankers chartered by oil-producing governments to hold the inventories of oil they are pumping but cannot sell. That physical oil is in excess supply at today's prices does not mean that producers are somehow cheating by storing their oil in tankers or keeping it in the ground. All it suggests is that there are few buyers for physical oil cargoes at today's prices, but there are plenty of buyers for pieces of paper linked to the price of oil next month and next year. This situation is exactly analogous to the bubble in credit markets a year ago, where nobody wanted to buy sub-prime mortgage bonds, but there was plenty of demand for “financial derivatives” that allowed investors to bet on the future value of these bonds.

The article quotes a book by George Soros which is available on Amazon.de or Amazon.com.

Europe Lacks a Risk Culture

nospam@example.com (Joerg Wolf) — Fri, 09 May 2008 20:24:38 +0200

InformationWeek:

London may be eclipsing Wall Street as the world financial capital, and the euro is trouncing the dollar, but Europe has yet to prove the equal of the United States in technological innovation.

Author and engineer Hervé Lebret thinks he knows why. "There is a risk culture that's missing. We don't have an environment to be more ambitious and risk-taking." His book, Start-Up: What We Can Learn from Silicon Valley, argues that Europeans need to recognize the value of risk -- and failure. "In the U.S. it's not that people like failure, but it's seen as a way to learn," he says. "In Europe, if you fail you aren't given a second chance to try again. So it's viewed very differently."

Sounds familar. See "Germany's Innovation Dilemma" on Atlantic Community.

German Banks and the US Mortgage Crisis

nospam@example.com (Joerg Wolf) — Tue, 06 May 2008 08:43:00 +0200

Deutsche Bank got a lot of negative press coverage in the United States. David Vickrey, who used to work on corporate finance transactions at Deutsche Bank Securiites and Barclays Capital, has written extensively in his blog Dialog International about the involvement of German banks in the US mortgage crisis. Here are a couple of posts in chronological order (latest on top):

Karma and Bad Times for Deutsche Bank in America (April 27, 2008)

Greed and Fear: US Subprime Crisis Takes Its Toll in Germany (April 9, 2008)

The Subprime Crisis Leads to Mad Mergers in Germany (April 1, 2008)

German Government: Please Sue Deutsche Bank (March 10, 2008)

Deutsche Bank: America's Foreclosure King (January 24, 2008)

What Schadenfreude?

nospam@example.com (Joerg Wolf) — Fri, 02 May 2008 08:52:00 +0200

German Bundesbankers expect a gradual slowdown of the economy as a result of weaker global growth, higher oil prices and a stronger euro. They are not concerned about any direct fallout from the US mortgage crisis, writes Ralph Atkins in the Financial Times.

The article's headline is "Schadenfreude stirs in resilient Germany," but Atkins only claims once that "across Germany, a sense of schadenfreude has even started to emerge." His only indication is that "Peer Steinbrück, finance minister, has long maintained that a run on a bank, as seen with Northern Rock in the UK, would not happen in Germany." Well, many Germans are scared about their jobs and worry about poverty in their later retirement. Many are so concerned about the financial markets that they do not invest their savings, but keep them on a bank account with low interest, which is bad for retirement plans and for the economy. That's why the finance minister tries to reassure the public. That's not Schadenfreude. Perhaps the folks at the Financial Times felt compelled to use a German word in their headline. Next time write "Blitzkrieg" or "Kindergarten" or address people as "Herr Steinbrück" rather than "Mr. Steinbrück" (a weird habit of some).

Otherwise the article is good and describes what has been going on:

Germany's recent economic history has been the mirror image of the US's. Instead of enjoying a consumer and housing boom over the past decade, Germany has experienced a period of painful adjustment to the costs of reunification in the early 1990s and the effects of globalisation on a high-wage economy. By the time the global financial crisis struck, extensive private-sector restructuring had restored cost competitiveness, while consumers had retrenched financially - with house prices flat or even falling. The result was an economy driven not by consumer spending but by its powerful export motor, with industry producing high-quality goods that appear relatively insensitive to the higher exchange rate.

Atkins ends with an FT typical conclusion:

But that is not the same as saying Germany has the better long-term prospects. Whereas the US's financial system and more flexible labour markets appear to booms and busts, Germany's economic growth rates traditionally remain steadier - but lower.

I believe "steadier but lower" is the very much preferred model in economic (and political) matters over here.

European Biofuel Producers Attack US Subsidies

nospam@example.com (Joerg Wolf) — Sun, 27 Apr 2008 00:47:12 +0200

From the Wall Street Journal's Environmental Capital blog:

Europe's biofuel industry has long complained about U.S. subsidies. Friday, it took its case to the European Union but the chances of winning a victory look slim. EU biodiesel producers have been simmering about the $1 per gallon tax credit American biodiesel producers get. EU producers say that distorts the market and, in the words of the biodiesel trade group, created a severe injury to the EU biodiesel industry.

The Guardian is a bit more optimistic regarding the European Biodiesel Board's case.

The First Big Book On The Credit Crunch

nospam@example.com (Sonja Bonin) — Wed, 12 Mar 2008 16:35:07 +0100

According to the Economist, Charles Morris is the first to really assess the current crisis of the financial market in his book The Trillion Dollar Meltdown:

He describes three trends converging to create the bubble: By 2006 the growing trend towards deregulation had pushed three-quarters of all lending outside the purview of regulators. Securitisation created a serious agency problem, leaving loan originators, who were paid up-front, with no incentive to avoid bad credits and every reason to piggyback inappropriate products onto good ones [...] Banks and rating agencies were gripped by the pretence that all finance can be calculated by risk-modelling eggheads. It did not help that many investors blindly accepted the rating agencies as a kind of “financial Supreme Court”.

In addition, the "Federal Reserve fuelled the housing boom by sharply cutting the cost of short-term money. Mr Greenspan ignored warnings about subprime excess, while eagerly championing 'new paradigms', from hybrid mortgages to credit derivatives." As for the solution:

He offers a raft of suggestions: originators should retain the riskiest portion of securitised loans; prime brokers should stop lending to hedge funds that fail to disclose their balance sheets; trading of credit derivatives should be brought onto exchanges for the sake of safety, even if this raises costs; and some version of the old Glass-Steagall act, which separated commercial banking and capital-markets activities, should be re-introduced. Ultimately, he argues, after a quarter-century of “market dogmatism” it is time for the regulatory pendulum to swing the other way.