More on China and Commodities


The inflation in commodity prices caused by China growth continues. Remember we in the OECD are also dependent on the terms of trade:

Xinhua state information agency reported that China has maintained a "basic balance" between supply and demand for major agricultural products since the late 1990s. Yet, national grain production is down for the fifth consecutive year, say experts. Inflation and decreasing grain reserves are worrisome.

The explosive demand for commodities in China has caused prices to rocket also at global level. Imports of grains and oil-seeds have doubled compared with last year. National grain production is down again for the fifth year consecutively. This year in particular, yields of all three major crops; wheat, rice and corn have dropped. Total national grain output is expected to fall below 450 million tons. If the trend does not change, it could result in a shortage by 2005, said the China daily on Thursday.

Inflationary trends have been recorded for grain, cooking oil, meat, eggs and fodder. The price hikes, which began in Beijing, Nanjing and Zhengzhou, quickly spread throughout the country. Purchase prices for wheat went up by 40 to 80 Yuan (US$ 4.80 - 9.70) per ton in major wheat production areas such as Henan Province. Prices for corn rose by 80 Yuan in northern China, while prices for rapeseed and rice increased by 20 and 10 per cent, respectively, in Anhui Province.

Farmers, who have been suffering sluggish income growth over the years, welcome higher prices. Still, that has its implications on the national agricultural market. The growing demand for grain stimulates imports from abroad that has other implications on the nation's trade balance.

Experts are expecting grain shortages. "China has been using its grain reserves to balance the market for the last four years," said Wan Baorui, vice-chairman of the Agriculture and Rural Affairs Committee of the National People's Congress. "The reserves can be used for, at most, another two years."

Since 2000, annual national grain demand has stood at 480-490 million tons, 25-35 million tons more than the annual output. Fundamental changes have caused that the national grain reserve have diminished. Not only natural disasters but also shrinking acreage slowed down the long years of oversupply. Moreover, rapid urbanization has been eating up grain fields.

In addition to the swift expansion of towns and cities, many regional governments have reserved large parcels of land for "economic development zones" meant to attract foreign investment, but many such zones simply lie empty due to a lack of infrastructure or adequate local investment, said the China Daily.

The low grain prices in the past have led to farmers' declining enthusiasm for planting it. Heavily burdened by various taxes and charges, most farmers would rather grow more profitable crops, such as peanuts and cotton, or migrate to the cities to look for better earnings. The latest government statistics indicate that 80.7 million rural labourers were working in cities at the end of September.

Professor Li noted that total global output of the three major crops this year would come to 2.03 billion tons, down 63.3 million tons from last year, marking the sixth consecutive year that the figure has dropped. The world grain market, meanwhile, experienced its biggest price fluctuations in seven years, said the China Daily.

Due to population growth, increasing consumerism and economic growth the grain demand is rising. Although, China must make every effort to guarantee that at least 90 per cent of demand is met by domestic supply, as grain is a product involving national security, that target is not reached so far.

To realize this target, Han Jun, an agriculture researcher with the State Council Development and Research Centre said, national grain acreage must be kept stable, at around 1.07 billion hectares. Han also suggested the central government abolish agricultural taxes in five years while taking strict measures to curb the occupation of farmland for industrial development and other purposes.
Source: China Biz
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This Was Not So Unexpected


Not for me at least. Germany is struggling, there is no easy and rapid cure. Equally one month thigs go up, and the next they come down. Or this month they go down and next month they go up. What you shouldn't expect is a clear and pronounced upward march.

German industrial production unexpectedly fell for a second month in September, held back by the effect of summer holidays, a government report showed, a sign the way out of recession for Europe's largest economy may not be smooth. Production at factories, construction sites, utilities and mines dropped 1.2 percent after declining 3.7 percent in August, the Economics and Labor Ministry in Berlin said in a faxed statement. The median forecast of 31 economists surveyed by Bloomberg News was for a monthly gain of 2 percent.

"There's a lot of talk about hope that we have bottomed out,'' said Robert Koehler, chief executive officer of SGL Carbon AG, the world's largest maker of carbon and graphite products. ``I'm not sure if we'll really see top-line growth worldwide.'' At least six reports in the past four weeks, from rising factory orders to falling unemployment, indicated the economy is reviving amid an acceleration in U.S. growth. Still, companies' third-quarter earnings reports have been mixed. SGL Carbon will cut more jobs in coming years and may shed one of its four units after forecasting a loss for this year and little- changed sales in 2004. Bayerische Motoren-Werke AG, the No. 2 luxury car maker, raised profit for the first time this year last quarter. The Economics and Labor Ministry, which said the summer holidays curbed production in September, said it expects industrial output figures for that month to be revised ``markedly'' higher.

Bundesbank President Ernst Welteke estimates Germany's $2.3 trillion economy grew 0.2 percent last quarter. The third-quarter gross domestic product reports is scheduled to be released by the Federal Statistics Office in Wiesbaden on Nov. 13. The euro, which has appreciated more than 13 percent against the U.S. dollar in the past year, may have hurt production. The single currency rose to a record of $1.1933 in late May. It traded at $1.1427 at 11:51 p.m. in Frankfurt. "When the euro rises, we lose sales,'' said Rudolf Winning, chief financial officer of Zapf Creation AG, Europe's largest maker of dolls. ``A rate of $1.10 to $1.15 reflects the fundamentals of the economy.'' The company last week cut in half its estimate for full-year operating profit partly on the euro. In a two-month comparison, which smoothes out short-term swings, German industrial production fell 2.9 percent in the eight weeks through September from the previous two-month period, the ministry said.
Source: Bloomberg
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Trichet Backs the Pact


Jean Claude Trichet the new governor of the ECB is trying to convince the media that 'things have changed'. Hopefully he is right. In order to try and set the stage for his term of office, he is quite forethright about his views on the Stability Pact. (Anyone who doesn't visit Fistful regularly could try this post and this one).

Jean Claude Trichet, the European Central Bank's new president, on Thursday warned eurozone countries that the rules underpinning the single currency were "now at a critical point". In a polished performance at his first press conference since taking over from Wim Duisenberg, Mr Trichet said the stability and growth pact provided "an appropriate framework" for ensuring fiscal discipline. He said the budget deficit limit of 3 per cent was "the anchor" for the pact. "It must not be placed in doubt," he said. His remarks came as the ECB held its primary interest rate steady at 2 per cent and signalled rates would remain on hold for some months amid signs that the eurozone economy was finally beginning to pick up speed.

The Bank of England on Thursday raised UK interest rates for the first time in almost four years, making it the first of the world's four leading central banks to tighten its policy since 2000. But Mr Trichet gave no indication that the ECB was close to following suit. The central bank was now more confident about the upturn in the eurozone economy, he said, and "anticipated some stickiness" in inflation rates over coming months because of higher food and oil prices and increases in indirect taxes. But he insisted that price pressures would eventually moderate. Economists said the bank appeared to have adopted neutral "wait-and-see" stance on monetary policy. "A reduction is possible . . . but looks increasingly remote," said Lorenzo Codogno of Bank of America. Mr Trichet also stopped short of giving any signal the ECB was looking to tighten monetary policy in the near term.
Source: Financial Times
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Trichet: A Man For All Seasons?

Yesterday was a reasonably interesting day over at the MS Gloabl Forum. Eric Chaney welcomes the arrival of Jean-Claude Trichet, and in so doing makes an interesting point. The demographic changes may make for a more deflationary atmosphere. When I started saying this publicly over a year ago I felt myself to be a very lonely voice indeed. Every day now I notice more and more people who are thinking about the argument. This can only be to the good. On another angle, I do hope he's right, and that Trichet is 'pragmatic'. What a breath of fresh air that would be!

All that is good, I am often told, but since Trichet got his medals as an inflexible inflation fighter and a true believer of the virtues of a strong currency, will he be able to cope with the challenges of a deflationist world? Although nobody knows if deflation will be a permanent feature of the next eight years, the risk is still there, as the abnormally low level of inflation in the US eloquently reminds us. As far as Europe is concerned, secular demographic trends may increase the risk of deflation: After all, inflation or deflation reflect social preferences, to some extent, and the growing number of pensioners in Europe might tilt the social balance in favor of deflation. This is why a central banker must be open minded and pragmatic. I think that Jean-Claude Trichet has proved he has these qualities in two particular circumstances. First, instead of abandoning ERM rules after the 1992 crisis, he convinced his partners to make the system flexible enough to cope with future speculative tensions, by adopting a large fluctuation band. This proved successful in 1995. Second, in 1998, when financial markets thought that euro interest rates would be some kind of weighted average of member countries’ past rates, Trichet, well aware of the dangerously low level of inflation in core countries (starting with France and Germany) and convinced that averaging Italian and German rates would dilute the credibility of the euro, argued to set the initial level of interest rates at the lowest possible level (3%), despite strong opposition from some countries. This is the man who did not hesitate to push French rates to 7%, then fought to cut them to 3%; simply, times were different. I would call that pragmatism.
Source: Morgan Stanley GEF
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Germany: Whither the Structural Deficit?


Following up on the last post, just how big is big in the case of the German deficit. Morgan Stanley's Elga Bartsch has a stab at making a 'best guess' (BTW the problem with giving Brussels giving short term stimulus now for structural reductions later is that if the problem deteriorates rather than improves with time, there really will be a push-comes-to-shove situation in two or three years time.)

Even though we have to wait for the fresh tax estimates to be released in order to finalise our assessment, our best guesstimate for the general government deficit for this year now stands at 4.2% of GDP. Previously, we had expected the Maastricht deficit to amount to 3.9% of GDP this year. According to government estimates, the federal budget deficit alone likely overshot by more than 100%, forcing the finance minister to submit a supplementary budget for 2003 in order to get a net borrowing requirement of €42.3 bn approved by parliament. So far, Herr Eichel only has a mandate to run a deficit of €18.9 bn this year. Both the supplementary budget for this year and the official government estimate for the Maastricht deficit, which will likely show a 4%-plus reading, are largely water under the bridge though.

What is of more importance, however, is the outlook for next year’s budget deficit. This is because according to the Excessive Deficit Procedure, in principle at least, next year would be the year in which the German general government deficit should be back below 3%. In our view, however, it is highly unlikely that the German government will be able to reduce the deficit that drastically. Instead, we estimate the deficit to be on the order of 3.6% of GDP next year. This constitutes a slightly more optimistic view than the one held recently (see Three Cheers for the Chancellor, 22 July 2003), reflecting a more drastic consolidation of subsidies and other tax breaks as well as serious efforts to contain health care and pension spending. But this might still not be enough to prevent the EU Commission from proposing additional consolidation measures to the German government. As in the French case, it seems that the Commission would be willing to allow Germany to stay above the 3% deficit ceiling for another year in exchange for a reduction in the structural budget deficit of 1% of GDP. At the moment, however, the government has delivered half of that.
Source: Morgnan Stanley GEF
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Killing the Stability Pact with Kindness?

There's an interesting tussle going on in Brussels at the moment, involving arguments which essetially involve long-term credibility. Short term this may find a not-too-difficult 'compromise' solution, but long-term I think it is an indication of problems to come:

Germany and France were on Monday accused of trying to "kill" Europe's fiscal rules, as EU finance ministers met amid mounting political tension in the 12-country eurozone.They claim to have found a legal loophole that might allow them to escape the threat of sanctions under the EU's stability and growth pact. But their manoeuvre has enraged the European Commission and some smaller countries, which claim it would destroy the pact's already weakened credibility.

Karl-Heinz Grasser, Austrian finance minister, urged his EU colleagues to stand up to pressure from France and Germany, the eurozone's two most powerful economies.Speaking ahead of Monday night's eurogroup meeting of 12 single currency finance ministers, Mr Grasser said both countries must face the consequences of breaching the pact's deficit rules for three years in a row. "We all are obliged for our own credibility and the credibility of the euro to find a way out," he told Reuters news agency. "The way out cannot be by killing the stability pact and putting one pillar of our monetary union at stake."

The 12 members of the single currency are at the point where they must decide if they are serious about enforcing the pact, designed to enforce fiscal discipline across the eurozone.They must decide this month - either on Tuesday or more likely at their next meeting on November 25 - whether to support the European Commission's recommendation to start proceedings against France for its third breach of the pact in 2004.It is the first time the eurogroup ministers have reached this point. Once passed, Brussels assumes powers to direct Paris on how to correct its deficit, and will require Paris to submit progress reports; ultimately fines can be imposed if it fails to comply.

Germany, which will also breach the pact's 3 per cent deficit rule for a third time in 2004, is about to find itself in the same position as France.But rather than face the humiliation of having to submit to economic direction from Brussels, Germany and France are now trying to draw the stability pact's remaining teeth.The two countries, who believe they have support from Italy, Luxembourg and Portugal, want the Commission to suspend enforcement proceedings and adopt a voluntary approach instead.But the Commission insisted that such a step would be illegal under the EU treaty, and that it would not agree to such a retreat. "The Commission has done its job under the treaty, and now it is up to ministers to take up their responsibilities," said Pedro Solbes, EU monetary affairs commissioner.
Source: Financial Times
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Sending the Jobs Back


As I have said before, many people in Europe seem very complacent about this situation. Seeing the problem as one of call centres and the like, they feel vaguely re-assured that linguistic difficulties will mean that they are protected. But let me suggest another possibility. Having this backroom-office at its disposal, UK companies may become slightly more competitive than some of their continental rivals. Then to overcome the UK language difficulty vis-a-vis Europe may recruit young educated French, German, Dutch people into the UK to facilitate export into the EU. It's just a thought.

If you live in a rich nation in the English-speaking world, and most of your work involves a computer or a telephone, don't expect to have a job in five years' time. Almost every large company which relies upon remote transactions is starting to dump its workers and hire a cheaper labour force overseas. All those concerned about economic justice and the distribution of wealth at home should despair. All those concerned about global justice and the distribution of wealth around the world should rejoice. As we are, by and large, the same people, we have a problem.

Britain's industrialisation was secured by destroying the manufacturing capacity of India. In 1699, the British government banned the import of woollen cloth from Ireland, and in 1700 the import of cotton cloth (or calico) from India. Both products were forbidden because they were superior to our own. As the industrial revolution was built on the textiles industry, we could not have achieved our global economic dominance if we had let them in. Throughout the late 18th and 19th centuries, India was forced to supply raw materials to Britain's manufacturers, but forbidden to produce competing finished products. We are rich because the Indians are poor.

Now the jobs we stole 200 years ago are returning to India. Last week the Guardian revealed that the National Rail Enquiries service is likely to move to Bangalore, in south-west India. Two days later, the HSBC bank announced that it was cutting 4,000 customer service jobs in Britain and shifting them to Asia. BT, British Airways, Lloyds TSB, Prudential, Standard Chartered, Norwich Union, Bupa, Reuters, Abbey National and Powergen have already begun to move their call centres to India. The British workers at the end of the line are approaching the end of the line.

There is a profound historical irony here. Indian workers can outcompete British workers today because Britain smashed their ability to compete in the past. Having destroyed India's own industries, the East India Company and the colonial authorities obliged its people to speak our language, adopt our working practices and surrender their labour to multinational corporations. Workers in call centres in Germany and Holland are less vulnerable than ours, as Germany and Holland were less successful colonists, with the result that fewer people in the poor world now speak their languages.

The impact on British workers will be devastating. Service jobs of the kind now being exported were supposed to make up for the loss of employment in the manufacturing industries which disappeared overseas in the 1980s and 1990s. The government handed out grants for cybersweatshops in places whose industrial workforce had been crushed by the closure of mines, shipyards and steelworks. But the companies running the call centres appear to have been testing their systems at government expense before exporting them somewhere cheaper.

It is not hard to see why most of them have chosen India. The wages of workers in the service and technology industries there are roughly one tenth of those of workers in the same sectors over here. Standards of education are high, and almost all educated Indians speak English. While British workers will take call-centre jobs only when they have no choice, Indian workers see them as glamorous. One technical support company in Bangalore recently advertised 800 jobs. It received 87,000 applications. British call centres moving to India can choose the most charming, patient, biddable, intelligent workers the labour market has to offer.

There is nothing new about multinational corporations forcing workers in distant parts of the world to undercut each other. What is new is the extent to which the labour forces of the poor nations are also beginning to threaten the security of our middle classes. In August, the Evening Standard came across some leaked consultancy documents suggesting that at least 30,000 executive positions in Britain's finance and insurance industries are likely to be transferred to India over the next five years. In the same month, the American consultants Forrester Research predicted that the US will lose 3.3 million white-collar jobs between now and 2015. Most of them will go to India.

Just over half of these are menial "back office" jobs, such as taking calls and typing up data. The rest belong to managers, accountants, underwriters, computer programmers, IT consultants, biotechnicians, architects, designers and corporate lawyers. For the first time in history, the professional classes of Britain and America find themselves in direct competition with the professional classes of another nation. Over the next few years, we can expect to encounter a lot less enthusiasm for free trade and globalisation in the parties and the newspapers which represent them. Free trade is fine, as long as it affects someone else's job.

So a historical restitution appears to be taking place, as hundreds of thousands of jobs, many of them good ones, flee to the economy we ruined. Low as the wages for these positions are by comparison to our own, they are generally much higher than those offered by domestic employers. A new middle class is developing in cities previously dominated by caste. Its spending will stimulate the economy, which in turn may lead to higher wages and improved conditions of employment. The corporations, of course, will then flee to a cheaper country, but not before they have left some of their money behind. According to the consultants Nasscom and McKinsey, India - which is always short of foreign exchange - will be earning some $17bn a year from outsourced jobs by 2008.

On the other hand, the most vulnerable communities in Britain are losing the jobs which were supposed to have rescued them. Almost two-thirds of call-centre workers are women, so the disadvantaged sex will slip still further behind. As jobs become less secure, multinational corporations will be able to demand ever harsher conditions of employment in an industry which is already one of the most exploitative in Britain. At the same time, extending the practices of their colonial predecessors, they will oblige their Indian workers to mimic not only our working methods, but also our accents, our tastes and our enthusiasms, in order to persuade customers in Britain that they are talking to someone down the road. The most marketable skill in India today is the ability to abandon your identity and slip into someone else's.

So is the flight to India a good thing or a bad thing? The only reasonable answer is both. The benefits do not cancel out the harm. They exist, and have to exist, side by side. This is the reality of the world order Britain established, and which is sustained by the heirs to the East India Company, the multinational corporations. The corporations operate only in their own interests. Sometimes these interests will coincide with those of a disadvantaged group, but only by disadvantaging another.

For centuries, we have permitted ourselves to ignore the extent to which our welfare is dependent on the denial of other people's. We begin to understand the implications of the system we have created only when it turns against ourselves.
Source: The Guardian
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German Economy Forecasts


The latest round of forecasts on the German economy strike a mildly optimistic note - with the notable exception of the employment front. Of course these are only guess-timates, and they do seem to be regularly subjected to downward revisions. Apart from the detail that the highpoint seems to be the extra days worked from the a-typical distribution of public holidays, the curious thing is how everyone seems to be looking for growth elsewhere to solve their problems:

The German economy, the biggest in the eurozone, looks set to stage a recovery -- albeit a modest one -- next year after stagnating this year, the six leading economic think-tanks in Germany predicted. In their widely watched autumn report, published Tuesday, the institutes forecast that gross domestic product (GDP) in Germany would "stagnate this year and only expand moderately next year. In 2004, real GDP will grow by 1.7 percent."


The six institutes are Berlin-based DIW, Ifo in Munich, HWWA in Hamburg, RWI in Essen, IfW in Kiel and IWH in Halle. And the new forecasts represent a downward revision from the institutes' previous report published in the spring, when the think-tanks had been pencilling in growth of 0.5 percent this year and a pick-up to 1.8 percent next year. Nevertheless, Economy and Labour Minister Wolfgang Clement insisted that the institutes' latest report provided "proof that the German economy has been gathering momentum since the summer". "Already in the second half of the year, we've noted a slight revival in the German economy," Clement said in a statement.


"And next year, recovery will get on a broader footing, thanks to positive global economic developments, an increased number of working days" and the anticipated positive effects of the planned tax cuts, the minister continued. The German government, which takes into account the six institutes' forecasts when drawing up its own prognoses, is scheduled to publish its new updated growth forecasts on Thursday. So far, the government has been predicting growth of 0.75 percent for the current year and 2.0 percent next year, but recent press reports have suggested that those forecasts would now be cut to zero and 1.75 percent, respectively.


Despite the first signs of an upturn, the six institutes remained cautious in their autumn report. While "there have been the first signs of an improvement since the midddle of the year, as the recovery we had predicted back in the spring gradually materialises," there could still be no talk of an "upswing", the institutes insisted. Economic activity next year would benefit from the substantially higher number of working days compared with 2003, with many public holidays in 2004 falling on the weekend, the report said. "In the first six months of 2004, economic developments will be accelerate largely as a result of increased domestic demand," as investment and household consumption receive a boost from the tax cuts scheduled to come into effect at the start of next year. Then, in the latter part of the year, growth would be driven increasingly by foreign demand, the institutes predicted.

Nevertheless, the modest economic recovery would not be sufficient to bring down the high level of unemployment in Germany, the institutes said. They predicted that the total number of people out of work in Germany would average 4.448 million in 2004 compared with an anticipated 4.393 million this year. Such figures would also continue to undermine Germany's public finances. Indeed, the German public deficit, which already amounted to 3.5 percent of GDP and was therefore in breach of the 3.0-percent limit laid down in the European Union (news - web sites)'s Stability and Growth Pact, would rise to around 4.0 percent of GDP this year, the institutes predicted. And despite Berlin's pledge to bring the deficit ratio back below 3.0 percent next year, the planned tax cuts and welfare and pension reforms meant the government would only be able to scale back the public deficit to 3.5 percent of GDP in 2004. Inflation in Germany was likely to remain firmly under control, averaging 1.0 percent in 2003 and 1.3 percent in 2004, the institutes predicted.
Source: AFP, Yahoo News
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Eurozone Companies Will 'Have to Learn to Cope'


ECB board member Matti Vanhala comments on the rising euro. Euroland companies will have to learn to live with it he says. It seems attempts at structural reform may be pursued more vigourously by the central bank here than it has been in Japan. If that is the case then we could be in for a real 'battle of the titans' between the bank, the Commission and the National Governments.

European Central Bank board member Matti Vanhala said companies ``will have to cope with'' the euro's appreciation against the dollar and that exchange rates aren't the ``main risk'' to an economic recovery. Nokia Oyj, the world's largest handset maker, said last week sales may drop this quarter following the euro's 20 percent appreciation against the dollar in the past year. PSA Peugeot Citroen, Europe's No. 2 automaker, on Monday cut its full-year profit forecast, partly because of the stronger currency. "The euro's appreciation is perceived by the corporate sector as a burden,'' Vanhala, 57, said in an interview in Helsinki. ``But on the other hand, the kind of movements we have seen from the euro should be regarded as perfectly normal in a global set-up where the exchange rate is a safety valve with an element of flexibility.'' The comments from Vanhala, who is the head of Finland's central bank, suggest the ECB is less concerned about the euro's increase than executives and politicians. German Chancellor Gerhard Schroeder said last month the euro is one of the ``dangers'' to growth. "I don't think the euro is the main risk'' to growth, Vanhala said. ``Much more important is whether confidence in economic policies can return.''

The euro climbed after Vanhala's comments and bought $1.1702 at 8:56 a.m. in Frankfurt, 2 percent below its May record, from $1.1667 late yesterday. The euro's ascent contributed to a contraction in the $8 trillion economy of the 12 nations sharing the euro in the second quarter by choking exports.

Vanhala's comments chime with recent remarks from ECB colleagues. ECB President Wim Duisenberg, who retires this month, said Oct. 13 that the stronger euro won't change the bank's growth forecasts and Bank of Portugal Vitor Constancio said late yesterday the shift in currency values doesn't ``fundamentally'' alter the outlook for euro region exports. Vanhala and other ECB council members are instead putting pressure on governments to adhere to budget deficit rules designed to protect the euro and pass laws making their economies more attractive to investors and employers. Duisenberg in July said that governments can ``no longer hide'' behind the ECB ``cover up their failure to enact the structural reforms that are so urgently required.''

Interest rates across the euro region are ``appropriate,'' Vanhala said, echoing comments by other ECB policy makers such as Duisenberg and Chief Economist Otmar Issing. Focus Money today reported Issing as saying that rates are low enough to help spur ``much stronger growth.'' The ECB confirmed the comments. Europe's growth prospects may be curtailed in coming years if governments don't seek to meet challenges posed by countries in Eastern Europe or Asia where labor and production costs are cheaper, Vanhala said. "It may be that our assumptions about growth potential are too optimistic,'' said Vanhala, whose office is adorned by oversized brandy and wine glasses from the Czech Republic. The ECB defines ``potential growth'' as between 2 percent and 2.5 percent. Labor laws in some European countries help ``create a rather rigidly moving economy'' that's less attractive to investors than economies such as China, said Vanhala. Euro region unemployment touched a 3 1/2 year high of 8.8 percent in July and may rise further this year, the European Union forecasts. Vanhala also cited the need to link together financial markets and tackle price differentials across the region.

German proposals to cut jobless benefits, approved last week by the country's parliament, won't be enough to revive growth prospects for Europe's largest economy, said Vanhala. "It won't change the nature and workings of the economy,'' he said. ``I'm sure no one in the political arena in Germany would claim that it goes anywhere near far enough.'' Vanhala is still forecasting a recovery across the euro region, though evidence from recent economic reports isn't enough to ``fire the imagination,'' he said. While German business confidence climbed last month to the highest in 2 1/2 years, executives' assessment of current conditions slipped. "There will be a sort of wobbly turn for the better'' next year that will be helped by a recovery in the U.S., said Vanhala, who expects growth in the euro region of about 1.5 percent in 2004. ``The likelihood is that we will get a modest, gradual rise in the GDP growth rate.'' Inflation will slow below the bank's 2 percent limit next year, even though higher oil prices represent a ``risk,'' said Vanhala. Crude yesterday traded at $28.63 per barrel.
Source: Bloomberg
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German Pension Reform on the Move

The FT describes this as a dangerous gamble, I think it is the first gambit in what is bound to be a fairly long and protracted process. The key question is what is Germany's trend growth? Most calculations are based on the idea that recent economic growth in Germany has been sluggish due to the impact of re-unification in the ninetees. This may be part of the story. But my own opinion is that there is more to it, and that nobody knows what 'German trend growth' really is. Perhaps we are about to see. One way or another the outcome will have a significant impact on the viability of public finaces there in the years to come.

Chancellor Gerhard Schröder took a dangerous gamble on Sunday by ordering what amounted to the first cut in pension benefits in post-war German history.The cut was one of five emergency measures agreed at a meeting of cabinet ministers and government coalition leaders to plug an estimated €8bn (£5.6bn, $9.3bn) shortfall in the state pay-as-you-go pension schemes next year without raising contributions. Mr Schröder sided with the majority of his cabinet, leaders of the Green party, the ruling coalition's junior partner, and business, all of whom had warned a rise in pension contributions would smother any hope of an economic recovery next year. But the move could alienate segments of the chancellor's Social Democratic party and complicate his efforts to push Agenda 2010, his ambitious package of structural reforms, through parliament before the end of the year.

"This was one of the most difficult discussions, and these were among the most painful decisions our government has had to make," Mr Schröder said after the five-hour meeting. Sunday's compromise shows how a lethargic economy has been blocking the chancellor's path to reforming the welfare state and boosting competitiveness. His reforms are designed to promote employment by lowering what are among the world's highest non-wage labour costs. Pension contributions, which at 19.5 per cent of the gross wage form a substantial part of these costs, would have risen to 20.3 per cent next year without corrective measures.

From next year, pensioners will have to pay full contributions into an old-age care scheme, part of which had hitherto been covered by the pension funds. Since a planned pension benefit increase due in the middle of next year would also be cancelled, Mr Schröder admitted this amounted to a benefit cut. In addition, the pension funds' legal reserves will be reduced from 50 to 20 per cent of one month's total benefit payments and new pensioners will now be paid at the end of the month. The state's annual subsidy to the pension funds next year will be €1bn higher than provided for in a bill adopted by the lower house of parliament last Friday. However, Mr Schröder said additional savings totalling €1bn would be required of all ministries in the 2004 budget.

This should prevent a further rise in Germany's budget deficit next year and help save the face of Hans Eichel, finance minister, after he threatened to resign if the subsidy was raised. The cabinet also endorsed longer-term measures for a reform of the pension system. These will be put to parliament before the end of the year, where they will require the backing of the opposition-dominated upper chamber. The chancellor said the recommendation by a government-appointed commission to raise the legal retirement age from 65 to 67 would not be considered until 2010. But the actual retirement age would have to rise from the current 60 to 63 by 2008. Separately, the government said it would make investing in private pension schemes easier and more tax efficient.
Source: Financial Times
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Eastern Europe's Informal Economy

There is definitely more than a hint of 'positive thinking' in the air. Whether this is unduly biased towards spin remains to be seen. Today two East European economists - Matthew Olex-Szczytowski and Jacek Rostowskitry - try to put a positive tint on the EU accession countries. They have a point. The situation is probably better than many imagine. At the same time it is important to differentiate. We can identify a number of 'groups' in the pack: Poland, Hungary, Czech Republic - Latvia, Estonia, Lithuania - Bulgaria, Rumania - the Ukraine, Russia. Of course there are others I have not mentioned, who do not fall easily into any identifable group. But if you look along the list, from left to right, the feeling you have is one of from bad to worse. All these countries suffer from major structural demographic breaks which make it difficult for them to sustain mid-term economic growth. Obviously those to the left of the list can benefit from migration from those more to the right. Thus there situation might be considered marginally better. Also short-term they seem likely to attract more FDI as the part of the manufacturing sector which can migrates from the Mediterranean fringe (Spain, Greece, Portugal).

But then look at the downside. The element which our two economists identify as a plus: the informal economy (incidentally how do they know it is significantly bigger in the East? We simply have no figures on Spain, Greece and Portugal. According to figures Marcello sent me from the Argentinian government, nearly half a million Latin Americans entered Spain on temporary visas in 2002 alone - this is based on information they extracted from the Spanish government - and few left.). Now the one thing I can tell you from my own research is: work in the informal sector is not high-wage, in fact quite the contrary. And employment in the informal sector is growing in an attempt to remain competitive by keeping salaries and costs down. And today, once you're hooked on this, it's hard to get off. In fact Spain in the 1990's grew rapidly in part because the PSOE economics minister Carlos Solchaga offered a favourable amnesty for firms to 'regularise'. This lead to a spurt of growth which was in fact an incorporation of already existing economic activity into the formal economy (incidentally he was last seen heading for Argentina just before the crash, in an attempt to do the same down there). That is, it was 'statistical growth' - although of course the Exchequer benefited enormously. In the last three years this situation has deteriorated markedly. Faced with a combination of pressure from competition from global outsourcing and from internal inflation in Spain, Spanish manufacturing has increasingly responded by 'informalising', particularly in the hard-pressed textile sector. One example, there are an estimated 10,000 undocumented Chinese workers in Barcelona dormitory towns Mataro and Santa Coloma. How do I know? Because I have a Chinese friend who is an interpreter, and every week the Policia Nacional contact her from the courts to go and interpret for an undocumented Chinese person who has had a brush-in with the law. Usually these are petty offences, domestic arguments, drunk in the streert etc etc, they are never pursued as problems about the lack of the legal right to be in Spain. What I am trying to say is that if the situation in Eastern Europe is as bad as these economists say (and my Bulgarian research suggests it is, although I have no quantitative data), I doubt this is going to change easily - simple cost economics says no - and the pension schemes are never going to be able to operate effectively. So watch out!

There is an unspoken compact underlying the expansion of the European Union. At least, that is what many in the eight central European accession countries believe. They have gone through wrenching reforms at a speed largely determined by the EU and are having to import the acquis communautaire - the EU's body of law, widely seen as an impediment to growth - en bloc. Now as they join and their "riskiness" falls they expect a massive flow of foreign direct investment in compensation.


Perhaps the most serious flaw in the data is the massive under-reporting of gross domestic product, largely because of failure to account for shadow economic activity. Since communist times this has been of a different order of magnitude in central Europe than in the old EU, and is widespread in the fast-growing new entrepreneurial sectors. The phenomenon has been accentuated in recent years by the growth in regulations and social charges. Friedrich Schneider, an economist at Linz University, has estimated that the shadow economy in the eight in 2000-01 averaged 28 per cent of official GDP, up from 23 per cent in the early 1990s. The percentages ranged from "only" 18 per cent in the Czech Republic and Slovakia to 40 per cent in Latvia. It follows that the region today generates well over €100bn ($116bn) in unrecorded output - a shadow Czech Republic plus Slovakia.

Labour markets are also healthier than the headlines imply. Prof Schneider found that the proportion of the working age population involved in shadow output ranged from 13 per cent in the Czech Republic to 33 per cent in Estonia. As with the GDP figures, these estimates are confirmed by local studies. In Poland, a survey last year for the Private Employers' Confederation put the proportion of workers in the shadow economy at 19 per cent.

These doctrines of doom reflect (and infect) mass opinion. In a recent Polish survey, 68 per cent of respondents thought life had become much worse since communism fell. Yet official real consumer expenditure per capita has risen by 55 per cent in the past 10 years (the EU managed 26 per cent).

In the Czech Republic, where irrational pessimism is dubbed blba nalada or "bad mood", about 30 per cent feel they are now poor. However, in recent years fewer than 5 per cent of Czech households have been below the official poverty line. By standard measures such as the Gini coefficient, the Czech Republic, Hungary, Poland and Slovakia, with coefficients in the 20s, are much more "equal" than, say, Italy or the UK, with coefficients of about 35.
Source: Financial Times
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Italy: Doomed to Work?


The phrase comes from Morgan Stanley's Vicenzo Gizzo, not from me. Here he gives the first part of an extremely informative breakdown and analysis of the Italian pensions reform.

On October 3, the Italian government passed a draft for the reform of the pension system. This document will now be submitted to Parliament and amend a previous proposal that had been sitting in the Senate for months. We believe this is the most serious structural reform effort in several years. The unions have called a half-day general strike for October 24, but the chances of the reform succeeding are high, in our view...........

The new reform implies a two-stage process. In the first stage, from 2004 until 2007, the employees who intend to stay at work for longer, beyond the age of 57, will obtain a 32.7% tax-free bonus, equivalent to the standard social contribution rate currently paid by employers and employees. The beneficiaries will have the option of cashing in the bonus, depositing it in their social security accounts, or channelling it into private schemes. In a second stage, from 2008 onwards, the number of years that will give access to seniority pensions will be raised from 35 to 40. Up to the year 2015, pensions for those employees who still want to retire after 35 years of contribution will be heavily penalized.

This is not the first attempt to reform Italy’s generous pension system. It is probably worth reminding our readers that up until the early nineties Italian civil servants could retire with 20 years of contributions and receive a pension equivalent to the compensation of their last year at work. Two major restructuring efforts were delivered during the Nineties. In 1992, Giuliano Amato raised the legal retirement age from 60 to 65 for men and from 55 to 60 for women. That reform lengthened the reference period on which benefits were computed from five to ten years, raised the minimum number of years of contribution to 35, reduced the disparities between private and public sector employees, and replaced wage with consumer price indexation mechanisms. A second significant step was taken by Lamberto Dini in 1995. That reform linked pension benefits to a stream of work-life contributions rather than a reference compensation period.

The impact of the two reforms is clear. Data from the Department of Welfare (Nucleo di Valutazione della Spesa Previdenziale, Gli Andamenti Finanziari del Sistema Pensionistico Obbligatorio, June 2002) show that the annual growth rate of pension spending came down from 12.2% in 1990-92 to 7.3% in 1993-97, and dropped further to 3.4% in 1998-2001. Yet over the same period, pension spending rose in nominal terms from around €70 billion in 1989 to nearly €160 billion in 2001, i.e., from around 11.5% to almost 14% of GDP, at an annual average growth rate of 7.3%. Today, at 13.8%, Italy still shows one of the highest pension expenditure-to-GDP ratios among the industrial countries. The transition from defined benefits to defined contributions took place in an extremely gradual fashion. The defined-contribution system was fully effective only for the new entrants into the labour market in 1996. It was applied on a proportional basis, pro-rata, for those who had been at work for less than 18 years. In contrast, the reform kept the status quo for those who had worked for more than 18 years. It will take until the year 2035 for Italy to shift to a full defined-contribution system.

The baseline scenario assumes an increase in life expectancy of around five years from here until 2050, a slight rise in the fertility rate from the current 1.3 to just above 1.4, and net immigration inflows of around 120,000 a year. The model rests on an eight-percentage-point rise in the activity rate to 72% mainly on a higher female participation rate and a five point drop in the unemployment rate to 4.5% by the end of the reference period. This progress limits the drop in the employment rate to only 14 percentage points over the next 50 years, or 0.25% a year, despite a 28% fall in the working age population. A strong productivity growth rate of 1.7% keeps real GDP on track for an average growth rate of 1.5%. While labour force participation has gone up in the recent past at a pace of more than one-half a percentage point a year, this progress has led to a marked deceleration in productivity growth rates. The combination of higher participation rates and strong productivity, as implied by the RGS model, is an aggressive assumption, in our view, and may hide risks of an even more unpleasant spending dynamic.

Yet, even under such favorable assumptions, the pension expenditure-to-GDP ratio, after some initial stability, goes up rapidly from the current 13.8% to a peak of 16% around 2035 before easing back to 13.6% in 2050. The ratio of pension expenditure to GDP could be conveniently decomposed into the product of a ‘legal-institutional ratio’, given by the average pension to the productivity per employee; and a ‘demographic ratio’, given by the number of pensions to the number of employees. This second ratio could be further broken down into (1) a dependency ratio -- the over-65 population to the working-age population, aged 20-65; (2) an eligibility ratio -- the number of pensions to the over-65 population; and (3) the inverse of the participation rate, which we label here the employment ratio.

In the 2006-15 decade, the dynamic in pension expenditure to GDP is likely to be almost entirely driven by demographics, as the baby-boom generation kicks in. Note that benefits paid during this period are still mainly linked to average earnings, due to the long transition phase imposed by the Dini reform. In other words, expenditure goes up with the number of pensions, while the average pension fails to decelerate quickly enough to offset the boom in retirements. When we move towards the middle of the forecasting period, pension schemes become less expensive as a larger number of employees whose pension is computed on defined contribution retires. This trend extends well into the final part of the reference period when it is also coupled with end of the impact of the baby boomers.
Source: Vincenzo Guzzo, Morgan Stanley Global Economic Forum
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Eurozone Inflation Numbers


The latest Eurozone inflation numbers are out. Francisco writes from Italy top say that the numbers are still causing controversy there (the euro rounding effect). Unfortunately I can't find a good link in English. I think for the tendency we need to get through the winter to see where we are going. There is still a lot of fluctuation on energy and food prices:

The eurozone harmonised index of consumer prices rose by 2.1 percent in September on an annual basis, unchanged from August and in line with analysts' forecasts, the EU statistics office Eurostat said Thursday. Across the full 15-member European Union, inflation decreased to 1.9 percent in September from 2.0 percent in August, Eurostat said. The eurozone rate was slightly higher than the European Central Bank's medium-term target of 2.0 percent. On a one-month basis, prices increased by 0.3 percent in the eurozone, pulled higher by clothing costs, which rose by 4.3 percent. Food prices were up by 0.6 percent but those for hotels and restaurants decreased by 0.9 percent, and energy costs were stable on the month. The highest inflation was seen in Ireland at 3.8 percent, Portugalpercent), Spain and Italy (3.0 percent each). Germany has the lowest rate at 1.1 percent, while Finland posted 1.2 percent and Austria 1.3 percent.
Source: EU Business
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German Exports Show Strong Growth


This is obviously interesting and significant, even if I'm not sure how to interpret it yet. Clearly Germany is benefiting from economic growth in the EU candidate countries, China and possibly elsewhere in the developing world.

The German economy has for the first time in 11 years recorded the world's fastest export growth, damping fears that the euro's rise could curb export growth. In August German export figures beat US ones by more than 7 per cent. According to the OECD and the International Monetary Fund, German export growth was $65bn higher than the global market export leader, the US. Japan ranked third. The successful turn brings Germany's exporters back to export growth levels in the 1980's which later deteriorated after German reunification.

Germany's export growth upsurge could lead to a re-evaluation of the causes of Germany's economic crisis. The lack of competitiveness of German products abroad has long been seen as the key problem. At the start of the 1990s, Germany's market competitiveness suffered from high wage contracts and the sharp appreciation of the D-Mark after reunification. "Today, we don't have this problem any more," said Harald Jörg, economist at Dresdner Bank. The strong German performance comes as last week the euro climbed to near-record highs against the dollar, triggering fears that the currency's persistent rise could curb German export growth and derail the eurozone's fragile upturn.

The rally, which took the euro briefly above $1.18, came amid mounting concern over the scale of the US current account deficit. The upward trend of German exports in the first half of this year has, however, been strengthened by the surge of the euro. The appreciation of the euro automatically leads to a higher value for European exports in dollar terms. A stronger euro was thought to damp export growth, especially in Germany which slipped into recession in the first half of this year, as the currency surged.

According to experts Germany's comeback can be attributed to favourable cost development since the mid 1990s. "Germany has gained a significant leap through wage restraint," said Mr Jörg. According to Elga Bartsch, analyst at Morgan Stanley, Germany has profited from strong presence on export markets in eastern and central Europe which have grown amid the global upturn since 2001. Fabien Wehnert at the BDI, the German industry federation, said that trade with the new EU member states had risen by about 6 per cent.

Last year Germany was the market leader in machinery exports with 19 per cent global market share before the US with 14.9 per cent followed by Japan with 12.2 per cent."US production suffers from weaker quality while Japan concentrates on mass production. That's why Germany will continue as the leader on the market offering high-quality production," said Olaf Wortmann, at the VDMA, the association of German machinery makers.
Source: Financial Times
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Germany's Fragile 'Recovery'


As if to demonstrate that things concerning Germany are far from clear, this afternoon's news shows that confidence is not as high as expected. This extremely complicated picture is going to need time to see really what is happening.

A key measure of German economic confidence has fallen for the first time in 10 months. The ZEW index, which polls analysts and financial market participants for their views of how the economy will develop, ticked down to 60.3 points from the September level of 60.9. Economists said the surging euro was the main reason for the fall. "The stronger euro has made people question their level of confidence about the upswing," said Ralph Solveen at Commerzbank in Frankfurt. ZEW, the Mannheim-based research institute that compiles the index, also blamed confused economic data for the change in sentiment. "The latest economic data for Germany is incoherent. On the one hand, industrial production fell dramatically in August, yet contract volumes started growing again." Until the October slip, the ZEW index had been climbing since it bottomed at close to zero at the end of last year. Economists are now geared up for the results of the Ifo index, due later this month, which is seen as a more important measure of business confidence because it polls companies themselves. "If that falls, too, that would really be bad news," said Mr Solveen. Until now, both confidence indices have remained blindly bullish this year, despite worsening underlying economic data.
Source: Financial Times
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At the same time ECB council member Ernst Welteke has said that the German economy emerged out of recession in the third quarter:

European Central Bank council member Ernst Welteke said the German economy, Europe's largest, emerged from its second recession in two years in the third quarter. Gross domestic product expanded about 0.2 percent compared with the second quarter, after the economy contracted in the first half, Welteke said in an interview with Bloomberg News, the first senior German official to give a quarterly estimate. "We will now see the recovery, even if it's a moderate one,'' said Welteke, who heads Germany's Bundesbank. A German revival means the $8 trillion economy of the dozen euro nations may also resume growth after shrinking in the second quarter. The French economy, Europe's third-largest, probably expanded 0.3 percent in the three months through September, speeding up to 0.5 percent this quarter, the Bank of France said today.

Germany's recovery may not be smooth. Investor confidence slipped in October, snapping the longest period of straight gains in a decade. An index measuring investors' economic growth expectations fell to 60.3 from 60.9 in September, said the ZEW Center for European Economic Research in Mannheim today. Germany's DAX Index was 15.92 points lower today at 3522.47 points at 12:07 p.m. in Frankfurt. The benchmark has surged 60 percent since touching a seven-year low in March. Germany's economy will continue a ``fragile'' revival in 2004, as exports increase, companies boost investment and consumer spending rises, the BDB banking association, whose 248 members includes Deutsche Bank AG and Commerzbank AG, said today.
Source: Bloomberg
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Meantime, part of the backdrop to whjat happens next will undoubtedly be decided in the political arena:

Germany is preparing for an unprecedented amount of legislative activity in the remainder of this year. What is likely to be the largest number of legislative initiatives in post-World War II history clearly reflects the government’s ambitions to push through with substantial labour market and welfare reforms (see also: Three Cheers to the Chancellor, July 22, 2003). Political observers are counting down to what is widely seen as a red-letter day on this Friday, October 17, when the lower house of parliament, the Bundestag, will debate and vote on several important reform proposals. These proposals include introducing further labour market reforms, pulling forward income tax cuts worth €15.6 billion to 2004 and overhauling the so-called trade tax, a quasi tax of around 14-16% on corporate profits charged by local municipalities. In my opinion, the Bundestag’s vote this Friday will merely mark the start of what should become a red-hot autumn in German politics. If Chancellor Schroeder’s push for reform fails, I believe we could see a major power struggle within the both government’s and the opposition’s rank and file. Independent of the political fallout from such a power struggle, the economic outcome will likely be even bolder structural reforms than the ones Chancellor Schroeder is pushing for at the moment.
Source: Elga Bartsch, Morgan Stanley Global Economic Forum
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You're Off the Hook

I've just posted on this over at fistful. The French are to be given an extra year to get their fiscal act together. This is more a sign of impotence than a seal of approval. In the end I agree with this approach, there is really nothing - except ridicule - to be gained from imposing a symobolic fine. But the point is that this should not be necessary. Everything here seems to be calculated. But still Austria, the Netherlands and Finland don't seem too happy. So how fine is the calculation? How often can you take advantage of the impotence of the other before a limit is reached? I have no answer to this, but I know the answer is out there somewhere. I guess we'd better all just hope - although I'm not personally too convinced - that the EU Commission growth provisions are fulfilled, and that we aren't going to see an even worse re-run of this next year.

France is set to be given an extra year to comply with the EU's budget rules, after Francis Mer, finance minister, indicated he will make extra efforts to trim his country's record budget deficit. A majority of European finance ministers now admit there is nothing they can do to stop President Jacques Chirac's government from breaking the EU's stability and growth pact for a third successive year in 2004.

Diplomats yesterday con ceded that France will have to be given until 2005 to comply with the rules, but they still expect Mr Mer to offer something in return. Paris will escape fines potentially worth billions of euros. French officials expect Mr Mer to make his peace offering next month, agreeing to European Commission requests to cut further France's underlying deficit and to make additional structural reforms. The modest concessions will be a belated signal that France is conscious of its responsibilities to other eurozone countries to keep its deficit under control. But they do nothing to disguise the fact that the stability pact - once a feared instrument of fiscal discipline - has been exposed as largely toothless.

Diplomats said that Mr Mer gave a "conciliatory" presentation of his 2004 budget to his 11 fellow members of the eurogroup - the informal gathering of single currency finance ministers - over dinner in Luxembourg on Monday night. "A lot of member states had felt the French weren't taking it [the breach] seriously . . . but that's not the case anymore," said Charlie McCreevy, Irish finance minister. By yesterday it was clear that almost all the finance ministers were now resigned to a "flexible" interpretation of the pact in relation to France. Only Austria, the Netherlands and to a lesser extent Finland maintained a hard line, suggesting the Commission should apply the pact ruthlessly and press for sanctions against France if necessary. "The outcome of the dinner was that everyone agreed we must try to find a reasonable solution to this problem," a French government spokesman said.

Diplomats from other EU countries expect the Commission to propose this month that France tightens its structural deficit by about 1 per cent - slightly more than the 0.7 per cent currently proposed - and to make further economic and social reforms. They expect Mr Mer to comply with the request before the end of the year, although it will not be enough to bring the French deficit below the stability pact ceiling of 3 per cent of GDP. Mr Mer's tone, in sharp contrast to some bullishly nationalistic performances at past eurogroup meetings, has persuaded countries such as Spain and Belgium to adopt a softer approach towards France.

Hans Eichel, German finance minister, also welcomed the change of tone. "It is very satisfactory that France has clearly committed itself to the [EU budget rules], to the discussions and recommendations within Ecofin . . . and wants to do everything to stay within the framework," he said. Mr Eichel's own budget deficit is expected to exceed 3 per cent for a third successive year in 2004, but he has stayed out of the line of fire by making it clear that he would do his best to observe the rules.
Source: Financial Times
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EU Commission Predicts Relatively Jobless Recovery


The US isn't the only economy which may experience job creation problems during the year ahead.

More Europeans are likely to lose their jobs in the months ahead even though the economy is expected to recover, the European Union Commission warned Thursday. The EU's statistical office reported the euro-zone economy shrank by 0.1 percent in the second quarter due to slowing consumer spending and decreasing investments and exports. That decline follows two stagnant quarters in a row in the 12 euro-using countries, Eurostat said.

The European Commission issued new predictions for recovery, expecting flat to 0.4 percent growth in the third quarter and 0.2 percent to 0.6 percent growth in the fourth quarter. But it said more European workers are likely to lose their jobs despite the expected improvement. "There may not be much scope" for preventing lay-offs by cutting working hours, the EU said in its 2003 employment report, issued Thursday. It gave no firm predictions of jobless levels. Until now, layoffs in the bloc have been relatively modest, despite the economy's sluggishness. In the 15 EU members, unemployment stands at 8 percent, compared with 7.7 percent in August 2002.


Many economists attribute this to tough labor laws that make it more difficult for European employers to cut jobs than it is for their U.S. competitors. The Commission also pointed to increased availability of new types of job contracts. About 18 percent of European employees work part-time and 13 percent have temporary jobs. In the past few years, EU industries have cut working hours and produced less with the same number of workers, at the expense of productivity. But the Commission warns these techniques may no longer may be sustainable.


"For the EU as a whole there may not be much scope for containing the impact of the slowdown through further reductions in working hours. Also, the decline in productivity growth cannot continue unchecked for much longer," the report said. The second-quarter fall in gross domestic product was most pronounced in the Netherlands, which contracted 0.6 percent. France was down 0.3 percent, followed by Germany, Italy and Belgium, each with 0.1 percent declines. Spain had the highest growth rate at 0.7 percent, according to Eurostat. The statistical office cited slowing growth in household consumption and a drop in investments and exports. For the EU as a whole, including Britain, Denmark and Sweden, GDP was flat for the second quarter in a row.
Source: Yahoo News
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German Unemployment Improves


By rights I should be getting ready to don my 'sackcloth', all the pundits seem to buy the German recovery argument. These employment numbers are certainly better than expected. There is however the small question of how the reforms may be reducing the number of people entitled to benefit. At the end of the day, I fear we may still have a long hard winter out there in front of us.

Unemployment in Germany, Europe's largest economy, unexpectedly fell in September, stoking optimism that the country is pulling out of a recession in the first half. The number of people out of work dropped a seasonally adjusted 14,000 from August to 4.39 million, the Federal Labor Office said in Nuremberg. Economists surveyed by Bloomberg News had expected an increase of 7,000. The jobless rate fell to a seven-month low of 10.5 percent from 10.6 percent. German business confidence rose to the highest since April 2001 last month, the Ifo institute's survey showed. The benchmark DAX stock index has risen 17 percent this year as investors bet on a recovery. Manufacturers unexpectedly received more orders in August as export demand rose, a report on Tuesday showed. "The worst of the slump is definitely behind us now,'' said Klaus Hofer, head of personnel at B. Braun Melsungen AG, a chemical supplies company based north of Frankfurt, with 8,500 workers in Germany. "We still have a few vacancies to fill.'' Infineon Technologies AG, Europe's No. 2 chipmaker, is hiring 145 software engineers from Siemens AG's Information and Communication Mobile wireless communications unit to help expand its telecommunications and services offerings. Business confidence in September rose to the highest since April 2001, driven by future expectations, the Ifo economic institute said last month. Investor confidence gained for the ninth month in September, the longest period of back-to-back gains since 1993, the ZEW institute said.

The unemployment rate, adjusted for European Union standards, was unchanged at 9.4 percent. In August, that was the second highest rate in the dozen countries sharing the euro after Spain. The U.S. jobless rate was unchanged at 6.1 percent in September.

September's unemployment figures were helped by changes the government has made to curb the number of people eligible for benefits, the Federal Labor Office said in a statement.

To improve conditions for hiring, Schroeder has also converted job centers into temporary employment agencies and introduced funding for jobless who set up their own companies.

The Labor Office said 21,000 people without work have been moved into temporary employment this year while 62,000 jobless have set up their own business, subjecting their income to a 10 percent standard tax. Some German companies are hesitating to hire. Juergen Strube, supervisory board chairman of chemicals maker BASF AG yesterday said ``the recovery has not yet materialized.'' Juergen Hambrecht, the company's chief executive officer, told the Tagesspiegel newspaper on Sept. 29 he ``certainly'' won't add any jobs in Germany. The number of people out of work in western Germany, which accounts for more than 90 percent of national output, fell by a seasonally adjusted 11,000, while the number of people out of work in eastern Germany fell by 3,000, the Federal Labor Office said.
Source: Bloomberg
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Why Turkey Should Be Put on the EU Fast-track


While I welcome the entrance of the new East European members into the EU, I recognise that, given their serious demographic problem, this is more justified by the need to 'extend a helping hand' than by cñear self-interest. On the other hand Turkey represents a clear opportunity for the EU, an opportunity which should be given the priority it deserves. Morgan Stanley's Serhan Cevik explains why:

We have long argued that the EU accession represents the last stage of Turkey’s 200-year-old modernisation venture and could be the ultimate policy anchor for economic and institutional development. Having said that, we think the process is likely to take no less than a decade to complete and face numerous structural and political challenges.

Recent administrative reforms help to meet the Copenhagen criteria, at least on paper. The ratification of a comprehensive array of laws and constitutional amendments further aligns Turkey’s institutional structure with European standards. Although the so-called ‘harmonisation’ reforms are not entirely adequate to meet the Copenhagen criteria, they address the EU’s primary concerns and cover most of the major issues specified in the Accession Partnership. In our view, there is a good chance that reforms herald the end of the ‘statist’ governing philosophy that has barricaded Turkey’s economic and institutional development and the coming of a truly democratic society that would also lay the foundation for a more competitive market economy. Particularly, improving civil liberties and the demilitarisation of the political landscape are revolutionary moves that are likely to bring a favourable assessment by the European Commission. Of course, there is still a gap between reforms on paper and rigorous execution. Thus, the government needs to complete the remaining legal requirements and establish a record of implementation in the next 12-month period to leave no ambiguity behind that could be used by Europe’s populist politicians again in evaluating Turkey’s progress.............

Turkey is a big challenge for the EU given the financial burden of accepting it into membership. In addition to a wide income gap, the agrarian nature of the society is a limiting factor. Over 40% of the labour force is ‘employed’ in the agricultural sector that produces barely 14% of the country’s gross domestic product. Europeans also perceive Turkey’s growing (young) population as a threat in terms of labour mobility. Indeed, income discrepancies may potentially lead to a wave of Turkish immigration into Europe and entitle today’s Turkey to get up to 15% of the EU budget. However, we believe this is unlikely to happen for two reasons. First, Turkey’s accession process is highly likely to include a phased approach to labour mobility. Second, Turkey’s income growth would naturally limit immigration flows. Though we believe Turkey’s labour force, with an average age of 26, is a demographic opportunity for aging Europe, the EU is likely to opt for an accession process that minimises the amount of transfers from the EU budget to Turkey.............

Turkey is the least popular candidate by virtue of its size and ‘cultural’ differences. Even beyond Hungtingtonian arguments on socio-cultural issues, Turkey is placed in the heart of the ‘widening versus deepening’ debate in Europe. The first-wave accession countries and the EU are already arguing over the fiscal and monetary implications of further enlargement. The political climate in Europe has clearly shifted toward a more reluctant stance on inviting new countries to join the club. Europeans are aware of the fact that once the accession process starts, there is no turning back. However, Europe’s anxiety over economic and social costs of the Turkish membership is based on a static analysis, in our view. Under the auspices of the IMF and the World Bank, the Turkish economy is already evolving toward meeting the core European standards, and by the time Turkey would become an actual member, the country’s economic, social and political conditions are likely to be far from what their erratic nature suggests today.

In our view, Turkey is not a liability, but a pivotal state for Europe’s geopolitical interests. Some Europeans may fundamentally dislike power politics and therefore see no ‘strategic’ value in the Turkish membership. However, we think European leaders would eventually base the accession decision on long-term considerations (such as economic potential and geostrategic capabilities). Turkey offers unique strengths in the Balkans, the Caucus and the Middle East, which are important geopolitical zones for the EU’s security and defence policy, and is also a bridge between Europe and the energy-rich countries of Central Asia and a cultural link to the Islamic world. On the economic front, we believe Turkey’s continuing trade integration with Europe and strong growth potential that could increase its international trade volume to US$250 billion over the next decade would make it an economic powerhouse in the ‘new’ Europe.
Source: Morgan Stanley Global Economic Forum
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Duisenberg Gives the Dolllar a Helping Hand Down


Just when I thought he'd said his last word, he goes and opens his mouth again! Long term, what he says may be true, but I don't think it's particularly in Europe's interest for him to be saying it, and certainly not now. Also, someone please remind me: why is the geoplolitical situation so much more stable mow than it was back in March?

The US dollar continued its decline on Monday as European Central Bank chief Wim Duisenberg put his weight behind the trend.
In an interview with Spanish newspaper Expansion, Mr Duisenberg - who steps down at the beginning of November - said that the huge US budget deficit made further falls inevitable. Amid thin business on the Jewish holiday of Yom Kippur, traders took that to mean that the ECB would not step in to prevent the euro gaining yet more ground. The result was a 1.2% leap in the euro's value against the dollar to more than $1.17, with the pound sterling up 0.5% to $1.67. Adding to the downward pressure on the dollar was the political situation, as suicide bombings in Israel and Israel's retaliatory airstrikes against Syria ratcheted up the tension.

The dollar's slide has gathered pace over the past few weeks, as the traditional "strong dollar" stance of successive US administrations has been seen to weaken. The trend was set in stone after last month's meeting of G7 industrialised nations, which alluded to the need for "more flexible" currencies - code for a slide in the dollar. The US is particularly keen to see Asian currencies appreciate, a situation the Bank of Japan and the People's Bank of China are keen to avoid. Stronger than expected jobs data unveiled on Friday checked the dollar's fall for a while, but analysts said it was not enough to change the trend. In the meantime, some of the European finance ministers meeting in Germany may not be pleased. The French and German economies in particular are in trouble with soaring deficits and stagnant performance, and a stronger euro could harm export prospects.
Source: BBC News
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One Last Swipe for Good Luck


Well, while we're in the business of farewells, we shouldn't miss the opportunity to say goodbye to dear old Duisy. We shall miss him, especially his special talent for putting both of his feet in it simultaneously. Now he's saying that the foundations of economic and monetary union may be in danger. Of course I agree but for different reasons, structural ones associated with the very idea of the euro itself. On the other hand, I can't say I am exactly inspired by the imminent arrival of his replacement, but then, time will tell.

European Central Bank president Wim Duisenberg yesterday signed off his five-and-a-half year term with an attack on the eurozone countries that have failed to contain their budget deficits. He said the ECB had serious concerns about the situation and warned it could damage the foundations of economic and monetary union.

In his last press conference before he stands down at the end of the month, Mr Duisenberg said: "There is growing evidence that most countries will miss their budgetary targets for 2003 by a significant margin and, in a number of cases, budgetary plans for 2004 are not reassuring." He acknowledged that lower than expected growth was partly to blame. But he added: "It is worrying to see that not all countries with severe imbalances have so far introduced sufficient consolidation measures. It is fundamental that the credibility of the in stitutional underpinnings of EMU be maintained."

Mr Duisenberg defended the stability and growth pact under which governments are supposed to keep their deficits below 3% of gross domestic product but countries such as France and Germany have breached it once and look likely to breach again. Shrugging off criticism the pact was too rigid to cope with the problems thrown up by stuttering economies and rising unemployment, Mr Duisenberg insisted it provided "an appropriate framework for maintaining fiscal discipline within adequate bounds of flexibility". The real problem was the need for structural reform of the eurozone's markets for goods and services to address "the main economic problem of the euro area, namely the high level of structural unemployment". Mr Duisenberg, who will be succeeded by Jean-Claude Trichet, governor of the Bank of France, is signing off with the euro at almost exactly the same level at which it launched in 1999 and with inflation at 2.1% - just above the 2% ceiling that the bank sees as consistent with price stability. Yesterday Mr Duisenberg said the ECB had decided to leave interest rates on hold at 2%. He said the bank expected price pressures within the eurozone to stay subdued and the medium-term outlook for price stability remained "favourable".
Source: The Guardian
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Auld Lang Syne

Richard Thomkins gets ready to say farewell to the Italians. My feeling is he is a little premature, but he has certainly got the message. This little meme is begining to go the rounds. His use of the Maslow pyramid isn't quite the way I would look at things, but he has a point. We are looking for more in life than primary need fulfilment, and not all our decisions are economic ones. Bottom line: he doesn't offer a solution, and neither do I.

Arrivederci baby

I am going to miss the Italians. Not that I have known many personally, but when you think what they have given the world - the Roman Empire, the Renaissance, pizza - it is a shame to think they are doomed by their low birth rate to extinction. Even allowing for immigration, the United Nations estimates the country's population will fall 22 per cent between now and 2050. You do not have to be a demographer to recognise that this is a nation spiralling into oblivion.

The Italians are not alone. All across Europe, women have stopped having enough babies to make up for the people who die. Russia's population is forecast to decline 30 per cent by 2050 and Estonia's by a catastrophic 52 per cent. Germany's is forecast to fall by a relatively modest 4 per cent, but only because the country is experiencing massive immigration. There will be plenty of German passport holders in 2050, but they will not be eating bratwurst, drinking beer and telling bad jokes.

As birth rates decline, the immediate problem for Europeans is the rising dependency burden: there are not enough young people to support the old. The looming pensions crisis has prompted calls for quick fixes such as increasing or abolishing the retirement age and encouraging higher levels of immigration. But in the longer term, what, if anything, can or should be done to stop entire peoples and cultures disappearing from the planet?

And why on earth should women produce babies any more? In advanced societies, most people have long since passed the point where life was just a struggle for subsistence. Soaring living standards have left them in a position where their material needs have been more than satisfied. Now their sights and expectations are set on something much higher than the mere fulfilment of some primeval urge to survive and reproduce. They want achievement, recognition, happiness, and to be all they can be.

Yes: for those familiar with the work of behavioural psychologist Abraham Maslow, we are back on the slopes of Maslow's pyramid, more formally known as his hierarchy of needs. According to Maslow, the highest level of human motivation is self- actualisation or self-fulfilment. But before it can be achieved, the lower levels of need have to be satisfied: the need for basic comforts such as food, warmth and shelter, the need for safety and security, the need for love and belonging and the need for respect and self-esteem.

In less developed societies, children satisfy security needs (level two of Maslow's pyramid) and are clearly essential. But it is less obvious where, if at all, they belong on the pyramid for those of us in the developed world. One hopes they will provide their parents with love, self-esteem and a sense of fulfilment, but they are certainly not the only possible sources of such feelings. Love, for example, can come from one's partner or friends, self-esteem from one's occupation and self-fulfilment from the freedom to pursue one's dreams.

In short, parenthood is a lifestyle choice rather than a necessity, and possibly not a particularly rational one. The higher levels of Maslow's pyramid, after all, are achieved not by indulging in the staggering levels of self-sacrifice that motherhood involves, but by satisfying one's inner needs for esteem, fulfilment and freedom. This is an agenda for selfish individualism, not for devoting the best years of your life to the raising and nurturing of others.
Source: Financial Times
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It Takes a Fool to Spot One, I Suppose

With Chief economists like this who needs a court jester. I mean what is he talking about. The US has growth of between 3 and 4% and Greenspan is firm on holding rates down for a considerable period. The eurozone is still more-or-less in recession, may be coming out, or may be going in deeper, and Otmar Issing is talking about raising rates. Brad often sounds off about the incompetence of some of the people running things in the US, he should come over and take a look at just who exactly we have running things here. My vote for what it's worth is that the rates should be down more.

The European Central Bank's chief economist on Wednesday warned that interest rates could soon rise in the eurozone if money supply growth started to drive up prices. Otmar Issing's comments came as a rise in purchasing managers' data for manufacturing boosted hopes of an upturn across Europe. Speaking in Zurich Mr Issing, one of the ECB's leading policymakers and a renowned anti-inflation hawk, said money supply growth might become a problem when the recovery started. "We are watching M3 [the broad measure of money supply developments] closely," he said. Economists said the timing of his remarks, just hours before the ECB's rate-setting meeting in Lisbon today, was puzzling. The ECB is expected to hold rates steady at 2 per cent, a postwar low. Neville Hill of Credit Suisse First Boston said that it was "an odd moment" to be concerned about money supply growth as the eurozone economy was only just beginning to show signs of life.
Source: Financial Times

Prodi on Mutual Trust


Answering my own question over at Fisful of Euros, I don't think Prodi should resign, but I do think someone should accept responsibility. Prodi yesterday he saw "no reason" for members of the EU executive to resign over the "evil" Eurostat scandal, a scandal saw millions of euros of public disappear into secret slush funds. Faced of mounting calls from some backbench members of the European parliament for heads to roll over the affair, he insisted: "I have not made progress in my political career by walking on the bodies of others." Which is another way of not apportioning responsibility by accepting all of it. Like this our institutions will not progress. AG Leader over at Leaderblog has an interesting take on the situation:

the boil will be lanced and the evil rooted out

And there is another question I ask myself. Can one base a Commissioner's relationship with his Director-General on anything but mutual trust? That is what Mr Solbes did. To do otherwise would imply the power to conduct unofficial inquiries, and no one here would want that.
From Prodi's Speech

I wonder how much scoffing there was around the Parliament when he said this. It's a key issue however, because even though trusting trust is a difficult matter, Prodi is effectively noting that institutions cannot function without it. The Economist has also suggested that the Eurostat scandal grew out of the rigidity of EC procedures, i.e., a lack of trust created this 'off the books' attempt at greater autonomy. Unfortunately talking about trust when the confidence has obviously been misplaced may end up giving it a bad name.
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While Abiola understandably wades in from his point of view:

There are two things worth noting here, the first being the shameful reluctance of EU bureaucrats to accept blame, or even to allow their colleagues to take the blame, for any wrongdoing that is discovered during their watch. It would be bad enough if Prodi were trying to simply pass the buck to an underling or a predecessor, but here he is, insisting that even Pedro Solbes should be let off the hook! The second thing that stands out is the manner in which Eurocrats never pass up an opportunity to plead for yet more powers, even when the issue at hand is the abuse of the powers they already have at their disposal. Always the solution to every difficulty is the same - "we lack sufficient authority!" One would be tempted to admire them for the insolence with which they reach out for ever greater authority, were one not enraged by the contempt for the listener's intellect betrayed by such transparently self-serving requests.
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Finally a piece from the EU observer which appears in Abiola's own post, and which as he says, ain't half bad:

Eurostat is not an exception. Eurostat is an example; indeed a very small example of what is going on for many years inside the European Commission, especially in all 'spending DGs', with large amounts of money to spread around. Insiders know it. 'Wisemen' (such as the 'Wisemen Committee" set up after Santer's Commission resignation) know it. People closely working with the Commission know it. Brussels-based journalists know it. Citizens in Europe feel it. The situation essentially has nothing to do with the Commissioners, nor with the idea of a vastly corrupted EU bureaucracy (most EU civil servants are honest). But it has everything to do with the lack of only two controls - political control and judicial - which can prevent an administration, and more precisely its top hierarchy, of becoming, either entirely or partially, a bureaucracy with all its hanging processes of cronyism, corruption and privileges. No political control and no judicial control naturally lead to illegality. Whether we like it or not, it is a fact that the European Commission is lacking both of them:
Source EU Observer
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EU Commissioners Under Fire


Couldn't resist posting on this one at Fistful , comments welcome:

Romano Prodi, European Commission president, will on Thursday attempt to fight off calls for resignations over the Eurostat affair amid new evidence that financial irregularities continued long after he took office in 2000.


Three reports into the financial scandal released on Wednesday night reveal a saga of fake contracts, secret slush funds and huge waste which went unchecked in the Commission for many years. They tell how millions of euros disappeared into the secret accounts, ostensibly to fund additional statistical research. Large sums simply vanished while some money was used to fund staff perks. Mr Prodi will on Thursday face a grilling by members of the European parliament, many of whom believe he and his team failed to get a grip on the situation soon enough. Members of the 20-strong Commission claim the first they knew about the extent of the problems at the EU statistics arm was in May this year when they read about it in newspapers, including the Financial Times.
Source: Financial Times

More Trouble for Alstom


I wonder what they'll make of this in Brussles?

Debt-stricken French engineering group Alstom received a sharp reminder yesterday that its fight for survival is just beginning when it emerged that the manufacturer of London Underground trains is facing a class action lawsuit in the United States. The news - which came one day after a controversial €3.2bn (£2.2bn) rescue plan for Alstom was agreed - appeared to unsettle investors, who began to fret about the company's long term viability, sending its shares plunging 14% on the Paris stock exchange at one stage. The complaint is similar to that levelled at Enron in the US last year and alleges that Alstom deliberately deceived investors by overestimating its results and understating its net debts at various times between November 1998 and June 2003. The plaintiffs are unnamed minority shareholders who claim that Alstom artificially propped up its share price in the process. They are seeking an undisclosed amount to compensate them for subsequent losses. The fact that US lawyer Bill Lerach, the scourge of corporate America and the man who lodged the Enron complaint, is said to be handling the case will make Alstom executives all the more nervous. According to the French magazine, L'Expansion, the case has already been filed in New York and targets Alstom itself as well as the present and former chief executives, Patrick Kron and Pierre Bilger.
Source: The Guardian
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Where is Europe Headed?


Tomorrow I'm going to post for the first time on Fistful. Today David Weman has a thoughtful post on the future of the European project:

There has been a lot of talk lately [back in May at least] about what the long-term consequences of enlargement will be, and also about the rift that the Iraq war has caused in Europe. Some people, especially Americans have been saying there's a risk of crisis, and that the Union will become divided and dysfunctional. There's one in my estimate strong indication that they're wrong: Look at the Convention. Divisions have not at all been on the lines of "old" or "new" Europeans, but between small and big states and between intergovernmentalists and supranationalists. The actors have taken positions out of what they think is right, and what they perceive is in their interest. And that's how things will continue to be.............

By the evidence of the Convention, plus my general knowledge of the Candidate countries, I don’t see enlargement seriously working against these trends, though if the constitution will be a drastic step, it may cause a temporary breathing pause. I don't see anything else seriously slowing the process either in the foreseeable future. (Granted, in these matters, that's hardly longer than a decade as I see it.) That begs the question when will it stop? I don't think this gradualist, often not noticed by the public, process can't possibly continue to the point where suddenly we find ourselves citizens of a federal state. At some point something's gots to give. When and how that will happen, I have no idea. Everything about the EU's development is so gloriously uncertain and unprecedented, which is why it's so fascinating.
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