Economics

James Mackintosh

Former US Treasury Secretary Larry Summers warned of the dangers in the eurozone in his latest op-ed for the FT, and it is hard to disagree. But part of what he said bothered me:

A worrisome indicator in much of Europe is the tendency of stock and bond prices to move together. In healthy countries, when sentiment improves stock prices rise and bond prices fall, as risk premiums decline and interest rates rise. In unhealthy economies, as in much of Europe today, bonds are seen as risk assets, so they move just like stocks in response to changes in sentiment. Read more

James Mackintosh

Just a quick update for those who love Iceland as a model (a category which unites the unlikely pair of uber-Keynesian Paul Krugman and Conservative eurosceptic Dan Hannan).

After its disastrous banking and property bubble and bust, house prices have been growing strongly again, and are within a whisker of their 2008 highs – in stark contrast to Ireland and Spain. All three (with two different measures of Spanish housing) are shown in this chart, and Iceland’s break from the Irish/Spanish pattern is clear:

House prices Iceland, Ireland, Spain

This, just like the country’s return to economic growth, looks like another justification for Iceland’s decision to refuse to bail out its banks, unlike most of the rest of the world.

Now, I’m no friend of bank bailouts, and would much rather see middle-class bank creditors take losses than taxes rise on the poor to subsidise those creditors.

But things aren’t quite as simple as the housing chart shows. As well as cleaning up its banking system through a gigantic default, in large part on foreigners, Iceland’s krona has collapsed.

When measured in foreign currencies, the people of the island are far poorer than they were, something which really matters for a place which imports virtually everything it needs other than fish and electricity.

One example is the import of cars: for the four years since 2008, the total tonnage of cars (I know, funny measure, but that’s how Iceland provides it) imported is lower than for the single year of 2006. And this isn’t only because of the extremes of the bubble: last year, even as Iceland began to recover and imports picked up, saw fewer cars imported than in any year from 1999 to the collapse.

Adjusting Icelandic house prices into euros, then, allows a fairer comparison with Spain and Ireland’s outcomes (although not a way Icelandic residents will think about it, of course). And it tells quite a different story:

Now, this doesn’t matter to Icelandic homeowners paid in krona. But it does put a bit of a damper on the idea that Iceland is having a strong recovery.

Measuring in krona, even Spanish house prices have started to rise, as you see in this next chart: Read more

James Mackintosh

Ireland’s recent history is a story of hopes dashed. Hope is now being stoked again, not least by those with the most interest in being positive: the Irish government and European lenders.

For Europe, Ireland is the poster child for austerity and must, just must, be recovering. Some positive jobs figures, showing the first growth in employment since 2008 (on which more later) have prompted what passes for elation in the depression-hit island.

European Commission President Jose Manuel Barroso led the cheering this week on a visit to Dublin, saying Ireland’s economy “is turning the corner”.

It shows that the programmes can work. It shows that there can be light at the end of the tunnel.

When there’s a determination we can achieve results. This is a message that’s valid for Ireland and other countries that are going through reforms.

Of course, he wants to believe this. Europe desperately needs a success story to set against the anti-austerity vote in Italy, yet more gloom in Greece and a worsening economic outlook for the eurozone.

But the bond markets agree, and have done for months. Irish 8-year yields (its benchmark) stand at 3.7 per cent, lower than Spain and Italy. The country has successfully returned to bond markets, and hopes to bring in a 10-year benchmark before the end of June. Even the inconclusive Italian elections prompted only a slight wobble.

So, have the markets become too optimistic? Below is a rather longer than usual read on Ireland and the wider eurozone issues. Read more

James Mackintosh

Brits wanting a holiday in the sun have to stump up a lot more since the pound’s crash during the financial crisis. Even after a partial recovery, the pound remains down almost a fifth in real terms against its trading partners.

On the plus side, exports should be booming. Sadly, they aren’t. There are plenty of excuses explanations, but one stands out: British exporters have too much focus on slow-growing European economies and not enough on the whizzy emerging markets. The killer statistic is that the UK exports more to tiny troubled Ireland than to all the Brics put together. Read more