Sunday, 15 March 2015

Backward Engineering.

I have recently read a few good pieces on why Germany needs to do more to iron-out its internal structure problems.  They focus largely on the demographic imbalances caused by an ageing population and a falling birthrate. Whilst they correctly cite various remedies that need to be implemented to stop it following the demographic trajectory of Japan they tend only very briefly to mention the most obvious quick fix answer, the one that Japan has failed to implement for all its cultural and xenophobic reasons and the UK Prime Minister only today is citing as one of the reasons the UK is doing OK -  Immigration.

The Eurozone was constructed by applying a wardrobe of artificial straightjackets designed to hold itself together. But as with most regulation, or even complex financial product pricing, if you contain one variable then stresses will display themselves through another (what is ‘implied volatility' in options calculations other than the remaining free variable once all the others in the Black and Scholes equation have been tethered). It’s like grasping a balloon between your fingers. Squeeze one part and it will pop out somewhere else.

I saw this marvellously demonstrated years ago at a Michael Jackson concert in the Singapore national stadium. We, the expats, sorry I mean 'immigrants',  in the crowd, were not used to having to sit still (as required) throughout an MJ style concert and so clumps of people would spontaneously leap to their feet and start dancing at which point a posse of security guards would rush over and demand they sat down again. It didn’t take long for the crowd to realise that the guards could not cover all bases so when one part of the audience was quelled another would rise on the opposite side of the stadium causing the guards to race over to quell them. This became a game with the crowd actively playing the guards, rising and falling just for the merriment of driving the guards in futile hot heeled persuits across the vast stadium. But basically they could not contain the natural forces that dictated that at a Michael Jackson concert the crowd were going to get to their feet and move.

The straightjacket of the EU is the Euro. Its unionised monetary policy without fiscal union has led to a veritable monetary buffet. Stimulus is provided through a centralised monetary buffet free-for-all from which all countries benefit, yet those who excessively benefit from it never have to pay through tightening domestic fiscal measures. As the feeding continues those with the best credit take more and get fatter and their credit improves further and they take yet more, meanwhile the hungry ones at the back find the table bare and demand it be refilled. The ECB kindly oblige.

Greece is the diner who fills his pockets and when challenged replies 'Who me? I only had the tomato soup”
Spain and Italy hide the piles of smoked salmon under a lettuce leaf so they aren’t spotted heading off with the best bits.
Portugal is under the table feeding on everything that hits the floor and hopping no one will notice it is there.
France is seen as polite and thankful, only taking what the waiter brings over to her. But the waiter is of course French.
Ireland meanwhile can’t believe they are being given free grub when they are actually meant to be dining with the UK.
The UK haven’t got a ticket to the buffet and though their mouth is watering they guess the food is poisoned.
Austria say they are a friend of Germany's and Germany says it's ok for them to have some of theirs.
Holland is trying to explain how the buffet works and is smacking the hands of anyone who leans past them.
Denmark was just walking past and is trying to explain that although it has a food sharing deal could people please stop eating off its plate.
And then there is Germany who protests the cost of the buffet and demands it should stop being refilled but when presented with another tray of low EUR/USD and negative funding foie gras helps itself and does nothing in the way of fiscal exercise to burn it off.

Everyone knows that if you don’t take your share at a free-for-all, someone else will. So Germany is growing fatter than them all. The best credit gives them the lowest borrowing costs and of course people always lend first to those who don't need it. With monetary policy generalised and fiscal policy local, there is a policy bias towards continuing looser monetary policy and relatively tighter fiscal policy. Why eat your own packed lunch when a free one is being provided?

So where do the adjustments occur? If a country will not voluntarily adjust its fiscal policy for the greater good but takes advantage of the generalised monetary policy, the last resort to adjust imbalances is for people to physically move and take jobs in booming areas, thus increasing labour supply and dampening wage pressures. This leads us back to the beginning. Germany needs immigration to counter its own demographics and the rest of Europe needs Germany to take immigrants to dampen economic cross border stresses.

So why hasn’t the whole of Greece upped sticks and headed off to Germany? The rich probably have and are there doing well and not paying taxes back in Greece (exaserbating a different problem that could also do with the unionising of fiscal policy) and the poor haven’t because they aren’t welcomed and don’t speak German.

Germany does exhibit the highest immigration figures in Europe but the fact that demographic failures are discussed at all is a sign that immigration is not doing enough to dampen the stresses. More can be done. But when economies suffer and disparities and national wealth inequalities extend, nationalism and protectionism start to dominate. These are natural barriers to migration. Until a European can head off to another part of Europe without being perceived as a foreigner stealing a job, the ultimate balancing function of migration that the EU has to rely upon (having artificially restricted all other variables) is less likely to work just when it has too.

Whilst the EU was originally formed to prevent wars, the mantle of cultural unity that has recently solidified over the cooling magma of past European conflicts is not yet strong enough to see swathes of non local lingo speaking arrivers taking from the buffet table of those who only have a buffet table due to them taking more from the original buffet table that the arrivers didn’t take as much from in the first place. So to speak.

Which leads me back to a tenet that I have been mumbling under my breath since 1998. -
"It won’t be the Euro that unifies Europe. It will be the English language."

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