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Friday
Nov232012

Euro Morons: Hyperinflation Successfully Avoided, Stagflation Successfully Created 

Contributed by George Dorgan, a macro-based fixed-income and currency overlay portfolio manager based in Switzerland, and the main editor of the blog SNB & CHF.

By keeping Greece in the Eurozone, eurocrats or better “euro morons” have successfully avoided a weak drachma and a subsequent Greek hyperinflation. Instead they have successfully created stagflation.

Currently European HICP inflation is at 2.5%, far above the max. 2.0% official ECB mandate, but the euro is becoming weaker and weaker. German salaries are rising with 2.6% per year. At the same time, the ECB cannot hike interest rates, because it wants to provide cheap money to the periphery.

The periphery continues to buy German products, even if they are 1.7% more expensive than last year. The difference between 2.6% higher salaries and the rise of 1.7% in production prices/costs is an indicator of German competitiveness. Production costs in the periphery, however, are rising far more quickly. Eurostat reports that the Greek Producer Price Index is up 5.1% on a yearly basis, the Spanish one 3.8% and the Italian one 2.8%.

 

Source Eurostat, Light green: countries with low labour costs,high price increases, Red: countries with debt issues, high price increases, Dark green: Low price increases, no debt issues, Yellow: debt issues, low price increases

 

According to Eurostat hourly labour costs are up in most peripheral countries. This is against what the ECB reported last year (as for unit labour costs),

change of nominal hourly labors Q2 2012 (source Eurostat)

 

Hourly Labor Costs 2011 in euro (source Eurostat)



The comeback of stagflation

It seems that there are more things that count to obtain high productivity apart from reducing salaries and firing workers. Firms desperately also need some capital to increase productivity, but capital is simply crunched away.

In the meantime holiday prices in Greece have risen by 12% since last year.

So far the wonderful measures to increase the Southern European competitiveness. The eurocrats have successfully managed to avoid a Greek, Portuguese or Spanish euro exit, a rapidly depreciating drachma, escudo and peseta and the following hyperinflation.

Higher production prices will certainly influence the consumer price index and have created stagflation. Spain sees 3.5% CPI inflation and a contracting economy at a pace of 1.6%, Italy 2.6% CPI inflation and a falling GDP of 2.7%. Greek GDP is down 7.2%, inflation up 1.6%.

At the same time disposal income in Greece is radically slowing:

Rising salaries in the Northern part, low interest rates and a weak euro might potentially trigger even higher inflation on imported products. The PIIGS except Ireland (that profits on its low-tax regime and more flexible labour laws) are and will remain in stagflation for months and maybe years.

Post Scriptum:

The author speaks Italian, Spanish, Portuguese and some Modern Greek, likes the mentalities and lived all these countries at least a couple of months. The critique is nothing against the peoples as such, but against the way the European politicians and economists, the euro morons, try to solve the crisis. Cross-posted from SNB & CHF.

Also by George Dorgan: The second biggest hedge fund in the world, the Swiss National Bank, will lose against the biggest hedge fund, namely the global conglomerate of Swiss companies that earn money everywhere in the world and repatriate it to the safety of the franc. But what Standard and Poor's published on the SNB, and for which it wanted news agencies to pay $400, was not even worth a penny. Read.... Is Standard And Poor’s A Rating Agency Or A Rumor Agency?

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Reader Comments (1)

1. The data stink. Either Eurostat or the ECB or both are incompetent and/or cheating. No way if you do both a proper statistical job things can be so far apart (what do they think it is: Americal presidential elections?).
Which means that as long we donot know which is which the data are basically useless (except for the fact that you better count your finger after shaking hands with either one of Eurostat or ECB).
Looking at the usual stuff coming from them imho the chance we get f-worded by some one is considerably larger than pure utter and worldclass incompetence.
Who is the most likely liar? Easy to answer the organisation that is most political so the one whose president is called by Draghicula by some of us.
Allthough the competency level of Eurostat should not be overestimated (a lot of their material simply sucks (especially relating to countries like Greece and Italy), however it has clearly improved over the last couple of years.

2. We can however safely conclude that the transmission of the internal devaluation to increased competitiveness clearly doesnot work. Wages go down, but prices go up. And Greece had already a relatively high price level in relation to its average wageslevel pre crisis. Which also makes a recovery very unlikley the country simply remains too expensive it is not only wages not even mainly wages one looks at it is more total price level.

3. Clearly that tax rises do a lot of harm as a lot of the inflation is caused by things like higher VAT. Not the way to get an internal devaluation on track clearly. Greece also imho better tax collection, which means that the real tax burden rises while the nominal stays the same. with the added problem that it is nearly impossible to see for an outsider what happens. However when it is perfectly normal to pay say only 1/2 your taxes and now you have to pay 3/4 it is a de facto huge tax increase that nearly certain will be seen as such by the people that got hit by it.
The drop in productivity might also be partly caused by better tax collection if you collect wagestaxes better, you can see higher wages costs.
My guess it that it is the combination: workers needed to do the job; what is sold and the price thereof. Prices relatively stable but tax increases and businesses with no other choice than raise prices to survive and a lot of the stuff imported, sold (well ultimately) by a relatively similar number of workers, while the turnover dropped faster than the other 2 because of loss in spending power and more saving (for the few who can).

4. Assuming that the drop in productivity is caused by lack of loans cannot be based on the facts we have. First of all the facts/data migh be totally incorrect. Second it could be caused by a lot of other things or a combination thereof. Like businesses simply at first raising their prices iso lowering them (simply to survive), often leading to even lower demand (and subsequently lower productivity). But often lateron being corrected.
Especially in combination with heavy labourprotection. Firing workers basically going slower than the drop in turnover (or the decrease in wages going slower, and as a consequence still clearly not enough). With companies that can fire workers probably throwing the least productive ones out first (goes the other way).
But to see what is happening we need reliable data.
The only thing that is pretty sure is that the transmission of lower wages to more competitiveness is simply not working. Both date with a considerable discrepancy confirm this.
November 24, 2012 | Unregistered CommenterRik

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