During the last decade in which he has been in power, Erdogan has allowed the Gulen movement to take control over the police, judiciary, and large parts of the state apparatus. The Gulen movement in turn established a republic of dirty tricks, with illegal wiretaps and video recordings, fabricated evidence, framing of innocent people, slander and disinformation as its modus operandi. The monster Erdogan created eventually turned against him as the common enemy, the military and the rest of the secular establishment, were vanquished. He is now trying to slay the monster. That means purges, bringing the judiciary under his control, tightening the screws on the Internet and social media, and greatly expanding the powers of MiT, the national intelligence organization. The collateral damage for Turkish democracy – or what remained of it – is huge.
We cannot look at all this and focus only on what Erdogan is doing without at least acknowledging that the Gulenists also bear considerable responsibility for bringing the country to its current crisis. The idea that there was something like the rule of law or Turkey was democratizing before Erdogan began to tighten the screws on the Gulen movement is dangerous nonsense. Those who call on Erdogan to respect democracy and the rule of law should be calling on the Gulen movement to do the same. Otherwise, they end up taking sides in a war in which neither side looks pretty.
Here is an analogy. Suppose Erdogan was still fighting the military rather than the Gulenists. Americans’ and European criticism of Erdogan would be coupled with calls on the military to respect democratic rules. Otherwise, it would look like these outsiders were favoring one authoritarian force over another.
Competitiveness adjustment in struggling southern euro-area members requires persistently lower inflation than in major trading partners, but low inflation worsens public debt sustainability. When average euro-area inflation undershoots the two percent target, the conflict between intra-euro relative price adjustment and debt sustainability is more severe.
In our baseline scenario, the projected public debt ratio reduction in Italy and Spain is too slow and does not meet the European fiscal rule. Debt projections are very sensitive to underlying assumptions and even small negative deviations from GDP growth, inflation and budget surplus assumptions can easily result in a runaway debt trajectory.
The case for a greater than five percent of GDP primary budget surplus is very weak. Beyond vitally important structural reforms, the top priority is to ensure that euro area inflation does not undershoot the two percent target, which requires national policy actions and more accommodative monetary policy. The latter would weaken the euro exchange rate, thereby facilitating further intra-euro adjustment. More effective policies are needed to foster growth. But if all else fails, the European Central Bank’s Outright Monetary Transactions could reduce borrowing costs.
The news from Germany is that real wages in 2013 have declined for the first time since the 2009 recession, according to preliminary data from the Federal Statistics Office. The reported average nominal rise in wages was 1.3%, which translate into a fall in real wages by 0.2%, given an inflation rate of 1.5%.
Frankfurter Allgemeine reports yesterday that these data have stunned experts, and conflicted with other data, including the labour market data of the Federal Statistics Office’s National Accounts. The latter suggested a nominal rise of 2.5%, which would have produced a real increase of 1%, instead of a decrease. The paper points out that yesterday’s estimate was based on a survey among 40,000 companies. The paper said a trade union foundation also came out with a much more positive result than this survey, but the discrepancy could be explained by a gap between officially negotiated wages and real wages paid on the ground.
But despite the statistical issues, the paper writes, there can be no doubt that wages rose by much less last year than they did in 2012. The main wage component that showed the biggest decline was profit-related pay, according to the Federal Statistics Office. Since this component lags behind about one year, the 2012 data were relatively strong reflecting the strong economy in 2011. Another component that fell was the number of extra hours worked.
Given the relatively high degree of wage demands for this year, it is likely that the trend will reverse again in 2014.
The above time series in German has the real wages on the dark blue line. This chart clearly highlights the adjustment that Germany went through last decade, but it also shows that there is definitely no reverse adjustment. Germany’s wage competitiveness has increased, and is staying there. This is extremely troubling news.
From SocGen’s Europe team, who think the threshold to action is extremely high even if you push the legalities aside:
Reaching a consensus on deflation
Firstly, there is the issue of defining when deflation or deflationary risks are present. Distinguishing between disinflation, temporarily negative inflation and real deflationary risks thus becomes crucial, with the ECB focusing very much on forward-looking inflation expectations. As frequently pointed out by the ECB when asked about fears for a Japanese- style deflationary scenario, long-term inflation expectations in the euro area remain well- anchored to the target whereas in Japan in the 1990s they were not. We expect that it would take a combination of persistently low or negative inflation, unanchored long-term inflation expectations (below 1%), as well as a high risk of recession for the ECB to declare a clear risk of deflation. While the speed of deteriorating developments may also play a role, we fear that the ECB could be slow to react to a deflationary threat.
Dispersion between countries likely to matter
Secondly, inflation divergence within the euro area may complicate matters. If all countries moved close to zero in unison, it would be easier to agree on the state of the euro area economy, but if, which is likely, some large countries remain stable with positive inflation (e.g. Germany) while others sink deep into negative numbers (periphery), pulling the euro area average into negative, some may still argue that individual countries’ negative numbers mainly reflect corrective country adjustment. We believe the ECB would need to act on euro area developments as a whole, in line with their Treaty obligations.
Countries could be less incentivised to implement reform
By buying large quantities of government bonds without conditionality, a QE programme could increase problems of moral hazard and lower governments’ incentives to reform or improve their public finances.
What happens in the event of a sovereign debt restructuring?
Finally, there is the issue of what happens in the event of sovereign defaults. This question is maybe the most interesting and possibly the biggest obstacle to a euro area QE programme (as evidenced by the recent GFCC ruling). While any asset purchase by the ECB implies taking on credit risk, with government bonds in theory being the least risky, defaults by governments would be particularly problematic as they could lead to a mutualisation of debt among euro area countries, much in the same vein as a Eurobond. We would, however, expect ECB-held debt to be senior and ineligible for pari-passu in a debt restructuring, which is likely to reduce the effectiveness of this option by increasing the risk of debt held by private investors. While one could imagine various other measures to limit the exposure of the ECB’s capital, and indirectly governments’ capital, such as limits on the amounts of purchases or a system whereby individual national central banks purchase their own domestic sovereign bonds and thus keep the credit risk on their balance sheets (much as in the use of the Emergency Liquidity Assistance). Neither of these options appears convincing or practical (for instance, volume limits may restrict the effectiveness of the programme). Consequently, one could take the view that euro area QE is a last straw instrument to prevent economic stagnation and a possible break-up, and that any failure to honour the debt taken on by the ECB would lead to severe implications, such as immediate exclusion from the EMU.
That’s 3.5% nominal growth over the past year, which is not explosive, but at least pretty OK. But why does this look so different than the topline number? Because of reasons; demographic ones, specifically:
Japan is shrinking, and shrinking pretty quickly, in the non-retiree department, and therefore if productivity-per-worker in Japan remained constant, we would see declining topline growth numbers. Not that the actual facts on the ground are good news for Japan, per se; they’re just different news than “Abenomics isn’t working.”
The U.S. has run an ever increasing deficit in her trade and current account since the early 1980s. She has thereby provided tremendous stimulus to the rest of the world by allowing other countries to export to an increasing extent. Some have accepted this opportunity with pleasure and have built a powerful export industry due to their competitive labor costs. The U.S. policy of increasing monetary and often also fiscal stimulus has allowed countries like China to build up their economies and become large and competitive economic powers. The U.S. behavior really triggered the rise of the emerging economies to a very large degree.
Like an oil supertanker that turns very slowly when changing direction, the U.S. is improving to smaller deficits in her trade and current account (Chart 1). The main reasons are a domestic energy production boom (and much cheaper energy prices than in other parts of the world), cheap and more competitive labor (due to a weak U.S. dollar over the last 15 years) and the end of a leverage-driven consumption boom. Smaller deficits by the largest economy have unpleasant implications for many other nations. Of course, foreign oil producers will earn less income, but foreign exporters selling to U.S. markets are also being hurt. Simply speaking, what once was ever-increasing economic stimulus provided to the world is now turning into restraining factors for the rest of the world.
The memo was addressed to Timothy F. Geithner, then the Treasury secretary, from Jeffrey A. Goldstein, then the under secretary for domestic finance. In discussing Fannie and Freddie, the beleaguered government-sponsored enterprises rescued by taxpayers in September 2008, the memo referred to “the administration’s commitment to ensure existing common equity holders will not have access to any positive earnings from the G.S.E.’s in the future.”
The memo, which was produced in a lawsuit filed by Fannie and Freddie shareholders, was dated Dec. 20, 2010. Securities laws require material information — that is, information that might affect an investor’s view of a company — to be disclosed. That the government would deny a company’s shareholders all its profits certainly seems material, but the existence of this policy cannot be found in the financial filings of Fannie Mae. Neither have the Treasury’s discussions about the future of the two finance giants mentioned the administration’s commitment to shut common stockholders out of future earnings. Freddie Mac’s filings do refer, albeit incompletely, to the administration’s stance, noting that the Treasury “has indicated that it remains committed to protecting taxpayers and ensuring that our future positive earnings are returned to taxpayers as compensation for their investment.” Note that this reference does not say all earnings.
Lewis D. Lowenfels, a securities law expert in New York, found this statement insufficient. “If there is disclosure regarding future Fannie and Freddie earnings and the administration has a commitment that existing Fannie and Freddie common equity holders will never receive any future positive earnings,” he said, “this commitment would be material to investors and should be disclosed.”
When the memo was written, plenty of people held these stocks. Regulatory filings show that 18,000 investors held 1.1 billion shares of Fannie Mae common stock, while just over 2,100 investors held 650 million Freddie Mac shares.
Back in 2010 and 2011, of course, common stockholders of Fannie and Freddie had little hope of making much money. During those days of rampant mortgage defaults and losses, investors were warned about the uncertainty of their companies’ prospects. Fannie and Freddie shareholders were repeatedly told that the preferred and common stock would have value only if anything remained after taxpayers were fully repaid for the rescue. With the amount of that rescue peaking at $189.5 billion, that was a very big “if.” On the day the Treasury memo was written, the price of Fannie Mae shares closed at 34 cents.
But the companies staged a turnaround; in mid-2012, they began earning billions. With interest rates low and banks not lending, Fannie and Freddie became the only mortgage game in town. By Sept. 30 of last year, the companies had returned $185 billion to the Treasury.
Failing to disclose the administration’s hard line on the companies’ shareholders is disturbing for another reason. In bailing out Fannie and Freddie, the Treasury received warrants — optionlike securities that rise in value when the shares underlying them do. When investors, hoping for a housing recovery, flocked to the shares and pushed them higher, the value of the warrants increased. Fannie’s common stock now trades at $3.06 a share.