Category Archives: Economy

Can Spain Weather its Exposure to Portugal?

Benn Steil and Dinah Walker of The Council of Foreign Relations ask: Will Portugal Bring Down the Spanish Banking Sector (as if it weren’t doing a good enough job of bringing itself down)?

The authors provide a really interesting graphic depicting the Spanish banking sector’s nominal exposure to Portugal, …and it exceeds $70 Billion. Wow!

spain-exposure-to-portugal

Although Spain’s exposure to Portugal is certainly alarming, the tidbit I found most interesting is that Spain’s exposure to Portugal is larger than France’s exposure to Greece, and Spain’s banking sector is less than half the size of France’s. That’s a mighty burden to bear for Spain, and its banking sector.

So how does Spain dig itself out from under its Portuguese burden? The authors argue that as with Greece, at some point the EU and/or the ECB will need to intervene.

Whatever the endgame, I encourage you to read the full CFR post here.

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Big Mac versus iPad Mini

Some of you might be familiar with the Big Mac Index, an index calculated by The Economist that compares the prices of Big Macs across countries (see Economist BMI Page). The underlying idea is that, by comparing the relative cost of Big Macs, we can get a sense for whether exchange rates appropriately equalize the prices of goods across countries in the manner suggested by Purchasing Power Parity (PPP) theory. If the price of Big Macs is not equivalent across countries, some take that to suggest that currency exchange rates are out of whack – i.e., one currency is overvalued while the other is undervalued.

Irrespective of what you believe about the Big Mac Index – whether you think it truly is indicative of exchange rate imbalances, or simply exposes shortcomings of PPP theory – it has gained currency amongst economists, though admittedly, mostly as a humorous diversion.

Nevertheless, Benn Steil and Dinah Walker, bloggers at the Council on Foreign Relations, offer an “updated” version of such an index by examining the relative prices of a product that they argue is likely to be more homogenous from country to country – the Apple iPad Mini (click on the figure below to see a larger image, or visit CFR iPad Mini Index for the full story).

ipad-mini-index-BIG2

Compared side-by-side, the Big Mac and iPad Mini indexes differ markedly. So who has it right? Or is this just further evidence that PPP theory needs to be revisited?

 

More on this topic (What's this?) Read more on Apple, Big Mac Index at Wikinvest
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The European Disunion

I’ve been interested in all things Euro these days, especially in the wake of my trip to Germany, Spain, and the ECB (see Reflections on My Trip to Germany/Spain). I was therefore interested to read a recent article in the Economist commenting on last week’s European Union summit, and offering prescriptions for all that ails the European Union (see The Sleepwalkers).

Although things have been relatively quiet recently (the markets are currently discounting the likelihood of a break-up), the article criticizes Europe’s leaders for their overly rosy outlook. Instead of taking decisive, concrete actions to repair the flawed Euro system, European leaders seem content to kick the can while trying to reassure the world that the worst of the crisis has passed.

According to the Economist:

The urgent task is to sever the ties between banks and governments too feeble to support them…In addition, the euro zone needs growth-boosting reform…it should ease austerity by slowing the pace of budget cuts and using cash from the core euro zone to pay for schemes to boost youth employment and investment in small and medium-sized firms in the periphery.

This is consistent with my position, as espoused in Reflections on My Trip to Germany/Spain. As I mentioned in that entry, the way core countries (Germany et al.) and peripheral countries (Spain et al.) view the crisis is fundamentally different; consequently, there is a gulf between the core and the periphery on the appropriate steps needed to resolve the crisis.

As long as those in the core keep pushing austerity as the answer and remain unwilling to come to the aid of their brethren (and part of the problem is that they don’t see them as brethren) in the periphery, the prospects for the Euro remain bleak.

Although the rhetoric coming out of the core continues to favor austerity as the answer, the call for easing austerity burdens is gaining currency.

The solution, however, goes beyond simply addressing the crisis with short-term economic fixes – e.g., easing austerity, instituting bailout programs, and/or quantitative easing. The real onus is on Europe’s politicians to address the Euro’s long-term ills with political solutions – chiefly, addressing the Euro’s design flaws.

To solve the European Union’s long-run problems, politicians need to think beyond myopic self-interest. They need to consider the greater good of Euro-land, and not simply what might be best for their individual countries and/or their constituents alone. They will need to make difficult (read: not popular) decisions regarding the Maastricht treaty, banking union, and deeper fiscal (political) union.

If Europe’s leaders are serious about keeping the Euro together, there needs to be a committed, cohesive effort to create a fiscal union, as opposed to simply a monetary union with a reliance on ECB intervention and half-baked, hastily designed bailout programs.

I’m not suggesting that fiscal union (i.e., a United States of Europe) is the only answer. One workable alternative would be to return to a system in which each country within the Eurozone controls both its fiscal and monetary policy (i.e., a return to individual currencies). But if European leaders are as committed to preserving the Eurozone as they claim, then the logical long-term solution is to complement the monetary union with a fiscal union.

 

More on this topic (What's this?) Read more on European Union at Wikinvest
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