Today’s Top Stories
- North fit for first Lions Test (BBC News - Home)
- NHS watchdog faces 'cover-up' claim (BBC News - Home)
- Investors opt for safety ahead of Fed meeting (UK Homepage)
- Investors opt for safety ahead of Fed meeting (Financial Times - US homepage)
- Metals Stocks: Gold extends losses as Bernanke update nears (MarketWatch.com - Top Stories)
- Currencies: Dollar slips vs. yen with Fed outlook in sight (MarketWatch.com - Top Stories)
- Japan exports data offer boost to Abe (UK Homepage)
- Japan exports data offer boost to Abe (Financial Times - US homepage)
- Sherwood Ross, President of Ross Bicycles, Dies at 92 (NYT > Business Day)
- Big Apple Braces For Basement Real-Estate Boom (Forbes - Business)
- DealBook: Weak Bond Trading at Jefferies Prompts Wider Concern (NYT > Business Day)
Other Blog Headlines
- Lawler: Updated Table of Distressed Sales and Cash buyers for Selected Cities in May (Calculated Risk)
- 10 Tuesday PM Reads (The Big Picture)
- Free, Unregulated Markets are Not Always the Answer: Seven Important Examples of How Markets Can Fail (Economist's View)
- Twitter Digest: 2013-06-09 (Paul Kedrosky's Infectious Greed)
Category Archives: International Business
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?)
Eurozone Government (Wealth Daily, 5/20/13)
More than Hundreds of thousands of jobs at stake, following EU’s Solar Duties against China (Green World Investor, 6/7/13)
The Next Great Economic Depression Has Already Started In Europe (Gold Stocks Today, 5/5/13)
I recently accompanied a group of EMBA students on a study tour of Germany and Spain. The intent was to study the European Economic Crisis from the point of view of a core country (Germany) and the point of view of a peripheral country (Spain). We benefited from some truly amazing visits with economists and officials on both sides. We were able to speak with folks from the ECB, Deutsche Bank, BBVA, AFI, and a former official of the Spanish Ministry of Economics/Finance.
What struck me is how differently both sides view the crisis. The Germans with whom we met typically view the crisis as a consequence of bad behavior on the part of both private and public actors in the periphery. The Spaniards with whom we met, who do not deny that bad behavior amongst private and public actors played a role, nevertheless view the crisis as one aided and abetted by the countries in the core.
Given the divergent views on the causes of the crisis, both sides, not surprisingly, disagree on how to resolve what ails the Euro zone.
The core is pushing the austerity agenda – e.g., compelling peripheral countries to cut government expenditures and reduce labor costs – to accomplish an internal devaluation to improve competitiveness. Unfortunately, austerity is very painful medicine, and has serious unemployment and social stability consequences.
Peripheral countries, by contrast, are asking for the ECB, and the countries in the core, to do more – e.g., intervene to stabilize sovereign borrowing costs, explicitly allow for greater levels of inflation, engage in stimulus, and/or lessen demands for austerity - as a means of helping the periphery make difficult structural adjustments (i.e., to cushion the blow).
Personally, I think those in the periphery have a point. I don’t think austerity has been working so well – resulting in a deeper, and more protracted, recession. The ECB seems wedded to austerity as an answer, even in the face of evidence to the contrary (though they do seem increasingly open to engaging in quantitative easing – OMT – if necessary). The powers that be in the core, however, have very little appetite for allowing inflation to increase (as memories of the Weimar Republic loom large).
So unfortunately, and especially for the constituents at the core, the issue is not just economic, but political. And 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. How much pain can countries like Spain, Italy, and Greece endure before there they decide that enough is enough and walk away from the Euro experiment? We might not on the precipice at the moment, but without a meaningful compromise, such an outcome might be inevitable.
Nevertheless, as the unbridled optimist that I am, I am hopeful that when push comes to shove, the ECB will intervene and the core countries will do more – ultimately recognizing that they bear tremendous costs should countries like Italy and Spain abandon the Euro. I am also hopeful that once the federal elections pass in Germany (in September), that the current rhetoric in favor of austerity will shift to one that emphasizes European unity and solidarity, with a commensurate commitment to do more to keep the Euro together. But let’s just hope that countries like Italy and Spain don’t reach their breaking point before that happens…
More on this topic (What's this?)
Spain and France Facing Huge Unemployment (Gold Stocks Today, 5/5/13)
German Manufacturing Ominous for Eurozone (Wealth Daily, 4/24/13)
Colt Reports, Expands Irish and German Regional Depth (Telecom Ramblings, 4/26/13)
A recent issue of The Economist magazine contained a timely special report on offshoring and outsourcing.
In a series of insightful articles, the magazine highlighted the trend of companies rethinking their offshoring strategies and bringing work back home (see Welcome Home).
According to The Economist, the “reshoring” trend is being driven not only by increased automation in manufacturing, but also by rising labor costs.
…The pull of low-wage countries is weakening. In a survey of big American manufacturers by the Boston Consulting Group last spring, nearly two-fifths of firms said they were either planning to move or thinking about moving production facilities from China back home…Consultants at both BCG and Alix Partners reckon that by 2015 it will cost about the same for an American firm to manufacture in America as in China.
It is only natural that as labor becomes increasingly more expensive overseas, and as automation tools become increasingly cost competitive, companies will reconsider their decision to offshore work. But the calculus doesn’t end there.
Western firms are also finding that innovation is easier when manufacturing is in the same place as research…early pioneers of services offshoring are bringing work back home, having discovered that looking after customers and developing new IT tools are in fact a “core” part of business.
It’s not solely about the nominal wage differences, but the hidden costs associated with managing far-flung activities. In many cases, cost differentials don’t compensate for quality differentials or its long-term strategic consequences. As I mentioned in prior blog posts (see Small Business Reevaluate Outsourcing and Revisiting Outsourcing Again):
…managers typically overestimate the benefits of offshore outsourcing (i.e., the ability to access cheap labor) and underestimate its costs (e.g., those born out of cultural, political, economic, and regulatory differences across countries)…[offshore] outsourcing is not without strategic consequences.
Although the economics of outsourcing can seem compelling on its face, the trend toward “reshoring” seems to suggest that managers are finally starting to recognize that the benefits are not quite what they seem.
With all that in mind, I invite you to take a closer look at The Economist special report. You can also watch the accompanying (embedded) video introducing the special report. Enjoy!
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Poor Indian Industry performance – Is Manufacturing Industry to blame (Green World Investor, 5/31/13)
China’s Manufacturing Expands at Fastest Pace in 19 Months (Penny Stock DD, 12/30/12)
What These Data Have to Say About the So-Called Economic Growth Coming to the U.S. (Jutia Group, 6/5/13)