Signs of strong second round effects in Spain
A very interesting story from Spain, showing runaway wage inflation as workers are seeking compensation for the persistent rise in headline inflation, comes from El Pais, which reports that Spanish wage costs rose in the first quarter by 5.3% (this article, like so many newspaper articles, does not reference this rise, so it is not clear whether these data are annualised, actual, or relative to the same period of the previous year). Like with any statistics, there is some room for interpretation of some statistical effects. For example, in Spain, dismissals have concentrated at the lower end of the pay scale, thus raising average pay. But the story says the Bank of Spain has been getting increasingly concerned about wage pressures, as Spain is losing competitiveness in the middle of an economic downturn.
Doubts over Lisbon implementation are growing
The FT reports from Brussels that Poland and the Czech Republic will not be able to ratify the Lisbon Treaty by the October deadline, which would have to be met for the Treaty to become effective in January 2009. That deadline has been knocked in any case by the Irish referendum. The article also talks about growing expectations that the Irish may not be alone in rejecting the Lisbon Treaty. There is stiff opposition to this treaty in the Czech Republic, where there is the additional threat of a constitutional court verdict.
Thinking outside the box on Lisbon
Writing in FT Deutschland, Stefan Collignon and Christian Paul argue in Financial Times Deutschland in favour of a democratic core-Europe, open to every EU member state, a colition among the willing. At the heart of this proposal would be a democratically elected European government, with responsibility only for common European issues. The present EU would remain in its current state.
Also writing in FT Deutschland, Wolfgang Munchau writes about a frequent misunderstanding about democratic process in Europe. The Irish No Vote is not symbolic of the popular will in Europe. The EU respects the Irish No vote not because it is a democratic thing to do, but because we protect minorities, in this case small states. From a democratic point of view, the only referendum that would have made sense would be an EU-wide referendum. Since this has not happened, and is not going to happen either, we have no way of inferring that the Irish non-ratification of the Lisbon Treaty by referendum is in any way more democratic than, for example, the German ratification by means of parliamentary procedures.
The options – according to the Irish
An interesting article by Ciaran Toland, a Yes campaigner and Irish barrister, in the Irish Independent, who looks at the options available now, under an Irish legal perspective. There are options which require another referenda and some that do not, such as various version of Lisbon-Lite, or Lisbon-Ultra Light. The article concludes that Ireland needs a lot of political and legal imagination to solve the crisis.
What if the euro were to fall?
The FT has a good speculative currency column this morning in which the author ponders the consequences of a weakening in the euro’s exchange rate – now forecast by several analysts. The impact would be severe on the euro area periphery, Poland, Czech Republic in particular, as investors would dump those currencies as the euro weakens. (They hold up during period’s of euro appreciation, as they offer higher returns. In the downphase, they may still offer higher returns but are seen risky). This means that once the euro starts to decline against the dollar back towards a more sustainable level, investors would dump zloties and other central European currencies.
FT Deutschland has an interesting related article on the rise of inflation in central and eastern Europe. In Bulgaria, inflation is now up at 14%, in Latvia at 17.7%, and in the Ukraine at 24.3%.
French strikes
In France there were strikes again against government reform plans of 35 hours week and the special pensions, see Les Echos. The turnout was less than predicted, inciting newspapers to declare victory for the government. Dominque Labbe in Le Monde argues that the reason for the low turnout reflects a loss of power of the trade unions with their basis and the inability to a truly common mobilization across trade unions. Dominique Seux from Les Echos argues that Sarkozy’s risky strategy to accelerate reforms even after defeat in the municipal elections and amid the slowdown of the economy seem to pay off. The government reform plans will be examined by the Parliament early July.
UK inflation to rise to 4%
Dear Chancellor… The art of letter writing is certain to be rediscovered in the UK, where Mervyn King has now forecast that inflation will rise to 4% by the end of the year. The FT reports that Mervyn King’s latest letter to chancellor has been interpreted by the banks as indicating that the BoE is willing to allow inflation to be accommodated. King makes the familiar excuse that inflation is due to higher oil and commodity prices, but yesterday’s UK inflation data show that prices are rising across the board, in both manufacturing and services. King’s letter suggests that the Bank will rely on the coming economic slowdown to take care of the inflation problem. One analyst is quoted as saying that this was conceivably the most dovish statement possible.
Martin Wolf on global inflation
Writing in the FT, Martin Wolf has an interesting comment on the rise in global inflation, which is caused by global imbalances. At notes that China alone constitutes a fifth of global economic growth, at purchasing power parity, while the all the developing economies together account for 70%. He also makes the point the inflation is a global phenomenon. If there was a global central bank, it surely would raise interest rates now. In the absence of such a global central bank, the best policy choice would be more exchange-rate flexibility, and domestic inflation targeting.
Stop Trichet
Der Spiegel reports on the initiative by a well-known French economist, Marc Touati, who has started an internet campaign to stop the ECB from raising interest rates at their next meeting. The campaign, www.stoptrichet.com, has so far attracted a little over 3,000 signatures (not much for an internet campaign, but we will keep you updated in case this turns into something popular). The website lists five reasons against a rate rise, including the familiar claim that our inflation is not a monetary phenomenon, but due to higher oil and commodity prices.
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