The BBC evidently does an annual review of the economic year as part of “BBC Newsnight,” and they’ve posted the top economists graphs of 2011, “sharing insights into the year’s extraordinary financial developments, particularly in the eurozone, by choosing a graph whih helps explain events so far and what lies ahead.”
If these don’t have you reaching for the aspirin–or a single malt–you’re made of stern stuff.
My selective take on it follows. (Images will open in a larger popup window if clicked.)
So interest rates on 10-year governments ran in lockstep from the introduction of the euro to the fall of Lehman–a period of magical thinking that sovereign risk was effectively the same across all countries. Guess again. But what’s really fascinating is that the pre and post divergence among countries is very similar, suggesting nothing changed during that seemingly long ago and far away decade of 1999-2009.
Lots of data here, but what’s going on borders on the historically bizarre. The horizontal line at 0 is financial surplus (+) or deficit (-); the green dotted line is government and the blue solid line is private sector (corporate plus household). The purple line is the “rest of the world.”
Here’s the story: Private sector and government spending run in wonderfully symmetrical opposite directions in general, but the UK and US private sectors are furiously paying down debt now and have been since just before the collapse of Lehman, even though interest rates are at historically low, near-zero rates. This should be, according to Econ 101 textbooks, a time to borrow money.
Since formation of the eurozone, German labor costs per unit of output have barely budged, but in southern Europe and Ireland have grown by around 40%. Guess who’s losing competitiveness? This structural imbalance in the single currency cannot be solved through bailing out debtors or even writing off their debt.
Courtesy of the nonpareil Ken Rogoff.
“The blue line is global average of public debt relative to GDP. The yellow bars denote the percent of countries in a state of default or restructuring on external debt. The dark pink bars that sometimes rise above the percent of countries in default or restructuring denotes countries with inflation over 20%. The chart suggests that if the historical pattern is followed, there will be soon a wave of sovereign defaults. Needless to say, we appear to be on the cusp of such an event in the eurozone and central Europe, and possibly some countries elsewhere.”
If you can’t read it, this chart spans 1826–2010.
Finally, we have this from Sir Howard Davies, former director of the LSE:
This charts the change in each country’s exchange rate relative to the euro currency countries as a whole, on the vertical axis, and each country’s growth in exports over the average of those same countries, on the horizontal.
The story is simple: When the euro was established, its architects assumed that once future devaluations were off the table, every country would realize it had to match Germany’s performance. Guess again: Southern European nations permitted their competitiveness to decline drastically, with dire consequences for trade imbalances.
I didn’t intend to depress you all in the midst of the holiday season, but the cumulative impact of these charts is, to my mind, nothing short of dazzling, in the same sense that Alfred Hitchcock’s Psycho could be called dazzling in the annals of terror films.
I not only see no quick way out of this mess, I’m not sure I see any way, short of a whole or partial breakup of the Eurozone.
