Will the British Pound Crack?


Just a few days ago, the New York Times decided out of the blue to make an international hero of a British blogger whose name is Edward Hugh. The paper described him as a “self-taught economist” in this long article – Blog Prophet of Euro Zone Doom – that made, under a different title on June 9 last, the front page of the European edition of the International Herald Tribune (in its turn, the IHT is the international edition of the NYT). And on top of that came this post – Cassandra Redeemed – on the Economix blog of the NYT in which the self-taught economist, prophet of euro zone doom, explains at length why we are doomed.
“We” means we Europeans Euro-zoners in general. But it means, of course, we Italians in particular.
Before we go on let me make clear what I think of prophets of anything in economic matters. Sooner or later they are always right, you know, no matter what they prophesize. Business proceeds in cycles, there are booms and busts, ups and downs – if you stick to your point, whatever it is, sooner or later you are proved right. It only needs patience, scant inclination to doubt and a good measure of self-righteousness. Obviously, if you are also able to tell exactly when you are going to be proved right, then you might wish to put your money where your mouth is – and become rich. Otherwise you must content yourself with becoming the hero of a period, another Mr. Doom à la Nouriel Roubini.
Ok, then, this Mr. Hugh has been predicting for years the implosion of the euro zone. Very well. Lets’ forget for a moment that the euro zone is still well and alive, did Mr. Hugh also predict how might the current sovereign debt crisis arise and unfold? That Greece and Spain would actually trigger it? “In fact – wrote the NYT – it was Italy, not Greece, that attracted his early attacks”.
He was not alone. Another (earlier) prophet of euro doom was Simon Tilford, chief economist at the Center for European Reform in London who, in 2006, wrote a pamphlet whose title was “Will the eurozone crack?”. The fifth chapter of the pamphlet – tellingly titled “Italy – five minutes to midnight?” – spelt out a scenario to which its author attributed a “40 percent probability”.
According to this scenario Italy’s “erosion of external competitiveness continues”, then “the financial markets lose confidence that Italy’s position is sustainable, causing debt financing costs to rise sharply”. At this point all hell breaks loose: public opinion turns against the euro, Italy leaves monetary union and devaluates sharply, Portugal and Spain do the same to stay competitive with Italy, France and Germany demand trade barriers against Italian imports and – finally – the single market itself starts unravelling.
See the problem? Italy’s external competitiveness. Let’s now go back to Mr. Hugh. Here is what he has to say today on the same problem, how he put it just a few days ago on the Economix blog quoted above: “Italy is simply Germany or Japan without the industrial competitiveness”. ( The emphasis is mine). Plus we Italians have a heavy public debt (hey, and what about Japan?). “Since 2007 – Mr. Hugh insists – the Italian government have (sic) made great efforts not to pump up the deficit to avoid highlighting this issue, but it is lurking there in the background”.
Here we go again, the basket case, the laggards, the fuse on the euro-zone time bomb because, on top of our public debt, we Italians are not competitive enough.
Really? Look at this table that The Economist updates every week, first column, “trade balance”. Is it Italy that has a problem of “industrial competitiveness”, or rather Spain, Greece, France, the U.S. and Britain?
Now, have a look at table 1.6 of this WTO document (World Trade Developments 2009), but please take into account that, due to a mistake, in the first 4 columns (years 1948-1973) Italy’s values belong to the UK and vice versa. It turns out that between 1973 and 2008 Italy lost 0.4% of world merchandise exports – whose overall value, though, increased 27 times – going from a 3.8% share of the total down to 3.4%. Over the same period, though, the U.S. lost 4.2 percentage points, France 2.4, Germany 2.3, the UK 2.2 (its share, at 2.9%, was well below Italy in 2008), Japan 1.4 – whereas China, of course, gained 8.1 points and “Six East Asia Traders” 5.6.
Taken as whole, the euro-zone has a current-account balance close to zero and is not particularly indebted either – both the private and public sector – on a world scale. It only takes a modicum of political will to hold the zone together and to uphold the euro, such as that shown last month when the EU governments and the European Commission put € 750 billion on the table. The economic fundamentals are sound, including those of Italy among others.
Can the same be said of Britain, for example, whose public debt as a percentage of GDP is fast approaching Italy’s, whose combined public-private (households and non-financial enterprises) debt as a percentage of GDP is projected to be this year one fourth heavier than Italy’s and whose “industrial competitiveness” is truly a laughing matter?
Why don’t some British economists and/or bloggers mind their own economy and its competitiveness?
In other words, will the British Pound crack?