Without Reform, the EU Will Go On Being a Poor Economic Performer
Here is a middle section of this excellent column by Roger Bootle for The Telegraph (my bold highlights):
Why was European economic performance relatively weak, even before the euro was formed? Until recently, the EU’s biggest venture, and its most colossal waste of money, was the Common Agricultural Policy, which inflated prices for food and incentivised farmers to overproduce, thereby leading to wine lakes, butter mountains and the rest. At a lesser level, the EU squandered money on ill-considered subsidies and pet schemes. Moreover, it overregulated and misregulated, especially in the labour market.
This tendency to make daft economic decisions has deep roots. If you are trying to harmonise institutions and practices across extremely diverse countries, then you are driven inexorably towards heavy intervention and regulation. That has substantial economic costs.
Moreover, the EU is an enterprise conceived by politicians and administered by lawyers. These two groups have a proven tendency to fall foul of the law of unintended consequences. They make rules which are supposed to bring benefit without taking due account of the effects. Their inclination is to believe that behaviour is driven by rules. By contrast, economists know that it is driven by incentives. Furthermore, France has had a disproportionate role in framing the EU. The French establishment is famously suspicious of markets and disdainful of competition. It is not surprising, therefore, that the EU has had an anti-market bias.
Even so, the most serious source of economic underperformance has been the euro. It isn’t only about the pain inflicted on the southern countries by uncompetitiveness and fiscal austerity, but also about the persistent tendency for Germany to run huge current account surpluses which drain demand from the other euro members – and countries outside the eurozone.
This tendency was there before the euro was formed, but it was kept in check by changes in exchange rates. Not any more. Out of this inflexible union has come economic misery – and not only for the eurozone. Its weak performance has been a leading factor restraining many other countries, including the UK.
Ironically, it was not necessary to form a monetary union. And if there was to be one, it wasn’t necessary to include countries such as Greece and Italy, with widely differing economic cultures as well as problems with competitiveness. If monetary union were to go ahead, the euro elites were warned by countless economists that this could not last without fiscal and political union. Monetary union was an integration too far and too fast.
So why did they do it? It was the politics, stupid. Monetary union was in line with the ambition for “ever-closer union”, and with the objective of creating an integrated EU in which nation states fall back and common European institutions surge forward.
David Fuller's view
The section in bold above speaks volumes in terms of the EU’s inefficiencies. I doubt this will change because the people in charge are unlikely to accept responsibility for the EU’s economic failures.
Regarding the concluding point above, this has been discussed since the Euro’s launch on 1 January 1999. My view is unchanged. They launched the Euro on its own because this was far less controversial than trying to create a Federal Europe, which would have had little public support. Europe has subsequently been paying the price for the folly of a single currency without federal backing. The better idea, in my opinion, would have been to stay with the European Free Trade Association (EFTA) and the European Economic Area (EEA).
Corn, Soybean Prices Rise Thanks to Smaller Grain Stocks, Bigger Demand
Here is the opening of this article from AG WEB: Demand for corn and soybeans is increasing, but stocks of both crops remain well above year-ago levels, according to data released Tuesday by the USDA.
On the bright side, stocks of both corn and soybeans were lower than expected and demand is fairly strong, according to the June 1 quarterly Grain Stocks numbers.
Looking at corn first, USDA projected stocks at 4.447 billion bushels, below the average trade estimate of 4.555 billion but within the range of expectations. Quarterly stocks of corn are 15% above last year’s 3.852 billion bushels.
Corn disappearance for the quarter at 3.3 billion bushels was 140 million bushels stronger than last year.
“Even though avian influenza set back corn demand in the poultry market, we saw growth from the beef and hog sectors,” said Chad Hart, agricultural economist with Iowa State University. “We also saw really good numbers from the ethanol industry.”
Corn use for ethanol production hit an all-time high last week.
David Fuller's view
When I commented positively on corn and soybeans last Wednesday, too much rain, soaked fields and the need for some replanting were the main features.
This item continues in the Subscriber’s Area.
Tsipras Asks European Union for a New Bailout Program
This drama continues to unfold in the manner of Lewis Carroll’s Alice (Tsipras) in Wonderland. Here is the opening from Bloomberg’s report: Alexis Tsipras just tried to jam the pin back into the grenade.
Less than nine hours before Greece’s bailout package was due to expire -- and a day after he was forced to shut down his financial industry for lack of cash -- the Greek premier sought a new deal to maintain an aid lifeline and an umbrella to assure the critical flow of European Central Bank loans.
Creditors will consider the gambit during a conference call at 7 p.m. Brussels time, though German Chancellor Angela Merkel said there would be no new talks before Greece’s referendum on Sunday. The plan would cover all the country’s financing needs for two years; it failed to include any economic-reform measures and proposed a restructuring of its crushing debt load. Both elements are likely to be rejected.
“It strikes me as just another brinkmanship tactic,” said Ben May, an economist at Oxford Economics in London. “It could arguably be the starting point for bringing Greece back from the brink, but it’s going to be a pretty bumpy ride.”
The request, contained in a letter to the European bailout fund and Dutch Finance Minister Jeroen Dijsselbloem, who heads the panel of euro-area finance chiefs, was sent shortly before Greece was due to miss a $1.7 billion payment to the International Monetary Fund.
David Fuller's view
EU officials from Mad Hatter Jean-Claude Juncker, the unelected President of the European Commission, to Red Queen Angela Merkel, are desperate to keep Greece in the EU. After all, the EU holds all those expensive Greek debts and does not want to write them off. Ominously, in this club which countries are expected to join but never leave, the EU fears Grexit would be followed by a queue of other Southern European countries, demanding preferential treatment to keep them on board.
Meanwhile, Tsipras is holding out to see if a desperate EU will give him better terms. That seems like folly but anything is possible because the EU is not being run on the basis of sound economic policies.
The UK either needs to dine a la carte in the EU or leave the restaurant
Here is the opening of John Redwood’s article for The Telegraph: Other EU countries strike very strange poses when it comes to the UK renegotiation. They tell us that they want us to stay in, and they also tell us they cannot possibly accommodate any of our wishes. They both tell us we will be better off by staying, and then lecture us on how we have to put up with all the things that clearly make us worse off inside the EU
Sometimes they move on to threaten us in unconvincing ways, implying they would no longer wish to sell us their cars and wine if we left. Now we have the French telling us we cannot expect to dine a la carte.
The French are of course wrong. We already do dine a la carte. The UK does not want the tough meat and gristle of economic, monetary and political union. We have opted out of the main course on this menu. If they wish us to stay in the restaurant, as they claim, they are going to need some tasty starters and delicious sweets to keep us going.
After all we cannot and will not order the chef’s special single currency dish at the heart of the table d’hote offering. Nor are many UK voters too keen on the amuse bouche of free movement of people, though we are told this is what you get in an expensive restaurant like the EU.
So what should the UK ask for in the renegotiation? What should Mr Cameron tell the other EU countries now the negotiations are underway? He should start with a clear statement that the UK wants to trade and be friends with them but has no wish to enter political and monetary union. He should remind them that the UK took the crucial decision not to join their centralised union when we decided to stay out of the euro. He should say what the UK wants is a fundamentally different relationship – a relationship based on mutual co-operation, joint action where both sides think it makes sense, and on tariff free trade. The UK will give up its right to tell the euro area what to do and to vote on their business, in return for being free to pursue our national interests without interference from the European Court and the Brussels bureaucracy.
David Fuller's view
This is all very sensible from John Redwood but I am not optimistic that David Cameron will be sufficiently successful in these negotiations. Brussels officials certainly wish to keep the UK in the EU, but they know that is also Cameron’s view. Moreover, they know that he only offered the Referendum to reduce defections to Nigel Farage’s UKIP. Consequently, undecided voters are unlikely to be impressed by terms agreed by the EU.
Assuming this is the case, I will most likely vote to leave the EU. If the ‘out’ vote succeeds it will concentrate minds in Brussels, leading to improved terms which may be acceptable. Cameron could then call for a second referendum on that basis. I believe Boris Johnson also holds this view.
China Turns to Market-Boosting Playbook That BofA Calls Obsolete
This article from Bloomberg News may be of interest to subscribers. Here is a section: “The margin call, forced sale, margin call vicious cycle can quickly develop a momentum of its own,” Cui, the head of China equity strategy at Bank of America in Singapore, said in an e-mail on Monday.
Doubts about policy makers’ ability to prop up the world’s second-largest stock market are spreading after a weekend interest-rate cut and speculation that regulators will halt IPOs failed to prevent the Shanghai Composite from tumbling into a bear market. The gauge would need to fall a further 13 percent to match its average downturn since 1990.
“Any support the government can provide would be short lived,” Chad Padowitz, the Melbourne-based chief investment officer at Wingate Asset Management Ltd., said by phone. “The only real support they can provide over time is providing a reasonably balanced, growing economy. That’s the best thing they can do. Anything they do short term, decreasing interest rates to support the market or things like that, are somewhat foolish.”
Eoin Treacy's view
Expectations for future upside potential deteriorate within a range not least because they are boring and disappointing relative to the trending phases. We define ranges as explosions waiting to happen. However, the conditioning process of these congestion areas means that the strength of the breakout is often surprising to people most familiar with the market. Following an impressive breakout from a medium-term range prices will rally for as long as it takes supply to overwhelm demand. The test of whether a new uptrend can persist into the medium-term is in the extent to which the breakout can be sustained in the ensuing period of consolidation. This is what we term the first step above the base.
Puerto Rico Creditors Said Drawing Battle Lines as Default Looms
This article by Laura J. Keller and Michelle Kaske for Bloomberg may be of interest to subscribers. Here is a section:
Garcia Padilla has turned the island’s rescue efforts on their head. In a televised speech Monday, the governor said he will seek to delay payments on the island’s $72 billion in debt for “a number of years,” and he called on officials to come up with a debt restructuring plan by Aug. 30.
His comments sent the prices on some Puerto Rico bonds tumbling to all-time lows, while both Standard & Poor’s and Fitch Ratings cut the commonwealth’s ratings deeper into junk.
With traditional municipal-debt investors shunning its bonds, the island faces a stultifying cash crunch and the government expects its development bank to run out of capital by Sept. 30.
Puerto Rico’s new fiscal year starts July 1 and lawmakers Monday night passed a budget that would enable it to make payments on central-government debt. The U.S. territory of 3.5 million people is grappling with a jobless rate double the national average and a debt load bigger than every U.S. state except California and New York.
The creditors own about $4.5 billion of Puerto Rico’s debt and are led by Fir Tree Partners and Monarch Alternative Capital. They had been proposing terms for the bond deal since at least February, people with knowledge of the matter told Bloomberg last week. It would siphon money to the GDB, which handles the island’s debt transactions and lends to the commonwealth and its agencies, by repaying debt owed by its highway authority.
Eoin Treacy's view
Puerto Rico is in a difficult situation being neither a state nor a city but a commonwealth. It therefore has no recourse to the same bankruptcy protection as a municipal like Detroit, the US government has said it will not bail it out and it does not have the ability to call on the IMF. Just how Puerto Rico anticipates being able to renegotiate the terms of its $73 billion remains to be seen. The market is now pricing in the inevitable budget cuts and tax increases that will be required but have not yet been announced.
Musings from the Oil Patch June 30th 2015
Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report for PPHB. Here is a section on Canadian oil supply:
The significance of the oil sands on global oil supply cannot be ignored. Over the past five years, oil sands output has grown by 1.1 mmb/d, fully one-fifth of the total oil production growth for North America. The impact of lower oil prices on the oil sands cannot be missed. Early in 2014, Western Canada Select, a heavy oil price market, was selling at $86 a barrel. By the end of March, that marker was trading below $30 a barrel. This is when, according to oil industry consultant Rystad Energy, new oil sands projects require a price of $100 a barrel in order to breakeven. What’s been the impact of the price decline on the Canadian oil industry?
In February, Royal Dutch Shell (RDS.A-NYSE) withdrew its application to build a new 200,000 barrels per day (b/d) mine at Pierre River, north of Fort McMurray. In May, the company announced it would delay for several years a new 80,000 b/d in situ oil sands project at Carmon Creek near Peace River. The significance of these projects is highlighted when one realizes that Shell currently operates 225,000 b/d of oil sands production. Other projects are being delayed as companies plan to bring much smaller in situ projects into production at a delayed pace in order to manage their cash flow and capital investment requirements.
A June 16th report from Ernst & Young LLP projects a 30% decline in Canadian oil sands spending, bringing this year’s investment to $23 billion, down from an expected $33 billion. The result of this spending decline and the announcements by several producers to stop or delay new oil sands mines and in situ projects means total oil production will be 17% lower by 2030 compared to the target output in the 2014 forecast provided by the Canadian Association of Petroleum Producers (CAPP).
In addition to cutting new investment, oil sands producers are looking at ways to cut their operating costs to help improve their breakeven prices. Suncor Energy (SU-NYSE), a significant oil sands producer, has said it plans to replace 800 dump truck drivers with automated trucks at its oil sands mines. That move, which is a huge boost for autonomous vehicle technology, is projected to save the company C$200,000 per driver.
Eoin Treacy's view
A link to the full report is posted in the Subscriber's Area.
Decisions to postpone or cancel spending on new projects has long-term consequences for oil supply growth forecasts not least when this situation is not limited to Alberta. Oil and gas companies are cutting expenditure wherever they can in order to remain profitable in what could be a persistently low price environment, at least relative to the levels that prevailed until a year ago.
Email of the day on Greece and oil wells
Well, Greece - what a fine mess... proof that the pundits don't have a clue what is priced in or what is not... proof that in humans, wishful thinking often overrules common sense... proof that the only limit to Socialism's spending other people's money is when that money runs out... proof that while people as individuals normally act more or less in what they believe is their own self-interest, people in crowds are really capable of mass stupidity... and, as if we needed more proof, politicians should never ever be in charge of negotiations...
Meanwhile it continues to be in the best interest of US oil producers to pump the oil they've already tapped. Most analysts seem to underestimate the cost of reopening a shut-in well, especially fracked wells, which may require refracking (a new scrabble word) to really get oil flowing again... I contend this makes oil cheap and possibly cheaper for several years to come (barring a massive supply disruption). As always, of course, the cure for low prices is low prices. Speaking of new scrabble words... the activity prior to fracking is prefracking, which you can repeat if needed leading to reprefracking, which is a lot of points. Of course the folks who perform the fracking are frackers, but the prefrackers are usually just called roughnecks, drillers, and tool pushers (each of those being a job description in the oil patch).
Eoin Treacy's view
Thank you for this informative email and I enjoyed your scrabble suggestions. I think a lot of people share your frustration with the Greek government’s negotiating tactics and we are all on tenterhooks as we observe how the situation is unfolding which is contributing to volatility. I wouldn’t want to have to vote in the upcoming referendum since the result is likely to be difficult regardless of the outcome not least because the question is ambiguous.