Thursday, February 21, 2013

Plus ça change, plus c'est la même chose

Titan CEO Maurice Taylor's refreshing, stream of consciousness letter to the French Minister of Industrial Renewal shines a bright light on unresolved, fundamental weaknesses in the euro currency system.  Labor laws are an impediment to productivity and export competitiveness, but the single currency doesn't allow adjustments for relative cost differentials between, say, France and Germany.

Darren Williams of Alliance Bernstein lays the issues out clearly in a blog post today,

"But France does share some unwelcome characteristics with the periphery. Top of the list is the competitiveness lost since joining the euro in 1999.
This is most noticeable against Germany. According to our calculations, the gap between the actual (irrevocably fixed) exchange rate between Germany and France and the one required to offset the divergence in unit labour costs since the late 1990s now stands at 20%.
The deterioration in France’s relative competitive position is confirmed by the export performance of both countries. During the 1980s and 1990s, both countries’ exports grew broadly in line with their respective export markets. Since then, though, Germany has hugely outperformed its southern neighbour.
In spite of these problems, France has grown at an average annual rate of 1.4% since joining the euro, the same as Germany and the euro area as a whole. How has this been possible?
Part of the answer is that France has run a large and persistent annual budget deficit since joining the euro, equal to 3.7% of gross domestic product (GDP) on average. This compares with 2.1% for Germany and 2.8% for the euro area as a whole."

Unfortunately, no Socialist government, indeed no French government, will be acting on these issues.  Bond market investors are in a position to put meaningful market pressure on through sovereign spreads, but they act more like sheep than supposed "bond market vigilantes." And so it goes.

I'd surmise that Titan CEO Maurice Taylor probably got a congratulatory phone call for his letter from ArcelorMittal CEO Lakshmi Mittal.

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