Still Bad

As we are still comfortably on the road to Europocalypse, there is more and more grim and utterly depressing news coming from the land of everlasting and unsolvable economic pain:

Activity at European businesses hit a near three-year low in May, according to a survey by Markit. Its index, based on a survey of purchasing managers in the manufacturing and service sector, fell to 45.9 in May, a 35-month low.

So, it's official. We are worse than we were in 2009. At least we are not back to the, say, 1970s... Oh, wait! We are.

As a result of the European firms performing terribly on a whole new historical level, the markets are obviously starting to price this in, by rushing to get rid of every asset even remotely reminding them of the Euro:

Some of Europe’s biggest fund managers have confirmed they are dumping euro assets amid rising fears over a possible Greek exit from the eurozone and single currency turmoil.
The euro’s sudden fall this month caught many investors by surprise. Europe’s single currency has lost 5 per cent in the past three weeks after barely moving against the US dollar for much of the year. On Thursday, the euro hit a fresh 22-month low at $1.2514.

I don't want to live in a world of such cruelty and unfairness!!!

Meanwhile, find out here how to lose $1.5 Billion in 5 days.

The MIT Family Tree

This is awesome:

Source: Link

P.S.: Paul Krugman, Olivier Blanchard, Lucas Papademos, and Mario Draghi were once classmates and, who knows, maybe even roommates. Crazy stuff.

P.P.S.: That's perhaps the best example ever of positive spillover effects.

Econometrics: Sample Exam Questions

Students of Econometrics,

Based upon your request, I have composed a list of sample questions for your final exam. Please note that these are NOT the exact questions you will see on the final.

Download link here.

BakuViews Music: Europe In Euphoria

It's over and I will personally miss it. The 2012 Eurovision Song Contest, which was held in Baku in the past week, was arguably the most spectacular musical event organized in the past five years. Journalists and representatives from all over Europe were (and still) are speechless with the unprecedented hospitality with which everyone was treated. The organizational procedures were almost surgically perfect, the quality of the event was more Brussels/London/NYC like. But hey! Baku is on the same list. At least after the whole world witnessed the esthetic taste and grandiose scale that will separate this particular ESC edition from many others, and for many years to come.

Congratulations to the extraordinary Loreen!

Strategic Decision Making: Eurovision Edition

Who said that Eurovision has nothing to do with economics? Well, it really doesn't, but there are some connections if you look for them carefully.

It should not be a surprise to you that at the voting procedures of the annual pan-European Eurovision Song Contest, countries tend to vote in favor of their neighbors and/or nations that are especially close and dear to them. It is obvious that the Scandinavian states will give many points to each other, or the former Soviet Union countries would support their friends, or the former-Yugoslavian bloc will prioritize the performances of that same region.

This is, in fact, somewhat of an example of strategic selection under uncertainty. I have been thinking about the reasons countries tend to vote in a certain pattern, almost every year, for quite a while. Although determining that exact pattern, collecting the data and running a regression would be too much (I have other and better things to do!), I still have been having this question in mind.

Today will be the final of the 2012 edition of the Eurovision, which is held in Baku, Azerbaijan. I have no idea who will vote for whom. But if history plays any role at all in determining future probabilities, then looking at how countries have voted in the past will be useful for at least expecting that some form of strategic voting will take place.

Below is a scheme that does a good job of showing how the countries have been voting in the past several years:

Let the best performance win!

Jobs Are Liberal

Assuming that we finally conclude that we need urgent growth-stimulating policies to bring the economy back to life, the obvious question is: what should we do to deliver this? Or rather: who can adequately perform the necessary task of growth boosting at these uncertain and difficult times?

Quick research shows that among all the available policy arguments that we have on the agenda, the democratic (liberal) propositions are those which consistently, systematically outperform all other alternatives. Liberal economics is not a political side of some story; it's the economically correct solution, which has worked in the past and there are no reasons as to why it shouldn't deliver this time around.

Bloomberg has a nice graph, clearly showing that private-sector jobs in the U.S. have increased more under Democratic Presidents rather than under Republicans:

If you pay close attention, proponents of liberal economics have created 42 million jobs in the past 40 years, as opposed to just 23.9 million by their opponents. The differential is staggering. But I am not even surprised.

Not long ago, I brought to your attention another fact about the strength of liberal economics. Democratic presidents have been always better at stimulating growth, and the JP Morgan's graph below illustrates that: 

We, as a matter of fact, have an astonishing amount of evidence that liberal economics is the path towards recovery. Liberal economists and policy makers have consistently outperformed the supporters of all other paths of thought. They have delivered higher growth and created more jobs. Two of the factors which we so desperately need in this hour. It really is extremely unfortunate that we cannot finally close the debate on which policies should be selected to cure the economy. The discourse is still, still! dominated by ideas which are simply wrong. Instead of trying to save the system from disintegration, we are wasting precious time.

Missing The Party

SOCAR (State Oil Company of Azerbaijan Republic), already one of the largest companies of its kind, is expanding its presence in Georgia. Via Trend.az:

Neftegazstroy Trust of State Oil Company of Azerbaijan (SOCAR) will build a 29-kilometer section of the pipeline Abasha - Senaki in Georgia... In November 2008, Azerbaijan and Georgia signed the agreement to stir up SOCAR's activity on Georgia gas market during next 5 years beginning from 2009. Under the agreement, SOCAR will launch subsidiaries to supply gas to consumer groups pinpointed by the Georgia government.

The fact that Azerbaijan is playing a role of a catalyst of regional economic activity should not come as a surprise to most of us. Enriched with an abundance of natural resources, Azerbaijan is carefully and surely building a transnational trade network that would tie its neighbors to the "land of fire" indefinitely, through the means of energy security and sustainable development. The benefits of cooperation with Azerbaijan in the spheres of oil, gas, petrochemical production are rather obvious: vast resources for decades to come; a politically and macro-economically stable partner; lower transaction and bureaucratic costs associated with transit that one would have incurred in alternatives routes - via Russia or Iran, to name a few.

What strikes me most though is that there are some who still, regretfully, do not understand the benefits that a pan-Caucasian trade network could deliver. Georgia, for one, is benefiting tremendously from Azerbaijan's resources; and Azerbaijan is more than happy to share and to build a long-term, multi-national industrial platform. This platform already includes, in addition to Georgia, countries like Italy, Russia, countries of the Eastern Europe and Central Asia. Azerbaijan has a real opportunity to convert itself into a regional hub for industry and trade, and this is an opportunity for cooperation that wise, pragmatic regional nations cannot forgo.

There are, unfortunately, some players in the region who, despite numerous advice from the international community, prefer political aggression over economic cooperation. I am, of course, talking about the continuous occupation of over 20% of Azerbaijan's territory by Armenian arms forces. The sad part is, that they are doing all the damage to their forever worsening international reputation themselves. But it doesn't have to be this way. Erevan has other options, not that we necessarily need Armenia, but rather Armenia needs its neighbors in order to have anything more than just a remittances-based economy. Remittances (money flowing into the country from wealthy national individuals and institutions abroad) amounts to over 80% of Armenia's GDP.

So, what can be done? The path towards including the neighboring Armenia towards a unified Caucasian energy-based revenue pipeline is extremely simple, and consists of 4 fundamental steps towards liberalization and utilization of the region.

No.	Purpose	Date
822	Calls for the cessation of hostilities and withdrawal of occupying forces from Kelbajar district of Azerbaijan following its occupation on April 3, 1993.	April 30, 1993
853	Calls on withdrawal of occupying forces from Agdam district of Azerbaijan occupied on June 23, 1993 and reaffirms UN Resolution 822.	July 29, 1993
874	Calls on withdrawal of occupying forces from recently occupied Azerbaijani districts of Fizuli (August 23, 1993), Jabrayil (August 26, 1993), Qubadli (September 31, 1993) and reaffirms UN Resolutions 822 and 853.	October 14, 1993
884	Calls on withdrawal of occupying forces from recently occupied Azerbaijani district of Zangilan, calls upon the Government of Armenia to use its influence on the occupying forces, and city of Goradiz and reaffirms UN Resolutions 822, 853, 874.	November 12, 1993

The Caucasian energy project is a polit-economical animal. It's just too unfortunate that some countries (or more correctly: certain regimes that reign in those countries) are prioritizing "polit" over "economical", thus sacrificing opportunities and growth for paranoia-like ideology and expansionist aggressivism. The rest of the region is going forward, while Armenia is missing the whole party.

Growth, Anyone?

The incumbent president believes that our focus must be on growth and jobs. Via BBC:

US President Barack Obama has said there is an emerging consensus that European countries must now focus on jobs and growth. Obama: "All the leaders here today agreed growth and jobs must be our top priority"

Guess who has been preaching growth-o-nomics in the past months?

Once:

The basic theme of the conference was, essentially, crisis prevention and building a fortress to save ourselves from the Eurogeddon. I am just afraid that we will overlook falling growth prospects in favor of financial and fiscal stability, thus repeating the mistakes of those from whom we are building the fortresses of supervision in the first place.

 Twice:

Growth is our priority in the short-run. Diversification is the long-run goal. Budget is not in this picture, it's a supporting accounting mechanism, which is never a goal in itself but a complementary annex to policy and long-term strategizing.

And many, many more occasions on which I have been struggling to focus our attention on growth-stimulating policies. Those who read BakuViews would testify my commitment to recovering from this depression and ignoring all the fallacies that dominate our discourse.

Europocalypse Revisited

It's remarkable that since November 2011, the time BakuViews iconized the buzz-word "Europocalypse", nothing much has changed. Eurozone is still in trouble, and because it can't solve its own internal problems, it's casting negative externalities on those other parts of the world which, in fact, are beginning to get better. That's why the old-fashioned "who cares?" cannot be applied to the Euro-puzzle. It is affecting all of us.

Much like most of us were contemplating, Greece is about to exit the euro. Via Financial Times:

“I guess an amicable divorce – if that was ever needed – would be possible, but I would still regret it,” Luc Coene, central bank governor of Belgium, told the Financial Times.

An ammicable divorce is possible, of course. But this would set a dangerous precedent for every other Euro state in trouble to consider exiting the union and re-launching its own currency. The problem here is fundamentally economical: the fiscal imbalances between the surplus-ed "core" and the deficit-ed "periphery" are too deep that could be solved by simply pumping out liquidity into the system or by ordering state-driven investments. The internal divergence of comparative advantage has caused a practically in-solvable structural problem of current accounts.

And the odd man out is Greece. The problem here is that sacrificing Greece would not be simply a case of getting rid of the bad apple in order to preserve the family. This will, most surely, kick-start a chain reaction of slow, prolonged bank runs in both Spain and Portugal, and perhaps Italy. The fiscal situation in these countries is just too bad to steer confidence into the markets, which haven't yet priced in the prospect of Italy and Spain/Portugal continuing the default marathon, but have certainly considered this as a real possibility.

There is, at least right now, no potential long-term solution to save the Euro from internal demolition. There is one, however, temporary key to keep the ship afloat before Carphatia arrives. And the only option remaining is to establish a pan-continental fiscal union and finance the region out of this recession via temporary state-driven spending, with the German-French axis being the major foundation of fiscal credibility. The fiscal union might, just might work out.

We should highlight that there is no "win" scenario for Europe. There is only "lose" and "maybe survive". While our policy-makers, commentators, economists, and members of the social community have been reading out loud all the wrong stratas from their age-old legends, we have been steadily accumulating deep, substantial problems in the global economy that will haunt us for years to come. With record-breaking youth and long-term unemployment, we are digging our own graves. And should start preparing ourselves to jump in, but only after we say farewell to Greece.

Econometrics: Exam Prep

Students of Econometrics,

In 2 weeks you will have your final exam and the course will end. Last class we have covered, briefly, the questions that you will encounter on the exam. I decided to provide you with a "summary" of the material, the stuff that you should revise for the exam. The link is here. You have to study the first 10 chapters of the book, and all the slides that were uploaded to the blog. Tomorrow I will upload 5-6 questions that will require your attention before the exam; as we discussed last week.

All course slides are available in this label.

Course text book is here.

Weird questions that need your pre-exam attention here.

Some motivation for your exam here.