Market Analysis

A Mélange of Miscellany

A midweek mash-up of news that caught our eye.

CPIIGS? PICIGS? PIIGSC?

Thwarting acronym lovers everywhere, Cyprus’s finance minister hinted his nation may soon be the latest to request EFSF/ESM aid. The nation’s second-largest lender needs a €1.8 billion capital infusion by June 30, and if it can’t access enough private capital, the government’s on the hook. But Cyprus has been shut out of primary debt markets for a year, and it’s relying on a €2.5 billion Russian loan to pay the bills.

If Cyprus needs EU aid, its leaders would likely prefer an arrangement like Spain’s—a banking-sector loan with fewer strings than full bailouts. Cyprus is also negotiating with a non-EU nation—purportedly China—in hopes of finding more favorable terms, as it did with Russia last year. Cyprus is keen to avoid any deal tied to a strict austerity mandate—leaders have seen broad public-sector cuts lead to varying degrees of social unrest in other peripheral nations, and they don’t see much need to endure that when Cyprus’s public debt and projected 2012 deficit are within Maastricht Treaty bounds. They also don’t want anyone to touch their coveted 10% corporate tax rate. They merely want some support for banks, which were overly exposed to Greece—were it not for that, Cyprus perhaps wouldn’t be in this situation. Its private sector and labor markets are pretty competitive—the Heritage Foundation ranks Cyprus 20th in the world in terms of economic freedom, and the World Bank places it in the top quartile for ease of doing business. There’s room for reform and privatization, but Cyprus isn’t Greece.

Cyprus is an interesting case study, but regardless of whether and from whom it gets help, the eurozone and global impacts are likely minimal. Cyprus represents 0.2% of the eurozone economy, and the amount in question is relatively miniscule.

A lesson in taxing trade

Tuesday, Chinese airlines gave the “Negative, Ghost Rider, the pattern is full,” signal on a request from the EU to submit emissions data for flights originating or concluding in EU airports. The request is part of the EU’s Emissions Trading Scheme (ETS)—which was first launched in 2005 to reduce pollution. However, this is the first year airlines are subject to the scheme, which requires foreign carriers to pay a tax on emissions created flying in and out of the EU. And in our view, Chinese airlines’ refusal to submit emissions data is timely evidence highlighting the folly of such political endeavors.

Widely panned as violating foreign airlines’ national sovereignty and enacting barriers to doing business in the EU, the debate has started something of a maelstrom between Beijing and Brussels. For example, Chinese officials have already hinted that should Chinese airlines be penalized by the EU for non-compliance with the ETS, China would consider impounding EU planes landing in China.

EU aircraft manufacturers have found themselves caught between a rock and a hard place, too—Chinese airlines are reportedly refusing to finalize orders for some $12 billion worth of jets. Moreover, if forced to pay the tax, it’s likely airlines attempt to pass along the additional costs to the consumer. And consumers likely want to do business where it’s cheaper (and easier). As we’ve said, tax something and you likely get less of it. Probably not the net effect EU politicians had in mind right now.

Two peanuts were walking down the street ...

Among the myriad proposals to fix the eurozone’s fiscal woes, Tuesday brought an entirely fresh suggestion: Germany’s government should give each German household €1,000 to be spent only on a vacation to a struggling nation. In addition, German citizens who purchase vacation properties in southern Europe should be given tax breaks.

Lest that strike you as a joke (akin to the Germans’ attempt at a lethal joke in Monty Python’s sketch), it seems it was an entirely serious proposal. And at first blush, it might not seem a terrible thought—why not encourage spending in nations who indeed could use the income right now?

Well, for one thing, it’s basically a single shot in the arm—not a long-term fix to broader underlying issues the PIIGS face, like lack of competitiveness or too much socialism (broadly speaking). Second (and relatedly), it suggests help must come from the demand side—which is akin to arguments those opposed to so-called austerity measures make. Those arguments go something like, “Without increased deficit spending and measures aimed at reinforcing demand, eurozone economies will continue struggling.” But as we’ve discussed before, such suggestions ignore the other side of the economic equation—namely, the supply side. Considering the supply side would no doubt lead more to measures aimed at helping businesses and encouraging production than one-time vouchers aimed at consumers.

Depressing semantics

No doubt, the Great Depression was a seminal moment in American economic history. Yet here’s what studying the Depression won’t teach you: The difference between a depression and a recession. Similarly, you’ll not learn when the Depression officially began and ended. You see, the NBER, official arbiter of recession dating, doesn’t differentiate between recession and depression. The time period often referred to is actually two separate recessions—1929-1933 and 1937-1938. (There was growth in the middle—twice at double-digit rates, as measured by annual real GDP.)

For these reasons, there is no official definition of depression. A problem making it all the more odd so many economists write of preventing them. Curiously, some even remind us there’s no definition, yet write prescriptions for ending depressions. Confusing, no doubt.

Maybe this semantic discussion isn’t the most fundamentally consequential stuff in the world, but it seems odd to us one applies the same moniker to an expanding American economy that’s bigger than ever before as you would a hole in the ground. (Or an area of low pressure generally associated with hurricanes.) Ultimately, the mental images conjured by depression lingo don’t seem to contribute much to general economic understanding.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.