I’m back (on Croatia, the euro, inflation differentials, and little else)…
Dear brothers and sisters, today the happy family of the Eurozone welcomes a new member: Croatia. This fact, which we had talked about in due time , aroused one, indeed, two waves of conflicting emotions. On the one hand, the inevitable circumstantial enthusiasm :
to which, from that ugly person that I am, I could not help answering in a Hamletic tone :
On the other, a series of prophets of doom, led by an old and dear friend of ours :
but the same concept has been expressed in a more refined and cryptic form also by others :
One wonders how many understand what the Frenkel cycle is, especially today, considering that this blog has never existed , that you don't exist (yes, it's useless to pinch yourself on the arm: you don't exist, but we'll talk about this later.. .)… But above all, since nobody asked me, I'll give you my "chennepenZa". It's not very difficult, and maybe it can be instructive, especially for pandemics (those who woke up in 2020).
By now you will have understood me: I tend to be a contrarian . When everyone thinks in one way it's easier: just think in the opposite way. But even when, as in this case, the others think in two opposite ways (from Madame's frivolous enthusiasm, according to which Croatia's entry into the euro will solve Croatia's problems, to Fabio's dark sarcasm, according to which the Croatia's entry into the euro will solve our problems), it's not too difficult to be contrarian . Just take inspiration from the classics: as in an old cartoon by Altan, it is easy to demonstrate that both of these feelings are groundless.
I would start with the catastrophists. To debunk their schadenfreude , I point out that Croatia has long been a euroised country, as Timpone underlines in this brief note of his . Not only debits and credits were already defined for about half in foreign currency (euro), as you can see here:
(taken from here ), but the exchange rate between the national currency and the euro was substantially stable, as can be easily seen here:
where, given the high noob rate, I would like to remind you that exchange rates are quoted uncertain for certain, i.e. that an increase in them means a devaluation against the euro (that is, it means that more units of national currency are needed to buy a EUR). It is clear that while not pegged to the euro like the Bulgarian lev (which was already pegged to the mark by a currency board before the eurist era), the Croatian kuna has neither shown a tendency to depreciate like the Polish zloty, nor to revaluation like the Czech crown, but it was kept in a rather narrow range (between 7 and 8 kuna per euro).
For this reason, fears of the start of a Frenkel cycle, that is, for newcomers, of the potentially destabilizing effects of the inflow of foreign capital that a currency peg normally favors (when it does not cause), determining thanks to easy credit the accumulation of unsustainable debt positions in the private sector, seem out of place for now.
The main indicator of the start of such a phase is the current account balance (which, if negative, measures the country's foreign debt and therefore, precisely, the trigger of a Frenkel cycle). In Croatia the situation is this:
The blue bars indicate that Croatia is, for now, in a position of net lending (not indebtedness), as a result of a negative goods balance, more than offset by a positive services balance (we can imagine that the tourism).
So Schadenfreude can wait a little longer.
On the other hand, dumb enthusiasm is always out of place, it is, I would say, by definition. Starting from the last graph, it is clear that the balance of foreign accounts (blue bars in positive territory) depends on the balancing of two trends, one of which is worrying: the negative trend of the goods balance (orange line), which indicates an Croatia's increased use of imported goods. What the risk is was clearly seen in 2020: when COVID brought everything to a halt, Croatia, despite the fact that the goods balance had improved (a positive consequence of the block on world trade, which also meant a block on Croatian imports), was went into negative territory with the overall balance (blue bar slightly below the abscissa axis) due to the collapse of the services balance (probably due to the stop to tourism).
We might then wonder why Croatia depends so much on foreign goods, and the answer does not seem to be, at least for now, in the real exchange rate, i.e. in the relationship between the prices of Croatian products and those of the rest of the world:
since it has remained quite stable so far, unlike what happened for example in the Czech Republic. The Czech anomaly is easily seen in the inflation rates. We can imagine that if Czech goods become more expensive than those of the rest of the world (and therefore the real exchange rate rises, it appreciates) this depends on the fact that there is more inflation in the Czech Republic. Indeed, it has been like this, especially lately:
But recently something else has also happened, which can be clearly seen if we restrict the zoom to the last legislature (just to have a temporal reference term known to you):
As you can see, Italy, thanks to the five million poor made in Monty , has always had an inflation rate lower than the European average in recent years. The same cannot be said of Czechia or Croatia, especially in recent months.
There would be a long discussion on how far the latter country has therefore complied with the criteria for admission to the Eurozone, which among other things, as you know, require a very limited inflation differential compared to the average of the other member countries, but I won't go into that: for today I have bored you too much, and after all it was already understood with us that the decision to let a country enter the trap does not depend on economic fundamentals but is purely political in nature (and here too they help Timpone's considerations in the short article I mentioned above: the advantage for Germany of having another vassal in the governing council of the ECB).
Those two extra inflation points in Croatia, however, are a variable to keep an eye on: that's where surprises could come from, that's the variable that could dampen Madame 's enthusiasm and validate Fabio's sarcasm.
But this is a discourse that can be generalized, which generally concerns relations between the North and South of the Eurozone. I made the graphs yesterday, and I'll show them to you tomorrow or later. We have to pick up the threads of a speech that for many has never been done and which therefore never led to events like this , which never took place, and therefore where these people have never been.
But, in fact, we will talk about it more calmly, with you, who have never existed, and therefore it is not even possible to say that you no longer exist…
(… in the last editorial meeting at a/simmetrie it was decided that a goofy mid-term will take place this year. The last one was in 2014 , as someone will recall, but now that the association's activity is recovery we can also support a similar event, for which we already have a date: April 15, on the weekend between Easter and the long weekend of April 25. We will deal precisely with the reversal of some European asymmetries, and what this implies for the euro and for European rules, with guests from all over Europe. But in addition to this welcome – I hope! – return, this year we will also have something new, the first goofy off, our personal rave party which will take place in places and ways that will be communicated to you. See you soon!… )
This is a machine translation of a post (in Italian) written by Alberto Bagnai and published on Goofynomics at the URL https://goofynomics.blogspot.com/2023/01/sono-tornato-sulla-croazia-leuro-i.html on Sun, 01 Jan 2023 22:00:00 +0000. Some rights reserved under CC BY-NC-ND 3.0 license.