Bizzaro Economic Policy

By, 05/24/2007

One of Superman's arch-enemies is Bizzaro. His craggy appearance and twisted sense of logic manifests as the reverse of anything Superman would say or do. For instance, when Bizarro says, "Me am going to kill you," he really means, "I will save you." Bizarro is the antithesis of right. Here's some background on the comic book life of the irregular rouge:

Unfortunately, the European Union and Organization for Economic Cooperation and Development (OECD) have managed to turn this backwards comic book character into a reality.

Last week, we alerted you to the strange, and often destructive, system of rules the EU forces upon a country wishing to join the esteemed euro club. (See our past commentary, "Currency Pegging Pedantics.") Less than one week later, the EU is at it again.

EU's Almunia Says Estonia Must Boost Labor Supply
By Ott Ummelas and Meera Louis, Bloomberg

European Union Monetary Affairs Commissioner Joaquin Almunia warned Estonia to "stem labor shortages" and speed increases in productivity in order to catch up with wealthier member states. "Estonia is not exempt from my warning to pick up the pace of reform…Increasing labor supply and productivity [in Estonia] remains a key challenge."

Yes, you read that right. According to the EU, Estonia should actually RAISE its unemployment rate to come more in line with relatively stagnant developed EU countries like Germany and, heaven forbid, France. (Both countries have unemployment rates well over 7.5%). This is Bizzaro logic if we've ever heard it.

The $15.1 billion Estonian economy grew 11.4% last year. That's fast, but perfectly fine for a developing economy. But here's the strange part: Estonian unemployment sat at 5.3% in the first quarter. Unemployment could actually go down a fair amount before labor shortages were truly enough to trigger huge wage increases, and consequently inflation. Intervening action to increase the labor supply would undoubtedly pinch economic growth. Why it could possibly be good economic policy to increase unemployment and decrease economic growth in this situation is far beyond our reckoning.

But that's not the only backwards-speak we've heart this week.

The OECD declared that aspiring EU members such as the Czech Republic, Hungary and Poland all must bring their budget deficits down to be more in line with EU guidelines. Not surprisingly, these mandates are given the Bizzaro-like title of "reforms." (The EU's rule is to have a budget deficit within 3% of local GDP. But France, Italy, and Germany have flaunted that extremely restrictive rule on more than one occasion.) Again, this is the antithesis of right. We've shown on multiple occasions in this space that budget deficits are generally not a bane to economies or stock markets. In fact, budget deficits can be a very good thing for stocks!

It's true developing nations lack the deep and stable capital markets and infrastructures developed countries have. Thus, a developing nation's debt is inherently riskier. But according to the very same OECD, the Czech budget deficit will be only 3.7% of gross domestic product this year, Hungary's shortfall is forecast at 6.7% of GDP, and the Polish budget gap looks to be about 3.2% of GDP. These are not budgets gone wild. Reigning in deficits to the claustrophobic 3% level with (gulp) higher taxes or other punitive measures to free markets would be a terrible thing for these fledgling nations.

Czech Republic, Hungary, Poland Face Budget Risks, OECD Says
By Balazs Penz, Bloomberg

The EU's Bizzaro rules for entering the euro club are threatening to derail some of the best economic growth stories of Europe today. This is a mercantilist super-villain scenario if we've ever seen one, and clearly a job for the Supermen of capitalism.

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

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


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