Veritas: Has Belgium manipulated data?
The Belgian press has been alarmed by the findings of a group of German professors who applied Benford’s Law to Belgium’s economic data and concluded some of its economic statistics may have been tweaked.
The German Economic Review, published in August 2011, contained a study entitled Fact and Fiction in EU-Governmental Economic Data.
The study was written by a group of German economists including professor Gernot Brähler of Ilmenau University of Technology, Stefan Engel of the Catholic University of Eichstätt-Ingolstadt and professors Bernhard Rauch and Max Göttsche of the University of Regensberg.
Brähler and his three co-authors used the Benford test to investigate the quality of macroeconomic data relevant to the deficit criteria reported to Eurostat by the EU member states.
Benford’s Law is commonly used to find irregularities in company accounts and cases of fraud.
The law dictates that the likelihood of numbers commencing with one in vast data sets is about 30%. By contrast numbers starting with nine are far less common, occurring on average just 4.6% of the time.
Yet humans trying to construct random data sets often believe there is an equal likelihood of one to nine appearing as the first digit of any number. What fraudsters believe resembles a random set of data is often easily identifiable using Benford’s law.
“Government accounting and statistics are similar in nature to financial accounting. In the European Union (EU), there is pressure to comply with the Stability and Growth Pact criteria. Therefore, like firms, governments might try to make their economic situation seem better,” the authors explained in the study’s blurb.
They concluded that the data reported by Greece showed the greatest deviation from Benford’s law among all euro states.
Interestingly, as Belgian newspaper L’Echo pointed out, Belgium’s deviations from Benford’s law were nearly as severe as Greece’s and it was one of the top four deviating countries in Europe. The other two were Romania and Latvia.
Many might have assumed beleaguered sovereigns such as Italy, Spain or Portugal were more likely to deviate from the law.
If the German academics’ theory is correct and Belgium has manipulated its data, there could be another shock in store for European markets which are already stressed to breaking point.
Asset managers once again eyeing European equities thinking the worst is now behind them might need to think again.