By Marshall Auerback, a hedge fund manager and portfolio strategist. Cross posted from New Economic Perspectives
Given the German electorate’s long standing aversion to “fiscal profligacy” and soft currency economics (said to lead inexorably to Weimar style hyperinflation), one wonders why on earth Germany actually acceded to a “big and broad” European Monetary Union which included countries such as Greece, Portugal, Spain and Italy. Clearly, this can be better understood by viewing the country through the prism of the Three Germanys, which we’ve discussed before:Germany 1 is the Germany of the Bundesbank: the segment of the country which to this day retains huge phobias about the recurrence of Weimar-style inflation, and an almost theological belief in sound money and a corresponding hatred of inflation. It is the Germany of “sound finances” and “monetary discipline”. In many respects, these Germans are Austrian School style economists to the core. In their heart of hearts, many would probably love to be back on an international gold standard system.
Germany 2 is the internationalist wing of the country, led by Helmut Kohl. Kohl and his successors are probably the foremost exponents of the idea that Europe can rid itself of the “German problem” once and for all if Germany firmly binds itself to a “United States of Europe” and continues to construct institutions that broadly move the EU in this direction. It is questionable whether this vision has survived significantly beyond the tenure of Helmut Kohl himself.
One can see the inherent tension between these two Germanys. Bundesbank Germany would never allow vague, internationalist aspirations to dilute the goal of sound money, low inflation and fiscal discipline. One could envisage most looking askance at the Treaty of Maastricht and the corresponding threats to these ideals.
Which brings us to the key third variable in German politics: Germany 3, Industrial Germany, the Germany of Siemens, Daimler, Volkswagen, the great steel and chemical companies, the capital goods manufacturers. Clearly, these companies benefited substantially from the economic stewardship provided by institutions such as the Bundesbank, along with the broad adherence to Erhard’s social market economy. But they also recognized the benefits entailed by a completely open and integrated European market (still the largest component of their sales). Currency union, even if it meant admission of fiscal profligates such as Italy and Spain, also minimized the threat of competitive currency devaluation, given the implementation of a European wide euro (as opposed to the narrow currency zone which represented the limits of the Bundesbank’s internationalism). Industrial Germany rightly perceived that a broadly based euro zone which incorporated chronic currency devaluers such as Italy, permanently entrenched their competitive advantage. And with the support of this key component of German society, Chancellor Kohl, was able to embark on the huge institutional transformation embodied in the Maastricht Treaty.
One could argue that “Germany #3″ made a bad bet, but is this really so?
A few months ago it appeared that the German sentiment data taken in aggregate showed that German domestic demand was turning up and the risk of a German recession was behind us. This was corroborated by truly powerful increases in total German employment, which now stands at a 20 year low.
To be sure, since then we received some weak data on industrial production and real retail sales. This coupled with the big down-tick in the manufacturing PMI rekindled recession fears.
But the previous worrying data about the German economy appears to have been removed with the latest round of positive data with upward revisions. We now have much better data on factory orders and real retail sales. A few weeks ago Germany’s March industrial production was released. It showed industrial production rising a large 2.8% in March; additionally, there was more than a one percentage point upward revision to prior months.
Taking the constellation of German economic data in aggregate – real retail sales, factory orders, industrial production, total employment and the services PMI (which remains well above 50) – it is unsurprising that Germany’s preliminary 1st quarter GDP subsequently came in at 2%.Yes, the periphery remains a disaster, but Germany is still growing. It is also the case that the slowdown in Europe could eventually reach the core and China’s worrying loss of economic momentum and dent Germany’s growth momentum in the future. But for now, there is no significant fiscal restriction to speak of (unlike, say, Spain or Greece), domestic interest rates are super low, employment has been expanding rapidly. In short, it appears that, having absorbed a trade related and sentiment shock emanating from the European periphery, a domestic demand led expansion has probably resumed.
The point is not to celebrate the German economic model per se, but merely to highlight that for all of the gnashing of teeth and whining about “the cost” to Berlin of perpetually “bailing out” the “profligate periphery”, the reality is that Germany has done exceptionally well out of the euro zone and continues to do so.
“Germany #3″ in effect placed the right bet: by locking in chronic devaluers to a currency union (thereby precluding the traditional expedient of currency devaluation to regain export competitiveness), Berlin in effect entrenched Germany’s mercantilist model and consolidated the country’s dominance as the trade superpower of Europe. The benefits are self-evident, given the contrasting data between Germany and the PIIGS.
Of course, one can already hear Germany’s apologists proclaiming that this success is the product of taking “hard decisions” in the earlier part of this century, in particular, the so-called “Hartz reforms”. The Germans have always been obsessed with export competitiveness. In the period before the euro, they would devalue the Deutschmark so that they could increase the sales of their products to their neighbors. Once the Germans lost control of the exchange rate by signing up to the Economic and Monetary Union (EMU), they couldn’t perform this trick anymore. They had to manipulate other “cost” variables in order to sell goods cheaply. So starting in 2002, they focused on wage suppression and cutting into the social safety net for workers through something called the Hartz package of “welfare reforms,” named after Peter Hartz, a key executive from German car manufacturer Volkswagen.
Unlike the American Henry Ford, who created good, well-paying jobs because he knew that having a secure middle class was essential to having a market for his cars, Peter Hartz regarded the relationship between wages and the economy very differently. In his view, squeezing workers was the way to keep a country “competitive”, which is precisely what his “reforms” did. And it had disastrous consequences for the rest of the eurozone – (See here – http://www.slideshare.net/
[As an aside, the other inconvenient little truth is that the much vaunted Hartz “reforms” themselves are really devoid of any kind of democratic legitimacy. It was subsequently discovered that Peter Hartz himself had only secured the acquiescence of Germany’s workers by sanctioning illegal payments to Germany’s powerful works council (see here – http://news.bbc.co.uk/2/hi/
The Hartz measures have been extremely far reaching in terms of the labor market policy that had been stable for several decades. Bill Mitchell and Ricardo Welters noted (http://e1.newcastle.edu.au/
More to the point, Germany benefited from “first mover advantage”: they initiated these reforms in the context of a growing global economy. Demanding such wage repression in the context of a global recession makes such “reform” virtually impossible, to say nothing of the fallacy of composition problems, when all other countries seek to deflate their wages in order to gain the elusive export competitiveness.
All of this is now coming under threat, given the renewed perturbations afflicting the euro zone. Greece’s inconvenient outbreak of democracy has created a new wild card: a new Greek party, Syriza, head of the coalition of the radical left, has vaulted to prominence. Its new leader Alexis Tsipras, a previously obscure left-wing member of Parliament. led his grouping to second place in the recent national elections with the promise of repudiating the loan agreement Greece’s previous leaders signed in February.
From the birthplace of democracy, then, comes this horrible outbreak of genuine democracy. Naturally, in typical Brussels fashion, eurocrats are decrying this development. They are once again whipping up the “Greece to exit” frenzy and wheeling out all manner of mainstream economists who are issuing the most strident warnings that Greece needs the Euro and will walk the plank if it exits. Their earnest hope is that the new elections will result in the emergence of a new Greek Quisling, who will happily implement the Troika’s incredibly destructive austerity package, reforms which provide no hope of recovery for Athens or the rest of the euro zone. By contrast, Syriza represents a real threat to the current thrust of fiscal policy.
Alexis Tsipras is a good man. At least he’s a very good poker player. He hasn’t yet capitulated to this massive orchestrated pressure and made it clear up front in the Wall Street Journal Germany that there are options for the Greek people which the Germans won’t like: He is, in short, the first Greek politician to use the his country’s leverage over creditors.
Rule #1 in negotiations: You must demonstrate to your counter-party that you have credible options to walk away from the table/deal. He has, amongst other things, simply pointed out that the Greek state is quite close to a primary surplus. All that is needed are a few small reductions wages and pensions, and the Greek public sector could finance itself for the foreseeable future. Were it to exit the euro, all of a sudden Athens’s problem becomes the eurozone’s problem.
Yes, Greece only constitutes a mere 2% of Europe’s GDP. And yes, the eurozone authorities are said to be “making preparations” in the event of a “Grexit”. But then again, Lehman was a tiny investment bank which almost brought down the entire global banking system when it was allowed to go bust. And recall that Lehman’s bankruptcy occurred several months after the rescue of Bear Stearns. In theory, the authorities had ample time to construct back-stops to prepare for this eventuality, as is now being said in regard to Greece’s potential exit from the euro zone.
Would a firewall today be any more effective in “cauterising” the Greek wound and preventing the contagion from extending to Portugal, Spain, Italy and then to the core? Tsipras clearly understands this, and he could well be Greece’s next Prime Minister. It would entail massive firepower from the ECB, a “bazooka” that the ECB has hitherto been loath to supply.
In the meantime, the Greek election result has resulted in an acceleration of massive bank runs within the eurozone. There has been a steady flight of deposit funds from the PIIGS into German and other northern European banks (and perhaps to some banks outside Europe) for some time now. Data on the Target 2 financing of these deposit runs by the recipient countries apparently accelerated in the first four months of this year prior to the French and Greek elections. A recent statement by the Greek authorities suggests that the deposit run from Greek banks has accelerated, perhaps hugely, since the Greek elections. This has been denied, but under such circumstances one should never believe official denials.
Indeed, late last week, El Mundo reported that depositors had withdrawn one billion euros from the Spanish bank Bankia since its takeover by the government on May 9th. The odds are that this deposit run may have as much to do – or more to do – with a flight out of Spanish bank deposits in general that it has to do with any fears about holding deposits in a bank taken over by the Spanish government. In other words, this may be a sign that a deposit run caused by fears about euro exit has now spread in a significant way to Spain. Of course, the authorities are denying such, but under such circumstances one can never believe such denials.
Paradoxically, the very existence of a monetary union facilitates bank runs. If you’re a depositor at a Spanish bank in Barcelona, there is nothing stopping you from withdrawing that money and re-depositing it in at a local German bank down the street. There are no capital controls or border controls in effect. With no exchange rate risk! Bank depositors in all of the periphery countries now fear they will wind up with the old currencies which will be worth much less than the euro. These deposit funds go into German and other core European banks who then recycle the funds through the ECB and the national central banks back into the banks of the PIIGS that are experiencing the deposit runs.
Apparently this deposit run and its reflux back into the imperiled banks on the periphery accelerated in the early months of this year before the French and Greek elections. It apparently has accelerated further since. In effect, the System of European Central Banks is involved in an ever growing and massive bailout exercise which they are not publicly acknowledging.
The German response so far? “Oops. This guy is blackmailing us. What shall we do?” Because Germany as a creditor nation faces huge losses if the entire banking system starts to come under pressure, to say nothing of the end of their vaunted “wirtschaftwunder” as the entire eurozone implodes. Greece, by contrast, has already experienced 5 years of unremitting economic austerity. The country has been virtually reduced to the state of a barter economy. What has it got to lose at this juncture by refusing to roll over to the Troika?
To be sure, the Germans might well say, “Enough is enough” and leave the euro zone (which would probably destroy the currency union). The likely result of a German exit would be a huge surge in the value of the newly reconstituted DM. In effect, then, everybody would devalue against Berlin, shifting the onus for fiscal reflation on to the most vociferous opponent of fiscal activism. Germany would likely have to bail out its banks (particularly the Landesbanken). This might well be more politically palatable than, say, bailing out the Greek banks (at least from the perspective of the German populace), but it would not be without significant short term economic cost for Berlin. And in the interim, the likely currency shock would put an immediate halt to its export machine, as the built-in conferred by the euro zone would be dissipated in the event that Germany reverts to a newly reconstituted DM.
By accounting identity, a fall in Germany’s external surplus would mean a large increase in the budget deficit (unless the private sector begins to expand rapidly, which is doubtful under the scenario described above), so Germany will find itself experiencing much larger budget deficits. It will become a ‘profligate’ if it wishes to mitigate the effects of a collapse in its current account surplus. Quite a reversal in fortune.
So who holds the gun now?
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Unlike the American Henry Ford, who created good, well-paying jobs because he knew that having a secure middle class was essential to having a market for his cars, Marshall Auerback
Yes, but what are optimum wages? Henry Ford said the following about banking:
“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” http://www.brainyquote.com/quotes/quotes/h/henryford136294.html#XLzXer24UHHXe0sb.99
Did Henry Ford himself take advantage of the counterfeiting cartel (the banking system) to finance his business and was that his clue that paying his workers as little as possible did not make economic sense because it was not just?
What if Ford had paid more that $5.00/day? Would he have done even better? What if he had paid his workers with common stock too? Would that not have been best of all?
Ford was a thug. He was absolutely not interested in the general welfare. But he was a smart thug. He knew how to create a social contract where the 1% got 99% of the profits, *and keep the 99% content*.
The mistake which the current 1%ers are making is their failure to give the 99% a sufficient minimum level of income. Ford knew that giving them a sufficient minimum was good for him; he paid his workers just enough so that most of their income came back to him (in the form of car purchases) — it didn’t cost him a penny, and it made them more content and less likely to strike.
Wow, there’s revisionist Ford history again. Remember, he created his own gestapo in order to keep “bargaining” in his favor. It’s been said the victors get to re-write history. Today they use the History Channel and other forms of mass media.
I just read that the purpose of the $5/day was to reduce worker turnover because the assembly line was so boring. But whatever the motivation, it was wise economics then and refutes the belief now that paying workers the lowest possible wages makes good economic sense GIVEN the present money system. With an ethical money system then paying workers the lowest possible wages might be optimum but we certainly DO NOT have an ethical money system now.
All employees over 22 were eligible for the plan, which included a shortened work day from nine to eight hours in addition to the opportunity to earn five dollars per day. In order for a worker to be eligible to receive his share of the company’s profits he “must show himself to be sober, saving, steady, industrious and must satisfy the…staff that his money will not be wasted in riotous living.” Workers who didn’t comply risked being payed half as much for performing the same work as their co-workers, and could eventually lose their jobs. from http://web.bryant.edu/~ehu/h364proj/summ_99/armoush/page3.html [emphasis added]
Haha! Savers subsidize borrowers in our money system so was Ford essentially lowering his own borrowing costs by requiring that his workers be savers?
But yeah, the paternalism is revolting.
Export workers are not badly paid. In opposite, export workers are amongst highest paid workers in Germany. Hartz IV affected haircutters, secretaires, garbage workers and the like, hardly places of work for exports. This article is nonsense.
Yes, it would make sense that export workers are the highest paid but that raises the question as to why giving foreigners real goods and services for pieces of paper is so important?
The Industrial base, networks and R&D survive a crisis in difference to paper and financial networks which have no problem to move from London to Zurich, Signapore and the like.
Sure but you still end up working for paper. A current accounts surplus is a gift to the world.
Thanks, btw.
“was Ford essentially lowering his own borrowing costs by requiring that his workers be savers?”
Yes, in a word.
The man was *smart*. Not *good*, but *smart*.
In contrast, our current elites are *stupid*. This is why they are guaranteed to lose power. The nightmare scenario for me is that as they destroy the existing system, it is taken over by *smart* would-be dictators, who establish a *stable* authoritarian system with a rich elite ruling over everyone else. This new elite would not include any of the current 0.1%ers, because they are stupid. In fact, the new elite would probably start off by publicly executing the old elite, as a gesture to attract popular support.
I have alaways thought that the two most important rates for a free country were its rate of exchange and the primary rate of its central bank. When it looses those two essential tools of economic policy, hell might well brake loose. This is what happened to the club med nations. Now France is joining this club at a fast rate.
The euro is a flawed construction and is doomed to fail. By the way, has anyone among the readers of NC heard of a little book called “L’heure des choix”, 1991 in French? In this book it was stated that a common currency needed transfers at a level of 12,5% of the GDP from the rich nations to the poorest one to be sustainable. The authors? François Hollande (new President of France) and Pierre Moscovici (new Finance Minister of France). Hilarious, don’t you think?
Now, the only question is: will the euro’s destruction be organized in a orderly fashion or will the break up be chaotic and disastrous for the people?
Germany (your #3) benefited enormously from the euro. Usually, when one party makes a killing, another takes a bummer. It is high time that the euro disappears and that European nations get back what they should never had abandonned: the two rates mentioned above.
..those of us living in Europe-Germany at time of EU coming together have friends who told us several interesting stories-for one, “Euro” was-is attempt to
co-opt “international monetary system”, which is good reason for U.S. banks to
provide manipulations seen by Goldman-JP Morgan, in Euroland…
How many are aware of real reasons Helmut Kohl worked to bring east-west back together?…business, of course, and $$$$ in his pockets…
I don’t think the Eurozone can endure for a long time
as it has been constructed. My sense is that the citizens
within the Eurozone think of themselves as nationals of
their country of citenzenship firstly.
Nice to hear about “L’Heure des choix” by Hollande and
2nd named author (1991). It’s the first time I remember
hearing of it.
“He has, amongst other things, simply pointed out that the Greek state is quite close to a primary surplus. All that is needed are a few small reductions wages and pensions, and the Greek public sector could finance itself for the foreseeable future. Were it to exit the euro, all of a sudden Athens’s problem becomes the eurozone’s problem.” Marshall Auerback
That’s great news! So except for paying usury for counterfeit money, Greece is solvent?
“It is the Germany of “sound finances” and “monetary discipline”.
Germany violated the annual max. budget deficit of 3% of GDP of the Stability and Growth Pact from 2003 to 2006 and in 2009.
“Currency union, even if it meant admission of fiscal profligates such as Italy and Spain, also minimized …”
Spain was running a fiscal surplus before the crisis.
Sloppy, at best.
@Ruben
He was referring to Spain’s admission, not to Spain prior to the crisis.
Greece is broken, because no investor is going to invest money in this corrupt country, with a broken government system. To small a country in a free trade union to bother to invest there with this big red tape hurdles.
Greece was and is mezzogiorno and even north italia doesnt want to pay for south italy. Why should Germany, Netherland, Slovakia, … and others pay for Greece, thats simply stupid and a nationalist time bomb waiting to explode.
One of the biggest employer in Greece is a Coca-Cola botteler.
That’s one of their problems right there. Western contamination with Killer Coke, as a metaphor for Wall Street’s cancer on their society.
“no investor is going to invest money in this corrupt country, with a broken government system.”
Oh, wait. You’re talking about Greece. Sorry.
Hee hee hee. Actually, investment money has been slowly trickling out of the US since the revelation that we didn’t have a functioning democracy, back in 2000 when the Supreme Court stole the Presidential election. The foreclosure fraud crisis, with its revelation that land titles are not respected in the US, has led to a recurrence of this.
The US responded in 2001 by instituting “soft” capital controls, which a lot of people still don’t know about; it’s hard to take money out of the US now.
Great note — I think that if Greece defaults, there will be a nationalist get-Germany out of the Euro faction/party that will gain influence in Germany and Germany will leave the Euro (to much rejoicing, in and out of Germany).
In the meantime, Greece can, and should, pay more of its bills with Bearer bonds, 0% 1-year bonds that are NOT legal tender for private debts, but which the gov’t accepts at 100% par value for tax payments.
If Greece later decides to leave, the drachma-bonds can easily become drachma money.
Germany, too, should issue mark-bonds and stop accepting bond buyers who are looking for risk free investments, but push such folks with cash into productive private, wealth creating investments, with business plans. Gov’t debt has too long been crowding out prodcutive investments.
This has to be *the* fantasy of the increasingly irrelevant US gambler – a goose stepping rise of rightward madness to continue Euro extraction. Hell, that’s what they are trying to do here in the US.
EURO was not popular in Germany, is not popular in Germany and is will not going to get more popular in Germany due to guaranties getting called very soon.
There was no referendum in Germany and the EURO was from the start not a “democratic” project but one from poltical elites.
Eurobonds wont fly (hopefully, because they would get part of the problem and are not the solution)
The EURO (with this very different members) doesnt benefit Germany, Greece or the european idea in the long run, the outcome of the EURO was foretold 10 years ago, just the financial crisis makes is easy to have a scapegoat “bankster, finanical industry, Germany, …” for this stupid idea to bring together too many countries with to different legal and tax systems.
The euro with all theese countries with different “stability” ideas was a fission bomb deposited by politicians 10 years ago exploding now.
Greece got to much money already and didnt use it to increase producitity or start produce goods they could export. Only option is transfer union forever or to get really cheap (EURO-exit) with the very big upheaval this will create OR EU will make steep import tariffs for China and replace low end labor intensive China goods with Goods made in Greece, Spain, Portugal.
Theese “middle” countries get squeezed by their hook to the “strong” euro and the free trade in the EURO zone and nearly free trade with lowcost countries like China, Turkey,….
A lot of the cheap mass products imported by “north” EU 15-20 years ago from the South (textiles, furniture, …) have been replaced with China, Pakistan, or products from other countries. The countries not able to climb up the value chain got/get squeezed, due to their hook to a too strong currency for them.
And their are only a few ways to get out of the overcrowded middle:
– Innovation and produce goods with more value (very hard and only in the long run)
– get Cheaper (EURO-Exit-> fast and painful/ austerity -> very slow and painful)
– import quotas (China, intra EU)
or a combination.
Many laborintensive production jobs in the South have been lost 10-15 years ago. This production(textitles, furniture,consumer goods) was lost in Germany 25-30 Years ago. Spain made this forget with their housing boom (over now and very painful) and Greece with their fast increasing public sector employment. Both models dont work in the long run.
Spain was another time bomb due to housing and high(er) inflation than the rest. One big problem is the dwindling competitiveness of theese countries due to high imports from China or other low cost producers for low/middle tech products. Germany had only more luck due to transfer of the lost jobs to the high end(paying for the other part) the local low paying jobs.
Greece and some other south countries got the “eurobond” benefits for 6-8 years (because interest was far too low considering the default riks) but didnt use the saved interest for the longtime benefit, but for shortime goodies for their voters. Therefore nobody believes real eurobonds will do any good, only save some more time (5-8 years) until the complete eurozone hits the debt wall.
butschi, of course, you’re correct.
But others disagree with us, disregarding the fact that Germany is a sovereign nation.
For some reason, many progressives insist on a United States of Europe, despite a strong majority in the North being against it.
And with respect to the Target 2, the same NC posters who have criticized JMPorgan for not unwinding its bad derivate bets months ago, are now criticizing the ECB and the EU for not “doubling down” via continued credit extension to peripheral countries whose only hope is to become states of a United States of Europe, on par with Germany and France.
Of course, once that happens, you’ll have permanent fiscal transfers from the North to the South.
Germans don’t want this. But, according to some, Germans are “too ignorant” to realize what’s good for them.
The fact is that the euro is massively beneficial for large German export companies, as long as the fiscal transfers continue. Unfortunately the German government doesn’t recognize that the money transferred to the South comes right back into German corporate coffers.
When Germany leaves the euro, this “Germany #3” will suffer.
On the other hand, the average German has interests very different from Siemens, and may be very happy to get out of the euro.
So, depositors have the capacity to initiative a good bank/bad bank resolution? By moving deposits out of the weak banks in their own country and redepositing them into the presumably stronger German Banks or even the Super Tanker America Flag Ship, JP Morgan, the depositors create a stronger bank that is still solvent, and leave behind the bad, toxic balance sheet of non performing loans in Greek Banks, who now are being stripped of all deposits, which serve as the basis for their solvency?! Once the Greek banks totally collapse the investors who own the private banks will want to be made whole, because capitalists are entitled and the bailout will come from the ECB?
So by voting with their Euros, the Greek banks either die outright without any reprieve or they are rescued by the ECB which needs the German surplus to pay for all of this. Why am I reminded of the joke about which part of the body is in charge, the brain or the asshole and the asshole wins because it won’t allow the brain to take a shit.
The German economy continues to show growth? Austerity programs in the periphery act as a subsidy for German banks and businesses. They keep capital flows headed north and eliminate competition. At the same time, a weakening euro facilitates German exports to non-euro countries and offsets some of its eurozone export losses. But if and when those transfers dry up and the eurozone falls apart, Germans will be faced with an expensive currency, an end to the capital transfers they currently enjoy, declining exports, and a lot of ill will.
The Hartz reforms were nothing new. Wage suppression began back in the 1970s in the US, and that and attacks on the social safety nets were features of Reaganism and Thatcherism in the 1980s.
I think a serious omission in Auerback’s writing is his failure to address kleptocracy. Without it, we are left with insoluble puzzles. Why would wise German bankers lend vast amounts to peripheral countries they knew to be profligate and unable to pay them back? Why would German elites demand austerity policies they knew were unsustainable and would destroy Europe? And please spare me the BS about Weimar. How is the depression which the Allies imposed on Germany after WWI any different from the depression that Germany is imposing on the rest of Europe now?
Look at this from the kleptocratic point of view and austerity makes perfect sense. It provides great looting opportunities for both local and German elites. Put the screws on German workers, suppress their wages, weaken the safety nets? Again in kleptocracy this is a no-brainer, and as I pointed out a general feature.
Again we need to see that Europe has 6 interrelated problems which must be dealt with together:
1. An insolvent, predatory banking sector
2. A weak, ineffective European Central Bank
3. No democratic fiscal and debt union
4. Mercantilist trade patterns within Europe
5. Corrupt political classes
6. A kleptocratic class calling the shots
Hugh argues, “Again we need to see that Europe has 6 interrelated problems which must be dealt with together:”
But there isn’t a United States of Europe.
When Argentina was bleeding dollars, did the US taxpayer propose a 50B permanent fiscal transfer to ensure that Argentina would not have to abandon the dollar?
So why should the German taxpayer have to send dollars to Greece?
Germany, or rather the German elites, was the primary beneficiary of the conversion to the euro. There either is or isn’t a Europe. If there isn’t, then the periphery should just default on its debts. Those billions you are talking about are just a pass through anyway that would go straight back to French and German banks. So why exactly should the periphery pay interest on them, in effect a subsidy to help bail out those French and German banks, and plunge their economies into depression doing so? If it is every man (or country) for himself, then let the Germans bail out their own banks. And of course as I pointed out above if the euro falls the renascent Mark will be expensive and kill German exports. So again why should the periphery help the Germans keep their exporting edge with a cheaper euro if the Germans are not willing to help them?
This is not some simple one act morality play. This is real. It’s complicated and it affects hundreds of millions. It is important to understand the whole picture, not just ideologically conveninet bits and pieces of it.
the US doesnt send money to Argentina, but New York and California send a lot of money to the poorer Southern states through Federal transfers, this is the US equivalent and this helps maintain stability in the ‘Dollarzone’
This may not be the winner take all analogy we might like to think it is. After all, “the north” also dictates law and policy to the US southern states along with its fiscal transfer. I know I don’t have to tell you what law and policy I’m talking about.
Is Greece prepared to have law and policy set by Germany? Are we prepared to say that’s okay?
I don’t know. I might go along with that. I’m not sure Germany doesn’t have a better government than Greece.
In the long run, what would happen, good/bad/ugly, if the world went on the gold standard? Thanks
In the long run? We’d be dead! [rimshot. laughter]
:) OK, I deserved that. Now, is there anyone who can answer my question? I serious as a heart attack.
The Euro is a virtual gold standard; the real thing would be much worse.
Here’s a news flash. Gold is also a fiat currency. It does have the advantage (as well as the disadvantage) of being a physical commodity in perpetual short supply – an advantage because the cost of producing more of it is steep, thereby imposing some sort of monetary discipline; a disadvantage because the cost of producing more of it is steep, rendering it somewhat inflexible in tracking economic conditions and making it quite easy to manipulate. The U.S. abandoned the gold standard because of a run on the U.S. gold stockpile in the early 1970s, which points up the basic problem.
of being a physical commodity in perpetual short supply Helix
Apparently not since a little gold goes a long way (it is the most malleable metal) and thousands of tons of it sit uselessly in bank vaults waiting for a new gold standard.
Fiat is already fully backed – by that taxation authority and power of the issuing government government. Fiat gold is just a very expensive (wasteful) form of fiat.
great article; one thing though: Haartz might be a convicted criminal; but the bribery had little or nothing to do with getting support for labor-market reforms. The german public was confronted with years and years of massive TINA-style propaganda, but even so I think ten years ago was a time when neoliberal reforms of this kind came much more naturally. German angst in connection with neoliberal fearmongering worked so well, retirement insurance was partially privatized several years ago and most people did not even recognize it. It was a terrible time to come of age during those doomsday-years when the decline of germany seemed unevitable unless we reduce the welfare state, etc:… I still cant believe the good economic data – it just feels unreal? especially since its mostly business that is doing well, the majority not.
anyway I realize how hard it is to write about politics of foreign countries, but naked capitalism does a good job of it.
It serves English prejudices. German social security is still more elaborated than English or Amirecan. But don’t get confused with facts.
@F. Beard:
“Sure but you still end up working for paper. A current accounts surplus is a gift to the world.”
The software on this website doesn’t support another reply, so this way.
Might be a gift, yes. And Germany will lose on the second bankruptcy of Greece for sure. But on the other hand when this banking/overproduction/state/Euro crisis will be gone (It can surely last ten years, uncontested). There will be a base to build upon and the standard of living of many not only the exporters will benefit from it.
You should work for yourselves too. All work, no play makes Hans a dull boy. Or how about a German space program?
One works for the vacancies in Greece, for example :).
But to get back to the topic, this article is really flawed. German unemployment benefits are still higher and more generous then the English or American equivalents.
So where is the problem?
If Mr. Auerback has a problem with social injustice he could argue for English and American unemployment benefits to be increased to German levels, but to complain about reforms in a country, which has better social protection (not to mention the health sector, which is also better and more just in Germany) than its own, is quite bigoted.
It`s more like a gift from the working class to the exporters. I want to know the millionaire who complains his overseas bank account is only fillded with paper…
Good grief! This post reeks of German envy, hence the conflicting messages? First, the author elaborates on the fact that Germany has weathered the crisis well so far, has made a number of adjustments to maintain/improve their economy, has increased internal consumption to compensate for falling exports to the periphery and then goes on to prognosticate disaster for Germany.
“Greece, by contrast, has already experienced 5 years of unremitting economic austerity. The country has been virtually reduced to the state of a barter economy.” Yes, exactly. And, in contrast to the Greek case, the author’s background sketch of the situation implies that, should disaster strike, Germany has the will, ability, and foresight to effect a better outcome.
“The Germans have always been obsessed with export competitiveness. In the period before the euro, they would devalue the Deutschmark so that they could increase the sales of their products to their neighbors.” This is interesting and confusing, interesting because, IMO, Germans improve export competitiveness by creating better products (and Greeks by defaulting or devaluing the Drachma); confusing because
Year DM/$
1971 3.643
1981 1.975
1991 1.490
1999 1.655 (unification effect?)
(www.history.ucsb.edu/faculty/marcuse/projects/currency.htm)
Some people can have their cake and eat it apparently; the author must be in one of those universes.
GERMANS ARE VILLAINS; that’s it! That’s the message of Mr. Auerback! I mean, you can surely remember the times as Germany was fighting to remain in the EMS and begged Britain not to play hardball and the Bank of England had to throw billions after billions into the market to save the Franc, the Mark and the Lira. But the economic model is just flawed, it gifts other people.
There’s a way to fix Greek debtors without hurting German savers – Steve Keen’s “A Modern Jubilee”:
“A Modern Jubilee would create fiat money in the same way as with Quantitative Easing, but would direct that money to the bank accounts of the public with the requirement that the first use of this money would be to reduce debt. Debtors whose debt exceeded their injection would have their debt reduced but not eliminated, while at the other extreme, recipients with no debt would receive a cash injection into their deposit accounts.
The broad effects of a Modern Jubilee would be:
1) Debtors would have their debt level reduced;
2) Non-debtors would receive a cash injection;
3) The value of bank assets would remain constant, but the distribution would alter with debt-instruments declining in value and cash assets rising;
4) Bank income would fall, since debt is an income-earning asset for a bank while cash reserves are not;
5) The income flows to asset-backed securities would fall, since a substantial proportion of the debt backing such securities would be paid off; and
6) Members of the public (both individuals and corporations) who owned asset-backed-securities would have increased cash holdings out of which they could spend in lieu of the income stream from ABS’s on which they were previously dependent.
Clearly there are numerous complex issues to be considered in such a policy: the scale of money creation needed to have a significant positive impact (without excessive negative effects—there will obviously be such effects, but their importance should be judged against the alternative of continued deleveraging); the mechanics of the money creation process itself (which could replicate those of Quantitative Easing, but may also require changes to the legal prohibition of Reserve Banks from buying government bonds directly from the Treasury); the basis on which the funds would be distributed to the public; managing bank liquidity problems (since though banks would not be made insolvent by such a policy, they would suffer significant drops in their income streams); and ensuring that the program did not simply start another asset bubble. “ from http://www.debtdeflation.com/blogs/manifesto/ [emphasis added]
German savers will suffer and that is a good thing; some antioligarchic measures fom time to time is a good thing…
If they suffer, but I hope they won`t be able to cash in as much as in the last thirty years, tax inspectors got and will get more grips.
the typical Anglo-saxon cliches about Germany and competitive devaluation.
Mr. Auerback seems obsessed with Germany, as he writes so often about it, but I don’t think he has a grasp of the German social-market model.
It’s not about the currency, Germany always had a strong currency. Where Anglo-saxons seem to think they can devaluate themselves to prosperity, for the Germans a strong currency is just a fact of life, and not something to worry about but to be proud off.
Instead they focus on innovation, research, education, co-operation with unions, good relationships with their workers (they had the Harz reforms but workers remain much more protected in Germany than in the Anglo saxon world) and yes: don’t let wages rise too much. And most important: a long term focus, so not about shareholder value as in the UK and USA.
regarding Europe: Mr. Auerback maybe missed it, but before the euro, the EU has had fixed exchange rates for over 20 years between the core members (so Germany did not devaluate before the euro). And if any EU countries would have been interested in competitive devaluation, they would not have joined the euro in the first place! (maybe the reason why the UK didn’t join). The reason why a country like France wanted the euro was because they hoped they would never have to devaluate if they had the same currency as Germany! Same for the Southern countries. So this is exactly the opposite of what Mr. Auerback seems to think. The Germans couldn’t care less about the euro, they were perfectly happy with their strong DM, it was the other countries that wanted to lock Germany in the euro!
The other countries should have thought twice if the euro was such a good idea for them. If the euro blows up, Germany will do just fine. But I think the periphery will make a huge fall in living standards as the euro has been a disguise for their lack of competitiveness.
While after post-war reconstruction the Mark was not a weak currency, it was not always a strong currency. Looking at data from the Fed, on January 4, 1971 the Mark/Dollar exchange rate was 3.6434. The Mark strengthened breaking the 3 level (2.9603) on February 13, 1973. It bounced around in the 2.5 area 1974-1976. It then gradually appreciated breaking the 2 level on August 9, 1978. From about June 7, 1979 (1.9106) to November 3, 1980 (1.9160), the Mark experienced a period of strength followed by weakening. The weakening continued with the Mark returning breaking back through 2.5 (2.5270) on August 3, 1981. It bounced around again at the 2.5 level for a few years and actually broke back through the 3 level on September 11, 1984, hitting 3.4525 on February 25, 1985. It then enjoyed another long period of appreciation breaking back through the 2 level on September 18, 1986, hitting 1.5708 on December 31, 1987. Throughout the 1990s the Mark traded at 1.4 to 1.8. The euro was launched on January 1, 1999. On December 31, 1998, the Mark stood at 1.6670.
Germany did not always have a strong currency. It had a strong, stable Mark for 12 years leading up to the launch of the euro.
You completely misstate who were the beneficiaries of the conversion to the euro. The periphery with their weaker currencies cheapened the euro which was essentially a competitive devaluation from the Mark and this made German exports cheaper to non-euro countries. At the same time, the euro opened up the eurozone countries to German exports, and these exports were facilitated by the easy credit German banks extended to their eurozone trading partners.
For political and historical reasons, it was important to both Germany and the rest of Europe that Germany be in the euro. Economically, it was a dreadful idea from the get go for the periphery and a golden opportunity for Germany.
And if the euro blows up, for the reasons I gave in my comment above, Germany will not be fine. That’s the thing about interconnectedness. If the euro blows up, German banks blow up. As we saw during the Great Depression, it is the creditor nations, not the debtor ones, which fall hardest. Germany would lose its political leadership role in Europe, its export markets, a large chunk of its banking sector, and at the same time be saddled with an overpriced Mark. This is nowhere near any definition of fine I am familiar with.
Then I suggest Germany get out of the euro.
The resulting strong DM will trash their export sector; Germany has major competition in all major exports, whether from Spain (trains) or Japan (cars) or many countries (electronics).
Or, you know, Germany could print DMs and devalue. Switzerland guaranteed that it would print Swiss Francs in order to keep the Franc from rising too high.
But if Germany is going to print, why don’t they just print euros now?
There are two forces at play here, sometimes the two are the same entities, but not every time.
Industrial capital in Germany contrary to anglo-saxon countries still is very strong, this is represented by export industry. They favour a gold-standard (even if virtual, like the euro), or a fixed exchange-rate regime.
Then we have the financial capital power, or the creditors (which at the same time are the biggest debtors, in a credit driven leveraged system), which are determined to extract as much wealth from the debtors as long as they can. If hey force too much the strings will break. Along this there is a a subset of capital, vulture capital, determined to obtain as much assets as cheaper as possible profiting from economic chaos and instability.
All this plays into the current complex game of financial extortion of the people; along this there is the neoliberal idealogical line of labour disciplining in developed nations, which favours any sort of capital and is the major wealth extraction force around and has been for decades. This can be carried out by various methods, all of them end up in diminishing purchasing power of the 99%, working more and being able to get less for your money. Economic progress should be the contrary, working less for more.
Also there is a deep darwinistic sense in this whole evil game, which promotes zero-sum policies, probably driven by the notion of limited resources. And if you want to keep the rate of consumption of McMansions high, you must suppress the wealth share of the rest of the population. This is the inflation card, inflation created by a minority which end up having most of the share to suppress consumption by the rest of the population.
And they are winning, period.
P.S: I don’t like the rhetoric of Auerback who helps the nationalistic xenophobic case and is foolish and moronic. Instead call the names like they are, we are talking about a power game between elites and the people, like in every other case anyway.
I agree.
And let’s also note that this post actually represents a huge advance over the usual Auerbachian “Merkozy” fare in that it at least breaks Germany out into the plutocratic factional interests within it, which also may be opposed to each other and engaged in a turf battle.
And some of which plutocratic interests have already been engaged in extractive activities against the German public, which makes the intransigence of that public in the face of further extraction explicable in terms other than some deep seated Nazi character defect.
I still have other complaints but I’ll leave it for another day, (because basically I think Auerbach is a lost cause).
The Bundesbank school of economics is called ORDOLIBERALISM, which, as with neoliberalism, espouses non-governmental interventionism (ie, the “free market”) with regard to the economy, EXCEPT where the government can speed along what the free market would have (supposedly) delivered given a greater time period. Then, it’s just hunky-dory for the government to force things along.
According to ordoliberalism, it’s fine to force a colony such as Greece into starvation in order to “fit” their wage structure to the colonizer’s economic needs. In this, ordoliberalism is much like Marx’s primitive accumulation, used with great success by the early British industrial capitalists to fill their factories with “willing” workers at poverty wages.
“Poverty is therefore a most necessary and indispensable ingredient in society…It is the source of wealth, since without poverty, there could be no labour; there could be no riches, no refinement, no comfort, and no benefit to those who may be possessed of wealth.”
– Patrick Colquhoun. 1806. A treatise on indigence.
By the way , did you look up wgo has the biggesz current account deficit? It is tada… UK but it is good that oeople from this country are still concious enough to give advises…
The UK also has a free-floating currency.
And?
just as drunken as me….But I don’t tell other states and people how to behave.
Und letztendlich nicht in meiner eigenen Sprache, ist ein wenig arrogant. Aber hauptsache der Oberchecker, der Marshal, oder?
And I don’t tell lies…
Auch im Gegensatz zu Herrn Auerback Oberchecker!
The article is pseudo-historical analysis in that the premise, that the current situation was known long before today is false. One has to sympathise with Germany when one reads an article like this, which creates a mythical version of Germany for the benefit of a non-German audience, looking at least, for a reason to try and understand why their economic and political system is currently under performing.
Reasons for the current catastrophe can be sought in the developed countries’ addiction to finance and banking. We are on the road that Great Britain took post WW2– the financial elite have been able to seek profits overseas and have not invested in their own societies. The result, which we can now see is social decay.
This is a failure of governance and democratic governance at that– we might not want it to be, but it is and mooning about how Greeks really just want to be middle-class, when their status-quo governments have been such failures isn’t going to change anything.
The west needs reform, but the ideological blinkers in the US are so firmly fixed that it’s impossible.
Hugh wrote:
“The Hartz reforms were nothing new. Wage suppression began back in the 1970s in the US. […]
Why would wise German bankers lend vast amounts to peripheral countries they knew to be […] unable to pay them back? Why would German elites demand austerity policies they knew were unsustainable and would destroy Europe? […]
Look at this from the kleptocratic point of view and austerity makes perfect sense. […] Put the screws on German workers, suppress their wages, weaken the safety nets?”
You know, when Schroeder reduced corporation tax, the reason that he gave was that German companies needed this to be able to remain competitive with US companies. While I have some sympathy for your point of view, kleptocracy (kleptein – to steal), as you define it, is far more advanced in some other developed countries’ economies, I can think of. In any case, it seems to me that you are describing a general feature of OECD countries economies and Germany needn’t be singled out for special attention. In fact, continuing to just paper over the cracks with more money will only result in the current status-quo. How is this desirable– other than it is needed to avoid some kind of undefined armageddon?
Kleptocracy is worldwide the economic paradigm. It just plays out differently in different areas, like the US, China, and Europe. Given conditions in Europe, I would say that kleptocracy is quite advanced there. Kleptocracy is one of the three great issues of our times, the other two being wealth inequality and class warfare. In Europe, the class warfare aspects have been very successful in that they have framed the current crisis along regional (North-South, core-periphery) and national (German, Dutch, Greek, etc.) lines and not class ones: 1% vs. the 99%.
This said, I still get sucked into discussions where I try to turn people’s logic back on them as a means to dismantle the narratives upon which they are based.
Hugh,
I’m not so sure that the North/ South dichotomy is some kind of phoney war, as you seem to be implying. I don’t understand how you mean this– are you talking about a “solidarity” of German and Greek workers? Because if you are, I’m not convinced that these two groups have enough in common to be grouped together. In any case, I think that the nation (and in particular, national government) has a positive role to play in representing people, and fostering their welfare, against for example, corporations.
I mean we’re talking about a ‘sea of variables, which we’re swimming around in,’ so it makes having a discussion fairly difficult. But in general, I think that government in the US is failing– maybe it has never been that good, but as it increasingly becomes important to have good government (due to there no longer being enough low-lying fruit for everyone) the problem is becoming apparent. In my opinion, there is some merit to the idea that the current corruption and kleptocracy in the US is related to the US’ contact with it’s periphery. This isn’t an argument against pragmatism but the US’ long standing relationships with, for example, Middle Eastern tyrants and these tyrant’s increasing ability to access the US political, military and financial system has lead to moral decay.
This isn’t to blame the Middle Eastern dictators, btw. The wealthy elite in the US simply have too much power and like empires throughout history that leads to decadence and decline. In Modern governments this should be countered by not allowing so much wealth to be amassed by individuals and there are many different ways to accomplish this.
The biggest issue of all is the utter failure to even begin to address the global ecological suicide trajectory we’re now on. The rest we’ve seen in one form or other over the centuries, but we’ve not has so serious a challenge to humanity as a whole since at least the last Ice Age.
The Anglo-American economic and financial model has for 2 centuries been premised on the power and accompanying prerogatives of Empires – the one the US eventually acquired from the UK (leaving the UK totally reliant on London’s hall of mirrors global financial extraction) and the one elite Americans had been consciously amassing in the fabulously wealthy New World. These new, capitalist, Anglo Empires and their histories to this day make 1 thing abundantly clear – opposition, no matter from what quarter, will be confronted, contained, absorbed, subverted, bought, controlled, destroyed.
It has never been possible for Germany to “win” in this fundamental global shakeout/shakedown, and the sorts of portrayals of German intentions/motives, etc. as currently in pursuit of their own Empire, or hyperventilating references to Nazis in Berlin and all the rest are quite ridiculous given any genuine effort to attain a disinterested perspective in the context of 200 years of intensive extraction practiced by Anglo corporates/Imperial States in their foreign operations.
If the (now) American-Anglo elite financial/corporate globalists at the apex of power cared 1 iota about anything but their own positions, Germany wouldn’t have been thrust into this lose badly or worse corner in the first instance.
To those who deny Germany is essentially being asked to support the whole of Europe indefinitely and that the cost of that support will prove positively crippling, if not entirely beyond Germany’s means in the global system as currently constructed, I note nobody seems eager to volunteer the US for this starring role. After all, the US is in every metric of modern power far, far bigger and stronger than Germany. Could it be that in proportional terms it would be tantamount to the US taking on financial responsibility for supporting, well, pretty much the rest of the world – the world of 2012, not 1945?
http://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28nominal%29
Not going to happen. In any event, Germany and the ECB have repeatedly demonstrated they are prepared to do whatever it takes to keep the markets happy. Support since late 2008/early 2009 by a long series of highly “dramatic” Central Bank operations, combined with large moves around a bevy of political events “deadlines” have already provided a feast for wealth extractors with the prospect of much more. That the predation is taking place at all can only be with the express approval of the US and UK (Wall Street and London) Governments. In other words, it is policy. This sad fact is deemed incidental to the discussion.
We’ll just see at the end of this process who has materially enhanced their relative positions and who has not. I suspect it’s a large “not” for Germany and all of Europe vis a vis the US.
There are two forces at play here, sometimes the two are the same entities, but not every time.
Industrial capital in Germany contrary to anglo-saxon countries still is very strong, this is represented by export industry. They favour a gold-standard (even if virtual, like the euro), or a fixed exchange-rate regime.
Then we have the financial capital power, or the creditors (which at the same time are the biggest debtors, in a credit driven leveraged system), which are determined to extract as much wealth from the debtors as long as they can. If hey force too much the strings will break. Along this there is a a subset of capital, vulture capital, determined to obtain as much assets as cheaper as possible profiting from economic chaos and instability.
All this plays into the current complex game of financial extortion of the people; along this there is the neoliberal idealogical line of labour disciplining in developed nations, which favours any sort of capital and is the major wealth extraction force around and has been for decades. This can be carried out by various methods, all of them end up in diminishing purchasing power of the 99%, working more and being able to get less for your money. Economic progress should be the contrary, working less for more.
Also there is a deep darwinistic sense in this whole evil game, which promotes zero-sum policies, probably driven by the notion of limited resources. And if you want to keep the rate of consumption of McMansions high, you must suppress the wealth share of the rest of the population. This is the inflation card, inflation created by a minority which end up having most of the share to suppress consumption by the rest of the population.
And they are winning, period.
P.S: I don’t like the rhetoric of Auerback who helps the nationalistic xenophobic case and is foolish and moronic. Instead call the names like they are, we are talking about a power game between elites and the people, like in every other case anyway.
Germany used to re-value, not devalue (or rather everyone else used to devalue) prior to the euro. Apologies if mentioned further up, no time to read.