Should Germany Quit the EU Rather Than Rescue Greece?

Ambrose Evans-Pritchard today has his usual type of offering: extreme, but nevertheless based on a valid observation, on his favorite hobbyhorse, the EMU. His key observation comes at the end:

EMU architects were warned in the early 1990s that monetary union would prove unworkable as constructed. They scoffed, sure that any crisis could be exploited to force the pace of economic union. Commission chief Romano Prodi later admitted as much. “The euro will oblige us to introduce a new set of economic policy instruments. It is politically impossible now. But some day there will be a crisis and new instruments will be created.”

We will soon learn if this gamble will pay off, or prove catastrophically wrong.

The interesting conundrum is that Greece does not appear prepared to accept the austerity measures demanded of it, particularly since unemployment is projected to reach 20% by the end of 2010 before budget cuts have an impact. But if Greece fails to come to heel, not only will its bond rates rise further, but the other PIGS will come under more pressure.

Membership in the Eurozone keeps Greece from adopting the usual emergency measure for debt-burdened countries: depreciating the currency (more accurately, letting it fall, which usually means overshoot on the downside. But rather than having Greece exit the EU to achieve this end, Evans-Pritchard suggests that Germany leave instead:

A German exit would allow Club Med to uphold contracts in euros and devalue with least havoc to internal debt markets. The German bloc would enjoy a windfall gain. The D-Mark II would be stronger. Borrowing costs would fall. The North-South gap in competitiveness could be bridged with less disruption for both sides.

To be sure, Germany is happily placed in the current EMU system. By compressing wages for a decade it has stolen a march on EMU. Critics unfairly call this a beggar-thy-neighbour policy. It is simply the way Lutheran society operates, in deep contrast to the way Latin society operates – a cultural clash that should have given pause for thought before Europe’s elites launched headlong into their adventure.
German goods are flooding the South. In the 12 months to November, Germany-Benelux had a current account surplus of $211bn: Spain had a deficit of $82bn, Italy $74bn, France $57bn, and Greece $37bn. German industry will not give up this edge lightly. However, the matter will in the end be decided by democracy. German citizens were given a pledge by their leaders in the 1990s that loss of the D-Mark would not lead to monetary disorder, or leave them liable for Club Med debt. That is the sacred contract of EMU.

“Politically,” said Bundesbank chief Axel Weber, “it’s not possible to tell voters that they are bailing out another country so that it can avoid painful austerity measures that they themselves have gone through. Such aid, whether conditional, or – even worse – unconditional, is counterproductive.”

Germany is in a similar position to China: a manufacturing powerhouse that sees it as to its advantage to have its currency “peg” result in its labor being underpriced. But the result, that its economy saves, means another economy much consume more than it produces. Keep that up for long enough, and the underproducing country starts to look like a deadbeat. So the surplus country needs to be prepared to accept either a revaluation or deadweight losses. But neither China nor Germany seem ready to hear that.

One of the side effects, as long as this drama is in play, at minimum, is that the Euro does not look like a new reserve currency contender. As has become increasingly common with Bloomberg, a tantilizing headline, “Euro Proving No Reserve Asset as Central Banks Shift (Update1)” had no accompanying story. I assume that will be rectified in the next couple of hours.

Most people expect the Greece drama to be contained…my, that has a familiar ring, now doesn’t it?

Update: Evans-Pritchard is guaranteed to annoy a fair number readers (but I think that is still useful, it gets people to think). A less apocalyptic set of recommendations comes via Wolfgang Munchau in the Financial Times:

The first of the essential conditions is a robust and transparent system of crisis management. Maybe the Greek bail-out will provide a blueprint for such a system. But in any case, it would need to be worked out formally and approved by national parliaments to achieve a maximum degree of legitimacy. This should not be imposed by diktat.

A good crisis-resolution system must also minimise moral hazard. Countries that benefit from help will have to accept a partial loss of sovereignty, and for this reason it is important that any such regime has wide political backing in all the member states. While eurozone members lack the political will for unconditional bail-outs, they accept that they need to help each other during a crisis. But this help is attached to the condition that the recipient takes corrective action.

The second essential prerequisite for survival is a reduction in internal imbalances, which lie at the core of the current crisis. This is an issue that requires action both in countries with large current account deficits, such as Greece and Spain, and in those with large surpluses such as Germany. While Spain, for example, would need to reform its labour market to bring about adjustments in real wages, Germany should implement policies to stimulate consumption, including a long-overdue income tax reform. The build-up of these imbalances is the underlying reason why the Greek problem got out of hand.

The place to handle this co-ordination is the eurogroup of the finance ministers of the eurozone, which now constitutes an official European Union institution under the Lisbon treaty. Jean-Claude Juncker, the prime minister of Luxembourg and chairman of the eurogroup, should make imbalances the defining issue of his agenda and propose binding policies.

Third, the EU should at some point revisit the now almost totally decaffeinated proposals for financial supervision. What started off as a deeply unimpressive set of recommendations by the De Larosière committee ended up further diluted as it proceeded through the EU’s legislative mills. The financial system remains the single biggest threat to the long-term stability of the eurozone economy. Fragmented financial regulation makes no sense in a monetary union and is potentially lethal.

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  1. Diego Méndez


    the fact that many people have come to use the acronym PIGS does not mean it has become a single gram less offensive. We’re not PIGS. We’re people.

    1. IF

      I agree that PIGS is not very polite and somewhat inconsistent with Yves abuse of language lectures. (Notice that Ambrose Evans-Pritchard did not use that word, but some commenters there did.) I prefer PIIGS if one has to use an acronym. Or, if I think about it a bit more, club med.

    2. craazyman

      How about GIPS?

      I think we in America are the top PIGS and we may be to Gips once they start reflating the national mortgage debt away, but that will be China’s problem, not Spain’s. :)

    3. Henrique Oliveira

      I’m Brazilian and I’m not a BRICK, either. But I don’t mind Brazil’s being called a BRIC country, even if the word “brick” has a negative connotation, as in “brickhead”.

      Stop being so touch-feely about the acronym. Plus, it’s PIIGS, not PIGS.

      1. Diego Méndez


        being a BRIC is almost a badge of honour. It gives the impression of robustness and stability. There is no negative connotation whatsoever in it.

        You can’t compare it with “pigs”. Most people use PIGS, not PIIGS, since Ireland is not Club Med. And lots of articles make turn of phrases as “Why pigs won’t fly”, etc.

        The origin of the phrase PIGS is related to British MOPs rejecting regional funds for “those pigs”, namely Portugal, Italy, Greece and Spain. That was 20 years ago. Several newspapers, including the Financial Times, have admitted it is a derogatory term.

  2. Peter T

    Germany leaving the Euro or the EU? Not going to happen, not because the current EMU is Germany’s economic gain but because the foreign policy of Germany is the EU, plus minor projects like Afghanistan. There is nothing realistic to replace it.

    Rather Greece will finally reject austerity and recreate the drachme, but stay politically in the EU, to trade votes for subsides. There are other states in the EU but not in the EMU (Sweden, UK), so why not Greece, will the Greeks ask? Will Greece repudiate their debt in Euro, by convert the debt using a fixed exchange rate to drachme that will never return after the first day? Greece is still a sovereign nation, and its place inside the EU protects it from sanctions that Iceland has to fear.

    1. Detlef

      “This does have a familiar ring. The old German spirit, at it again, in the form of the disgusting “Protestant work ethic”, e.g. the religious justification for slavery.”

      Slight problem here.
      The population in Germany is roughly 1/3 Roman-Catholic, 1/3 Protestant and 1/3 not belonging to any religious organization. With perhaps 3-5% Muslims and 1% other religions thrown in.
      And with church attendance very, very low.

      Not to mention that when we look at “average hours worked per year” Germany (OECD: 1433 hours 2007), the Netherlands and the Scandinavian countries have pretty low numbers.
      While countries like the USA (OECD: 1794 hours 2007) or Italy (1824 hours) seem to be much more “infected” by the “Protestant work ethic”. :)

  3. attempter

    This does have a familiar ring. The old German spirit, at it again, in the form of the disgusting “Protestant work ethic”, e.g. the religious justification for slavery.

    It is simply the way Lutheran society operates, in deep contrast to the way Latin society operates – a cultural clash that should have given pause for thought before Europe’s elites launched headlong into their adventure.

    Exactly. Why Mediterranean peoples, who on the whole seem to have a more human way of thinking about of life, would have roped themselves to the grim “work ethic” instead of banding to together to protect themselves from it, is beyond me.

    That’s what you get when you don’t suppress the psychopaths of greed among your own people.

  4. Diego Méndez


    “By compressing wages for a decade it has stolen a march on EMU.” That’s like saying: by having zero growth for a decade, they could avoid having destabilizing import growth. Nonsense.

    “Critics unfairly call this a beggar-thy-neighbour policy. It is simply the way Lutheran society operates, in deep contrast to the way Latin society operates – a cultural clash that should have given pause for thought before Europe’s elites launched headlong into their adventure.” Yeah, right. When Mediterranean countries have decade-long zero growth, they somehow culturally manage to produce wage hyperinflation? What’s this guy talking about? The worst thing that could happen to Mediterranean countries is repeating last decade’s German economic underperformance.

    The undercurrent producing all these obvious reasoning failures is the belief that a German (which, by the way, may not be Lutheran) and a Greek (which is *not* Latin) are fundamentally different in values. That Germans are responsable and hard-working while Southern Europeans are PIGS.

    OK, let them bet their money on their prejudice. We’ll win, they’ll lose.

  5. IF

    “Greece is a major beneficiary of EU aid, equal to about 3.3% of annual GDP.”

    I propose:
    1) Redirect this cash flow to Germany in perpetuity (reduce Germany’s contribution to EU financing by this amount)
    2) As a compensation to Greece, let Germany take on most (100 percent GDP worth) of Greece’s debt.
    3) Reintroduce the drachme if you think it is beneficial.

    Should be trivial to finance. Germany, EUs new hedge fund.

  6. a

    “Most people expect the Greece drama to be contained…my, that has a familiar ring, now doesn’t it?”

    Greece and maybe Portugal and even Italy will be allowed to fail, but Germany will draw the line at Spain.

  7. Kevin de Burxelles

    What A E-P is basically admitting is that Greece is going nowhere but he covers this by speculating the Germany will leave the Union! I like reading A E-P because you know that he is not pulling any punches (when it comes to Europe) and you know you are getting the worst case scenario. The idea of Germany leaving the Eurozone means however that he is grasping for straws.

    In fact the Eurozone is using this “crisis” to fall back to s stronger position by reinforcing its continental economic model while discrediting the Anglo Saxon model. If you look at the economy of Greece, it is a microcosm of the Anglo Saxon model, huge current account and fiscal deficits along with an oversized military budget and gutted manufacturing sector. The other IPIS countries are less so but many still share too many Anglo Saxon characteristics. Germany and other continental model countries will use this crisis to force other countries to move away from the Anglo Saxon model and sure, there will be short term pain in this restructuring.

    But the only thing that was going to break up the monetary union was an overpriced Euro. It is now back below $1.40 and if this “crisis” can be milked a little more hopefully the Euro will even get below $1.30. This will give European manufactures a chance to export to, and cut imports from, the global dollar zone (which includes China).

    Due to the continental economic model of balanced trade the Euro was never going to be a reserve currency, as this requires a huge current account deficit according to the Triffin dilemma. But don’t worry, the dollar is going nowhere. If push comes to shove the US will leverage its military might to keep the dollar as the reserve currency. While China may huff and puff, if the US Navy were to stop patrolling international waters then China would find itself with quite a problem on its hands.

    I think Wolfgang Munchau’s recommendations are quiet sound and will be the direction taken.

    1. jon livesey

      Considering that as recently as last September you were telling AEP that questions about the viability of the Euro is just “the usual British paranoia on steroids”, it seems to me that your comments today are a little amusing. In fact, today you actually sound quite like AEP. All he does is point out the obvious, and now that the obvious has arrived, you are pointing it out, too, as though you are teaching us something. You think we can’t read Bloomberg, too?

      But I shouldn’t be surprised. As long as I have been reading about the Euro, I have noticed the same evolution in the stands taken by Euro-fans. It goes “It can never happen”, “it is unlikely”, “there is only a ten percent chance”, and finally “I have always said”. And each time delivered with that exquisite certainty of the teacher instructing the student.

      Pretty soon, it will be about as easy to find a Euro-fan as it was to find a Nixon voter. They’ll all be talking about the “always” said.

  8. Swedish Lex


    AEP makes some valid points although those are obscured by all the rubbish he writes. Münchau’s piece is on the spot and I am pleased that he is not only pointing at problems, as he often does, but also providing some solutions.

    I have always been a keen EMU supporter although I have always said that there is a 10% risk that the euro would implode within a decade of its launch unless there was fiscal harmonisation too. That harmonisation should have been implemented during the good (or better) years but did not happen due to two factors; 1) poor political leadership (Schröder, Chirac, Berlusconi, Duisenberg and Prodi) and 2) EU states only give up competence to the EU level when they absolutely have to when it often is almost too late.

    That 2010 would be the year when the euro would be tested to its limits has been clear for some time. Two things need to happen; 1) the ECB, Germany, France, the Benelux and Finland (the new EC Commissioner in charge of the euro is an early-90s-total-austerity-hardened-Finn who will not be duped by Club Meds not wanting to tighten their belts) will have to agree on a fiscal carrot and stick policy towards Greece and its euro peers. That policy will have to be improvised and implemented simultaneously since, almost, no policy or legal frameworks have been prepared. Anything could be envisaged, much of it, if anything, will however not be to the liking of Greece. 2) Greece somehow will have to be able to face up to reality which, as far as I can understand, will have to mean that Greek voters who have been feed with manure by their political leaders will have to understand, accept and implement harsh policies that are in contradiction with what the Greek political propaganda has been telling them. Governments will tremble and if the Greek leadership adopts a “blame Brussels” position when the domestic political temperature becomes untenable, then the EU peers will have little, or no, patience with the country. In that case, it will become more important for the euro states to use their energy to keep a smaller euro zone intact and solid than to help states that do not wish to be helped.

    (My wife wants to go to Greece on vacation this summer. We will either be paying in euros or get a 30-50% discount if there is a new local currency).
    A voir.

  9. DoctoRx

    What am I missing by commenting as follows?

    Yves says:

    “But the result, that its economy saves, means another economy much (must) consume more than it produces.”

    I would think:

    That a nation (Germany) saves does not mean that another nation dis-saves. The tautology relates to external (trade) balance of payments, which has nothing directly to do with saving.

    Two nations can each produce more than they consume year after year, thereby “saving”. Balance of trade can be whatever it is between them without necessarily making the net importer a net dis=saver.

  10. Christian

    The simple fact of the matter is that Greece lied to get into the Euro. And they continued to lie.

    If they had listened to competent advisors, they should have realized that they can’t continue a policy/economy that has seen their currency depreciate by 85% against the DM in 20 years before EMU without problems.

    The question is what to do now.

    IMO (as a German), it’s similar to the banking crisis: Bail them out now, but put in place measures to prevent this sort of situation from happening again.
    One proposal I’ve seen that is a bit simplistic, but goes in the right direction, is to change the stability and growth pact’s debt/deficit limits to include private savings.
    If your country’s private sector runs up massive debts, than a 3% government deficit is certainly not good enough. At the same time, countries with high private savings should be treated more lenient regarding government deficits.

    The Asian developing countries took the lesson from their crisis that it doesn’t make sense to allow private inflows to simply accumulate and invested heavily into “safe” government debt of industrialized countries (IMO they overshot the mark on that one, but the basic principle is sound). As such they now have a buffer to ride out the crisis and stimulate their economy while export demand is weak.

    Greece benefited from low interest rates by being in EMU, but they not only spent that windfall, they spent even more. Germany and other CA surplus countries in the eurozone enjoyed an export boom associated with that and didn’t try to ensure that it’s sustainable in the “customer” countries.

    This is asymmetric, the export countries received debt in exchange for their goods and now should forgive them because otherwise their customers default which is really the same thing. However no one is talking about returning the goods (cars, machinery, etc) purchased with that debt.

    Since the surplus countries didn’t try to fix the situation that led to this either, I think they should allow a bail out. The question is, and it’s a difficult one, how to not repeat this in the future.

  11. Martin

    Münchau’s remedies are totally fake. He says income tax reform, but what does he mean?
    Poor people pay very little income taxes. Very rich people pay almost the amount that the constitutional court will accept as consistent with the guaranty of property. How can income tax reform increase the spending?

    In another column he requested reform of consumer debt regulation. So consumers should spend more by taking on debt. This would work, but only for some time and end then pretty ugly as we have just seen.

    Probably due to him working at the financial times, he can not give any recommendations, that would really lead to higher spending?

    1. Christian

      I don’t think income tax reform is the answer here. Personally, I’d rather see a list of taxes the government wants to keep (say income, VAT, corporate, energy, maybe inheritance) and abolish the numerous smaller ones left.

      A good tax reform should always lead to howling in the tax advisor community. A simple adjustment of rates of existing taxes is something that should come second.

  12. grecian

    As a Greek it really cracks me reading all these pontifications from the outside.

    What you gentlemen fail to grasp is that there are two ‘Greeces’, if you like.

    One is the pretty poorly paid & exploited purely private sector, where the bulk of the GDP comes from & the other is the bloated, corrupted & wasteful public sector (which includes everything from banks to public utility companies and farmers expecting their subsidies like clockwork every year).

    According to some estimates close to 40% of the working population is in the public sector.

    For me & for the other non so ‘equal’ Greeks, this crisis is a perfect opportunity to get this problem under control.

    The politicians would never have the guts to do this with the s**t hitting the fan.

    I should also make a honorary mention of the previous catastrophic conservative administration, which acted more like an criminal gang bent on looting, instead of preparing for the crisis.

    That would also make me question why the EU monitors accepted the obviously bogus figures while they were in place, and threw a hissy fit when they were removed. Could it be because the central european administrations were helping a fellow conservative administration in exchange of pliant support in the EU fora (and part of the loot)?

    Nah, that would never happen, their protestant work ethic would never allow them to stoop so low…

    1. Swedish Lex

      I can understand that Greeks view the new, undesired, attention to Greece’s economy, internal politics, fiscal choices, etc. by the country’s creditors, the EU Institutions and the other euro states as unwarranted meddling and “not understanding the internal specifics and sensitivities” of an independent state. However, by choosing to have a currency together with large states, the Greece limited its options. What may be perceived in Greece as external bullying is in fact legitimate claims by other euro states on Greece to stop jeopardising the entire euro project.

      Would it be possible to organise an referendum under Greek law on the euro? The question would be stay – and face the consequences or leave – and face the consequences.

    2. Tortoise

      grecian makes valid points that most readers have missed. Greece has a private sector that functions surprising well, is profitable, and gainfully employs Greeks and immigrants whose work ethic would put to shame the Teutons or Anglo-Saxons in EU. Shipping (no 1 in the world) and tourism are well known. There is also infrastructure construction (most of it abroad) and industry (except that the manufacturing facilities have moved to other countries). I am told that the flights from Athens to Sofia, Tirana, Istanbul, London, the Gulf, and other destinations are full every Sunday night with Greek managers or engineers who return to work after a weekend with the family. Their incomes largely escape taxation in Greece. There is also a thriving underground economy in Greece that escapes the tax man.

      Greece has problems but its economy is NOT collapsing. What is collapsing is the government finances. Imagine 1.05 million civil servants who cannot even collect the income or property taxes and all too often forget to collect the garbage. The big problem is not poverty, since I would estimate that the average Greek is now as poor as the average Briton. (Greeks are superstitious and consider it bad luck to ever say that they are doing well.) The big problem is disorganization (though some will tell you that this is a major advantage of doing business in Greece) and widespread corruption in government services.

      The best the EU can do for Greece is to guide Greeks in solving their problems without bailing them out. The new administration is moving slowly but a consensus is building that major reforms are urgently needed in government. This crisis is a godsend for most Greeks who realize that the government must mend its errand ways.

  13. But What do I Know?

    This issue with Greece illustrates a paradox of debtors which Mr. Bernancke seems not to have discovered in his mathematics–that if you bailout debtors, you will create more of them.

  14. gnez

    As someone living in Greece, I can understand the argument for leaving the Euro. The question though is whether this practically possible. Two observations: 1. Imagine what would happen if Greece were to announce withdrawal. I expect that no same person would keep their euros in the country if devaluation were a prospect in the coming months. 2. Could people be stopped from taking their euros out of the country? This would require massive changes in EU legislation and essentially the adoption of law specifically targeting only the rights of the citizens of one country. In short, Greece may well benefit from a Euro exit but the practical implications are such that I can’t imagine it ever taking place.

    1. Swedish Lex

      I hope that the Greek leaders think this through carefully and understand that leaving may be a lot more difficult than styaing.

  15. MickeyHickey

    What British economists/journalists say about the EMU should be taken with a grain of salt. The British have chosen to isolate themselves on their island, as in newspaper headlines stating Europe cut off fog in the Channel. The value of the Euro is now well established and it’s establishment is seen as the most positive thing that has happened since the formation of the EU itself. The Lutheran/Catholic rift is another red herring, organized religion is in decline in Europe with secularism running rampant. German ideas on sound currency spring from their unfortunate experiences in the 1920s’ and their immediate post war problems. The Mediterranean countries are no different than the Baltic or Celtic countries or even Iceland they played the cards they were dealt without anxieties of past economic excesses and resulting disaster to instill caution. I look upon Europe as going through a learning experience that will make them stronger and wiser.
    Democracy is messy and sometimes slow but the resulting consensus provides a sounder platform for progress.

  16. rharris

    When one party hands over goods to another party and receives debt in return, and then does it again and again and again, why do we blame the receiving party, while haling the donor party as virtuous?
    Also, I don’t think there’s anything inherently unsustainable in such a relationship!

  17. jdmckay

    Germany is in a similar position to China: a manufacturing powerhouse that sees it as to its advantage to have its currency “peg” result in its labor being underpriced.

    Yves, you’re wrong on both those counts… really wrong. You write a lot of great stuff shining light on doings inside US borders, but this (and your various China assessments)… utterly irresponsible and factually false.

    W/both this “observation” & previous China conclusions, you look at import/export accounting, currency valuations against the $USD, and draw conclusions (eg: in this case, comparing Chinese lbr costs held low by “its currency “peg” and saying Germany’s doing the same), and declare conditions and conclusions w/out examining or describing the nuts and bolts of what their economies actually do.

    German industrial workers are amongst the highest paid in the world: they do not have cheap labor. They also are in an elite few w/the best trained and highest skilled in the western world. And that fact is consistenent w/the extremely high quality products they produce… well beyond “beemers & Benz'”: machine tools, very hi-end electronic components, much of the world’s burgeoning “green” energy technology/production & much more: Germany delivers very high quality products, much of it BTW several generations beyond anything in the incubator on US shores.

    Excellence has it’s rewards.

    In your description of things, the distinction between hi-quality “stuff” coming from one economy and shit coming from another gets lost in your spread sheets.

    China, by contrast, even w/their phenomenal growth of recent years, still averages less than $.70 p/hr industrial wages. I mean, really… US mfg’ing hasn’t been flocking to “cheap” German labor that I’m aware.

    Beyond that, whereas Germany is predominantly high-end “stuff”, China is… everything: they crank out shitty, cheap stuff, they increasingly are producing very high quality stuff in markets the whole world needs (or will soon need), and quality levels filling the void between these 2 extremes.

    The difference in China, however, is trajectory: everything is, for some years now, up: quality, engineering, research, and in particular, research/production going to needs rather than “consumer” gadgets.

    But the result, that its economy saves, means another economy much consume more than it produces.

    It does not mean that, the former does not lead to the later. It can happen that way, and it sometimes does, but that statement is not a law, cause & affect, in any way. It certainly happened on US shores, but not by cause >> affect as you suggest: rather because we devalued and/or offshored our production (labor & intellectual) for the quick profits of cheap labor, and borrowed to fuel consumption.

    Germany has not done that.

    And in your conclusions, looking only at currency/trade spreadsheets, the more fundamental cause & affects that drive things are missed.

    Keep that up for long enough, and the under-producing country starts to look like a deadbeat. So the surplus country needs to be prepared to accept either a revaluation or deadweight losses. But neither China nor Germany seem ready to hear that.

    As well they shouldn’t because it’s balderdash.

    I do appreciate time/effort you put into this blog, and find great value in much of it. But this kind’a stuff, it seems to me, you regularly express from a belief rather than objective observation of reality.

    It also seems to me that a more tangible cause & affect than what you describe here is: whenever you get sucked into an AEP writing of hubris (as is his want) your stupid gene kicks in w/reliable regularity.

    God Bless you Yves.

    1. Detlef

      The funny thing is that lots of economists – back when the Euro was introduced – warned that the German Mark entered the Euro system overvalued.
      Which was one reason – according to them – why the German economy then “stagnated” for the first half of the 2000s.

      And coming back to your arguments one could also mention that the Euro itself certainly isn´t undervalued. :)
      In fact, it´s probably overvalued compared to quite a few other currencies. So that´s not an explanation for German trade surpluses with non-Euro countries.

    2. Yves Smith Post author

      I have elsewhere defended Germany’s productivity and competitiveness. However, it also remains true that in a free floating currency system, the currency of a chronic debtor nation should fall, increasing its wage competitiveness. That cannot happen intra the eurozone, nor has it been allowed to happen with China.

      The undervaluation of the RMB has if anything increased since the crisis began, and it is at least 20%, some estimate 40%. China also has very high reject rates in many types of products (I hear this directly from importers) AND the cost ex labor/product are significant (shipping, inventory funding, US overheads due to much greater coordination required). The very fact that a lot of major multinationals started rethink their supply chains to go regional when oil prices spiked attests to the fact that other costs can and do trump a labor cost advantage.

      Similarly, if Germany is a persistent exporter within the eurozone, that implies a currency adjustment (meaning leaving the euro) would in theory benefit the debtor nations. That happened in the Nordic banking crisis. All the Nordic countries had pegs to what I think then was the ECU. They lowered their pegs to stoke an export boom.

  18. Mark

    German Perspective:

    “We will join the EU so that our currency will be weaker than the D-Mark would have been. Thus we will be able to export more than we would have other wise.”

    PIGS Perspective:

    “We will join the EU so that our currency will be stronger than it would be other wise. Thus we can consume more than we would other wise.”

    So now the bill has come due. Who’s turn is it to pay the tab?

    If Greece were to leave the EU their assets would be priced in Dracmas and not Euro’s. Talk about a deflationary depression!

  19. Chris

    Don’t be surprised when one day a Eurozone bond market appears and a beginning is made on euro-zone fiscal questions (especially income sources). This is being discussed (unified bond market) in the European parliament (new powers under Lisbon treaty), but there is a certain delicacy involved in surfacing the discussion. Sovereign debt crisis provides the opportunity, and the argument from necessity.

    It doesn’t take much imagination to figure out how such a discussion would impact the London financial center, nor where EP and Munchau’s enthousiastic depression talk originates. In the rhetorical game of paper stone knife, style and ‘explication de texte’ never beat discovery of puissance motrice.

  20. Kiste

    German Perspective:

    “We will join the EU so that our currency will be weaker than the D-Mark would have been. Thus we will be able to export more than we would have other wise.”

    I’m not sure that’s the German perspective, considering that Germany had to be strong-armed (French consent to reunification) / bribed (persistent rumors about backroom dealings in relation to the sale of Leuna) into the EMU by Mitterrand.

    Let’s be clear here: the Euro was mainly driven by Italy and France. In their perception, the regulatory dominance of the Bundesbank within the European Monetary System was a problem because they had, in essence, to go along with Bundesbank montary policy and shoulder the whole burden of the economic adjustments.

    In Germany, Helmut Kohl muscled the EMU through, the Social Democrats on the other hand remained skeptical for quite some time.

  21. Vi ny G.

    Germany will never leave the EU. Neither will Greece. Make no mistake, the EU is the new German Empire, the Fourth Reich finally done right. The EU will continue to grow east until it will include oil-rich nations in the Caspian Sea area. By then the boys on Wall Street will likely cause a few more crises, steal a few more trillions, and continue to arrogantly flas their impunity. That’s when the German industrial machine will once again set its sights on the decrepit, deindustrialized, and pathetic nation that the US has become, and once and for all remove the Anglo-Saxon evil from the face of the Earth. I hope to live to see it from my condo in Greece.


    1. Dan Duncan

      This Vinny G comment, taken in connection with his Jew-rants…Here’s one example that Vinny G recently shared on this blog (all you have to do is search this blog for “Jew” or “Jewish” and Vinny G’s name is all over the place):

      “Your Jewish lobby has skewed America’s policy to serve only the interests of your genocidal nation of Israel, your Jewish-controlled banking system has destroyed the lives of tens of millions in this country alone, and your Jewish-controlled media has turned this entire country into a nation of immoral chumps.”

      I mean it’s bad enough to go into one of these “Jews control the banks and media” rants…but then to openly hope for the 4th Reich to rid us of that Evil Anglo-Saxon Jew-Bank-Media Complex???

      The “G” in Vinny G…does it stand for Goering by any chance?

      1. Yves Smith Post author


        Vinny has said equally bad things about Europeans on previous threads….did you pick those out? No, you engage in a pure ad hominem attack.

  22. dearieme

    “”the disgusting “Protestant work ethic”, e.g. the religious justification for slavery”: it was evangelical Protestants who abolished slavery, for the first time in the history of civilisation.

  23. Kiste

    About the “protestant work ethic”… the economically strongest areas in Germany are in the south, which is predominantly Catholic.

    1. IF

      Sigh. Unfortunately Kiste is right. But we all know by now that Ambrose Evans-Pritchard is bullshitting his way through his opinion pieces.

  24. RebelEconomist

    I wouldn’t take AEP seriously. The euro is to British right wingers what universal healthcare is to American right wingers – they are viscerally hostile and incapable of an objective assessment. A hard currency is desirable because it makes reality plain – eg rising pay without increasing productivity results in uncompetitiveness; borrowing to increase consumption today means reduced consumption tomorrow. As a Briton, I have no particular affection for the bureaucracy of the EU, and would have been happy for us to stay out of EMU if the BoE had been firm, but as UK cpi inflation looks set to breach the top of its target range for the fourth time, I am beginning to conclude that Britain would be better off in EMU. It might not be a bad idea for EMU to be uncompromising with Greece, and see how it turns out, pour encourager les autres.

  25. sean

    The euro is the only major currency I am aware of which has no tax base.
    It is dependent on intergovernment transfers.
    The proposed euro bonds imply there must be a constant source of funds to pay these euro bonds coupons.This must mean there is a proposed EU Federal tax backstopping them.

    Good luck to the EU in trying to impose an EU federal tax .In my view it will be resisted in any number of ways ,refusal to pay taxes ,expansion of the black economy,even violent resistance.

    If a euro bond is launched its price will reflect the recalcitrant peripheral States negative effects.
    Credit default swaps will presumably be set high for fear of default (missed coupon payments) as there is no currently guaranteed source of income such as a Federal euro tax.

    1. Kevin de Burxelles


      Correct me if I am wrong but I don’t see why you would need an EU federal tax if you introduced a Euro bond. The idea behind a Euro bond would be an implicit German guarantee as well as explicit German control. The bonds would be purchased centrally and then distributed to each member state by demand and /or need. This way Greece and Ireland, for example, would be limited in how much credit they could obtain. In other words, there would be a de facto German minister of finance in each European country. And the bonds would be repaid, not by a Federal tax but via intergovernmental transfers back to the center from the nations who benefited from the bonds as they became due. That way each nation just pays for the debt they use.
      Over time, as the system stabilized, the coupon on Euro bonds would approach that of a German bond.

    2. Detlef

      Hi Ambrose Evans-Pritchard. :)
      Sorry, couldn´t resist. Especially with that “refusal to pay taxes ,expansion of the black economy,even violent resistance”.

      Customs and excise dues on goods entering the EU belong to the EU (roughly 17 billion Euros in 2007). A percentage of the member countries “VAT income” (another 17 billion Euros) too is part of the “normal” EU income.
      Both of which of course only pay for a part of the EU budget. The rest of the budget (an additional 85 billion Euros) is financed by member “fees” based on GDP.

      You think there would be riots if for example the EU percentage of the VAT would be raised somewhat?
      The VAT in Germany “earned” 175 billion Euros for the federal and state governments in 2007.

      The EU has a right to an “average” 0.31% of that sum.
      (It´s a bit more complicated because the formula has to deal with different VAT rates in member countries and different VAT rates for goods inside a country.)

      Let´s say around 1-2 billion Euros for Germany. The EU got roughly 17 billion Euros from all member states in 2007.
      Just a bit more than the Goldman Sachs bonus pot in 2009. :)
      To put things in perspective.

      You really think that for example doubling that percentage would lead to riots?
      15-20 billion Euros per year could pay for a somewhat larger amount of bonds, I´d say.
      (Assuming of course that you can reassure German voters that they won´t be paying endlessly to bail out other member states.)

      Not to mention that I just don´t understand that talk about “The euro is the only major currency I am aware of which has no tax base”.

      Having a tax base is nice but it doesn´t help you if the government tries to devalue the currency to help pay back the debts.

  26. mac

    “Germany is in a similar position to China: a manufacturing powerhouse that sees it as to its advantage to have its currency “peg” result in its labor being underpriced. But the result, that its economy saves, means another economy much consume more than it produces….”

    This is the type of economics that make economics as a field of study nonsensical.

    1. Yves Smith Post author

      No, it’s accounting. I admittedly should have said, “saves more than it invests domestically.” Both Germany and China are capital exporters. A country that “exports” savings by net investing abroad MUST run a current account surplus. That’s accounting. You can debate which way the equation goes (did the savings cause the current account surplus, or does the surplus cause the savings) but you cannot have one without the other.

      1. RebelEconomist

        And, similarly, you also should have said “consumes and invests more than it produces”. The importance of this point is that the US did not have to consume Chinese official capital inflows, it could have saved more itself. In fact, with a bit of organisation – eg by issuing more treasuries into the Chinese demand and investing in physical and human capital projects that yield more than the treasuries – this cheap funding could have been an advantage to the US. But that would have involved bigger gubbermint, and Americans don’t do that. Alternatively, the US could have increased its own foreign exchange reserves, but reserves are for little people. In my opinion, given their ageing populations, Germany and China are doing the right thing, and it is the US – and the UK, so no smugness here – that have been complacent and irresponsible.

        1. Yves Smith Post author

          While I agree that the unwillingness of the US to have anything resembling a thought-out industrial policy (we do have one, by default, we subsidize agriculture, for instance) was wildly irresponsible, and Germany has comported itself better than the US in many of its policy choices, I don’t agree at all re your characterization of China. China has pursued unabashedly mercantilst policies, as do Japan and the Asian Tigers.

          What happens when you have a world where everyone wants to run trade surpluses and protect their labor markets? You either have protectionism and therefore not much trade, or you have a chump. We decided, out of a bizarre combination of ideology and complacency, to be the chump.

          I also don’t agree that the US government could have run large scale investment programs. The last ones we’ve had have been in the name of the military objectives: the interstate highway program and NASA (the NIH is a weird exception here…and our letting Big Pharma put through price increases well in excess of inflation when government funds basic research is just bizarre, but it proves the point, the exceptions are more covert subsidies than investment, and the benefits are not accruing as much to US citizens as foreigners). Aside from the “big government” issue, private businesses would howl at how there were disadvantaged by having to compete with government and its cheap funding. What would happen, for instance, if we tried putting in high speed rail? The airlines would go nuts, along with car makers and businesses along interstates. We have too many people who’d be losers for the resulting program choice to be sensible. That’s why so many cities build sports complexes that lose money. The loser is the taxpayer, lots of private interests come out ahead.

          1. john c. halasz

            Yves, I don’t think the mercantilist charge is the whole truth with respect to China’s RMB/$ peg, though, to be sure, China is following the other prior East Asian models in its development model, and, yes, it’s good to recognize that it’s an East Asia undervaluation as a whole, with China only being in the first mover position. But two other main objectives are served by the peg: 1) to maintain capital controls and thus control over domestic monetary, fiscal and, er, regulatory policy, and 2) to gain access to world quality production technology and know-how, in which case their eventual losses on $ holdings, which mean that they’re selling their export goods at below full value, are deemed well worth the costs, especially considering the network spillover effects that contribute to development take-off. (The idea that they would somehow agree to open their economy up to Wall St. finance to compensate for the merchandise trade deficit was always an hilariously insane idea. Rogoff says they have a “repressed” financial system: yes, it’s a bureaucratically ruled commie system, and maintenance for financial controls is very much a continuing goal).

            That said, China has been simply adapting deftly to a U.S./MNC dominated global trading system and many of the key decisions were not in their power, but made abroad and especially in the U.S.A. The undervaluation of their exports likely means that they are gaining less of the surplus-rents from the China trade than the foreign MNCs that run the trade. (In fact, those vast parks of SME industrial producers are often running on low margins, compared to the large industrial rents traditionally enjoyed by high-capital-intensity developed country oligopolies). The huge gains to MNCs and the wealthy investor class are what’s principally behind the U.S. trade deficit and de-industrialization policy. It’s not a Machiavellian plot by those inscrutable orientals, and China-bashing should be somewhat restrained.

            That stated, I don’t see how we in the U.S. can get out of our current mess solely by relying on investment from the “private” markets, especially finance sector-led investment. I think that active government policy, encompassing not just fiscal, regulatory and trade, but public investment and coordinated industrial policy would be required, if this isn’t to be a decade long stagnation with repeated set-backs. However politically “impossible” that may be, given our dysfunctional, archaic and ideologically confused political system and the dominance in it of MNC/Wall ST. interests.

          2. RebelEconomist


            I hope you see this. Here are a couple of examples of opportunities for public sector investment in the US that are supposed to yield double figure percentage returns:

            pre-school education:

            NE railways:

            When you say that it would be politically difficult for the US to do public investment, overcoming such disagreement is what I mean by “organise”. These are basically questions of political will, and the US cannot expect countries like China and Germany (both of which, by the way, are leaders in high speed rail despite having their own carmakers, autobahns and airlines) to change their policies to accommodate the political inflexibility of the US.

  27. linda in chicago

    Greece should offer free vacations in return to the sun-starved Germans. End of problem.

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