The Beginning of the End of the Eurozone As We Know It?

The widely-extolled idea, that the EU would find a way to muddle through the Greece crisis, looks very much in doubt. The pressure has not simply put the rescue of Greece into disarray, but appears to have led to some positions being taken that, if they hold, could lead to the partial dissolution of the monetary union. This development would have far-reaching ramifications which are far from well understood, to put it mildly.

We have a sober assessment from Wolfgang Munchau at the Financial Times:

At last we are heading towards a resolution, albeit a bad one. After weeks of pledges of political and financial support, Angela Merkel appears ready to send Greece crawling to the International Monetary Fund.

Germany cites legal reasons for its position. In past rulings, its constitutional court has interpreted the stability clauses in European law in the strictest possible sense. These rulings have left a deep impression among government officials. It is hard to say whether this argument is for real or is just an excuse not to sanction a bail-out that would be politically unpopular. It is probably a combination of the two.

I have heard suggestions that a deal may still be possible at this week’s European summit, but only if everybody were to agree to Germany’s gruesome agenda to reform the stability pact. That would have to include stricter rules and the dreaded exit clause, under which a country could be forced to leave the eurozone against its will. I am not holding my breath.

But either outcome will mark the beginning of the end of Europe’s economic and monetary union as we know it….

In a column several weeks ago I put forward three conditions necessary for the eurozone to survive in the long run: a crisis resolution mechanism, a procedure to deal with internal imbalances, and a common banking supervisor. Since then, things have been moving in the wrong direction on all three counts.

For a start, we have come from a situation in which the “no bail-out” clause of the Maastricht treaty, having been almost universally disbelieved for 10 years, is suddenly 100 per cent credible…

The debate on imbalances is also regressing. It would be unreasonable to ask Germany to raise wages or cut exports, but there is a legitimate complaint about Germany’s lack of domestic demand. Berlin should accept it needs to develop a strategy. But the opposite is happening…

On banking supervision, the main reason for a common European system is macroeconomic. In a monetary union, imbalances would matter a lot less if the banking system were truly anchored at the level of the union, not the member state. As banks can obtain liquidity from the European Central Bank, even extreme and persistent current account deficits should not matter in good times. But they matter in times of crisis. For as long as bank failures remain a national liability, persistent imbalances could ultimately lead to a national insolvency. If the banking sector were genuinely European, imbalances would still be an important metric of relative competitiveness but we would need to worry a lot less, just as we do not worry about the current account deficit of a city relative to its state.

The lack of a bail-out system, of an agenda to reduce imbalances and of a common banking system are realities that investors should take into account when making long-term decisions, as should policy-makers when they make important choices for citizens. The reality is that the eurozone, as it works today, is not a monetary union but a souped-up fixed exchange rate system.


Ambrose Evans-Pritchard at the Telegraph waxes characteristically apocalyptic, but it seems fitting today. Not that he does NOT predict a break-up, but does anticipate shifts if Greece does go to the IMF:

The failure of EU leaders to cobble together a plausible bail-out – if that is what occurs at this week’s Brussels summit – is a ‘game-changer’ in market parlance…

There will be no inevitable move to fiscal federalism; no EU treasury or economic government; no debt union. It is Stalingrad for the federalist camp and the institutions of the permanent EU government.

I remember hearing Joschka Fischer, then German Vice-Chancellor, telling Euro-MPs a decade ago that EMU was “a quantum leap … creating an inexorable federal logic”. … Yet the moment of truth has come. There is no quantum leap. We have a Merkel pirouette…

EU leaders may yet rustle up a rescue package that keeps the IMF at bay, but alliances are shifting fast…

Besides, too much has been said over the last week that cannot be unsaid. Mrs Merkel’s speech to the Bundestag was epochal, a defiant warning that henceforth Germany would pursue the German national interest in EU affairs…

Days later, Thilo Sarrazin from the Bundesbank blurted out that if Greece cannot pay its bills “it should do what every debtor has to do and file for insolvency. This would be a suitably frightening example for every other potentially unsound state,” he said, pointedly excluding France from the list of sound countries.

Dr Sarrazin should be locked up in a Frankfurt Sanatorium. It was such flippancy that led to the Lehman disaster, requiring state rescues of half the world’s financial system. A Greek default would alone be twice the size of the combined defaults by Argentina and Russia. Contagion across Club Med would instantly set off a second banking crisis..

Core inflation in Euroland was 0.9pc in February, the lowest since the data series began. It is certain to fall further as the doubling of oil prices fades from the base effect. M3 money has been contracting for a year. Business credit is shrinking at a 2.7pc rate.

So, it is not enough for the EU to impose a fiscal squeeze of 10pc of GDP on Greece, 8pc on Spain, and 6pc on Portugal, and 5pc on France over three years, we need a dose of 1930s monetary policy as well to make sure life is Hell for everybody…

The deeper truth that few care to face is that under the current EMU structure Berlin will have to do for Greece and Club Med what it has done for East Germany, pay vast subsidies for decades. Events of the last week have made it clear that no such money will ever be forthcoming.

Let me be clear. I do not blame Greece, Ireland, Italy, or Spain for what has happened…
Nor do I blame Germany…

I blame the EU elites that charged ahead with this project for the wrong reasons – some cynically, mostly out of Hegelian absolutism – ignoring the economic anthropology of Europe and the rules of basic common sense. They must answer for a depression.

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  1. Diego Méndez

    “The reality is that the eurozone, as it works today, is not a monetary union but a souped-up fixed exchange rate system.”

    Now it’s official: Wolfgang Münchau is economically illiterate. He can’t understand the difference between a monetary union and a currency peg.

    Greece cannot leave the eurozone. It would lead to financial armaggedon. And Germany *cannot* expel any country from the eurozone; just as Germany *cannot* forbid any Schengen citizen to enter Germany.

    It’s the European citizen’s unalienable right, sanctioned by EU-level laws, and enforceable by EU-level justice tribunals. If German Tribunals say freedom of movement/EU-sanctioned bail-outs go against their Constitution, Germany has to leave the Schengen area (resp. the euro area), not the other way round.

    Germans are acting with a sense of superiority and short-sightedness which will be remembered for decades.

    1. a

      “They must answer for a depression.”

      Well, since the UK should be one of the first countries in depression, beginning roughly right after the next election, when either the markets or the government cut off the current free-spending ways, I’m not sure what the euro has to do with it.

      Lots of people and governments have borrowed too much. Nobody wants to lend to them any more. Losses have to be taken, and borrowers will have to live within their means.

      There’s not a inalienable right for governments to borrow anything, much less 10% of their countries’ GDP, every year.

    2. Vinny

      “Germany *cannot* expel any country from the eurozone”

      In that case, they’ll just have conquer them… May I suggest we all start learning German…:)


    3. Patrick

      Diego – The souped-up peg comment is an apt metaphor in light of the couterfactual of Greece having it’s own currency. Greece is essentially pegged to the Deutsch Mark, is trapped in a deflationary death spiral, and can’t devalue to escape. It’s very much like the gold standard in the 1930’s.

  2. attempter

    Ah, globalization, financialization, the EU…great ideas.

    It would be unreasonable to ask Germany to raise wages or cut exports, but there is a legitimate complaint about Germany’s lack of domestic demand.

    I suppose where a group of drug dealers are dependent upon one another’s addictions, if one of them isn’t as much of an addict then he is a kind of slacker. Or a “hypocrite”.

    Yeah, I sure have wasted my time always opposing all this insanity and immorality….

    1. bb

      i do not share your position regarding the quoted nonsense, nevertheless i think this sentence is pure nonsense.

      it is not governments that cut exports or increase domestic demand it is human beings’ genuine needs. even if VAT were to be eliminated (against EU laws anyways) unemployed people would not buy more because they save on taxes. equally, no company that works for profit would lock its doors or turn away customers because the country has to export less.

      i guess popularizing the writings of brainless economists that advocate an economic ecosystem without economic benefits to its participants has become the purpose of this blog.

      you lost me as a reader, i am removing this blog from my google reader. good-bye to all intelligent readers still left around. if you want to read more intelligible articles, look elsewhere.

  3. Tim Coldwell

    A pseudo solution to the euro’s failings
    by Martin Taylor | FT

    The introduction of the euro was meant to end squabbling over the disadvantages supposedly accruing to a single-market participant from exchange rate movements. The abolition of these inconvenient prices, it was felt, would remove the underlying sources of friction. It may be, instead, that the absence of exchange rate information within the eurozone has fostered a complacency about sharply diverging competitiveness.

    The least damaging solution now might be a north/south split of the currency. Imagine a “neuro” and a “sudo” (pseudo in Greece). For every €100 you would receive 50 neuros and 50 sudos. Countries would from then on opt to use one or the other. Existing obligations – including the national debts of all current eurozone members – would thus have a hard and soft component. Readers can amuse themselves by guessing which currencies some of the more ambiguous countries might choose.

  4. renting_is_like_owning

    The euro will die because Germans are demanding that those who live beyond their means need to pay their bills? That a country that used fraud to enter the eurozone (with fat fees seemingly wending their way across the Atlantic) is a domino which will lead to the eurozone toppling?

    Actually, some of the reporting is starting to get interesting – the bill is coming due, worldwide, and it is always better to blame someone else, anyone else, than take responsibility for one’s own actions. Especially the sort of reporting that says how much worse off everyone else is, while not dwelling on things closer to home.

    Germany is acting the way it has for decades, and no one in Europe is surprised in the least. And as for Evans-Pritchard writing ‘a defiant warning that henceforth Germany would pursue the German national interest in EU affairs,’ this statement blinds with the obviousness that Germany is just like every member of the EU, most especially including the UK.

    The eurozone, much like the EU itself, is an attempt to handle, though only the most thoughtlessly optimistic individuals can believe they can solve, a number of concrete European problems. And no one in Europe, absolutely no one, expects it to last forever.

    What is amusing is to read such musings, without seeming to live in a daily European context – the euro has meant that those in the eurozone not only travel freely among the EU countries (well, not quite the UK – almost as if the UK pursues its national interest in EU affairs), but also spend their money. Except for those nations out of the eurozone – and look, the UK is again the major example of a nation determined to avoid the euro trap. An entire generation of Europeans is now growing with the reality that when they work and travel in Europe, they just use Europe’s money, without thinking about how it is Italian or Dutch or Slovakian. Slovakia having joined in 2009, those poor fools – look at all the coverage of just what a disaster joining the eurozone was for Slovakia. Oh, wait – there hasn’t been any.

    The challenges are real, mistakes will be made, and at some point in the future, the euro will go the way of all other European currencies. All of them till now, actually. But to think that the euro will collapse because Germany is demanding that other nations live within their means is almost amusing, except when you realize just how many people wedded to the euro collapse narrative live in countries that have problems of a different order. The UK does manage to stand out in one way from the eurozone – its public debt situation is worse than any eurozone member.

    1. Diego Méndez

      “And no one in Europe, absolutely no one, expects it to last forever.”

      I expect the eurozone, the European Union and the European citizenship to last until it disolves into similar institutions at a global level.

      I can’t imagine someone would strip me, as a European, of my rights to move freely into other EU countries, live, work and marry there, use the same European currency all over the eurozone, and not being discriminated against just for such a small issue as the European place I was born at.

      Nations don’t have rights. It’s citizens who have rights. The European project is just a small prototype for what will come at a global level in a matter of decades.

      1. renting_is_like_owning

        ‘I expect the eurozone, the European Union and the European citizenship to last until it disolves into similar institutions at a global level.’

        A possibility which really frightens certain people, a number of them living in the DC metro area.

        ‘I can’t imagine someone would strip me, as a European, of my rights to move freely into other EU countries, live, work and marry there, use the same European currency all over the eurozone, and not being discriminated against just for such a small issue as the European place I was born at.’

        My comment was directed to the longer term – after all, the East Europeans never expected to live forever under Soviet rule, but if you had asked a typical East European in 1975 whether the Russians would go home in their lifetimes, the general, and incorrect, response would have been ‘no.’

        However, your attitude is something that Americans just don’t understand about the EU – it may lack many of the aspects of a nation state, but it does foster a sense of loyalty to its ideals, or the idea of Europe as something larger than a single region or state. Ideals which more than occasionally fall short, but ideals which are much better than a cynical refusal to even believe that ideals are important. And Americans seem almost incapable of understanding that the primary focus of the EU is to stop war, not wage it.

        And to mix comments a bit – ‘The EU expansion eastwards was a strategic priority for Germany, and Germany only.’ No – it was a strategic priority for the Europeans living in Eastern Europe, a group of people who concretely demonstrated that even a totalitarian system can’t survive when its subjects peacefully (with few exceptions) refuse to be its subjects.

        Those Eastern Europeans embody many of the ideals you wish to see at a global level, having stood up to a system which attempted to deny them hope of ever experiencing what West Europeans took for granted. To see this eastern reintegration as nothing but a German priority is simply wrong. Not that it wasn’t important to Germany, of course – but many of the Eastern Europeans had no interest in becoming German partners (‘partner’ being a politer word than client), seeing the EU as a way to keep Germany in check, an attitude likely shared to an extent by the Russians. An interesting result of the EU experiment, as without the EU, it is extremely unlikely that Eastern Europe would have ever gained its freedom without massive bloodshed. The EU provided a framework in which smaller nations could achieve a degree of peace and prosperity which had been unimaginable in the past. Whether from ideals, or cold hard cash for development – just as Ireland, Spain, and Portugal had experienced beforehand.

        1. Diego Méndez

          EU expansion will benefit all EU member states in the long term. As would a Greek bailout.

          However, expansion *eastwards* was an economic and political priority for Germany only. Of course it’s great to build roads in Eastern Europe with Western European money (as it was when Spain or Ireland were the recipients), but other areas did certainly need that help more urgently.

          In the early 90s, the question was: should we help Eastern Europe *or* should we help Northern Africa to develop into economically advanced democracies? The roads in Poland are great, but roads linking Morocco to its main enemy and neighbour, Algeria, are much more important, IMHO.

          And, on economic and political terms, Latin European countries’ economic priority was trade with Northern Africa, not Russia and Eastern Europe. To put things in context: Southern Spain’s main trade partner is Morocco. Distance matters, after all.

          1. renting_is_like_owning

            ‘However, expansion *eastwards* was an economic and political priority for Germany only.’

            And the Eastern Europeans – they most certainly did everything possible to join the rest of Europe, from Solidarity to the Velvet Revolution. This point seems to be easily overlooked, though why is beyond me, though from an Eastern European perspective, the direction was westwards.

            I have left NATO out of this discussion, but it wasn’t just Germany that wanted Eastern Europe to integrate as quickly as possible, because at the time, the Soviet Union was still an actual fact, not the memory we now have.

          2. Diego Méndez

            Western Europeans wanted to preserve good ties with Russia above all. In 1992 you had Western European leaders discussing whether to help Russia militarily crush an eventual move towards independence in the Baltic countries.

            And they feared resurgent Germany as much as Russia.

            The question then was not whether to accept Estonia into the EU, but whether to send tanks there to help Russia. Who knows? Maybe that would have led to a free, democratic, economically advanced Russia.

            But the West chose China over them as partners. Russia defaulted and keeps on desintegrating.

          3. Vinny


            But if you build up Morocco’s roads and help them become an economic powerhouse, they might just decide to reconquer Spain…


          4. Vinny


            I live in Greece for most of the year now. The truth is, Greek roads are the worst in the EU, bar none. The EU has financed very little road construction around here, and the same is true about much of the new EU members in Eastern Europe. And, if I may add, the few they did finance some 30 years ago showed no improvement, as the funds ended up in the pocked of some corrupt official, anyway. Yeah, the Greek way, my friend… :)

            But I agree, the EU has financed a lot of nice freeways in Spain. I think the reason for that is because the sun-starved northern Europeans (i.e., Germans and the like) were once (up until about 2 years ago) dreaming about retiring in places like Spain, but they just could not live without the autobahn at their doorsteps.

            But you know what, there are more important things in life than roads. After 30 years of life in the US (a quarter of which I must have spent getting angry on those quality American freeways), I have adapted very nicely to Greece. So, my friend, let’s let those Germans die of a heart attack at 40 because they were late 5 minutes to work in some Volkswagen assembly plant. I for one, will stick with my siesta and healthy Greek food, and most likely live to be 100.

            Vinny… currently sipping on a well-made frappe while waiting on my souvlaki at my favorite beach-side cafe downtown Chania, after just having woke up from my 3 hour afternoon siesta. I tell ya buddy, this sure beats life in Hamburg… or Berlin… or London… or New York… or Chicago…

          5. DownSouth


            Your comment very much reminds me of something an urban planner once said in a lecture I attended: “In America, we may not have very happy people, but we have extremely happy cars.”

          6. jake chase

            I am trying to imagine trade between Spain and Morocco. Let’s see: Spain sends Morocco wine? No, that wouldn’t work. How about goat cheese? Then, Morocco sends Spain what? Olives? No, Spain has olives. Perhaps Spain sends Morocco golf architects? Morocco sends Spain people? Camels? Figs? This trade stuff gets reall confusing. No wonder the Euro is in trouble. Perhaps that is why they are all busy exchanging one another’s bonds?

          7. Diego Méndez

            Jake Chase,

            Spain is the third largest European car manufacturing nation, apart from manufacturing, well, almost anything.

            Morocco has phosphates, cheap food and light industry (textiles). Algeria has huge reserves of gas making our houses warm in winter. (Much more reliable than Russians, if you ask me.)

        2. charcad

          However, your attitude is something that Americans just don’t understand about the EU – it may lack many of the aspects of a nation state, but it does foster a sense of loyalty to its ideals, or the idea of Europe as something larger than a single region or state. Ideals which more than occasionally fall short, but ideals which are much better than a cynical refusal to even believe that ideals are important. And Americans seem almost incapable of understanding that the primary focus of the EU is to stop war, not wage it.

          I have to nominate this as this thread’s most self-delusional post. Been there, done that, smelled the bodies. The EU project is one vast lie. It’s a nonstop serenade of inflated language accompanied by performance standards set to the least common denominator in every field of human endeavor.

          The real “EU” future is civilians being massacred by barbarians after cowardly 4th rate EU troops run away, the fiscal discipline of the Greek government, the fidelity of the Sarkozy family and the immigration policy of Jean Raspail’s “Camp of the Saints”. Accompanied by the unlimited arrogance of battalions of Diego Mendezes playing Mouth.

          The Germans have peered into the bottomless Abyss represented by all things “EU” and are rightly turning away in horror.

          Good for them. Enough is enough.

          1. James

            Absolutely agree. Finally the Germans realise they cannot carry all the deadbeat economies of the ClubMed. Diego, how long do you expect the north to bailout the south ?

          2. Diego Méndez


            Europe needs to help Greece, which is an exceptional case. And I mean Europe, both Northern Europe (Germany, etc.) and Southern Europe (Spain, Italy, etc.), lending a hand to Greece.

            I don’t think any other bailouts will be necessary.

          3. YankeeFrankee

            Yeah, the Germans are so prudent and wonderful. God I love them. Its wonderful how export-based nations wrap themselves in the mantle of moral superiority… as if without other nations being net importers they would be able to sustain their exports. What a joke. And to think Germany destroyed Europe twice within the last 100 years and now they balk at being the “savior” of the EU. I’d say they have to “save” the EU approximately 30 times to make up for their prior nastiness. But of course the arrogance, coldness, and silly national pride never really went away did it?

          4. Dave

            Just dropped in to say thanks, you, charcad, describe the European project to perfection, and describe one of its most likely futures. Support for Europe comes from self-interest, cynicism, delusion, ignorance or some combination of these common human weaknesses. It is an invalid project, totally anti-democratic, very much in tune with European tradition, i.e. ruling classes which subject the vast majority to a government which at every turn acts against the well-being of that majority. To write or talk about European citizens rights is irracional, devoid of sense…the E.U. is an impositition which ignores all the concepts of any Constitutional govt above all the most important: that the government derives from the people, that sovereignty resides in the people. I believe the first European treaties guaranteed the right of all the people’s of Europe to ratify, and that that ratification would be by public vote was generally accepted. Further, it would have to be unanimous. Instead Europe has only gone forward, for all its obvious and even glaringly dangerous faults, because a self-appointed political elite (and a miserable, dishonest, and relatively ignorant one at that) has pushed aside the good sense and solid reasoning of the citizens of member nations…that exists in spite of the prostitutes we call the press and television media…and instituted Europe against the expressed will of what used to be free citizens born with citizen’s rights. All the arguments in favor of Europe have no basis in logic nor reality, but there is no free debate, logic and reality are simply prohibited, good sense and sound reasoning rejected, the history of progress of human civilisation ignored and its most basic values violated. Those who have created and support Europe promote a new religious belief in human values that ignore humanity, civilisation, morality, and human biology. The role of the British government…this sort of new long Parliament wth no respect for political tradition or even political decency…is a sort of high treason against the very concept of human dignity and the only rights governments were created to protect in the first place: life and liberty
            Anyway, thanks.
            I think the future of Europe is a dark, gray existence in a totalitarian state of enormous dimensions. Blair (Orwell) got it right, though to date excess has replaced scarcity, the scarcity will be soon to come. We are to be ruled by the worst and dullest for centuries just as we are today.

    2. MacroStrategy Edge


      You wrote:

      “But to think that the euro will collapse because Germany is demanding that other nations live within their means is almost amusing.”

      Now take the five or ten minutes to read this, because you and many other people like you, who feel strongly you are on high moral ground by demanding that more eurozone nations live within their means like Germany, are caught in a fallacy that become very visible, if you are willing to understand the way financial balances are interconnected both within and between countries.

      It takes nothing more than 6th grade geometry or algebra – you don’t need a PhD in economics to get this, and in fact, many people walking around with PhD’s in economics, including most of them in positions of policy making authority, clearly DON’T get it (even though Martin Wolf at the FT and Ambrose Evans-Pritchard are getting most of it, judging by my conversations with them).

      Note, rent-to-own, that Germany in fact is not “allowing” countries to live within their means when it persistently runs a trade surplus with the peripheral eurozone nations, and does not reinvest the proceeds from trade in fixed direct investment in these nations, or participate in some sort of fiscal transfer to these nations.

      This is one of the main design flaws built into the EMU.

      Look at the financial balance map in the animal sacrifices piece I posted here a week ago. If 5 centuries of double entry bookkeeping is correct, Germany cannot possibly run a growth strategy that depends on much of the eurozone runnning current account deficits, and at the same time demand these nations run fiscal surpluses, without insuring the domestic private sectors of these nations run up mounting external liabilities (usually debt, but could be equity in the case of the domestic business sector)which eventually, over time, is likely to lead to the bankruptcy of a rising proportion of the household and business sectors of the eurozone periphery.

      There is simply no way – none whatsoever – for the domestic private sectors of these nations to avoid deficit spending if the Germans insist that they run current account deficits and fiscal surpluses at the same time. When private sector persistently deficit spend, they eventually tend to go bankrupt.

      Wolf got most of this pretty clear last week. Evans-Pritchard got it even clearer. They get it because they see these simple accounting relationships. They get it because they are thinking about the economic design of the EMU system. They get it because they are realizing the so called moral imperatives being imposed here on the peripheral eurozone nations are incompatible with these accounting realities.

      The sooner more people get this, the less unnecessary and ultimately system threatening suffering will need to be inflicted across the eurozone. The measures that are being imposed now in the name of moral righteousness and so called fiscal soundness are bound to produce little more than widespread political and economic instability.

      This, you will note, is precisely the opposite of the original intent of the eurozone project.

      Now once you figure this out renting, turn around and go tell ten people you know so this self-inflicted shot gun wound, this game of Russian roulette across the peripheral nations, can be brought to a close. Because it is going to come back to bite Germany, right through the lederhosen. Their private bank loans to the region are about to go even more sour, like fouled sauerkraut, and their hard won export markets to the eurozone are about to vaporize themselves. Their policy makers need to get off their moral high horses and get familiar with a little double entry bookkeeping before the shoot both feet right off their own legs with this unneccessary ignorance and stupidity.

      Wolf got this dead right on March 9th in the FT when he wrote:

      “Now Germany insists that every country should eliminate its excess fiscal deficit as quickly as possible. But that can only happen if current account balances improve or private balances deteriorate.”

      Moody’s doesn’t get this yet, but they do surprisingly enough understand where this is all going, as indicated by the comment they released last week:

      “Preserving debt affordability at levels consistent with AAA ratings will invariably require fiscal adjustments of a magnitude that, in some cases, will test social cohesion,” said Pierre Cailleteau, the chief author.

      “We are not talking about revolution, but the severity of the crisis will force governments to make painful choices…”

      Yes, painful enough that people in these countries, submitted to these contradictory and insane policies, have and will revolt, possibly against all things euro.

      While the circumstances are not identical, we have already witnessed the fall of two governments in Europe – Finland and Latvia.

      How many more have to fall before we realize there are design flaws that must be addressed in the eurozone project?
      How many more people must eat dirt and shoe leather before the gods are impressed with the moral rectitude?

      May the people of these nations, including Germany, insist on an immediate end to this madness.


      Rob Parenteau

      1. i on the ball patriot

        “How many more have to fall before we realize there are design flaws that must be addressed in the eurozone project?
        How many more people must eat dirt and shoe leather before the gods are impressed with the moral rectitude?”

        INTENTIONAL design flaws and CONTRIVED moral rectitude. The imf handcuffs are at the door. The intentionally created ‘perpetual conflict’ in the masses is incrementally building up as planned.

        We are now the enemy combatants,
        We are the Indians of yore,
        We are the raped, the pillaged and the decimated,
        We are imperialism’s newest gore,

        So rise up my fellow citizens,
        Throw off these banker scum,
        See through their lies and deceit,
        Beat their deceptions until they are numb …

        Deception is the strongest political force on the planet.

      2. renting_is_like_owning

        ‘Now take the five or ten minutes to read this, because you and many other people like you, who feel strongly you are on high moral ground by demanding that more eurozone nations live within their means like Germany, are caught in a fallacy that become very visible, if you are willing to understand the way financial balances are interconnected both within and between countries.’

        Greece used accounting fraud to enter the eurozone, is completely unable to collect taxes from its rich citizens, and has a retirement age that Germans cannot imagine, seeing as how Germany has increased its retirement age recently. And yet, Germany needs to bail out Greece?

        Think about another fallacy for a moment, the one currently infecting those societies attempting to use debt as a way to the problems of debt.

        Many Germans (you might be familiar with the Greens, or have heard the word ‘Konsumterror’) would be satisfied with a change from the mindless growth is good perspective which dominates most English language economic discussion.

        Living within your means isn’t optional, after all – a scary reality which is just now starting to become unavoidable in places like the UK and US.

        However, the alternative to living within your means isn’t ‘people eat[ing] dirt and shoe leather before the gods are impressed with the moral rectitude?’ It is simply retiring at the extremly old age of 62 if you are Greek, instead of 50 in extreme cases, like hairdressers. Who, I’m sure, being in a cash business, are faithfully paying all the taxes required.

        Of course surpluses are matched by deficits, if you view trade as nothing but consumption. Oddly, German companies seem to export things more related to infrastructure or manufacturing, which does tend to change the equation just a bit – for example, if I sell you a piece of mining equipment for 1 million, it is quite possible to imagine this transaction as requiring a deficit on the other side of the ledger of 1 million. Or, it is also possible to imagine that the mining equipment will be used to produce a commodity sold in turn to the market. To be concrete – both sides gain, regardless of the necessity for accounting to keep its ledgers balanced at zero. Some people believe in zero sum games, others don’t. Those who don’t are often called such epithets as engineers.

        1. hibikir

          Yes, it can be sold to market… but then someone else has to buy it! Every country can’t run a trade surplus. Show us ANY example in which any number of people are trading coins where everyone has a trade surplus.

          Now, wealth is not a zero sum game, but that’s different than trade balances. I can run a negative trade balance and still be richer than I was last week, because my wealth is not in currency, but in services that could theoretically be monetized. But those do not show up in the trade balances at all. If the extra wealth is to be sold, then someone else has to buy it, and incur in a negative balance.

      3. bb

        you as well fall in the brainless economists category: germany is not forcing anyone to buy german cars, wear hugo boss at business meetings, buy german machinery. it is the superior quality that makes people buy german goods, just like on the east coast where german cars are so popular.

        and germany is not providing vendor financing either for those purchases like china and japan do in their economic dealings with the u.s. germany has not accumulated any stock of PIGS bonds.
        i will point the obvious: logical reasoning is beyond your capabilities.

      4. kevin de bruxelles


        I’ve been reading Richard Koo’s The Holy Grail of Macroeconomic (I think it was you who recommended this) where he discussed balance sheet concept. According to him there are four variables: households, corporate sector, fiscal (government spending), and external trade balance. He claims that the ideal situation is that households save, industry borrow, and the fiscal and external balance stay near zero. According to him the Great Recession in Japan is primarily caused by industry paying down its debt and refusing to borrow – in fact they are running a huge surplus. The problem in Japan is one of demand so since industry is spending less, the government compensates by taking the industry surplus and spending it as government deficit spending. Mr. Koo also states that this is not a good long term situation since the private sector is more efficient at investing, ideally it would be they who should do the borrowing.

        So I am a little confused by your statement that Greek industry should not be borrowing. From my amateurish perspective, and from starting Mr. Koo’s book, it seems that making loans to the Greek private sector would be the way forward. Unless, of course Greek industry is already totally overextended debt wise. I wish I had a chart like Exhibit 1-6b in Koo’s book for Greece.

        Unfortunately I don’t have all the statistics but it seems to be that Greece must work towards tweeking the variables so that they end up with the ideal situation of having households save, industry borrows, and the fiscal and external balance hovering around zero. So this does mean reducing the fiscal deficit, reducing the trade deficit and somehow moving the household and corporate number so that it all balances. This obviously has to happen over a number or years (five?) and at a pace that avoids serious dislocations.

        1. kevin de bruxelles

          To take these thoughts a bit further, one must recognize that one of the main tenets of neo-liberalism is its elixir of wealth that teaches nations that they can abandon the idea of making things and live on debt and consumption alone. One has to avoid the temptation of placing Greece in the category of abused and oppressed victim. No, they bought hook, line, and sinker into the alchemy of neo-liberalism and now they need to either abandon it or abandon the Eurozone.

          Here is a chart that shows Greece’s GDP growth vs. the Eurozone.

          The good news is that there is a fairly straightforward way for Greece to get back on the right track. Taking the four sectors of the economy from Koo’s book mention above; households, corporate sector, fiscal (government spending), and external trade balance, it seems to me pretty clear now what has to happen. And reducing GDP SHOULD remain an option given the chart above; albeit in a way that does not impact employment.

          The first two numbers that have to move are the trade deficit and household savings (which I am assuming are low). Greek consumers must cut their purchases of imported. One very simple way to start this process is to cancel all military orders for foreign weapons immediately. This will lead toboth a rise in household saving rate while not impacting the employment rate that much in Greece. These savings should then be lent to the corporate sector to build plants to make stuff or provide services that at the very least Greek people will buy, but ideally for export as well. Next, as savings are being transferred to the corporate sector and in response they start employing people, the fiscal deficit should come down. Excess civil servants should switch to the private sector where they can make stuff or provide a sellable service. This process should continue until Greek household savings can support a Greek private sector. Greek imports must then remain limited to Greek exports. Budget deficits should only occur temporarily when needed to keep employment levels up.

          This process may be anathema to neo-liberals but this is the only way to stop the fantasy that the world can be divided into nations full of consumers being supplied by other nations full of producers. The obvious fallacy of this is why in the hell would any nation chose to produce things when instead they could just sit on their collective fat asses consuming things all day long?

          1. MichaelC

            under your proposal to reduce military imports, I think the savings increase shows up in the fiscal sector, No?

            If Yes then savings from reduced military imports are available to service govt debt (and cap its growth).

          2. Kevin de Bruxelles


            I think a straight reduction in Greek military imports would show up in both categories – a decrease in the trade deficit and a decrease in the fiscal deficit.

            So here Greece would have a choice to make. In an ideal world the Greek government would transfer this spending to the domestic market. Instead of buying foreign-built tanks the would buy domestically produced aircraft or naval vessels or better yet civilian products. This just reshuffles global demand but keeps it a zero-sum game.

            If they instead decide to reduce the fiscal deficit, which is more likely, by cancelling the foreign orders and not replacing them domestically and instead as you mention paying down their debt, then Rob Parentheau’s point holds about demand destruction as this will cleary result in a loss in global demand.

            My somewhat weak counterargument would be that this demand destruction is a result of demand inflation fuelled by unserviceable debt as evidenced by Greece’s wild GDP growth in the preceding years. The political reality is that there will have to be some fiscal retrenchment as well in Greece and so policies should be found to spread this pain outwardly and widely where it can be more easily absorbed so that it is not concentrated on the domestic Greek population. Cutting Greek military imports seems to be one of the best ways to achieve this.

          3. MichaelC


            I was intrigued with your military imports idea. If its sizable enough, that solution could ease the current crisis.

            Of course that solution opens up a host of other issues, that will influence the EU/Greece political solution, but that’s just a distraction in this thread.

            Cutting the military imports leads directly to the beggar thy neighbor issue, though. In this case if the military exporter to Greece is non EU then I think it helps the EU . If the exporter is Germany or France, (ouch) then it doesn’t and raises some ugly issues about financial priorites within the EU but.. If the exporter is the US, then that doesn’t help our CA either.

            Maybe its not such a bad thing to beggar they neighbor by cutting military budgets.

          4. MacroStrategy Edge

            Yes, you are starting to see what it takes to crack the code and solve the puzzle. But note my comments below, you still have some pieces muddled.

            What is really missinig here is a mechanism, price or policy based, that forces imbalance resolution and adjustment in a win/win, pro-growth direction.

            Instead of Greece converging real GDP growth down to eurozone, eurozone needs to converge up. Current account surplus nations need their private sectors to invest more and save less. Financial capital accumulated from current account surpluses needs to be reinvested in real tangible capital in peripheral eurozone nations. Or, if that cannot be incentivized, fiscal transfers from the current account surplus nations must be arranged.

            This missing price or policy adjustment mechanism, that encourages or forces the current account surplus nation to lead the adjustment in a pro-growth fashion is what is missing with regard to the eurozone, and on a larger scale, with regard to Asia and China in particular.

            Keynes got this. He tried to design Bretton Woods to address this adjustment by the current account nations issue, but the short sighted and purely self interested American negotiators stripped most of it out. Market forces alone do not appear to deliver the required current account surplus led adjustment.

            This desperately needs to be a) revealed, b) understood, and c) openly and effectively addressed. I am happy to see you are starting to see some of this – keep going!

          5. MichaelC


            Yes, absent a ‘federal’ treasury for Europe, the current solution was always going to require some Rube Golberg mechanism unless they could agree on some kind of stabilization fund (?) mechanism.

            As I recall, this flaw was acknowledged, but unaddressed from the beginning. But, that’s a vague recollection from an American working for a European bank at the time.

            I need to commend you on the posts. The framework is refreshingly helpful for critical thinking. Thanks.

        2. Adam


          “Unfortunately I don’t have all the statistics but it seems to be that Greece must work towards tweeking the variables so that they end up with the ideal situation of having households save, industry borrows, and the fiscal and external balance hovering around zero. So this does mean reducing the fiscal deficit, reducing the trade deficit and somehow moving the household and corporate number so that it all balances.”

          This is correct, the problem is that because of the monetary union Greece does not have all the normal tools to do this. Greece needs to lower its trade deficit, however its wages relative to the rest of Europe (Germany in particular) are too high. Any country outside of the European Union would be able to devalue its currency correcting the disparity (granted there would be bad side effects such as high short term inflation). Because Greece does not have the ability to do this (because they don’t have their own currency anymore) either wages have to increase in the rest of Europe (Germany in particular) or Greek wages have to decline to balance out the trade issue. Neither of these can be done overnight, and falling wages in Greece would be the worst of the two (because debts are fixed in nominal terms so falling wages generally brings on increases in private bankruptcies and that’s bad for everyone including Germany). If you agree that the trade issue is not going to change overnight then:

          A) The accounting identity holds (zero sum game in the short term)
          B) Greece has to borrow from the rest of Europe (because the accounting identity holds in the short term)

          With A & B firmly in place then it’s a matter of who continues to borrow money – the government, businesses or households. Add in the fact that Greece is suffering more severely in declining GDP than the rest of Europe, Greek businesses are not going to borrow. On top of that Greek households are way over indebted so they too are not going to borrow. So either the Greek government continues to borrow or trade between Greece and Germany will be forced to collapse because the accounting identity will hold.

          So while Greece is only a tiny county and a complete collapse in Greece wouldn’t blow up German trade or collapse the EU, the fact that Greece is not alone is what will be the undoing of the EU. They can all agree to undo the imbalances nicely or they can set themselves up a major Depression – remember while German and everyone else wants to pretend their an island, they are in an economic union and a set of collapsing dominos rarely stops where you want them to.

          1. kevin de bruxelles

            Thanks for your response Adam.

            I agree the key is to lower the Greek trade deficit but the way you describe, lower wages, seems brutal and self defeating since as you imply this will also lead to both lower household savings and maybe lower tax collection. Isn’t it possible to lower the trade deficit by literally cutting back on importing stuff? I mean no new X-Boxes, no new Mercedes, no new military hardware? Obviously some imports like energy or food are essential but most consumer and luxury goods are anything but. And I think the typical Greek citizen would prefer less consumption to a huge pay cut.

            The problem may be global trade rules. So instead of a bailout, maybe Greece should be given a five year exemption on trade rules and be allowed to impose selective tariffs on consumer and luxury goods?

            Would this work?

          2. MacroStrategy Edge

            Kevin – go back an look at the “On Fiscal Correctness and Animal Sacrifices” piece on NC last week.

            All the GIIPS have trade deficits. So you appear to be proposing that they all just stop buying imports, which in part the fiscal retrenchment they are facing will accomplish, because tax hikes and government spending cuts suck cash flow and net financial assets (net worth) out of the domestic private sector, so Greek households and firms will have less spending power (and also be less capable of serving their private debt loads, but hey, who cares, government solvency uber alles, ok?).

            That means they’ll spend less on imports. Good for trade balance right?

            Look at the eurozone current account balance. It used to be near 1% of eurozone GDP, now it is just below zero. That means most of the eurozone trade takes place within the eurozone.

            So as fiscal retrenchment imposes domestic private income deflation, and households and firms cut spending accordingly, including on imports then…you see those large current account surpluses in the German and Dutch GDP accounts? The go poof. And as the export led economic recoveries of Germany and the Netherlands get tripped up, guess what?

            Congratulations! You’ve just set off all the triggers needed to put into motion the largest debt deflation spiral in the western world since the Great Depression…and we all kinda know how that did wonders to dampen political extremism and military conflict in the region.

            Look at the game you describe. That is a race to the bottom game, isn’t it? We’ve seen how that inevitably ends, and it just is not where we have to go if we are willing to change the rules on the sociopathic wing of global finanzkapital and their predatory sock puppets currently in power in government.

            Hope that helps,


          3. kevin de bruxelles

            Thanks for your response Rob.

            It seems clear to me that any lose of import demand from the GIIPS has to be made up by an increase of demand in the surplus countries. For example German workers can take their summer holidays in Greece instead of staying in Germany.

            I totally agree with you on fiscal retrenchment, done too early it is self-defeating. That is why I am suggesting that the first move is to cut imports, this leads to increased household savings, which leads to private sector investment, which leads being able to then attack the fiscal deficits by moving people off the public purse and into the private sector.

            How else does Greece get to the Koo’s ideal balance sheet scenario?

            We have a choice to do this in a controlled way or to bury our heads in the sand until the defaults come. The current Greek situation is unsustainable and must be unwound one way or another.

          4. Adam

            kevin de bruxelles (I had to reply to myself)…

            You are correct that tariffs could be used ease the trade deficit, but if you think the rest of Europe is pissed off over re-financing Greece’s debt wait until you start talking selective tariffs. German’s may not understand why they need a shared sacrifice right now for Greece, but they sure as hell know that tariffs mean unemployment in Germany.

            What the German’s and the rest of Europe hasn’t come to terms with is that everyone was happy when the world credit bubble was inflating (who cared about trade imbalances then), but now that the party is over those with positive trade benefits from the imbalances are not keen on giving them up. That said they will have to give them up because imbalances can’t be sustained. At this point it’s just how messy the correction is going to be.

        3. MacroStrategy Edge

          Kevin de Bruxelles:

          Regarding Koo’s ideal sector financial balance/growth mix:

          o Ideal situation: Business sector finds enough profitable opportunities to invest in tangible capital on a recurring basis at a level that is consistent with the desired household saving rate at the full employment levels of income.

          Short of that ideal, you try to find ways of using fiscal policy to encourage firms to innovate and develop products that can be sold abroad to get you the trade surplus you need to reach full employment.

          If neither of those work, then you need a sovereign currency so you can use fiscal policy to deliver the complimentary or enabling public investment (here using a definition of investment that includes education as an investment in human capital of citizenry) that will encourage higher private investment levels.

          Finally, if that still doesn’t work, you use an automatic adjustment mechanism in fiscal policy, such as the employer last resort idea/job guarantee advocated by Bill Mitchell, Randy Wray and others to get you to full employment and price stability.

          Notice the many places I differ from Koo, who as I warned in my original recommendation of his book, is barking up the right trees, but does not quite have it all straight in his head yet (although he may get there soon enough).

        4. MacroStrategy Edge

          Kevin –

          “The problem in Japan is one of demand so since industry is spending less, the government compensates by taking the industry surplus and spending it as government deficit spending.”

          So Koo does argue this way, but notice his gaping error. The business sector cannot net save (run a financial surplus) unless and until another sector can and does deficit spend.

          Koo, like many mainstream economists, misses the fact – and this was one of Keynes main contributions, but either widely ignored or forgotten – that you cannot increase net saving out of income flows unless some other sector is willing to net invest or net deficit spend. Otherwise, you are just redistributing saving.

          Businesses cannot run a surplus, that the government then taps and mobilizes with fiscal deficit spending. Rather, businesses could not successfully net save unless either:

          a) govt is net deficit spending
          b) household sector is net deficit spending
          c) foreigners are net deficit spending (we are running a trade surplus

          Koo is not yet thinking consistently in a stock/flow coherent manner – but then again, neither does the bulk of his profession!

          If you (or anyone else) still do not get this, come back to me and I will try to make myself clearer, because it is of the essence of many misunderstandings, misconceptions, and outright lies perpetrated by mainstream economist and their mouthpieces in the media.

          Break the spell of stock/flow incoherency, and you are well on your way to being d-ECONned!

        5. MacroStrategy Edge


          You wrote:

          “That is why I am suggesting that the first move is to cut imports, this leads to increased household savings, which leads to private sector investment, which leads being able to then attack the fiscal deficits by moving people off the public purse and into the private sector.”

          First: cut imports how – as another reader responded, you will have EC all over you like a cheap suit if you try it with tariffs or quotas. Cannot due it with exchange rate. Can only do it by improving relative price of import substitutes Greece produces, or domestic private income deflation and credit constraints. Relative price result could also come from private income deflation, but better off finding product innovation or labor productivity gains to do it, or you risk converging down, into debt deflation.

          Second: Cut imports is a solution for one country, but as more countries try to mimic any success in this direction, current account surplus economies find their engine of growth is stalled. Import cuts kill exports of Germany and Netherlands. That sets up race to the bottom dynamic, as they too cut back on their imports in response, and then voila, Greek exports start coming up short.

          Third: Household saves more out of income flow as it cuts import purchases. So how do you propose this sends a signal to businesses to invest more? Remember, saving involves no concrete forward order for future goods and services. Higher household saving does not guarantee lower corporate borrowing costs either (contra mainstream econ, interest rate is not the “price” equilibrating saving and investment), nor do lower borrowing costs guarantee higher business investments. Profit perceptions need to improve as well.

          Having said that, you are headed generally in the right direction. Peripheral eurozone nations need to redirect fiscal policy in a way that reinvigorates private investment. As I mentioned in my origin “animal sacrifices” piece, and in the “let a dozen Latvia’s bloom?” piece, reviving product innovation, labor productivity, and opening/creating new markets for tradable goods must also be part of the “real side” adjustment process that accompanies a better complexion of financial balances.

          That is why I say a better fusion of the insights of Keynes and of the Austrians is one way forward. The structure of demand, the structure of production, and the structure of financial flows must all be addressed by policy changes and private sector adjustments if an adequate solution is going to be found.

          Instead, we have deficit errorists insisting all that is required is a cold bath of fiscal discipline, which on my analysis, will merely dump the eurozone region into a debt deflation spiral that will spare neither Germany nor the Netherlands.

          But people cannot quite see this, because they do not think coherently about macrofinancial balances and how they interrelate.

        6. MacroStrategy Edge


          You wrote, “From my amateurish perspective, and from starting Mr. Koo’s book, it seems that making loans to the Greek private sector would be the way forward. Unless, of course Greek industry is already totally overextended debt wise.”

          Greek private debt to GDP ratio is around 90% – not small either, so why just worry about public debt to GDP ratio? Ideological bias? I have not yet been able to uncover how much of that 90% is business debt. If someone has access to that data or insight, please share.

          But no, I am suggesting business needs to invest more, and have good reasons to invest more, as part of the solution. They can use cash on the balance sheet. They can reinvest retained earnings out of existing profit flows. They can issue equity. And as a last option, they can issue debt, but if that option can be avoided, it should be, at least until a much more robust growth path is underway and sustainable.

          1. Kevin de Bruxelles


            I really have to thank you for taking the time to engage with us in these threads and to explain all this so patiently. It is a little like being back in university! I have a much better grasp of these things thanks to you (and many others) but I still have a long way to go!

            Thanks again.

          2. MacroStrategy Edge

            Kevin –

            I appreciate that. I would not do it unless I thought there is a lot at stake in the eurozone predicament, and it is not going to stop there unless people can see what they are doing to themselves and find a better way.

            Yves is dead right – we’ve all been ECONned over many, many decades. It has taken me years to d-ECON myself. If I can spare other people that learning curve, I will. So take this material and spread it around to other people you think might benefit. We don’t have much time left.

            And don’t assume I have everything right. Use your own intelligence, do your won research. When you find vantage points or tools that work, share them so we can all learn how to avoid imposing stupid, unnecessary suffering on each other, and so we can all stand up against the lies.

            keep going,


      5. DownSouth

        MacroStategy Edge,

        While I am not foolish enough to challenge your take on financial balances—-It would be tantamount to arguing that 2+2 doesn’t =4, no?—-I do question your reading of human psychology.

        You are undoubtedly a follower of Descartes, who, as Michael Allen Gillespie explains in The Theological Origins of Modernity, “was convinced that anyone who is freed from the prejudices of the world and uses his good sense will arrive at exactly the same conclusions he did.” “[A]t the core of the project initiated by Descartes and Hobbes,” Gillespie continues, “is a faith or self-confidence that an enlightened humanity can discover a ground for an apodictic or at least an effectual truth, and that this truth will provide the foundation for an unprecedented human flourishing.”

        But almost all recent findings by psychologists—-including those in the field of neuropsychology—-dispute Descartes’ and Hobbes’ claim. As Jonathan Haidt writes in The Happiness Hypothesis: “Over and over again, studies show that people set out on a cognitive mission to bring back reasons to support their preferred belief or action. And because we are usually successful in this mission, we end up with the illusion of objectivity. We really believe that our position is rationally and objectively justified.”

        So the bottom line is that people are seldom rational. They are seldom reasonable.

        On the contrary, one of the chief motivations for human decision-making is morality. Here’s how Amitai Etzioni puts it:

        Neoclassicists may argue that the examples cited concern mainly social behavior. However, evidence shows that commitments to moral values also affect economic activities. Consider saving behavior. Neoclassical economists explain the level of savings mainly by the size of one’s income (the higher one’s income the more one saves), by the desire to provide for consumption in retirement, and by the level of interest rates. However, these factors explain only part of the variance in the amount saved: the extent to which one believes that it is immoral to be in debt; that one ought to save (for its own sake) and in order not to be dependent on the government or one’s children; and that one ought to help one’s children “start off in life.” These moral commitments are affected in turn by the content and level of morality in society, by the values of one’s subculture (for example, these pro-saving values seem stronger in small towns than in the big cities), and by other non-economic factors.
        –Amitair Etzioni, The Moral Dimension: Towards a New Economics

        And when we peel back the layers of the onion, there does appear to be a reason or rationality behind morality, as Herbert Gintis et al explore at great length in Moral Sentiments and Material Interests:

        Three important lessons can be derived from these research efforts and other recent theoretical and empirical research based on an assumption of multiple types of players including rational egoists (homo economicus, the sole type of player in classical and neoclassical economic theory) and conditional cooperators who have adopted norms of fairness, reciprocity, and trust. The first lesson is that many individuals are motivated by social norms that affect intrinsic motivation or are at least capable of learning social norms and using them to guide some of these decisions. Second, it is possible for individuals who adopt these norms to survive in repeated situations where they face rational egoists as well as others who share similar norms. So long as they can identify one another, trustworthy fair reciprocators actually achieve higher material rewards over time than rational egoists! In other words, they can flourish. The third lesson is that achieving some reliable information about the trustworthiness of others is crucial to this accomplishment. Consequently, institutions that enhance the level of information that participants obtain about one another is essential to increase the capacity of individuals to solve collective-action problems. Information rules are as important (or more important) in solving collective-action problems than payoff rules, but payoff rules have been the primary focus of a considerable percentage of public policy initiatives.

        1. Matt Franko

          Down South,
          You are waaaaaaaay over-thinking this. It is as simple as Rob P. has laid it out here for us.

          If there is any psychology involved, it is an inabilty of those who do not agree with Rob P. here to achieve a simple quantitative perception of a system in equilibrium. They do not possess the mathematical aptitudes (probably scored low on Math part of SATs) necessary to “see” this concept. And do not possess the common sense to leave this up to those who do.

          1. Yves Smith Post author


            I’m not of the school this is a math aptitude issue. The reaction is quasi-religious, an out of hand rejection of what Rob is saying. I have no doubt the logic is within virtually all readers’ grasp IF they were to spend five minutes to work through it. It is a combination of deep attachment to existing beliefs, which are reinforced by the media, plus ADD like patterns (does anyone take even five minutes to work through new ideas these days?) resulting from information overload.

          2. DownSouth

            When I see that word “equilibrium,” it throws up red flags all over the place.

            To quote Taleb:

            Merton the younger is a representative of the school of neoclassical economics, which, as we have seen with LTCM, represents most powerfully the dangers of Platonified knowledge… The math is tight and elegant. The theorems are compatible with other theorems from Modern Portfolio Theory, themselves compatible with still other theorems, building a grand theory of how people consume, save, face uncertainty, spend, and project the future. He assumes that we know the likelihood of events. The beastly word equilibrium is always present. But the whole edifice is like a game that is entirely closed, like Monopoly with all of its rules.
            –Nassim Nicholas Taleb, The Black Swan

            Economics is a behavioral science. But somehow economists have convinced themselves that they can study economics while leaving human behavior of human beings completely out of the equation.

        2. MacroStrategy Edge

          Sorry, DownSouth, Descartes was a reductionist. Reductionist logic is no small part of what got us into this whole mess, on nearly every single level.

          The whole point of my rant against fiscal correctness and deficit errorism is these folks have also had their minds warped by Descartes and his Cartesian wannabes. We need to understand you can not possibly make a large change in the fiscal balance without affecting the financial balances of other sectors. Full stop. End of Cartesian fallacies of discomposition (or decomposure – not sure which is closer to the heart of the matter/energy particle/wave).

          1. DownSouth

            Don’t get me wrong. I think you’ve got the right policy prescription. But at some point you’ve got to look around and ask yourself why you’re losing so badly in the courtroom of public opinion. And that goes not just for Europe, but the US as well.

          2. Matt Franko

            The opposition is much better funded at least for now.

            There are two main organizations out there that are promoting most of this “fiscal conservatism”. The Concord Coalition and The Peterson Institute.

            Situation: For now it looks like the Concord Coalition is being run frugally with a few staff and now a youtube channel, CC seems like they dont have too much financial resources but enough to have a website, host some conferences, get in the press and in front of a Congressional Committee often enough.

            Peterson seems like they are LOADED! CEO David Walker is EVERYWHERE! (I think he has a chair with his name on it at CNBC both in NJ and DC). I believe they had a hand in the production of the Micheal Mooresque movie “IOUSA” and probably have plowed those proceeds back into the organization. (Search ‘Peterson-Pew Commission’ and look at the memebership on that Commission…all a waste!) To counter their dogma, the MMT movement needs a “benefactor” on the order of a Pete Peterson (ie Billionaire). Then use proceeds to set up an “institute” (501C), get a small press office, get some people in front of cameras in NY and DC, and on some of these panels, in front of Congress, etc….

            Without these resources, just using the new media here (thanks to Yves) and elsewhere, its going to be a lot tougher but I believe still possible with more time.

          3. DownSouth


            I’m cognizant of the juggernaut you’re up against.

            The problem is that too many wealthy and powerful individuals perceive their short-term interests being served by budget terrorism.

            My personal hope is that somebody like FDR will come along who is willing to “betray his class,” or to put in another way, someone who has the intelligence to question orthodoxy, the clairvoyance to look farther than the tip of her nose, and the courage to try something new and different.

            Without that high quality of leadership, I see no end to the amount of suffering that is about to be inflicted upon humanity.

          4. MacroStrategy Edge


            If you really are down South, then you must know what it means to go down fighting, with your head held high.

            I think you may underestimate the palpable sense among many people that the whole charade is up.

            Problem is, they still are trying to figure out what the charade is, why it is up, and what they can do to break free of the charade to find a better way forward.

            And for the most part, the answers they are being fed leave them still as fodder for the sociopathic wing of Wall Street.

            As a kid, I grew up learning I lived in a country where it was ok to assasinate an innovative president, murder a presidential candidate, and take out leaders of major social change movements with a bullet. Then, when it was finally time for me to vote, my country elected an actor.

            So let’s just say I know in my bones how to be cynical and disgusted. But I also feel in my bone marrow that this is the wrong time for smug defeatism. In fact, DownSouth, if you think about it long enough, you may realize that smug defeatism is preciscely what the powers that be would prefer you to believe at this pivotal moment. Get up from behind your screen and consider the many ways you can make even a dent in the machine. It’s time, because we’ve run out of time to just sit there and moan and kvetch. Get to it, in whatever way you find most effective (and don’t be surprised if it takes a few times to find a fulcrum that really works for you).

          5. i on the ball patriot

            I think Down South does a great job of revealing what the charade is. One of the major problems here is to get the language of this voodoo economic bullshit out of its pretentious little box and into street language that the ordinary person can understand so that they will know how deeply they have been fucked.

            But the root problem is that the system is totally co-opted, in all of the boxes, and the many hang in with it any way in the false belief that they can can change it from inside. That is bullshit! The best hope of peacefully changing things is election boycotts as a vote of no confidence in this crooked government.

            An occasional hoping for a savior by someone is not an indication of “smug defeatism”, it is just a hopeful lament.

            What is your grand plan?

            Deception is the strongest political force on the planet.

  5. Swedish Lex

    It is obvious, and has always been, that there cannot be a monetary union without a political one. The latter has to be invented and put in place.

    If the Germans decide that they do not want to play that game and prefer to stick their heads in the sand instead, then there is a clear and rather imminent risk that the euro will unravel. There is no way to kill or reduce the euro without huge amounts of political and economic collateral damage.

    Kohl would never have let things go this far out of hand. This is a crisis that provides a huge political opportunity but Angela and the German political leadership appear to only see a lot of trees and no forest. If the Germans, as it seems, are seriously considering to begin a strategic withdrawal from the euro and further European integration (i.e. breaking with the chosen path of the past 60 years), then they should at least be discussing the full potential consequences of that new scenario. Seems that the memories of the bad old days have disappeared rather quickly.

    1. Vinny


      Perhaps Angela figured it’s cheaper in the long run to conquer these “other Europeans” than to subsidize their excesses.

      Perhaps only then, under the German boot, would a Greek go to bed at 10 pm to wake up at 7 am in order to be able fully rested to give his/her 110% at the nearest Volkswagen plant…

      But until that sad day arrives, I’ll just be sitting here by the beach, enjoying my frappe and souvlaki… and I have to confess, I’ve had very unproductive days lately…lol


  6. a

    “Kohl would never have let things go this far out of hand. This is a crisis that provides a huge political opportunity but Angela and the German political leadership appear to only see a lot of trees and no forest. ”

    Funny, how everyone talks about political leadership and opportunity and such, but what they really mean is that the Germans should – once again – open up the checkbook and pay for everyone else (while, incidentally, France runs the show). All everybody else wants is German money, i.e. German sweat, toil, and goods, with no strings attached and for free.

    1. Swedish Lex

      That is a silly comment.

      Political leadership consists of 1) knowing what you want
      2) what your opponents/partners want 3) device a strategy that will make both winners and nobody a loser 4) create support for your vision.

      The German Government is failing on all accounts right now. Kohl would have seen this coming light years ago and would have prepared for it.

      1. a

        “That is a silly comment.

        Political leadership consists of 1) knowing what you want
        2) what your opponents/partners want 3) device a strategy that will make both winners and nobody a loser 4) create support for your vision.”

        Well, “political leadership makes winners of everyone” is so remarkably silly I wouldn’t know where to begin. So I won’t even try.

        Again, you expect the Germans to think that by writing a check, they have become “leaders”. Maybe you’ll even give them a trophy, “European political leaders,” so they can feel good about themselves. On the contrary, sometimes leadership is not giving in to unreasonable requests.

        1. Swedish Lex

          I suggest you do a bit of basic reading on European integration over the past 60 years. Happy to continue the discussion with you afterwards.

          1. Diego Méndez

            I agree with Swedish Lex. If Germany believes it can get nothing out of Greece and other EU partners, that points to an urgent need for imagination and boldness. Kohl-wise.

    2. Diego Méndez

      This is really funny, since France, Spain, Italy etc. are paying right now more than they receive from the European Union budget in order to help Germany’s Eastern border to develop.

      The EU expansion eastwards was a strategic priority for Germany, and Germany only. The price Germany imposed on a monetary union, and Latin European countries gladly paid in the spirit of collaboration and long-term European stability.

      1. a

        “This is really funny, since France, Spain, Italy etc. are paying right now more than they receive from the European Union budget…”

        How “net” is calculated is notoriously difficult. According to the first Gooogled link, Spain is not a net contributor.

        “The price Germany imposed on a monetary union, and Latin European countries gladly paid in the spirit of collaboration and long-term European stability.”

        A complete rewrite of history. Germany didn’t want the euro and had it forced on them as a price of German reunification.

        1. Diego Méndez

          Your link shows Member States’ net contributions to the EU’s annual budget for the period from 1997 to 2003.

          In contrast, I said “right now”. Of course Spain received money before expansion eastwards, that’s what cohesion funds were for: helping poorer countries adapt to a single market. But right now, Spain is a net contributor.

          Eastern Europe is the one receiving the money now, thus helping German exports and competitiveness (outsourcing complimentary activities there, etc.).

          If the EU were sending those funds to its Southern borders, the story would be different. I am not saying it was not a good and fair agreement; what I mean is it *was* an agreement.

          You give me a monetary union (with all its consequences), I give you a free Eastern Germany and Eastern Europe and we all forget about our Southern neighbours (Morocco and the like).

          1. a

            “Your link shows Member States’ net contributions to the EU’s annual budget for the period from 1997 to 2003.”

            Actually the link runs through 2007.

            “I said “right now”.” OK, you said it, but you’ve provided zippo of a link, so at the moment, it’s “sez you”.

            As to the rest, I just don’t know what your point is now. You seem to think there is some kind of unwritten agreement between Germany and everyone else, and that part of this agreement is that Germany must bail out Greece. Well, it looks like Germany doesn’t think it’s party to such an agreement.

          2. Diego Méndez

            I am sorry, you are right.

            Anyway, cohesion funds have a purpose: old member states have had time to adjust to competition. New entrants, and especially poorer entrants, mostly didn’t have that much time. Cohesion funds are the price for opening up fast their markets and making them lose their best manufacturing industries, letting old member states get market share.

            Spain’s still a net recipient (partly because Eastern Europe is being so inefficient at getting projects for its already *assigned* budget), but the idea is the same: Latin European countries are financing the eastward expansion.

            Spain, France, etc. will lose their funds over the next few years for the benefit of Eastern Europe (i.e. Germany), hence becoming huge net contributors. Germany won’t pay a single additional eurocent for the expansion.

            You may say not changing the status quo would have been unfair for Germany, but remember: the status quo was the result of an agreement. That agreement changed in two ways:

            1) Germany gave up the mark (with all consequences)
            2) Latin European countries financed Eastern European expansion and forgot about Northern Africa

            Germany can’t back out of its shared responsabilities towards Greece. It’s on the spirit of the euro and, some (German) jurists argue, also on the letter of the Treaty of Maastricht.

          3. A. Gouveia

            “1) Germany gave up the mark (with all consequences)
            2) Latin European countries financed Eastern European expansion and forgot about Northern Africa”

            I’m sorry, Diego, I don’t follow the logic: how did Latin Europe “finance” anything? Or you mean they agreed to receive less so that some will go to Eastern Europe? Receiving less (sharing) is not the same as paying, which is particularly obvious if you are the one paying.

            I’m portuguese, but I don’t think we have a divine right to the (primarily German) european funds…

          4. PJM

            Dear Gouveia, the problem maybe is another one.

            Do you see, Spain catched up the average europe income. Now they must pay to help others after received help from his partners. Or maybe Spain believes that can be rich as Italy and still have the “right” to be a net receiver of european (german too) funds?

            Well, I wish to see Portugal above the european average income to pay for others and help them. I am happy to see Spain better than Portugal and I hope they pay for others.

            Some comments are strange. For example, if we take the same logic as I read here, I think Spain must stop selling goods to Portugal because we, portuguese, have a huge trade deficit with Spain. Or the governement must to buy portuguese goods to help his poor neigboor. ;) If we stop buying sapnish goods our trade deficit would disapear.

            Nationalism isnt good when we are struggling all to live together, do you agree dear Gouveia?

          5. PJM

            I suggest that link to dear Diego:


            In 2009, Portugal hade the 4th trade fedicit in Eurozone. Can we blame Germany?

            Ill show to Diego the figures: almost all portuguese trade deficit is with Spain: 8 billions of euros.

            Last year we sold more to germany than in 2008. We have a deficit with them too, but we will have better productos to sell in germany as well in Spain. We dont want stop trading with Spain. If Spain sell more that Portugal is because spanish products are more competitive than portuguese. Or maybe not, according some comments.

            Do you see Diego, is easy blame the neighbour. Can we portuguese blame Spain to sell moer than buys to Portugal?

            Some times is better dont comment when we have some huge glass window.

            With simpathy for you, Diego, Spain of course.

          6. Diego Méndez

            PJM and Gouvela,

            PJM: sorry, but I can’t see how your comment is related to mine;

            Gouvela: France, Italy, Spain and others have changed (or soon will change) from large net recipients into large net contributors, as a result of Eastern Europe entering into the EU.

            Which is completely ok, but we must remind Germans: “We accepted this for you.”

            “Eastern Europe in the EU, receiving EU funds, has mainly favoured your exports and your competitivity.”

            “And we accepted this in exchange for a full monetary union; why don’t you want to accept your full responsibilities in the spirit of a full monetary union and help Greece, together with us? Why do you insist on a caricature of Latin Europe as irresponsible and getting German money, when we’re the ones that are financing EU funds for Eastern Europe?”

          7. PJM

            Dear Diego, if one day Portugal will need help,for a bailout, maybe we will nock the door in Moncloa. Do you understand now? If our problem starts with huge trade deficit with Spain, and that deficit inst helping us to avoid the fiscal deficit… Do you see, if governement of Spain starts to reduce his taxes maybe spanish people starts buy portuguese goods. Is all about price. ;)

            Nevermind, I touched a sensitive muscle. Iam so sorry.

    3. Vinny

      a wrote:
      “All everybody else wants is German money, i.e. German sweat, toil, and goods, with no strings attached and for free.”

      And, might I ask, “is there anything wrong with that?”… :)

      Vinny… souvlaki just arrived — now, my friends, that’s what I call “quality Greek engineering”… You should all come down and check it out one day…

  7. kevin de bruxelles

    We are in the middle of a pretty intense negotiation so it’s not surprising that politicians are taking more extreme positions. What they are doing is on the one hand defining the limits of the discussion between the individual countries and on the other creating the political space domestically to make a deal. Once these limits are defined and the necessary political space created, the parties will start moving towards a compromise. It always helps to create an atmosphere of crisis to help budge last minute holdouts, and so the two columns discussed in this post are making a positive contribution to the debate.

    The goal is to design a European financial system within the existing political constraints that avoids moral hazard. But to get there we must point out that there is an inherent contradiction between those who decry TBTF and at the same time call the Lehman bankruptcy a policy error or disaster. This is why the German plan to allow an exit door for failing countries is a good idea. This is analogous to allowing large banks to die. Sure it may be painful, just as Lehman was, but the alternative, allowing zombie banks like Citi to continue to suck up valuable resources, is worse. And so if the economic performance of a country within the Eurozone has declined to the extent that they are no longer competitive, or their debt has become so large that it cannot be serviced, then they should have a way to leave, default, and start over again. In effect, this is kind of what Argentina did in 2001-2, albeit not leaving the Eurozone of course but instead leaving the Dollarzone.

    I’m not saying that Greece has reached this stage yet. But in their internal discussions, for better or worse, they have to realize that they are not Too European To Fail.

    In any case it is always a good sign when AEP is basically making the case for a European super state! But surely he has been around the block enough to know that only after their exposed moral hazard flank is covered can European politicians launch the long anticipated offensive on greater European integration.

    1. Swedish Lex

      There is currently no clause in the Treaty that allows for kicking out euro states. A Treaty amendment process – requiring consent of all euro states – that would have as sole purpose to create a capital euro punishment, German style, to kick out euro states is politically unthinkable.

      Ad hoc solutions that deal with the current situation within the existing Treaty framework have to be deviced and a political process set up that would have as purpose to create long-term solutions, involving Treaty changes, no doubt. That is a 5 years + programme. But if the Germans say no to all and fail to lay down a long-term strategy, then all bets are off.

      1. PJM

        I disagree, dear Swedish Lex. It was that lack in the treaties that gave some people thinking having errors in their economic policy.

        Without sanctions do you think all countries will not have a free ride? Do you see, as portuguese, I think is better for my country to know if were are not good we could be out €urozone. It gives to our politicans a sense of respect for others money.

        But some critics arent good enouph. For example, a lot of noise comes from UK where they ask for harmonization the financial laws inside eurozone. But is that the really his ambition? or we cant remeber the sistematic oposition to european harmonization laws? Because the City have a lot of financial activities outside the power of regulators?

        In fact, every central bank inside eurozone is an extension from ECB. Where every central bank is supervising their own national institutions because the proximity and know how about his national financial system.

        It wasnt lack of supervision that we had problems. It was taking a lot of risks from states without foresigth that credit crunch.

        The problem is more than that. For example, how can a commom monetary policy can adjust to desincronization in the economic cycle and prices cycles, inside the eurozone?

        What is happening now is the same old problem: who will pay the greek bailout? Everybody wants german money. Thats the problem.

        1. PJM

          We can look inside Spain. Spanish central bank did a good job during the “ladrillo bubble”. Without his own regulation, the spanish financial system blew up. Like in others countries. For example, in Germany. It was the conservative policy inside spanish financial system, above the goals from ECB that avoided a meldown in Spain. Even they had a lot of problems.

          In Portugal, the financial institutions are better than in Europe because the portuguese dindt bougth “funny financial produtcs ” to americans. Ecpeto a small bank that was managed like an hedge fund. It was nationalized and it will be privatized in short time and good opportunitty.

          Suedish financial institutions have more problems than in Portugal, and theyre outside eurozone. Why? It was because the euro? or it wasnt the risky bets in estern Europe?

          But the swedish had a independent currency and and independent central bank, right? But the swedih financial system is very shaky.

          For example, in Portugal is the debt from the State what is hard to cut because isnt easy to cut spend without pain. But that is the deal that the portuguese government will show in Brussels. More taxe, more cut spending, more economic reforms and more privatizations. And try to not destroy too much the level of economic activity.

          Of course is difficult. The portuguese must pay more tax, less social proteccion and so on. But is the onlye way. The good thing is the main opostion party wants more cuts in the State wich gives some sense of good faith to portuguese.

          1. Dave of Maryland

            So Greece gets clobbered, followed shortly thereafter by Italy & Spain & Portugal & Ireland, etc., etc.

            So what’s to stop starving Greeks, Italians, Spaniards, etc., from drifting north to where the jobs (and money) are?

            What’s going to keep them down on the farm, if the farm goes bust? When all roads are open?

            The day after Germany closes its checkbook, it will close its borders.

            Countdown to the next European war has begun.

          2. PJM

            Is one view. Do you see, it wanst Greece that coocked his books to get a free ride? Do you see, we received a lot of money from our european partners. Do develope our standard of life. It was others money. If you receive money and call to your friends that youre nazi, like did the greek leader… Do you know, if someone is an friendship and call his brother who is helping helping a nazi…

            You miss the point. We portuguese received a lot of money from others european members. At least we must respect who is trying helping us. Not blaming them for our own mistakes.

            Do you see, USA helped Europe (Portugal in that time refused) after the war with the Plan Marshal. We could be cinical and call that help in the self interest. Is that fair? No! USA fought in Europe and lost a lot of life in our lands. USA gave us an opportonutity to live together without having afraid for another war. We are thnakful for that help. We must bless the good american generation who helped us. Do you think that we must to deny the gift that americans made us and call them nazis? Of course not. Isnt fair.

            The Greek case isnt good. Greece cheated others partners. Greece call to german nazis and demanded more money because the gold in II World War. hey! Greek must unbderstand that this is not a good step to show us that is our friend in Europe. One these days they will call portuguese nigger slavers, because our past History. hey! I dont admit that in anybody because mine ancestors profited with slavery.

            We must respecte each other, even when were figthing between brothers.

            To me It was very sad see that nasty beahviour inside “Euroland”. I expect, one day, see one sorry from the greek leader. He was offensive to german and all others european friends.

          3. PJM

            I would like to remember a simple fact. The greek bailout was almost signed until the greek leader almost said that german are nazi and owned money to Greece.

            Maybe the greek leader was in trouble with the stress. Maybe the pressure is high in his position. But ate least, after his nasty words he could be more sensate and say: sorry! Im witjh a lot of pression. I deny my previous comments.

            But! Hey, they didnt say sorry and he believes that other smust help him. If I was german… I would say: “look, if you stil think that were nazis, dont ask us help. Look in Washington”.

            And they did, right?

            Some comments are abject. The words from greek leader were very offensive. He must ask help to be polite and say thanks.

            Remember. The bailout was agreed but then… Greek leader made that statement. Dont deserve more than reprtovation, not just by german but others friends in Europe. He must chilly and respect others. The german leader maybe is annoyed and we must recongnised we would be too in her foots.

          4. MindTheGAAP

            “The day after Germany closes its checkbook, it will close its borders.[…] Countdown to the next European war has begun.”

            Going from “Germany doesn’t wnat to bail out Greece for its stupidity” to “the next European war” is quite a big leap.

            Having said that, the alternative–Germany bails out Greece, then Portugal, then Italy, then Spain, etc–is equally untenable. Germany does not have an unlimited amount of funds (it’s actually not even nearly as strong as others on this board seem to suggest). There is no real solution here that will restore everything to the year 2005.

            This is an interesting discussion. I am sure that a similar one will be conducted in the US soon re: whether t bail out California.

      2. kevin de bruxelles

        The Euro capital punishment clause will be one of the conditions of any debt union. Ms. Merkel has to confront her Eurosceptics first so she is obviously emphasizing this portion of the political bargain to her domestic audience. Only after she convinces this constituency that she “gets it” on moral hazard will she have to political space to make a wider deal on debt union. Thus all the tough love rhetoric.

        As for a long term goal that much is clear; a United States of Europe (USE), albeit one that takes into account the obvious historic differences between uniting colonies with short histories vs. uniting nations with long established historic traditions. It is the difference between the problems designing a new planned city (USA) vs. an organically evolved urban space (USE). In other words the problems in designing a Brasilia (or Chandigarh or even Washington DC) are different than urban interventions in say Rome or Paris. Where we see political clarity in the USA we see organic charm or clutter (depending on your point of view!) in the USE. But that is because the USA started more or less as a blank slate and was based on the perfect forms of Polybius (the idea of the rule of one (monarchy) – the few (aristocracy) – and the many (democracy) finding political expression in the in the form of a President – Senate – House of Representatives. The USE does not have the option of totally destroying its current political fabric to build an ideal political form so all changes are incremental and the momentum towards union ebbs and flows. That is why the functions of the European Commission, Council of the European Union, and the European Parliament are somewhat less clear.

        So while the goal (USE) is clear, the problem is that many (most) are afraid to admit it. Paradoxically the fiercest critics of the USE concept also just happen to be the strongest supporters of the USA (and perhaps vice versa). But I am hoping this crisis will serve to make the concept of working towards an end goal of an USE more obvious to everyone.

      3. a

        If push comes to shove, if Germany wants it, Greece can and will be expelled from the euro. Germany has the credible threat which will make everyone else back down: *it* will leave the eurozone (with say the Netherlands).

        1. Diego Méndez

          Wow, that’s a credible threat… I am already shaking on my knees…

          So Germany gets out of the euro. The new German mark means a less liquid debt market (per definition, using marks instead of euros means less liquid domestic financial markets), so interest rates shot up.

          At the same time, the eurozone devalues against Germany. All of Germany’s foreign income sources (exports) half in value, while debt (in marks) has just exploded.

          All contracts were decreed to be redenominated in marks, but there are a lot of losers and a long judicial process beging to judge if that was legal. There is no financial & legal security whatsoever: markets are in panic.

          Germany is flooded with imports from France and other irresponsible countries. Germany’s products just can’t compete with them at an overvalued exchange rate. Meanwhile, debt service explodes since markets have no trust on a single “risky” national economy. Without the restrictions in the Maastricht Treaty and a flood of cheap imports, who would trust them?

          Opportunistic Spain claims Germany’s getting out of the euro violates the Treaty of Lisbon (which it does, by the way). A long judicial process beings which could end in Germany being expelled out of the Single Market.

          etc. etc. And then what? Do we resort to armies again?

          1. a

            “The new German mark means a less liquid debt market (per definition, using marks instead of euros means less liquid domestic financial markets), so interest rates shot up.”

            On the contrary German interest rates, especially the longer term, will go down, because investors will buy the mark and need to put their money somewhere.

            “At the same time, the eurozone devalues against Germany. All of Germany’s foreign income sources (exports) half in value, while debt (in marks) has just exploded.” How has debt in marks just exploded? Any German debt in euros is now worth less, because the euro has devalued. It seems you are making some kind of hypothesis about how euro debt will get redenominated into marks (if it does). That would be up to the Germans to choose, so I doubt they will come out losers. As to German ability to export, they will continue to sell things others can’t: good cars, products that work, factory equipment. I think they’ll manage.

          2. Diego Méndez

            Yes, good cars and so on. Like the Audis being manufactured in Barcelona? Or those Volkswagen cars being made in Slovakia? Or you mean the Mercedes-Benz vans driving out of Basque car factories?

            There is nothing (*nothing*) being made in Germany that is not made in other EU countries. If it’s made in Germany, it’s because it’s competitive to produce it there at *current* exchange rates.

            Change prices and everything else changes.

            On interest rates, look at historical interest rates for Germany (and other EU countries) and compare with euro interest rates now. They’ve never been so low, precisely because of higher liquidity and deeper debt markets.

            On contracts: no matter how you redenominate contracts (I suppose German workers would stop getting their salaries in euros, wouldn’t they? What’s the purpose of losing power in the ECB if the euro would still be the national currency for practical purposes?), you must redenominate them and people will sue you. Financial panic follows.

        2. Swedish Lex

          My point is that it has not been foreseen constitutionally to kick states out of the euro, whether it is desirable or not. There is no procedure or mechanism in place to deal with that scenario. The “fastest” way to get exit rules into place is a 5 year round of negotiations to amend the Treaty.

          If we assume for a second that Germany would like to open the negotiations and that they would like to limit the discussions to one topic only – punish the punishable, we can be sure that most/all states would like to broaden the scope of the discussions to include their own pet projects. The British would like to “repatriate” social legislation back to the UK, etc.

          That route is thus so difficult and fraught with all kinds of political risks that the euro states, unless they go suicidal, should understand that they are tied together and that they have to deal with it using with existing constitutional tools. That requires a bit of political bravery and vision but he German political class seems more and more to believe that they somehow are a bit more detached from what is going on. As Münchau pointed out in the FT column, Kohl, or Adenauer for that part, would not have hidden behind jurisprudence of the German Courts, he/they would have seized the opportunity to create a new win-win situation.

          1. a

            “As Münchau pointed out in the FT column, Kohl, or Adenauer for that part,…”

            I can only presume you are too young to have developed a historical sense, despite your patroniwing comment elsewhere. It is a common ploy, and been constantly used throughout time, for the current leader to be compared unfavorably with past leaders. It’s funny you mention Kohl, who, while he was Chancellor, was constantly vilified as lacking vision and unfavorably compared to Schmitt, Brandt, and (yes) Adenauer. Such a comparison means nothing – except that the writer has run out of things to say.

            “My point is that it has not been foreseen constitutionally to kick states out of the euro, whether it is desirable or not. There is no procedure or mechanism in place to deal with that scenario. The “fastest” way to get exit rules into place is a 5 year round of negotiations to amend the Treaty. ”

            And I repeat – if Germany wants it done, it will be done.

          2. Swedish Lex

            Please take the advice and learn some basics on how European politics and law function ahead of commenting on the issue.
            Repeating that “if Germany wants it done – it will happen” does not make it any less ignorant and wrong.

          3. a

            Please learn some history, rather than pretending you know some.

            And you’re saying that it’s wrong, doesn’t alas make it so.

      4. Vinny


        Your Capital Euro Punishment concept is indeed interesting. However, may I suggest we tweak it a bit? How about if instead of kicking out these serial debt defaulters, we simply allow Germany to annex them?…


  8. PJM

    I would like to disagree.

    If british think Greece must to have money without pain and economic reforms why Mr. Brown dont spend british money to help the greeks? Hey! UK is a mamber of EU. Nobody will stop them to give money to greeks. Meandwhile if they have plenty of money, dont forget us, portuguese. We will thank you. :)

    Europe was allways this. A lot of noise, fighting between brothers, but we look forward. Even during mr. Miterrand and Kholl leadership, with Jacques Dellors in front of EEC, we had a lot of troubles. Hey! I remember the gift from Mr. Miterrand to HM Elizabeth, during his trip to London.

    Do you see, EU isnt USA. We got a lot of national interests and elections. We cant forgot that yesterday a regional lections took place in France. And the rethoric was there to catch voters.

    But we will forward and find some solution, as allways we did in the past. Were living the longest peacefull time in Europe. We cant forget that.

    1. Vinny


      That’s precisely my point. Namely that the Antichrist could do a better job in Europe. And I’m sure Oh’bama will be happy to lend his services after 2014…


  9. Brett

    They’ll blame, not without reason, the US. I wonder what kind of spillover this will generate?

  10. Mansoor H. Khan

    Germany needs to take a leadership role here:

    1. It needs to realize that “free money” Greece has been getting by selling debt should NOT be withdrawn overnight. This will lead to chaos and hungry people roaming the streets. That is like saying we in America should “stop” welfare to the poor overnight.

    2. The revenue (subsequent spending) from the sales of greek debt can be viewed as a place where German (and other)savings have gone. If this spending stops then these savings will have to find a home elsewhere so can be spent/invested or else you willl get deflation in europe.

    3. Germany can simply give Greece money (i.e., charity) based on a sliding scale over the next year 10 years so can make a transition from a welfare economy to real economy where they produce something.

    4. ECB also also needs to print-up Euros and stimulate the European Economy to create jobs for Greeks and others in a similar situation. This can done via massive public works and other projects (like Airbus Industrie).


  11. bb

    any critique of the writings of munchau or ambrose e-p is just waste of time.

    yves, why is that you recurrently make references to yellow press nonsense? as a HBS grad (not the GWB calibre), you should have very strong reasoning and elementary logic skills.

    let’s just discuss if heidi montag could save starving kids in africa with her new diet. i bet we can find more common sense in her than ampbrose. and silicon as well :)

  12. bb

    why don’t you write an article on the subject (greece) that puts political miscarried musings aside and focuses purely on economics. just develop this:
    greece is bust. with debts equal to 120% of gdp and to exceed 135% within 2 years, they have to grow their economy at least by 4-5% a year just to pay interest on their debt and have a balanced budget at the same time. greece has never achieved such results in its history. looked from all angles, greece is a ponzi scheme. lending to greece is a sure bet to lose money.

    p.s.: as an eurozone citizen, i’d rather see the IMF foot the bill than the ECB. i guess that makes me anything but a ‘narrow minded socialist’.

    1. MacroStrategy Edge


      You are short changing yourself again, bb (not gone yet, I see?)

      Probably more like 7% of GDP if interest rates on Greek public debt are up around 6%.

      Ok, so what is the VAT rate now in Greece? It is going to bankrupt Greece to collect taxes from one set of citizens and pay off its bond holding citizens with the proceeds – i.e. by moving euros from one Greek pocket to another, the whole system is a Ponzi scheme about to fall in on itself?

      Consider going for a walk and thinking this through.

      1. bb

        pay attention to the timestamps, do not look for replies in chronological order of people’s posts. attention to detail is another weakness of yours.

        i am paying VAT without taking a walk, you seem to quite misunderstand economics, so call yourself a microROB.
        another folly of yours: greece is paying 6.5% on 10 year bonds, much less on shorter durations, this is why i averaged lower, you a$$(um)ed yourself once again that everything is bearing 5% coupon payment or more. wrong a$$umption microROB.
        and from purely pragmatic point, yuur a$$umption is just as useless as your other writings: greece is notorious for very low tax collection levels, most of the business is done off the books (consider 30-40% of all sales), tax increases will hardly have any positive impact. if it were otherwise, the imposed 2% hike would have fixed the situation by now.
        yes i have left for good, i am no longer reading this blog, just stopped by to find more confirmations that the people that write here, like you microROB have no understanding on the subjects they pick.

        my opinion that this blog is going in freefall since last spring has been confirmed once again. get some education microROB, if you can’t get a full time job. it might help you in the long run.

  13. /L

    Unbalances will create this situation according to J.A. Kregels prediction 1999:

    J.A. Kregel: Eastern Economic Journal, Vol. 25, No.1, Winter 1999

    “Export-led growth usually involves exchange rate adjustment, but with Europe about to embark on an experience of irrevocably fixed exchange rates, the same result can be produced by a fall in the domestic rate of inflation caused by nominal wages rising at less than the rate of productivity growth providing a real depreciation of the currency and an increase in external demand to offset the decline in domestic demand. The problem with this approach is that it is virtually identical to the old-fashioned concept of beggar- thy-neighbor devaluations which plagued Europe in the 1920s. The current version, using wage reductions and real exchange rate changes rather than nominal exchange rate adjustments, is often defended as preferable to the earlier version since it produces the benefit of internal price stability and nominal exchange rate stability. Nonetheless, it remains a policy that can only be practiced successfully by a single country relative to the rest of the world. It is wholly inappropriate for a country that is part of an integrated economic area that has a high proportion of its trade within the group and is about to introduce a single currency so that exchange rates will become irrevocably fixed. Export-led growth in the context of EMU can only mean relative to the rest of the world outside the EU. It is not a policy alternative that can be operated by any single member country. Yet this seems to be precisely the policy that some countries are employing to solve their unemployment problem.”

    As noted, this policy cannot be employed by a single country within a group of countries linked by a single currency without negative effects on the others, since all will eventually be forced to adopt the same policies. If the rest of Europe does not follow Germany in keeping wage increases down to the target inflation rate (which is lower than the rate of productivity growth) the result will be exactly the same as if their nominal inflation rates were excessive relative to the inflation rate in Germany, and they will be losing intra-EU competitiveness. The culture of nominal price stability would simply reproduce differentials in real terms. While previously these differences would have appeared as real appreciations of exchange rates relative to Germany, and have been eliminated by nominal appreciation of the DM before EMU, the differences will now appear in terms of differential real returns to capital and labor in Germany relative to the rest of the EMU. Although there will no longer be any national balances of payments to finance or exchange rates to defend, there will still be flows of funds among countries, and the same instability will result. In simple terms, Germany will be draining domestic demand from the rest of the EU.

    Note that greater independence of any individual European Union country in managing its own fiscal policy would change this picture very little. If France or Italy decided to expand domestic demand, it would be quickly drained out of the country it would no longer show up in the German balance of payments surplus and an Italian deficit as before EMU, but now appear as increased expenditure flows from Italy to Germany, with the Italian fiscal deficit deteriorating, and credit risks on Italian securities increasing. While both labor and capital costs will be rising in Italy relative to Germany, this will only exacerbate the divergences and make a policy of downward wage convergence more pressing. The single currency will bring the positive benefit of releasing European economies from having to contract their domestic expenditure policies to defend their exchange rates relative to the DM, but it brings with it the cost of requiring that they contract their nominal wages to defend the competitiveness of their domestic production against cheapening German imported goods.

    Add to that that the rates will predominantly be set to suite the big dogs. Low inflation countrys will get to high rates and those with higher inflation will get to low.

  14. /L

    Europe is far from close to a federation today and it was even more distant 1999, still they did lock it in to a monetary union without common fiscal policy, not there wasn’t dire warnings of the risks involved in this adventure.

    The entire handling of the crisis, Baltic States, Island, Greece et al is a disgrace that only show that this EU fantasy is run by narrow minded intellectuals and without real statesmen, who only functioning when the sun is shining.

    It’s hard to see any trace of progress in the EUropean leaders of today and the ones that forged the idiocy of the Versailles treaty. Under the heritage of the sketches of post war order drawn up by FDR and US Department of State Europe was built up from the war havoc in a couple of decades, of course US used the situation as winner to its advantage but never the less Europe benefited, here we talk about true statesmanship that didn’t shun common sense. If they had reasoned like the “illustrious” leaders of Europe today the world had very quick come to grinding halt. They had the common sense to understand that with USA piled up most of the gold (70%) in the world and money it had to spread it out to get things going, of course they have to fool the Americans with exorbitant threat of communism otherwise they have reacted with shortsightedness it’s — our money we earned it. But what’s the purpose whit money if there is nothing to shop.

    What have the “illustrious” leaders of Europe achieved in guiding the eastern Europe former soviet states for two decades — disaster and havoc.

    EU the wannabe federal European state have almost every insignia of a state, it’s own flag, national anthem, sort of a government with ministers aka the Commission, right to legislate, a pseudo parliament, it’s own court, it’s own coins and notes and now also a phony head of state i.e. a president and foreign minister. Almost all that is needed to be a real state/nation there is only one crucial thing missing — a people. A political wet dream, an entire state without an unruly populace. To have a fiscal regime there have to be a people to tax.

  15. NotTimothyGeithner

    As long as the EU does not operate under the philosophy of one-person one vote, they will face dissolution problems every time something is out of whack. At the end of the day, the German government can not serve the interest of both the EU and the German electorate. Serving two masters is impossible.

    I’m reminded of one of the Foundation books, but the flaws in the old empire meant every time they tried to solve the problems of the outer worlds the inner worlds would try to replace the leader.

  16. DownSouth

    If American exceptionalism is alive and well, then this thread demonstrates that European exceptionalism is equally as alive and kicking.

    Are these the mere growth pains of globalization and neo-liberalism?

    Or do they represent something much more serious—-the death throes of globalization and neo-liberalism?

    I hate to rain on the parade, but count me in the latter camp. Of course I believe the party is over for the US as well, so you could call me an equal opportunity cynic.

    Europeans, like Americans, have created quite a mythology for themselves:

    The European Union needs to forge a spirit of cooperation between the once warring nations of the Continent, and it is no coincidence that the European Science Foundation’s research project into this period was entitled “The Transformation of the Roman World”—-implying a seamless and peaceful transition from Roman times to the ‘Middle Ages’ and beyond. In this new vision of the end of the ancient world, the Roman empire is not ‘assassinated’ by Germanic invaders, rather, Romans and Germans together carry forward much that was Roman, into a new Romano-Germanic world. ‘Latin’ and ‘Germanic’ Europe is at peace.

    Europeans have always had to work hard to find common roots and the origins of unity in their troubled past. A shared Christian heritage has good historical credentials as the basis for a common culture and identity, but is awkward for present-day reasons: Christianity, with its many sectarian squabbles, is now as divisive as it was once unifying; and adopting it as a badge of ‘Europeanness’ would, of course, definitely exclude all non-Christians from the club. Furthermore, linking Europe with Christianity might give the Pope ideas above his station, would be disturbingly ‘American’, and would certainly clash with liberal and left-wing European traditions of secularist politics.

    The Roman empire on its own, although in some ways a wonderful precedent for much that modern Europe aspires to (with its free-trade zone, its common currency, and the undoubted loyalty that it inspired), has also never been entirely satisfactory as an ancestor for the European Union. Roman power was used too recently (by Mussolini) as part of a specifically Italian national and imperial agenda, and too much of northern and north-eastern Europe was never in Roman hands (whereas the southern and eastern shores of the Mediterranean were central to the Roman world). An entirely ‘Roman’ EU would marginalize northern Europe, and might be centered in Rome, Athens, and Istanbul, not in Strasbourg, Frankfurt, and Brussels. An interpretation of history that keeps the Roman past, but ‘transforms’ it into a post-Roman Europe dominated by the Franks, is therefore much more satisfactory. The centre of the present-day European Union, the Strasbourg-Frankfurt-Brussels triangle, and the centre of the eight- and ninth-century Frankish empire coincide very closely: Brussels, for instance, is little more than 100 kilometers from Charlemagne’s favoured residence and burial place at Aachen.

    North of the Alps, the Franks have occasionally been wheeled out to support Europe in a more populist and explicit way, particularly because they are acknowledged as common ancestors by both the French and the Germans. Already in 1949 a ‘Prix Charlemagne’ was instituted, which is awarded annually to figures who have made a remarkable contribution towards European unity; and Charlemagne was also commemorated in an exhibition at Aachen in 1965, where he was presented as ‘the first emperor who sought to unite Europe’. Whether the Lombards who lost their Italian kingdom to him, or the Saxons who were massacred by him in their thousands, would have viewed this as a positive achievement is a moot point. In 1996 a second exhibition, the fruit of Franco-German collaboration, honoured the Franks of an earlier period, by commemorating the fifteen-hundredth anniversary of the baptism of Clovis (which supposedly took place in 496). The title chosen for the project was ‘Les Francs, Precurseurs de l’Europe’, ‘Die Franken, Wegbereiter Europas’—-‘The Franks, Precursors (or Path-Finders) of Europe’: Again it is doubtful whether the historical Franks can really live up to the projection upon them of such high ideals, though the baptism of Clovis, a powerful Germanic warrior accepted into the Catholic faith by the Gallo-Roman bishop of Reims, does fit rather well with a French vision of the respective roles of France and Germany within the European Union: German might, tamed and channeled to positive ends, by Gallic culture and civility.
    –Bryan Ward-Perkins, The Fall of Rome and the End of Civilization

    One can only sit back and watch all this with a sense of awe and wonderment. History in the making—-what more could one ask for?

  17. Hubert


    the comments show you touched a very hot issue.
    I miss your personal opinion on this and the reasoning behind.

    I personally sympathize more with a´s view then that of Swedish Lex´s, I see no proper solution for this mess – only different ways of blowing up a less perfect monetary union.
    Greece is in effect a failed state already, even from official statistics and, more important, through the grapevine of people who live there. Greek government experienced the incredible fortune of being lent a few hundred billion Euros – none of which they will pay back under any monetary regime. So why not get over with it now, as Thilo Sarrazin proposes, and build the ring of defense where it could hold (Portugal, Spain?) ?
    Kevin de Bruxelles is also right (unfortunately in my view) in seeing the German standpoint as a tactical one – german leadership is still desperate in not rocking the European boat. I wish they would see more the need for a different boat or at least the capacity of their lifeboats.
    It was Helmut Kohl who helped put the cart put before the horse and now the bill – bailout clause or not – is due, though much highter then ever deemed: no sain person could imagine in 1998 that german institutions would lend 50 bn unsecured to Greece, even knowing the stupidity of german state banks – but guess what: the french did the same this time. This will be France´s biggest loss since the Russian railway bonds.

    Anyway – what is your view on this ?

      1. MindTheGAAP

        It’s interesting that from this article, Germany seems to be a bigger source of frustration to the rest of the EU than Greece.

      2. MindTheGAAP

        1. Thanks for the link.
        2. “Merkel’s curt reminder wasn’t just a rebuff for Schäuble, but also signified a renunciation of Germany’s decades-long approach to Europe. In the past, Germany was always prepared to contribute a few billions, if necessary, to promote European unity. This logic no longer applies. Germany is rethinking its financial assistance to other euro countries, particularly when the debtor nations are openly blaming Germany for their problems.”

        I can’t fault Germany for this…

        1. Swedish Lex

          According to Jean Quatremer ( ) there are elections coming up in parts of Germany in May and if Merkel’s party performs badly, the current majority could loose its dominance in the Bundesrat, the upper German Chamber.

          So part of the talk tough on Europe stance could be explained by simply crude election tactics, i.e. politics as usual. That Merkel’s flip flopping on Greece and Europe amounts to playing with TNT, putting global economic (in)stability in the balance, seems to matter less. As outlined by Der Spiegel, Merkel’s current behaviour does not count as great statesmanship.

          1. MindTheGAAP

            “As outlined by Der Spiegel, Merkel’s current behaviour does not count as great statesmanship.”

            Perhaps not, but I’m not sure that committing German taxpayer money to subsidize Greek standards of living would constitute great statesmanship, either.

            More to the point, I don’t quite understand what long-term good can come from Germany helping Greece at the moment. What happens if Greece doesn’t keep its promises to reduce its deficit to 8% (the assumptions in that promise seemed somewhat optimistic)? Do the Germans bail them out again?

            More importantly, what happens if Greece does in fact narrow its deficit to “only” 8% of GDP and still has problems raising money in the future? Do we demand that Germany cough up even more money? What about all the other Euroland countries which are ineivtably going to go through their own crises?

            The underlying assumption by many posters (and in many links) is that Germany has an infinite amount of resources, and that it is being miserly with them. My take is that Germany has, in fact, very limited resources and that it can’t afford to squander them on a no-win situation, especially if someone else (the IMF) is stupid enough to step in anyway. I understand the whole “european pride” bit, but I don’t think that pride is worth billions of dollars.

  18. Vinny

    Okay, now that we all agreed the technocrats in Brussels and democracy in general failed miserably, can we make way for the Antichrist? I understand he could solve the Greek/German crisis with a lot more panache and savoir-faire than Angela Merkle ever could…


    1. psychohistorian

      I was of the opinion that George W Bush was the antichrist. Maybe there is room for more than one.

      1. Vinny

        Or, maybe even three Antichrists… like a Trinity of Antichrists, to make it all biblical… :)


  19. Hugh

    There seem to be all kinds of tangents and recriminations in this thread. Politics getting mixed with nationalism getting mixed with economics.

    There are several things to keep in mind. Greece and other countries did not sneak into the eurozone. The problems in their budgets and their economies were known. In the intervening time, no serious effort was made to firm up their financial practices or ease the financial costs of their integration. Everyone was happy as they always are on the upside of a bubble.

    Look at our own country. Rich states like California, Illinois, and New York always send more money to Washington then they get back. Where does the difference go? To states in the South and the West. Yes, it is irritating that these are the regions that talk the most about cutting federal budgets and rugged individualism. But the outflows to them serve the greater political purpose of keeping their economies in the range of the rest of the country. And the richer states do benefit from this arrangement because a lot of the wealth and economic activities in these other areas gets recycled through them.

    What we see in Europe, on both sides, is that individual countries wish to preserve the benefits they have but not pay the costs associated with them. The field is economics but the failure is political. We should not be surprised by this. Our own elites show us every day how incapable they are of fixing the problems they created. Why should Europe or its elites be any different? Those elites let their banks run just as wild as ours. They applauded and fostered bubbles which they duly took credit for. The dislocations inherent in those bubbles, now burst, are coming home to roost. There is no real leadership there or here. What we are seeing is that those groups that are best positioned are looking out for themselves to the detriment of everyone else: banksters here, Germany and the banks there. Yes, this is a shortsighted strategy because it will come back and blow up on them in the next downturn. But that is merely further evidence of their incompetence. They aren’t looking that far ahead. They aren’t interested in the health of the system in which they live and which is the basis of their wealth. It is no different for the Chineses, the Japanese, the Europeans, or us.

  20. Doug Terpstra

    “It is hard to say whether this argument is for real or is just an excuse not to sanction a bail-out that would be politically unpopular. It is probably a combination of the two.”

    This sounds so much like a politician vowing not to vote for any bill without a robust plublc option. Right! Or the first bailout bill, voted down on principle, before the real one week later in the where they all bent over for the sausage injection.

  21. /L

    14 March 1968
    Big dollar crisis: the price of gold on London gold market have increased to $44 per oz. The London gold market is closed. the Second Gold Exchange Standard de facto ceases to exist when USA no longer unconditional exchange dollar for gold on request from Central Banks. The Gold Pool is abolished. The London Gold market is not open until beginning of April.

    June – December 1969
    Eurodollar rate (3 month) increase to double digits.

    10 August 1969
    The French Franc devalues by 10 percent.

    24 October 1969
    The German mark revalued by 8 percent.

    1-2 Deceember 1969
    Haag summit. At The Six (EC) first summit after de Gaulle have left office (April 1969) the plans for closer political collaboration and a currency union is announced. UK gets OK on its application for admission.
    (The path for EUrope had been staked out, recurring currency crises is the “solution”.)

    8 May 1971
    West Germany let the Dm float in an attempt to curb the dollar flows.

    15 August 1971
    The Second Gold Exchange Standard breakdown definitely when USA declares the Dollar inconvertible. The dollar is floating.

    March 1972
    The so called currency snake is established by the EG countries, they make the fluctuation margin more narrow than was agreed in Washington December 1971 (+- 2,25 %). EG Central Banks shall intervene with their own currencies to keep exchange rates inside the margin.

    1 May 1972
    UK join the EG currency snake.

    23 June 1972
    Big Pound crisis, UK leaves the currency snake.

    20 January 1973
    Italy leaves the currency snake. The Lira is floating on non commercial transactions.

    23 January 1973
    Swizz let the Franc float.

    And on it goes, from monetary crisis to monetary crisis.

    Albert Einstein once defined insanity as “doing the same thing over and over and expecting different results.”

    1. MyLessThanPrimeBeef

      Albert Einstein once defined insanity as “doing the same thing over and over and expecting different results.”


      That’s not insanity. That’ calll playing the odds.

      He must not have flipped a coin or played dice in his life. In any case, I think that’s his problem with his God. Hopefull, that didn’t drive him insane.

      By the way, it IS insanity to expect the same result ALWAYS by doing the same thing over and over again. It’s called ‘fighting the last war.’

  22. plschwartz

    I think that it is a mistake to take the Eurozone attitude toward Greece and generalize it.
    The fact is that Greece does not play well with others.
    It has we know blocked the entry of the Turkish side of Cyprus to EU. As well as blocking Macedonia because of its name (!) I imagine that this is the tip of the iceberg that is Greece.
    I do not believe the common myth that Greek financial problems were met with a wink and a nod. It wold be entirely within the Greek stance to get financial reprieves as payment for not putting a hold on important EU business. If so this would be time to let Greece twist in the wind.
    I doubt that the Iberians would get the same tough love.

  23. scraping_by

    A lot of what’s happened in Greece has an odd echo in John Perkins’s book Confessions of an Economic Hit Man. His job was to sell wildly optimistic projections of national economic growth to justify loans that could never be paid back. The debt would be the method of control for the IMF, the World Bank, and their clients in the petroleum and other industries.

    From the boards, it seems the Greek debt wasn’t used for massive public projects. It may have been to cover shortfalls in taxation, especially to pay for government services. Perkins specialized in useless development projects that enriched US engineering firms. This is the ECB, which is a supranational council of bankers, rather than the US government fronts for bankers in Perkins’s day. Some difference, here.

    The outcome depends on whether the Greek Socialst Party is a real Socialist party. If they’re another leftist party captured by neoliberals like Labour in the UK and the Democrats in the US, they’ll give up significant control to the central monetary authority, whether the ECB or the IMF. Not because they have to, but becuase that’s their world view.

    1. MyLessThanPrimeBeef

      You are not saying any CIA complicity in this with the Perkins/hitman reference, are you?

      1. scraping_by

        No. Perkins himself said,

        “This system, however, is fueled by something far more dangerous than conspiracy. It is driven not by a small band of men but by a concept that has become accepted as gospel: the idea that all economic growth benefits humankind and that the greater the growth, the more widespread the benefits. This belief also has a corollary: that those people who excel at stoking the fires of economic growth should be exalted and rewarded, while those born at the fringes are available for exploitation.”

        The neoliberal, mainstream plutocracy is based on an idea, not a strategy. If there are jackals, they’re only servants and incidental to the main action.

        1. /L

          The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back… soon or late, it is ideas, not vested interests, which are dangerous for good or evil.

    2. DownSouth


      Of all the comments on this long thread, that comes closest to capturing my own sentiments.

      Perhaps Nestor Kirchner put it best when he warned: “Neoliberalism is a death trap, a death trap that first ensnares the weak, but eventually, one way or another, finally arrives to the strong.”

  24. gobalnomad

    If Greece is allowed to default then all hell will break loose. There will be another financial tsunami wreaking havoc through global markets and the price of money into any investments at all will go through the ozone roof, the PIIGS will follow Greece with Italy leading the way, the IMF will be unable to hand out emergency loans (with dire punitive terms & conditions) to all, and the EU will be in complete and utter disarray. Oh and nationalism will rear its ugly head big time. Then again…..maybe this all aint such a bad thing…….Europe can go running to America for a new version of the Marshall Plan to prop them up once more, and America will rejoice in rediscovering the wonders of the rest of the world being forced with their American financial aid to “buy american”. Wow… will be the boom-time 50s all over again and Americans will kid themseleves that the good times are there to stay…… ca change…plus ca reste la meme chose n’est-ce pas?

    1. MyLessThanPrimeBeef

      I think it’s far-fetched to assume any CIA conspiracy in the breaking up of the Europrean Fortress.

    2. /L

      I don’t believe US want EU down, USA probably think the eastern European countries that helps to surround Russia is in safe keeping in the EU, US want Turkey inside EU, better to have the Turk there than in any eastward assembly. That is as long as EU is a compliant vassal and knows who the master is. And the bigger EU gets the more of a colossus with feet of clay who can’t really challenge US hegemony in any efficient manner.

  25. Ming

    The moral hazard, obfuscation and untrustworthiness in the financial class and their political enablers is the biggest issue facing the world financial system. Obama has made a huge mistake in allowing the US treasury to be the effective backstop for the banks(via Fannie, Freddie, AIG, numerous Asset Guareentees, and of course the TARP) and in allowing the US Fed to be the toxic asset waste dump for the US banks, without demanding clarity, transparancy, real reform, and punishment for the reckless behaviour of perhaps a few dozen key personnel. Instead Obama faces an industry that is rejuvinated with a new sense of entitlement, self-empowerment and willingness to corrupt any reform imposed on it, culminating with Lloyd Blankfein’s statement, made in a London Cathedral, that the banks do ‘God’s Work’. Germany is wise to make a stand against this moral hazard of blindly laying its financial credibiltiy and resources at the service of those that got Greece into Trouble.

    If Greece really does default, and this triggers a small calamitty (probably via the CDS and other derivative contracts), it would be humane for the Euro-zone to intervene to prevent a depression from harming the ordinary people in Greece, even as some austerity must be imposed (perhaps taxation on those who have avoided tax?).. However, they could use the distress to force Greeks to ‘open the books’ and reveal the counterparties who helped foment this mess. They should also reform Basel…it should not allow any entity to disguise or obfuscate its present or future debts or liabilities.

  26. PJM

    Sometimes I read the mainstream media and bloggers and I smile. A person as me, who looks for the crude figures in the screens, I still smile.

    Anglosaxon media screams: “This is the Armageddon in Euroland! The war is the next step for european troglodites!” :)

    But, do you see, I invest and trade markets and Im seeing the cross €ur/u$d and is almost the same as one year ago. Not bad for a currency who is in his final stage do the death. Hey! Please, short the €uro agaisnt the dollar. Maybe is better for us, europeans. At least portuguese producers have more opportunity to sell good wine, good clothe, some machines, some cars (are Volkswagen, sorry!), some software, some olive oil, some gasoline (yes, we can!), and so on.

    I look to the british and american fiscal deficits and I realize that we arent so bad as we think. At least, in case of fire, we, portuguese, can sell our gold reserves to bandwagon who is surfing the last bubble. I realize, well, in shorterm Portugal must have his fiscal deficit under 3% of his GDP. Is it hard? Yes, it will be. But as our finance minister told in an special interview on TV: “we (the State) cant give more money than we have. No free lunchs.” The majority portuguese people will understand as he is used to have. As we say in Portugal: “não há dinheiro, não há vícios.” [No money, no funny, in similar english language.]

    Everybody is afraid that €uro will collapse. But where I see strength, maybe others, like traders are seeing weakness. Ok! Do your bet. Bet against the €uro. And you will see the results shortly.

    If I will do some previsions for five years, that normally I dont, I can see: Obama struggling with Congress to pass a bill to cut the spending. The fiscal deficit is worse than in Europe, who managed to have better figures. Mr. Cameron is in trouble because he made a lot of promises. Cut spending, fight the climate change, revive british pound and others lovely promises. Nothing worked beacuse Uk still is looking for oil in Falkland islands.

    Thats what is telling me the cross €ur/u$d. Euroland is in bad sahpe? Sure. Look to USA and UK. And check the respective crosses. Euroland is in bade shape but better than others currencies. Hey! Someboby must to tell mr. Schwarzenegger to adjust his fiscal budget. Do you see, California represents more that PIGS together. Dont you believe? Check the figuress. hey! The dollar will pay for California, NY, Florida, and so on. “Não há dinheiro, não há vícios.” ;)

    Thats why I love markets. They are more smart than economists, politicians, Nostradmus and, hey! Governements.

    I wish you good times for all. Is good to be alive and enjoying peace, health and good mood. Enjoy as you can.

  27. Panayotis

    It seems that many commentators that know nothing about Greece decided to open their ignorant mouths and speak a lot of nonsense!
    1. 40% of Greek GDP goes unreported so the true public debt to GDP is about 90% which according to Rogoff/Reinhart is optimum! The problem here is that tax evasion is such that the deficit is larger from the tax collection problem.
    2. Greeks save and they have a private debt to GDP ratio less than 90%. The problem here is not private debt but the private sector does not produce byt instead imports most goods from the rest of Europe. The high value of the euro does not help the Greek tourist industry that competes with other Mediterranean countries with other devalued currencies.
    3. The unit prime cost in Greece is not high but close to the average in the euro area.
    4. The growth of GDP in Greece in the last 10 years was one of the highest in Europe.
    5. The growth of public debt in Greece from 2000-2009 was close to the average in the euro area.
    6. Most of public debt is owed to foreign banks and investment funds while Greeks have accumulated abroad close to 300 billion euros!
    Greece can borrow from internal funds and Greek money abroad. It should focus on improving productive capacity and entrpeneurship as Greeks do successfully abroad in shipping and many other industries. The government should start collecting more taxes. Finally if it wants independence it should leave the euro to the Germans. renegotiate the foreign loans with a haircut and convert it to drachmas. It should immediately go to the European courts and force the German cheats and murderers repay war reparations and the occupation loans, a total bill at last count nealy 100 billion euros. Finally it should invite more people like Vinny to come enjoy Greek hospitality and the superior Greek way of living!

    1. charcad

      I’m sure this is a representative and honestly held Greek sentiment.

      The other misconception, spread by EU-philiacs, is that Angela Merkel and Guido Westerwelle are stirring up German public intransigence to “bailout”. The truth is they are suspected by their closest supporters of weakness and harboring globalist sentiments. They are both under 24/7 surveillance for any further signs of tendencies towards compromise with Eurocrats in Brussels/Paris.

      1. PJM

        Dear Charcad,

        No itinst a honest statement. If greeks emigrants (abroad) has that money, why dont buy greek bons insted demanding money to his european fellows?

        The problem is greek nationalism. Did they agree dwith Germany, 40 years ago about the Second War indemnizations? If so, germany dont have a debt to Greece.

        Or greeks think because germany had Hitler they pay the good life forever to greeks?

        Do you see, exactly 200 years ago napoleonic troops came to my country and stole as he could. Sometims when we go to Louvre Museum, in Paris, we see some things that was stollen to Portugal. Do you think is fair ask today for money because that historical moment?

        The greek problem is high self pride. They dont admit his own mistakes. They blame others especially germmany because the Second World War. They think that have the right to suck others money.

        Hey! This inst a good fellow. If they think is better to them to be outside EU, they should say so to others countries. But, at least, they repay what they received until the party was good.

        This isnt nothing about federalism or EU-philiacs, is about respect for others and not to be a ploundry cheater.

        Do you see, we portuguese are paying for others mistakes. Isnt good to see that rapacy mentality.

  28. Cathryn Mataga

    Even with a bailout now, doesn’t that
    just delay the inevitable. In another
    year or so they come with an even bigger

    Is some kind of default by Greece really
    going to be the end of the world? Maybe
    they default, and okay, that triggers more
    bailouts of banks, but then things muddle
    back to where they were. Probably AIG
    will end up paying for a lot of it anyway.
    After a default, Greece might even have
    an easier time getting credit, just because
    then the storm will have passed.

  29. Panayotis

    Portoguese ignorance is no substitute for the truth! Greece has never agreed that war reparations and repayment of war loans are forgiven! It is easy for an ignorant portoguese fellow to talk about Greece when Portugal did not suffer from the war and supported Germany! 500000 Greeks died from the WWWII. more per population than any other country! It is only fait that Germany pays for the suffering its troops caused. As regarding to the current debt I repeat renegotiation, restructuring with ahaircut and the rest in drachmas that the greek government will have the sovereign authority to issue!

  30. PJM

    My dear Panayotis,

    Strange enouph, greeks discovery only in 2010 that germany must pay war reparations. Only in 2010.

    Hey! I would like to receive free money every year from the germans too, do you see?

    Concerning Portugal, in World War II maybe you must read more even we had a dictatorship.

    Have a nice weeekend. But dont expect solidariety when you have that mentality.

  31. Panayotis

    I do not expect solodarity from you because you show none. Lets wait and see what happens to Portugal! Regarding war reparations you show your ignorance. For many years Greek people have been winning court cases regarding their damages. As about Portugal where were you during the WWII?

  32. PJM

    My dear Panayotis, I will try to tell you the Portugal position regarding WWII.

    In 1926, on the verge of portuguese collapse concerning his lack to control his fiscal deficit, trade deficit and inflation, we had a coup d’état. The new regime choosed an obscure politician as finance minister. The guy was isolacionatist, anti-commmnist and… Anti-capitalist. But the guy was a genius in his job. Portugal won his lack of credibility in the international markets and especially british sovegreign bons investors.

    It was good at this work that the militar power give him political powers to be a dictator. It wasnt good for democrats and liberal believers.

    When came Hitler and his mates, Portugal regime didnt believe in international cooperation. Portugal was isolacionist concerning his International Affaires. The main goal of the portuguese dictator was avoiding taking part in the war. He made an choice: Portugal, unless in WWI, doesnt have to figth for others.

    Portugal in WWII was neutral as others. And only cooperated with Allies when was clear for him that nazis would loose. His main concern was Spanish dictator, because Franco proposed to Hitler invading Portugal and took african portuguese colonies, in 1940. If Portugal took place in the war, Portugal would loose his colonies. The irony is: our dicator avoid thw war and loosing the colonies in WWII but after the WWII we had war in Africa because ours colonies wanted his freedom.

    After WWII the portuguese dictator deny the Democracy and Freedom for his own people. He refused american help during Marshall Plan and only agreed to be OTAN member because he was affraid of communist russians. But, stubborn til his death, portuguese dictator was isolacionist. And onle we was too old and a new generation of portuguese, Portugal started open his mentahlity to world. But took to much to portuguese can be free and, smile, could drink a Coke.

    So, dont blame portuguese or others for yours problems. As I said, your methality is sucking others money. Sorry but its the truth. If Greece agreed 40 years ago with germany and was helped by germany since then, you must to realize that you dont deserve solidariety.

    As portuguese I dont deny our past or have high self pride about. We made a lot a mistakes as good things. But we dont pretend to live with others money. We are thankfull for others help and we hope, one day, to be rich enouph to help others, like easterns europeans or others that can join EU.

    I dont believe that all greeks think as you, but in that case, dont expect solidariety. Too much greed in your mind.

  33. PJM

    My dear Panayotis, if you want blame someone for yours problems, look inside your cowntry. As we do in Portugal.

    Today we have a political debate if is good for us stay in eurozone and, more, if the money that EU give us is good.

    Some thinkers believe is better for Portugal to leave €ruozone, but they say: Hey! We cant fight fiscal and trade deficit with a strong currency. We must leave and promise to our partners to pay all the money we received in the last thirties years. They tried help us, we must respect them and we must to pay that money. This is a good debate and good faith from that position.

    Others think the problem is too much money that is wasted. When Jacques Delors made is policy, give money too poors countries to rise standards of living, the goal is using keynesian tools to enrich a cowntry. But that money have bad unintended consequences. Put pressure in internal demand and dont have mechanisms to adjust business cyles. That money have more unintended consequences. Put pressure in current spending, because the hospitals must have workers, schools must have teachers, and so on.

    In 2001 we discovered that too much money came from EU. We had a small real estate bubble, high speed in our lowering interest rates and too much internal demand and lack od productivity to pay that debt and public spending. Thats why or economy since the recession of nineties is having problems. As I said before: were discovering the unitend consequences of high credit to spend and invest.

    Portugal have a lot of infraestrutures. But they dont give us the returns to pay them. We dont have enouph growth to use that capacity. Thats why we are having problems to cut spending. Do you see, an highway payed with the help of EU has a lot of costs. The cost to payback the investment and the repairing costs.

    Portugal discovered that a lot of money invested in infrastructures, as neokeynesians give us as shortcut to be rich, doesnt work by self. First, you must to pay the credit to make that infrastructure, secondly, we must to pay to mantain that infrastructure. The economic activity level in Portugal isnt enouph to give good returns for that investment.

    Now its time to greeks and spanish to learn the truth: too much money in infrastructures. As will discovery chinese and others “fast grwing countries” who leverage that growth with cheap money and credit. That growth is unsustainable. Thats the neokaynesian trap: bridges to nowhere, as in japan.

    Thas why, some snakeoil sellers dont have enouph knowledge to give some advice, like mr. Krugman. He lives in another universe with too much theory and lack of doing trial-error. We, portuguese, as you greeks and spanish, are learning now. High leverage in your shortcuts to be rich. Castles sands.

    In sted greeks blame others perhaps is better listening others and dont pretend to be more smart than others. Learn with yours own mistakes and look outside the others examples. To avoid some mistakes and to learn to survive.

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