Marshall Auerback: Bankers Gone Wild in Ireland AND Germany

By Marshall Auerback, a hedge fund manager and portfolio strategist who writes for New Deal 2.0.

Despite a blame-a-thon on Ireleand, Germans banks are really at the core of the eurozone catastrophe.

Much ink has been spilled in the press over the Irish problem and the laxity of the country’s southern Mediterranean counterparts in contrast to the highly “disciplined” Germans. But perhaps we have to revisit that caricature. Not only has the Irish crisis blown apart the myth of the virtues of fiscal austerity during rapidly declining economic activity, but it has also illustrated that Germany’s bankers were every bit as culpable as their Irish counterparts in helping to stoke the credit bubble.

One of the traditional rationales for the creation of the euro was that a single currency and strict Maastricht criteria would keep the profligate Mediterraneans and their Celtic equivalents in line. Instead, critics, particularly in Germany, increasingly see the European Monetary Union as a means for freeloading nations to offload their liabilities onto fitter neighbors.

Not surprisingly, this has engendered much discussion that perhaps it would serve Germany’s interests to leave the euro, rather than booting one of the Mediterranean “scroungers” out. But as Simon Johnson has pointed out, this comforting narrative of German prudence matched up against Irish profligacy doesn’t really stack up:

German banks in particular lost their composure with regard to lending to Ireland — although British, American, French and Belgian banks were not so far behind. Hypo Real Estate — now taken over by the German government — has what is likely to be the highest exposure to Irish debt.

But look at loans outstanding relative to the size of their domestic economies (using the BIS data on what they call an “ultimate risk basis”).

German banks are owed $139 billion, which is 4.2 percent of German G.D.P. [my emphasis]

Where were the German regulators? As my colleague Bill Black has noted:

They seem to have believed that ‘What happens in Vegas (Dublin) stays in Vegas (Dublin).’ Instead, their German banks came back from their riotous holidays in the PIIGS with BTDs (bank transmitted diseases). The German banks’ regulators continue to let them hide the embarrassing losses they picked up on holiday, but that cover up will collapse if any of the PIIGS default. The PIIGS will default if the EU does not bail them out, so there will be a bail out even though the German taxpayers hate to fund bailouts.

German banks’ relatively high exposure to Ireland does pose the question as to whether there is some wild, Weimar-style hyperinflationista lurking deep in the heart of every German, only able to express itself fully when away from the prying eyes of fellow citizens.

All of the rescue plans that have been introduced in Ireland or Greece thus far rest on the assumption that, with more time, the eurozone’s problem children could get their fiscal houses in order — and Europe could somehow grow its way out of trouble. But the fiscal austerity being offered as the “medicine” is turning out to be worse than the disease. It has exacerbated the downturn and unleashed a horrible debt deflation dynamic in all of the areas where it was reluctantly implemented.

But here’s the thing: these fiscal straitjackets obscure the history of how we came to today’s horrible impasse and, more specifically, the German banks’ role in helping to fuel the credit binge. Also lost is the reason why this has metastasized into a far greater crisis: as part of the eurozone, Ireland does not have the fiscal freedom to come up with a sufficiently robust government response. The UK had a comparable real estate bubble in the late 1980s, which culminated with the Soros attack on the pound in 1992 and the ejection of sterling from Exchange Rate Mechanism (the precursor to the EMU). This was a blessing in disguise. Withdrawal from the ERM saved the UK because it allowed the country sufficient latitude to reflate. Yes, the country had a major recession (in many ways a consequence of the surrender of fiscal freedom as a result of joining the ERM in the first place), but there was never a systemic risk that posed a threat to the country’s overall solvency as is the case in Ireland today. And this is exacerbating the problem in Ireland because it persists in chasing its tail repeatedly with futile fiscal austerity measures.

The truth of the matter is this: the eurozone seems rotten to the core, literally. Germany represents that core. The Germans might occupy the penthouse suite, but it is the suite of a roach motel. And we know what happens to those who enter such “establishments.”

Yes, longer term the problems currently afflicting the eurozone could be sorted via the creation of a supranational fiscal authority — a “United States of Europe”. But with each crisis (Ireland today; Portugal and Spain tomorrow; Italy and then France next?), the political forces are coalescing in a radically different direction. The Germans are becoming increasingly resentful as they perceive their country as the bailout mechanism of last resort (even though the Irish experience suggests that their bankers are also guilty of many of the same excesses as the “Celtic Tiger”). The PIIGS themselves are seeing that the benefits of euro membership have been vastly overstated and in fact now act as a cancerous influence through the Germanic embrace of austerity. (Paradoxically, it has been the “profligate” behavior of those so-called lazy Mediterraneans that has enabled Germany to retain its export-driven model, as well as allowing it to run lower budget deficits than most other countries.)

The eurozone could ultimately end up like Yugoslavia writ large. Prior to the break up of that country, the relatively rich republics, Slovenia and Croatia, resented policies that transferred wealth to the poorer republics like Serbia, Macedonia, Montenegro, or the autonomous region of Kosovo. Once Tito’s organizing genius disappeared, the links stitching the country together became frayed and eventually snapped as old grievances manifested themselves in newer forms. The same could happen to the Europe Union if it underwent a supranational fiscal union — the beginnings of which are already in evidence. I think the Germans are beginning to recognize that, which is why there is discussion about leaving the euro.

But let’s first be clear: German Chancellor Angela Merkel has persistently argued that it is essential that private investors, notably the bond holders, begin to suffer losses so that they will have the proper incentives to provide effective “private market discipline” going forward. She has further argued that it is fair that they suffer losses, given the premium yields they received and their lack of due diligence. That’s an honorable policy. But it’s like the old Irish joke of the driver who gets lost, asks for directions, and is told, “Well, I wouldn’t be starting from here.” By the same token, Ireland clearly illustrates that German banks, as well as their Mediterranean counterparts, would be big losers under the Merkel proposal. Ironically, German financial institutions could find themselves subject to the same kinds of bailouts that Chancellor Merkel and many of her counterparts in Berlin are urging on the Irish and Greeks.

As always, leave it to the Irish to come up with the most poetic response to the crisis. True, W.B. Yeats did not live to see this disaster, but his passionate “September 1913” does evoke the tragedy of today’s Ireland and the futility of the current policy responses for their people (and beyond):

Was it for this the wild geese spread
The grey wing upon every tide;
For this that all that blood was shed,
For this Edward Fitzgerald died,
And Robert Emmet and Wolfe Tone,
All that delirium of the brave?
Romantic Ireland’s dead and gone,
It’s with O’Leary in the grave.

Graves that might soon include not only the O’Learys, but also the Garcias, Texeiras, Moreaus, and Schmidts if a more rational course of action throughout the euro zone is not adopted soon.

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  1. john c. halasz

    Re Yugoslavia, it’s worth remembering that it wasn’t simply inter-ethnic resentments that got the whole catastrophic mess started. It was the imposition of IMF sponsored “shock therapy”, which destroyed the workers’ self-management system, resulted in mass unemployment, discredited the federal government and left a vacuum in both ideology and power, which was left for demogogic atavistic nationalisms to fill…

  2. hitesh brahmbhatt

    India is a close second example, no wonder Nehru and Tito were such buddies (with Non-Aligned Movement and all).

  3. voislav

    It is interesting that Yugoslavia gets mentioned, because Europe today is very similar to Yugoslavia mid-late 80’s. It is worth mentioning that Yugoslavia’s economy suffered because it was outrageously uncompetitive and most exports had to be heavily subsidized. The government pursued full employment very wastefully, for example Zastava car factory, the home of the (in)famous Yugo, employed some 30,000 people, although it assembled only 230,000 vehicles at its peak (domestic market was 100-150,000 at best). Not to mention other like the oil refineries and steel mills. A popular radio show at the time joked that Yugoslav steel mills can satisfy the needs of the whole planet plus an extra North America. It was a house of cards, supported by foreign loans and once they stopped, it all fell apart, starting with the debt crisis in 1982, followed by high inflation until 1989. The government policies in ’89-90 led to a temporary increase in living standard but by that time it was already too late.

    The main problem that I see is the gross misallocation of resources. There are large sectors of the economy that were artificially built up on expectations of exponential growth. Now the market is not there (and never will be) and they have to come crashing down. In Europe today that is most of the construction sector expanded during the housing boom and much of the durable consumer goods (electronics, automotive, etc.). The only question is how many people go down with this ship.

  4. Scott Nance

    So let me make sure I understand this. Because of deregulation, Irish banks could make all sorts of loans on housing. Because they could get higher returns by loaning money to Irish banks than to German companies, German banks loaned the Irish banks billions of euros. The Irish banks then re-lent this money to build houses. The result was a housing bubble of mammoth proportions. And then, when the bubble burst, and the Irish banks and their German lenders found themselves staring at gargantuan losses, the solution is to make the Irish taxpayers pay off the losses, while losing government services needed for everyday survival, because … Well, because the banks don’t want to, I guess. Am I missing something?

    1. K777

      You sound like a crybaby. The PIIGS are called PIIGS for a reason. Instead of whining about “Nordic supremacism” and “anti-periphery racism” and the supposedly lavish level of social security the Germans enjoy compared to the Greek (like having a pension age entry of 67 as opposed to 60 in Greece, I guess?), you should maybe for a second take into consideration where these periphery countries would be at today, if it wasn’t for decades of EU wealth transfer from the rich countries to these periphery countries. Greece would be just where it belongs, economically speaking: just where Turkey is today. Ireland would be just one potato famine away from providing another boost to America’s ranks of crooked cops. And don’t even get me started on Spain, the country that has probably been the most aggressive and brazen when it came to squeezing the EU for money.

      1. Gary Anderson

        Lending money in a ponzi way is not transfer of wealth. It is irresponsible rolling the casino dice. I can’t believe people are thinking Germany was responsible. Germany was reckless and only has a veneer of responsibility. German banks are predatory vermin.

        1. K777

          Oh, right. I guess they put the gun to the PIIGS heads and forced them to take out loans. We’re talking about states here, not hapless grandmas that have been talked into going into debt they cannot afford.

          And again, in what way was “Germany” reckless? You seem to use “Germany” and “German banks” synonymously. If you want an idea why German banks got involved in places like Ireland, check Pierre’s response below. This has little to do with being “predatory”. But I guess it’s more important to have a simple explanation and a scapegoat to blame (Germany! Bad!).

          1. Gary Anderson

            I have argued on Business Insider that ponzi lending in the US was a result of a deliberate pulling of sound underwriting. I would suggest that the German banks did the same thing. This is a massive scam.

            If you want banksters to have the reputation of used car salesmen, then keep talking K77.

          2. Maju

            A lot of the debt is not even public debt: it is private debt assumed directly or indirectly (i.e. assumed, somewhat happily, per the nationality of the debtors) by the state.

            Spain for instance had one of the best budgets in EU till last year and in fact the problem is not other than the lack of substance behind the economical activity (largely construction bubble not yet fully burst: everything is still wildly overpriced).

            In the case of Ireland, as mentioned in the article, it was often German bankers’ debt operating at an Irish headquarter – what can be a more colonialist thing to do than setting a trading post and sell junk for gold and slaves? Then the Irish government, obviously corrupted somehow by the banking mafias with the support of the big core states, bought all those banks, without previously declaring them orderly bankrupt (as is de rigeur) in the most suicidal banking bailout so far… instead of doing as Iceland wisely did (not without hard political fights): refusing to assume private debts and acknowledging that EU, as it is, is bad for any kind of socially aware economy.

            This is no better than the Opium War and the Unequal Treaties imposed to China, this is no better than the Scramble for Africa. But EU was supposed to be something different: an alliance of equals, human and civil rights, moderate social capitalism… yet it was just a mirage and there is nothing like a crisis to show the ugly truth without makeup.

      2. Maju

        I’m thinking more in unemployment benefits/social salaries, union participation in companies’ decision-making structures, public housing (very important), etc.

        “And don’t even get me started on Spain, the country that has probably been the most aggressive and brazen when it came to squeezing the EU for money”.

        Get some figures straight because I understand that about “half” (some 40%) of the EU budget goes to farming subsidies and here France is the main beneficiary. As for the other “half” that goes to the cohesion fund, sure that it has benefited Spain in the remote past (i.e. before the expansion to the East) but not anymore.

        I do not say anyhow that peripheral countries could not have done better but that most of the caricature is anyhow false and that the Eurozone was since the very beginning oriented to benefit primarily the central economies, such as Germany (and others). The euro is not designed to be like the peseta, not even the franc but to be a new Deutsche Mark, deprived of autonomous monetary policies (and that’s largely the error of the peripheral countries, who succumbed to the liberal magic aura of the EU), they could never compete anymore with Germany or similarly developed and welfare-high countries, so they could only buy and go bubble-making, with the connivance of the central economies of EU, and again Germany standing high, and the overall establishment of the imperial (Western) economy.

        Whining? The only ones whining here are the Germans and their Anglosaxon and otherwise Nordic accomplices. They write “PIGS”, they claim Corfu half-jokingly, they demand that budgetary cuts that destroy the economies even more are made, in spite that we know well because of the Irish case or the Lithuanian case also that this is a major error, they attempt to make the people to pay for the debt of the bankers…

        All I call is for some Icelandic dignity in the peripheral countries that say: enough, swallow your damn part of the fault in all this disaster, Merkel and co. This is a structural problem, with whatever local twists and a good deal of global and certainly pan-European speculative madness in it, and not as it’s being sold as some sort of essentialist error on the part of the defaulting countries.

        The error is, first of all, to keep the euro so high, impeding that European products could compete in the global markets, making the Eurozone so autarchic and exerting internal colonialism within EU, much like large Third World countries do to finance their development and bubbles. The euro should be at parity with the dollar, and print as many as need be.

        This devaluation is the first thing that the German-dominated ECB should have done long ago, at least since the crisis began in 2008. We are seeing how whole business are being moved to Africa or Asia, how once highly competitive industries have become a relative failure because of the euro’s excessive strength that only seems to benefit the Germans (with many question marks) and we see how industries are allowed to close even when they report benefits.

        All that cannot be tolerated. We need a Europe of the peoples and for the peoples and not this ultra-Capitalist madness.

        And all we see is Merkel whining on who’s going to foot the bill. Well: nobody, Mrs. Merkel, because we are all in the same ship and we are all going bankrupt. And the only one who seems to worry a bit is China, who, discretely, bought a good deal of Spanish debt in the last auction, because they fear their European markets collapsing. Meanwhile we Europeans all we do is to play the blame game, throwing the blame not to politicians, bureaucrats and bankers, who are not tightening their belts at all, but to the European working class, which we attempt to divide so cheaply across state and ethnic borders.

        No way! Europe has to be for the European people(s) and not for a bunch of gangsters! Let’s the regime change begin!

      3. Marshall Auerback

        You are prone to the same sort of nonsensical caricature as many of the people I highlighted in my piece. In the case of Ireland, the public sector was not particularly profligate. Martin Wolf has pointed that out very well in a recent Financial Times piece:

        As far as some of the other PIIGS go, let’s look at Greece, as one example of the so-called “pigs” that you castigate. Many argue that this crisis exposes the profligacy of the Greek government and its citizens, who are stubbornly fighting against cutting the social safety nets and refusing to live on what they can afford. Reading the press, one gets the impression that the Greeks must enjoy one of the highest standards of living in Europe while making the frugal Germans pick up the tab. In reality, the Greeks have one of the lowest per capita incomes in Europe (€21,100), much lower than the Eurozone 12 (€27,600) or the German level (€29,400). Further, the Greek social safety nets might seem very generous by US standards but are truly modest compared to the rest of the Europe. On average, for 1998-2007 Greece spent only €3530.47 per capita on social protection benefits–slightly less than Spain’s spending and about €700 more than Portugal’s, which has one of the lowest levels in all of the Eurozone. By contrast, Germany and France spent more than double the Greek level, while the original Eurozone 12 level averaged €6251.78. Even Ireland, which has one of the most neoliberal economies in the euro area, spent more on social protection than the supposedly profligate Greeks.

        One would think that if the Greek welfare system was as generous and inefficient as it is usually described, then administrative costs would be higher than that of more disciplined governments such as the German and French. But this is obviously not the case. Even spending on pensions, which is the main target of the neoliberals, is lower than in other European countries.

        Instead of resorting to caricature, you should look at the actual evidence.

        1. FoodforThought

          Don’t the Greek also have extremely lax tax policies too though? The French and German’s have very high marginal tax rates, which fund a lot of the social programs. Anecdotally, I have heard that Greek’s pay very little in taxes from Greek friends and have also heard similar claims on NC(several articles). Also, the German banks search for yield doesn’t necessarily mean they are complicit in the Irish bubble in the same way that American banks were complicit in the US real estate bubble. From what I gather, German banks did not write Irish legislation or lobby for Irish deregulation so claiming that they somehow rigged the game seems a bit on the aggressive side. I do agree that the public outcry against bailouts in Germany definitely reflects a certain naivety about the interrelated nature of the markets, but for a German citizen who has never experienced a domestic real estate bubble(40% down eliminates such things) it might be hard to understand how other countries find themselves embroiled in these situations.

          1. Skippy

            Germany et al exported the bubble…eh…arms length disclaimer, bought and payed for poli were chump change.

            Skippy…shoe shine boxes for everyone!

            PS. methinks Merkel is noble but alas surrounded by Wasserschloss filled with unter allen Umständen.

            PS. time is realization…um.

  5. Maju

    What I just said at the original site:

    You nail it, Marshall. I have been all this time quite shocked at the verbal and financial abuse, true bullying, of the EU core, very specially Germany (but cheered by the Anglosaxon media and others, who invented the demeaning acronym PIGS, then PIIGS, but never managed to get the letters GB or G/D of Germany in their fanfare) against the peripheral countries.

    The Manichean falsehoods thrown against the hardworking, underpaid and low welfare peoples of the European periphery, contrasted with a Nordic supremacist of supposedly hardworking Germans (sure, they probably are too) who enjoy salaries that easily triple the Greeks and welfare levels that Greeks do not even dream to have and that amount to practical subsidies to workforce costs, have been incredible! They still are.

    With such a defamation campaign more than just bordering outright racism, the EU core and specially Germany has been trying to hide its own faults and the imbalances generated by an Eurozone that has gone quickly from free market dream to neocolonialist nightmare, with Germany playing particularly the role of colonial power.

    Exposing the German and otherwise core-European implication, which permeates all levels (not in vain they are the center) is most important. And in this sense I welcome this most accurate and revealing article, as well as at least one other you published recently. Thanks, Marshall for clarifying what is happening behind the veil of what almost only amounts to racist propaganda of the worst kind.

    Germany should be acting as European leader, yet it is acting as mere, largely circumstantial, colonial power, and shamelessly proclaims so. This attitude more than anything else in all this mess can really get the EU to collapse, as Germany in particular and the rest of the EU core in general are not anymore perceived as friendly but as predatory and blatantly disrespectful and therefore growingly hostile by the peoples of the periphery.

    1. Jim Haygood

      ‘… never managed to get the letters GB or G/D of Germany in their fanfare) against the peripheral countries.’

      Can’t help you with the Germans, but as my buddy SagerXX joked today, ‘Throw Belgium and Austria into the mix, and you could have a real BAy of PIIGS situation.’

      Bwa ha ha ha!

      1. Maju

        Well, I think the concept is more like: we make them to be “PIGS” so we can eat them with baked potatoes. This is nothing but making the peoples pay for what they have not benefited for the most part. It’s about getting taxpayers to pay the banks directly for losses that are mostly their private affair.

        Sorry, nope.

        1. MyLessThanPrimeBeef

          That Gaelic writing came later.

          First, we must practice illuminating Latin manuscripts or the modern equivalent, which is to gild fiat paper currencies with gold.

  6. HarryKlein

    As Ireland has attracted (with their 12.5% tax rate) many headquarter od EU Multinationals a lot of money (~ 80$ Billion) of the german banks went to Ireland, but is used back in the EU. Still quite some money which fueled the Irish econonmy, but not as much as the IZB in Basel shows.

  7. Pierre

    There is an easy explanation why the German banks behave this way, and Auerback isn’t even close. German banks can’t make money in Germany! It is way overbanked, spreads on loans are at-cost, and German companies don’t have enough other business for German banks to make peer-equivalent RoE targets. So, they have to look elsewhere, picking up tons of garbage along the way.

    The fundamental problem is simple economics.

    And this isn’t limited to Germany. No big Irish, UK, French, Italian, or Spanish bank makes decent returns in their home markets. So they venture outside far away from their comfort zones. BoA is trying this too , now with a big push outside the U.S. and they are gonna get creamed.

    1. Sid

      This is also why German banks, Dutch pension funds and other dubious organizations dipped into structured products like U.S. subprime CMOs and other things they didn’t really understand.

      Like everyone else in a world awash in liquidity, they were chasing after yield.

  8. Pierre

    Auerback fails to address the root cause. German banks can’t make money in Germany! It’s over banked and loans are given out at razor thin spreads. German companies don’t have enough other business to compensate the banks. So they go elsewhere and pick up tons of garbage along the way.

    This isn’t limited to Germany. No big bank in Ireland, UK, Spain, Italy, France, make money in their home market. Not enough, at least, to compensate for risk. So they do stupid things. And they will continue to do stupid things until either investors price them as utilities, or their government does.

    And even BoA is trying to get out of the U.S. market. I don’t think that will end well.

    1. sneelock

      I tend to agree that German banks can’t make the big money domestically. Consider:
      1. Credit cards. Living in Germany I use my credit card as a debit card. The balance is debited from my girokonto/personal bank account at the end of each month. I have never been offered a minimum or had to pay a minimum, nor have I ever had an overdue balance (plus loanshark-level interest rates) since moving to Germany. Ing-Diba recently jetisoned its credit card service. They can’t make the big money, I presume. Banks get a Euro 30 annual fee and god knows what tiny percentage if any of sales. There used to be free credit cards but those are less and less common. I suppose credit cards are technically not banking but their role in Germany says something about the industry.
      2. Checking. It doesn’t exist in Germany. I am convinced that the absurdly inefficient system of checking still exists in the US because fees for bounced checks are a major source of bank income. Is there any other reason for it? Risk-management? Privacy issues? Hard to imagine.

  9. Hunman

    With his comparison of the Eurozone to Yugoslavia, Auerback manages to hit a new low in anglosaxons’ desperate campaign against the euro.

    Americans, including of course the British, continue to embarrass themselves with these strange concoctions of malice and ignorance. Their sickening schadenfreude has proven quite impervious to arguments, but let me try anyway:

    First of all, no serious person in Germany contemplates a breakup of the Eurozone. Consumer confidence is up, as is the IFO, and growth may reach 4% this year. Germany is booming, not least because of a euro weakened by excessive sovereign debt in some member states.

    Lower exchange rates also benefit the latter countries, even if they cannot revert to the nasty habit of competitive devaluations that many anglosaxon commentators continue to view as the panacee for debt problems.

    Without the euro, any German currency would have soared to uncompetitive heights. Yet despite the weaker euro, Germany et al continue to borrow at historically low rates. In this context, some transfer of credit from stronger to weaker countries seems appropriate. And many Europeans, including Germans, realize that.

    In the context of the Fed’s attempts to monetize American debt and devalue the dollar, a lower euro as well as possible monetization by the ECB may ruin the old American game of forcing appreciation of surplus client states’ currencies after periods of blatant abuse of its exorbitant privilege.

    Unless, of course, the eurozone splits. Even if it won’t be in the orgy of violence and ethnic cleansing of Auerback’s perverted fantasies, that will most likely ensure the US another round of free lunches at the expense of its trade partners – until the next bubble bursts.

    1. Maju

      The euro is anything but weak: it is at 1.40 USD, what is quite a bit above where both currencies were when the euro was launched in 1999.

      In 1999 they begun at near parity: 0.95 euros = 1 dollar, and after an initial fall of the euro in 2000-02, it begun raising its value (0.8 euros = 1 dollar in 2004) and is now even higher: 0.7 euros per dollar. It has increased its value by almost 40% in comparison to the USD, which is the most generally accepted reference.

      So IMO the euro needs a rather sharp “competitive” devaluation, not as solution for everything but certainly because it is much overvalued. If it’s not devalued in a controlled manner it must crash anyhow alone, exploding through other avenues, as is actually happening now.

      Even if devaluation is not any panacea, the lack of such mechanism or the lack of its actual implementation only causes us to become the market for others. That is nice as long as you can afford it, but we just cannot anymore.

      We have to devalue the euro to 1999 levels, to fine tune our currency according to our needs, and not to let that critical tool of our economy to be hijacked by the wrong interests.

    2. Delarge

      You are talking absolute nonsense. How the hell the weak euro help the non-producing members of the euro zone? No, exporting your way out of the mess with the weak currency is just a fantasy for them. That works only when you have a total control over your currency, and there is an external situation to allow for that. With Germany being the gigantic lid to suppress them on the exporting front, there is no way you could have it that easy. You can’t have EVERYONE export their way to recovery. That’s not how trade works. Simple arithmetic.

      The weak euro would rather be a drag for most of them. What you are saying is a much bigger fantasy than the hypothesis in Marshal’s article.

      1. Maju

        Yah, but every exporter needs an importer and every producer needs a buyer. That’s how economy works. Even Ford understood that workers had to be paid properly if he wanted to sell more cars (or in general the bourgeois sell their merchandises whatsoever). And of course Marx understood even earlier that Capitalism has a strong tendency towards an overproduction crisis like this one.

        If you are asking me anyhow for a global solution within capitalism, I do not have one (just to try outside of the Capitalism paradigm for a change). But a local solution within capitalism in this situation, not just for the peripheral European countries but even the core ones for whatever they may plan for the near future: a too strong euro is not in the interest of Europe overall, and I dare say that it is not in the interest of Germany either anymore. It is not helping the European economy in any way. We have been spending too much in foreign merchandises and exporting little and it’s our fault as EU politico-economical alliance and it is in part because the euro is too strong by comparison to the dollar and the yuan (and maybe others).

        The business is not working well this way, that’s pretty clear. And we the people do not feel like being the only ones paying, specially as we are all more or less broke already.

        1. Mickey Marzick in Akron, Ohio

          Enjoyed reading your comments up to this point. Just one question:

          “And of course Marx understood even earlier that Capitalism has a strong tendency towards an overproduction crisis like this one.”

          But is this crisis of overproduction temporary or increasingly a permanent, structural feature of ALL “developed” political economies? It is no longer a question of supply but maintaining sufficient demand via the credit spigot.

          German banks lend/invest to stimulate demand in the periphery for German goods thereby “subsidizing” the “exportieren oder sterben” economic mentality that that makes the social market system possible. This German “colonialism” is not that much different than the “internal colonialism” practiced in the US. Either way it is predicated on the expansion credit to stimulate demand. Without contunued expansion of credit the crisis of overproduction becomes permanent. But the latter is the underlying cause.

          1. Maju

            I don’t know for sure (I can just dream of being so smart and/or having psychic powers of forecasting). However I am inclined to think it is a final systemic crisis because Capitalism has exhausted already all the three stages that Marx forecast (but Marx, even if a genius, was no “prophet” with the ability to foresee the future neatly anyhow).

            If we are to follow Negri and others, who argue that the third stage “real subsumption of Work into Capital” (posthumous manuscripts) began around 1968 and is equivalent to Toyotism (and I’d dare say Thatcherism/Reaganism to some extent too), then we have been for some many decades already in this phase.

            I am indeed of the opinion that the best comparison of this crisis is that of the Ancien Regime in the late 18th century, rather than just the one of the 1930s (which anyhow does offer some points for comparison too). What I do not know is how long it will take for it to explode in revolutionary pathways that reshape our history (and maybe even save humankind from self-induced extinction). Like the Ancien Regime crisis, it may well be a long agony, scattered with revolutionary spurts, reactionary countering, etc. before the change gets consolidated. What I do know is that now information travels a lot faster and widely and that changes in general tend to be faster therefore.

            Your comment, Mickey, I understand that describes well how I perceive it too: in the current paradigm, without credit bubble there is no growth because demand simply collapses but I understand that the leaders in general already acknowledge that the bubble has offered all it could and is burst, and all that can be done now is to contain the burst (implosion), to salvage whatever is still of any use and to get the oligarchy entrenched in their positions of power, ready to resist a long and hopeless siege by the hard facts of reality.

            I don’t know if they have planned any exit strategy (which I doubt can work) but I do not see it anywhere, nor does the general public.

            I remember reading some years ago (Dieterich, with Chomsky) that when the US think tanks pondered their economic needs in WWII they realized they needed to keep a little ahead of Nazi Germany in economic sphere (and that’s why they needed China and that’s why collision with Japan was unavoidable) and that they pondered that the USA (big and diverse as it is) could resist without a colonial area but that would mean a total change in their values, what I understood as adopting socialism. Similarly now EU cannot anymore live luxuriously nor expect to retain the advantages of long-gone colonial empires: it has to face the need of some kind of socialism, hopefully with emphasis in democracy and human rights but not on private accumulation of wealth anymore. This last has become a true cancer.

      2. Diego Méndez

        Non-producing economies of the eurozone? WTF?

        I’ll tell you how a weak euro would benefit Spain: through more Spanish exports outside the eurozone, and through more Spanish exports into the eurozone core.

        Why so? Weaker euro -> higher inflation in Germany -> higher salary inflation in Germany (not so in the deflating periphery, where salaries are correcting downwards) -> more relative competitiveness in Europe’s periphery.

        I can’t understand what a non-producing economy is, but it’s very easy to understand how a weaker euro would increase e.g. Spain’s car production for export into the eurozone, which amounts to approx. 2m cars and trucks yearly. That already accounts for over a third of Spanish exports and would have a positive drag effect on the overall economy.

    3. Diego Méndez

      “First of all, no serious person in Germany contemplates a breakup of the Eurozone.”

      Maybe some serious person in Germany should stop navel-gazing and look at the extreme situation Europe’s periphery is living.

      I can certainly imagine a scenario where Germany keeps on behaving irresponsibly because of the IFO, etc. and workers at Europe’s periphery decide to show the middle finger. First a couple of small countries, then a medium-sized country, and when Germany starts to react, the Eurozone has been reduced to Germany plus a couple of small neighbours.

    4. Yves Smith Post author

      Sorry, I know about a half dozen very serious people in Germany who are not only thinking about a breakup of the eurozone, they favor it. They see it as inevitable, and figure better to get on with it than drag things out.

      1. Sid

        I was also wondering whether the Very Serious Germans I work with were maybe not so serious all of a sudden.

      2. Sid

        I was also wondering whether the Very Serious Germans I work with were maybe not so serious all of a sudden.

        Or, to put it more accurately, wheter some were less serious than I had suspected.

      3. Hunman

        Sorry Yves, but considering that you allow ridiculous hacks like Auerback to publish their drivel on your blog, I have to question your judgement as to the ‘seriousness’ of anyone.

        It would help if any of you eurobashing fearmongerers could read German. But you can’t, so you believe anything the uninformed europhobes in anglophones publications tell you.

        One more word on the economic consequences of austerity measures in southern Europe: austerity in countries with a bloated public sector and high benefits is not the same as austerity in post-Tatcherite/Reaganite social wastelands of the US and UK.

        Sensible austerity in southern Europe is more likely to decrease public sector inefficiencies, promote private sector initiative and reduce corruption and waste, and thus may well lead to higher productivity and competitiveness in the medium term.

        1. tim73

          The Euro bashing from Brits and Americans is rather tiresome because it is rarely based on facts, so many half-truths and hyperboles.

          Spain is supposedly be some kind of supersized PIG while their public debt from GDP is lower than in the UK. They actually managed to pay down the debts during boom times. Brits and Americans never did, just kept adding to the debt pile like there is no tomorrow.

          About 12 months from now UK is starting to be in the middle of crisis, could be even worse than in Ireland. Devaluation might actually make things worse because it could result in bank runs from the City.

  10. Thomas Barton, JD

    This excellent essay and today’s essay at the Telegraph by AEP on Germany’s awful choice make watching this monumental train wreck much more clearly understood and much more heart-rending. These are two excellent minds at work in the battlefields and carnage of the modern marriage between the nation state and the houses of high finance.

  11. Paul Tioxon

    The integration of Europe as a whole Civilization with commonly understood cultural, political and economic expectations, a Federation, as opposed to just a EuroZone, a integration by a common currency, is clearly a goal further down the road. Part of the process of becoming a Civilization, will be coming to grips with nations that are not as rich in resources, not as wealthy in talent and fewer in number, and poorer than others, but still loved and accepted as part of the whole. Europe is not quite there yet, at least not as much as the United States. Certainly California or the people of well integrated areas, such as NY, NY and PA, possess in these four states over 25% of Americans and an equally outsized percentage of the GDP. 3 of the 10 wealthiest urban areas in the world are in this grouping as well. But we more than tolerate the rantings of US Senators from RI or Nebraska or Alaska, as well as whole sections of the country that make up a dozen or more states but less than 10 million Americans. Germany, France and Italy will just have to suck it up as a great people to lead Europe into a more integrated polity than they currently have. This crisis is the crucible that will produce a stronger union, along with more and different crisis to come. What ever the financial solutions, the fate of hanging separately in the face a future with India and China confronting them, will be worse.

    1. purple

      This is a misunderstanding of the U.S. economy.

      For instance, few of the leading figures of Silicon Valley (as an example of a high productive area) were born in California. They represent the best and brightest from the entire U.S.

      Silly Valley is a reservoir, but cut it off from the U.S. and it is nothing special – just hot and treeless.

      This is the main problem with ‘surplus’ and ‘deficit’ state arguments.

      1. FoodforThought

        Any specific mid western Silicon Valley folks you can think of would be appreciated?
        Here are three that jumped to my mind:
        Bill Gates(might not count)- Washington
        Steve Jobs- San Francisco
        Larry Ellison – NYC

  12. Swedish Lex

    A good post, unfortunately :)

    Unless prevented, the falling dominos will hurt the German banks where it hurts most; at the core capital. The final stage of this story may be the level of pain that German banks can take before they have to throw in the towel themselves and ask for state support and what kind of “solution” Berlin and the other Member States will be able to come up with then. The “solutions” thus far have largely contributed in putting us in the situation that we currently are in.

  13. Brick

    The German banks were guilty of being greedy but they probably were not at the core of Irelands problems. Irish banks faced competition from external banks, notably GMAC and GEMoney from the US and because they did not fund themselves with cheap money in the same way as their US counterparts they essentially copied the US banking model and funding. They used the US Shadow banking system to get wholesale capital with all its mismanagement of risk and then sold on the risky assets to the likes of German banks. It is the same story with Icelandic and UK banks and the core of the problem was the US banks exporting a ponzi like business model. The finger of blame points at the Irish banking regulator, Irish banks naivety, certainly German banks, but most assuredly US shadow banking which has managed to escape responsibility and the costs of their actions. You could make an Argument that Ireland should send the bail out bill to the US.

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