Marshall Auerback: To Save the Euro, Germany Has to Quit the Eurozone

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By Marshall Auerback, a portfolio strategist, hedge fund manager, and Roosevelt Institute fellow

When the euro was launched, leading German politicians used to argue, with evident relish (and much to the chagrin of the British in particular), that monetary union would eventually require political union. The Greek crisis was precisely the sort of event that was expected to force the pace. But, faced with a defining crisis, Ms Merkel’s government is avoiding airy talk of political union – preferring instead to force harsh economic medicine down the throats of the reluctant Greeks, Irish, Portuguese and Spanish electorates. This is becoming both economically and politically unsustainable. If the objective is to save the currency union, perhaps policy makers are looking at this the wrong way around. In the end, paradoxically, to save the European Monetary Union, the least disruptive way forward would be for the Germans, not the periphery countries, to leave.

One major reason why political, and social, unification is so important is that it provides conditions under which the adjustment mechanism, to being uncompetitive, is facilitated. Labour mobility is much greater within, than between, countries. Cross-regional fiscal transfers help to smooth the adjustment process. Social and national unity makes break-away policies almost unthinkable and hence provides the cement to keep the discipline of adjustment in place.

None of the above are, as yet, strongly anchored in the euro-zone. Nor are they likely to be in the current context in which any moves toward a broader supranational fiscal structure continue to be resisted by the Germans, who perceive this as a backdoor mechanism for yet more bailouts of their “profligate” Mediterranean European “partners”.

And yet some sort of broader fiscal expansion is becoming increasingly necessary if the euro project is to be sustained. From a standard Keynesian perspective, shrinking a fiscal deficit is virtually synonymous with shrinking economic growth. Keynesians emphasize the prevalence of multiplier effects. Cuts in government spending and hikes in taxes are expected to reduce incomes and spending in the private economy. If the fiscal consolidation is ambitious enough, it can deliver an outright recession.

At the time the euro was launched, there was much hopeful talk that a surge in trade and investment between the euro zone nations would create a truly unified European economy, in which national levels of productivity and consumption would converge on each other. It was also assumed – or perhaps just hoped – that the euro would create political convergence. Once Europeans were using the same notes and coins, they would feel how much they had in common, develop shared loyalties and deepen their political union.

The designers of the single currency were hoping for a third form of convergence, between elite and popular opinion. They knew that in certain crucial countries, in particular Germany, the public did not share the political elite’s enthusiasm for the creation of the euro. But they hoped that, in time, ordinary people would embrace the new single European currency. This has clearly not been reflected by the reality. Crudely speaking, the markets today are calculating that governments lack the shared political commitment to underwrite the stability of the single currency.

The main disadvantage of adopting a currency union in the absence of a fully fledged political union is that it limits the ability of the constituent regions (countries) to adjust to an (asymmetric) shock by using domestic fiscal policy to mitigate the deflationary impact of this shock, as well as eliminating the ability to deploy exchange rate adjustments to do so. The European Monetary Union doesn’t work and without a federal fiscal redistribution mechanism it will never be able to deliver prosperity. Every time an asymmetric demand shock hits the Eurozone, the weaker nations will fail. Trying to impose fiscal rules and austerity onto the EMU monetary system just makes matters worse.

The fiscal austerity that accompanied the period of transition into the EMU as governments struggled to reach the entry criteria established under the SGP manifest now as persistently high unemployment and rising underemployment; vaporising social safety nets; decaying public infrastructure and rising political extremism.

Some 10 years after the introduction of the EMU, these problems are increasing rather than decreasing, as the proponents of the system claimed. Already, Greece has disappointed and requires more EU financing than the $150 billion that seemed more than enough a year ago. Despite the very great weakness in the Irish economy, its fiscal deficit still remains at 15% of GDP. The Portuguese finance minister has conceded that the Portuguese economy will contract 2% this year and 2% next year, and these forecasts tend to be optimistic. Portugal’s real GDP was still growing at a 1% pace versus a year ago, but the sequential contraction in the final quarter of 2010 also places that growth path in question (and in fact Portugal’s policy makers have shifted to a forecast of a 2% real GDP recession in 2011 and 2012). No surprise, then, that Portugal is joining Greece and Ireland in seeking loan assistance from the EFSF. Italy’s real GDP growth was the strongest versus a year ago at 1.5%, but the pace of growth was slipping by year end, and Moody’s has recently threatened the country with a debt downgrade.

And then there is Spain: As Rob Parenteau has noted recently (“Spain under Strain”), Spain’s recovery through the end of 2010 was primarily a consumer led advance, yet the fundamentals for consumer spending were hardly favorable. The tumble in retail sales growth that began late last year appears to have accelerated to the downside through March of this year. Higher taxes, plus the onset of the global consumption tax, have put the squeeze on consumer spending. The GCT also makes it more difficult for Spain to improve its current account balance. Investors and policy makers are fixated on reducing the fiscal deficit without considering what that requires for the financial balances of other sectors. The fact of the matter is that Spain has tended to run a chronic current account deficit, not a chronic fiscal deficit. The fiscal deficit is to a great extent just an artifact of the sharp reversal in private sector deficit spending that arrived once Spain’s housing boom went bust and the GFC hit. Private sector debt/income ratios are multiples of the government’s, yet all eyes are on containing the public debt/income ratio. Some earnest efforts at restructuring are underway, and early results may be showing up favorably in capital goods production, but unless more heroic efforts are taken to improve the rate of reinvestment of corporate profits in Spain’s economy, growth shortfalls may indeed lead to a destabilizing cycle at a time when the unemployment rate already tops 21%.. This in turn could knock the euro off its perch as expansionary fiscal consolidations become elusive across the eurozone periphery. Investors do not appear to fully appreciate the challenge Spain faces in maintaining an expansionary fiscal consolidation.

With three of the five peripheral nations contracting in the final quarter of 2010, and a fourth decelerating markedly, the elusiveness of an expansionary fiscal consolidation in the eurozone periphery is becoming all too evident. That is entirely consistent with the view that the cards may be stacked against an outcome which allows the periphery countries to grow their way out of trouble.

Of course, this wasn’t an issue prior to the creation of the EMU, during which each of the member states were sovereign in their own currencies and had their own central banks. That means they were not revenue-constrained and could conduct fiscal policy and monetary policy in a co-ordinated way to best serve the socio-economic interests of their citizens.

The German political class in particular seems incapable of recognizing this basic fact, as they continue to view this as a problem defined in terms of lax government fiscal discipline. Chancellor Angela Merkel’s interpretation of the woes of the Eurozone, for example, focus on what she claims are the problems of “excessive public debt”:

We now have a clear crisis of indebtedness. But let me tell you, there is no crisis of the euro as such. This is a debt crisis. Let me say this very clearly again. The euro is our currency. And it is much more than just a currency. It is the embodiment of Europe today. Should the euro fail, Europe will fail. We are going to defend the euro …

Which is tantamount to ignoring the real issue: There is no public debt crisis without the Euro. Japan has a public debt to GDP ratio at a level some 2.5 times bigger than the euro zone, yet there is no solvency crisis in Japan. The only reason the euro has hitherto survived to this point is because the ECB has stepped in as the “missing” fiscal agent and keeping the bond markets at bay. As the ECB’s bond purchases have wound down, however, the crisis has intensified, because the ECB remains the only entity in the EMU which has currency sovereignty and can “fiscally fund” member state deficits permanently. Given the central bank’s political resistance to continuing these purchases (largely supported by the Germans) the underlying logic of the monetary system will continue to ensure these on-going crises will spread across the union.

This in turn has led to discussions that the weaker constituents of the euro zone – notably, Greece and Ireland – undertake debt restructuring. Christian Noyer of the ECB recently set out the rationale as to why the central bank opposes such restructuring:

If we restructure Greek debt, that means Greece defaults.

And what are the consequences of a default? The banks with the most Greek bonds are Greek banks. The Greek banks themselves will be badly damaged. When the banking system is stricken, what do you have to do to prevent the financing of the economy from collapsing? You have to recapitalize the banks. Who will recapitalize the Greek banking system? The Greek state.

That means the Greek state will gain nothing. It will invest in the banking sector everything that it has gained in the restructuring.

Next there are the Greek insurers and pension funds who will be hurt. That means it will weigh on the Greek population’s savings, which could cause a drop in consumer spending and Greek growth will take a hit. This counters the Greek recovery.

Then, what else is there in terms of Greek creditors? There’s the European public sector, European governments and the central banks. This is directly tapping the European taxpayer.

If we make European states pay, the mechanism of European financing will stop immediately. The states will not continue putting their taxpayers’ money on the line when their loans have just been cleaned out, when they’re taking losses on the money they’re lending. So that’s the end of support from other European states.

And for the central banks, what happens? Greek debt will become debt that is no longer worth anything. It’s no longer debt that can be considered as sufficiently safe for operations in the Euro System. That means by definition that to restructure is to become ineligible as collateral. If it’s ineligible, then it means a large part of what the Greek banks bring as collateral for refinancing can no longer be used. That means the Greek banking system can no longer be financed.

The next day what happens? Greece needs to find investors because the Greek state won’t move from deficit to surplus overnight. As long as it doesn’t have a primary surplus, the Greek state needs to borrow. International investors, that small group that remains, have just been restructured. It’s not the next day they’ll come back with financing.

The Euro System won’t refinance. The European states won’t finance. The IMF won’t go there alone. No one will finance the Greek state in coming years. That means the meltdown of the Greek economy. This is a horror story. That’s why we’re against a restructuring.

Perhaps we’re looking at this the wrong way around: Given the continued German aversion to more broadly-based pan European style fiscal programs, which its populace continues to see as nothing but bailouts for lazy Mediterranean free-loaders, there is another way to solve the euro crisis.

Let Germany leave the euro zone.

Let’s leave aside the politics for a moment as there are many who believe that a German exit from the euro zone in effect means the end of the euro because a number of other countries would leave.

So consider this exercise solely from an economic context: The likely result of a German exit would be a huge surge in the value of the newly reconstituted DM. In effect, then, everybody devalues against the economic powerhouse which is Germany and the onus for fiscal reflation is now placed on the most recalcitrant member of the European Union. Germany will likely have to bail out its banks, but this is more politically palatable than, say, bailing out the Greek banks (at least from the perspective of the German populace).

To be sure, this will not come without some cost to Germany: Germany will probably save its banking system at the expense of destroying its export base. The newly reconfigured DM will soar against the euro and become the ultimate safe haven currency. This will mitigate the write-down impact of the inevitable haircuts on euro-denominated debt, because the euro (assuming it is retained by the remaining euro zone countries) will fall dramatically. Even if the euro itself vaporizes, the Germans simply will pay back debt in the old currencies, likely fractions of their previous value. And the German populace would likely find it far more palatable to be bailing out its own banks (as it did during the reunification period), as opposed to spending German taxpayer funds to recapitalize the banking systems of a bunch of Mediterranean “profligates”.

By the same token, a fall in Germany’s external surplus means a large increase in the budget deficit (unless the private sector begins to expand rapidly, which is doubtful under the scenario described above), so Germany will find itself experiencing much larger budget deficits. In the current German situation, although the country runs a large current account surplus, it is insufficient to offset a high private sector predisposition to save (which means there is some deficit). But the current account surplus does allow for a smaller budget deficit than its so-called “profligate” Mediterranean neighbors, whilst still facilitating the private domestic sector’s desire to net save. As we have argued before, it is the “profligacy” of Germany’s Mediterranean trading partners, which has allowed it to rack up huge current account surpluses, and therefore run smaller budget deficits than the likes of the so-called PIIGS countries.

Once divorce from the euro is complete, Germany will regain its fiscal freedom. This is itself something the Germans should celebrate, providing their government takes advantage of their newfound fiscal freedom. Remember, once it returns to the Deutsche Mark (DM), Germany becomes the issuer, as opposed to the user of a currency, as is the case under the euro, and is fully sovereign in respect of its fiscal and monetary policy. Consequently, the German government can offset the external shock by running large government budget deficits, which will add new net financial assets to the system (adding to non government savings) available to the private sector. Germany might well decide not to adopt this course of action, given its historic resistance to aggressive fiscal policy, but it will no longer be bound by any of the institutional constraints inherent in the European Monetary Union.

In the meantime, the rest of the euro zone gets a huge boost to competitiveness via a (likely) substantial fall in the euro against the newly reconstituted DM. Also, the resultant potential instability means that the ECB would likely have to stand ready to backstop all of the bonds to prevent this from becoming a fully-fledged crisis, but it would encounter less political resistance to doing so, given the absence of a restraining German voice in the European Monetary Union.

It seems like an odd way to consider the problem, but the paradox of the current situation suggests that an exit from the euro zone of its strongest member, rather than its weakest links, might well be the optimal means of saving the euro, in the absence of a fully fledged return to separate national currencies.

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  1. IF

    Hehe. Hehe. Chuckle. Snicker. Hehe. Is it open season in the political carnival again? Or just rewarming an old thought-experiment. But really, what is Germany’s motivation to do so? Taking one for the team?! The only realistic way of Germany leaving the Euro (without anybody else exiting violently) is IMHO via a right winged coup because people get fed up with inflation and transfers. Not visible yet.

  2. leroguetradeur

    Its an odd sort of argument and one has a number of issues with it.

    It is doubtful that the reason for lower labor mobility in the EU than in single nation states has anything to do with political structure. Its a language and culture issue, people simply cannot move and find work easily because they lack the linguistic skills and its a huge cultural issue.

    The argument seems to be that before the Euro the ‘profligate’ countries really did ‘conduct fiscal policy and monetary policy in a co-ordinated way to best serve the socio-economic interests of their citizens’. Of course, they did not. The best way to serve those interests would have been fiscal responsibility, along the German lines. But they resolutely declined to do it both before and after the Euro. This was basically a sell-out to those groups in those countries who benefited from continual inflation, deficit, default, devaluation, at the expense of the population as a whole.

    We perhaps get a clue to the underlying thinking when we read ‘From a standard Keynesian perspective, shrinking a fiscal deficit is virtually synonymous with shrinking economic growth’. Possibly so, though its not clear that the standard perspective says that about all shrinkings under all circumstances. But that is part of what is wrong with the standard perspective. It tends to promote unsustainable fiscal policies. The deficits are going to shrink, because no-one will finance them indefinitely, and they will in the end produce crisis.

    The Japanese example is then introduced to show basically that ‘deficits don’t matter’. Wrong. Japan has been able to get away with it for a very long time. Greece, Italy, Spain cannot, whether inside or outside the euro. Because no-one will lend them enough to allow their deficits to continue and to continue rising.

    I agree that default is the only realistic solution for Greece, Ireland and probably for other euro countries as well. It is silly to keep pretending its not going to happen. However, where the post is wrong is thinking that the policies which led there would be sustainable or in the best interests of the citizens as a whole whether inside or outside the zone. They are hare-brained, stupid, and not in the interests of any but a minority, in either situation.

    There really is one correct way to run fiscal and monetary policy, it does not depend on how far south the country is, and it is the German model. Its called living within ones means.

    1. DownSouth

      Well that certainly is a simplistic and one-sided way of looking at things. For if everyone “lived within their means,” then where would the banksters find debt slaves?

      For neoliberals, all human existence boils down to a morality play, a morality play in which the banksters get to play God. And the bankster God, far from being a God of benevolence and forgiviveness, is a God of judgment and wrath. God must punish sinners. Sinners must be made to feel the pain. Debt is the only eternal value.

      Little intelligence is required to discover the true purpose of this orgy of self-righteous piousness. The entire moral order is used to justify exploitation. Perhaps no one ever put it better than Hernán Cortés’ devoted companion, the historian Bernal Díaz del Castillo: “We came here to serve God and the king, and also to get rich.” Spanish imperialism had it’s moral justification, and so does German neo-imperialism.

      This sort of highly judgmental and unforgiving moral regime has nothing to do with “we.” Quite the contrary, it has to do with “us” vs. “the other.” The idea of a “European union” is thus exposed for what it is—-a rationalization. It is pursued only insofar as it behooves the national interests of Germany and France.

      1. illusionist


        Of course – he who pays the piper picks the tune. That is reality. Did not see Greece et al complain when after unification they were able to raise credit cheaper then before. That low spread was on expectation of better prospect that union provided – they blew it the opportunity so what is the beef? (or is it beacon??).

      2. illusionist


        Furthermore since you bring up ol Hernán Cortés’ think of the current situation in Spain as Montezuma’s revenge.

        Loot and plunder seems to be the way in Club Med (like lets us stiff the lenders on the Greek Govt debt etc..and the crescendo of cheers from the assorted commies here)- I mean all colonialists exploited but the Anglo-saxsons also built things in enlightened self interest.

        BTW- Think the German work ethic may have something to do with the current disparity or is that out the realm of possibility for Club Med to emulate ??

    2. financial matters

      I think it does essentially boil down to people and countries need to live within their means eventually. But this can mean huge debt defaults to get there. if Greece defaults it will hit Germany and France very hard and will hit Greece very hard. But kicking the can down the road is just living on borrowed time. If people are making high interest off of risky loans they may have to eventually realize that risk.

  3. Maju

    Mr.Auerback: what does Germany gain from keeping the DM (or the euro now) so high (compared with USD and Renminbi specially)? This is something I never understood: controlling inflation is understandable but keeping your currency so high in comparison to others is economic suicide because you can’t compete in international markets in equal terms: you’re bound to import much and export little.

    Germany’s economy is therefore saved (temporarily) only because its belonging to the Eurozone. It is the Greeks and the Spaniards who, largely, are buying the volkswagens and other German products and keeping Germany economically afloat.

    If Germany gets out of the euro and the euro is devalued (as it should have been long ago) then Germany would lose most of its markets and eventually collapse. If Spain and Greece and Italy and who knows who else leave the euro it’d be even worse (for these countries and for social stability through Europe as a whole) but the basic effect for Germany is the same: loss of markets.

    So the only intelligent option is to retain the Eurozone as it is but devalue the euro (carefully but steadily). Germans and other Europeans alike can only win from such a tactic.

    There’s no great difference of objective interests between Germany and the other European countries: what they all need is a reasonably weaker euro, so they can export more and import less in the global markets, while keeping their exchanges unaltered.

    But, if Germany would leave the euro and this would initially fall sharply, I’d recommend buying euros because Germany can only lose with a stronger currency and the remaining Eurozone can only win with a weaker one, so there should be some of a bounce soon after.

    1. Diego Méndez


      the objective interests of Germany and the European periphery are different, indeed. A high-tech export base, such as the German one, needs a high savings rate (to finance capital investment), which can only be possible if long-run inflation is low.

      A strong currency is compensated by the fact that high-tech exports are partly shielded from price competition.

      Spain, on the other hand, has a medium-tech export base. Capital investment is not so important, while a strong/weak currency does have a big impact on exports.

      Moreover, you can see different interests from a political point of view. Politically, most large Spanish-owned companies are low-tech and dependent on internal demand, while most large German-owned companies are higher-tech and dependent on exports. Whose companies need high inflation to finance consumption, and whose companies need low inflation for a capital-investment-prone environment?

      1. Maju

        I’m not really sure why a high savings rate is so important to finance capital investment. I think it is much more important to have credit (credit replaces savings nowadays and is dependent on image rather than proven substance) and to have strong public investment in education and research.

        Anyhow why in 10 years of “low inflation” (good joke!) euro Spain has not done anything of the like anyhow but has invested into a crazy real state bubble instead? True that this has been done by every other European economy and even the USA – Germany has managed to avert such a bubble thanks to their welfare state but is among the few.

        But anyhow, why with the same financial constraints “in the long run” (10 years) not all EU is like Germany, not even remotely so? I have some ideas: one that only a few can specialize in such strategic high yields economic niches, German or not German, another that the German real salaries are financed by the German state via welfare, allowing German companies to keep lower comparative costs, yet another that states like Spain do not really invest in high tech research because of international constraints (not the role assigned to Spain in the NWO) and internalized psychological reasons (related).

        But I think that the Basque Country, without being Germany, has a much higher tech/quality export base than Spain proper, yet we’d also appreciate a lower euro. It’s not a matter of inflation or not inflation but a matter of competitiveness. We can’t afford to let the dollar (and the yuan, which is pegged to the dollar) plummet without taking some reaction: we need to flexibly peg the euro to the dollar somewhat as well. Otherwise we are destroying ourselves for the benefit of the USA and China.

        1. illusionist

          You really think competing only on price (lower exchange rate) rather than quality (things that make your products/exports desirable even if not cheap) is the way to go? Will that not guarantee you always get the short end of the stick?

          Seems to me the Germans took the road less traveled and are the shining example to a world searching for durable prosperity. As the rest of the world cheapens their currencies the Germans will gain in relative purchasing power.

          1. illusionist

            Deep South –

            Low increase in wages offset by zero inflation leaves you better off that an illusion of prosperity by wage increases offset by rampant deterioration in debasement of money.

          2. DownSouth


            Can you really be that ignorant?

            What do you think the term “net real wages” means?

          3. illusionist


            The proof of the pudding of philosophies is in the result –
            Would you rather be a working stiff in Greece,any other PIIGS, the erstwhile iron curtain countries or Germany? I think the answer pretty much settles the question everything else is noise.

          4. DownSouth


            Is that the latest in neoliberal apologia?

            German workers didn’t get fucked over as badly as Greek workers, so there’s no need for them to remove their lips from the banksters’ asses?

            Truly pathetic, illusionist. Truly pathetic.

        2. Diego Méndez

          “I’m not really sure why a high savings rate is so important to finance capital investment.”

          Well, this is Econ 101. Nothing to discuss here. Spain entered the euro to have less inflation, which means lower interest rates and cheaper credit in the long run.

          If you think Spanish inflation has been high this last decade, I suggest you read Spanish inflation data in the 70s and 80s and compare them to Germany. (In the 90s, but for a brief devaluation, the peseta was pegged to the mark – so we already were in a kind of eurozone for all practical purposes).

  4. /L

    Margret Thatcher once said in a book:

    Europe is “a monument to the vanity of intellectuals, a programme whose inevitable destiny is failure: only the scale of the final damage is in doubt“,

    It becomes more and more evident day by day.

    The eurocrats dream of an common labor market, think it going to happen with a common currency. The British empire, the Soviets, Yugoslavia and so on did understand the importance of an common language. But such basic stuff is beyond the eurocrats. And what should the common language be, what would the French, German, Spain, UK accept?

    EU has almost everything a nation state have, a currency, central bank, anthem, flag, (pseudo) parliament, supreme court, a (phony) president and foreign minister. Almost everything a state require, the only thing lacking is a people. Must be the politicians wet dream. And on the flip side the peoples of Europe is in a situation where their state, government and democracy is vanishing.

    Not much I did agree with Maggie but in this she was dead-on.

    1. attempter

      And what should the common language be, what would the French, German, Spain, UK accept?

      The rootless global criminals already have their neoliberal Esperanto of neoclassical economics and pseudo-democracy. This post speaks that language too. Why is it desirable “to save the euro”? How is it possible to pretend not to know that all centralization and integration has done nothing but build kleptocracy?

      Only if, at one’s core, one agrees with the ECB:

      When the banking system is stricken, what do you have to do to prevent the financing of the economy from collapsing? You have to recapitalize the banks.

      That’s quite a begging of the question. Circular, too. It really means: The bank tyranny is the essence of what we recognize as “civilzation”, and no other value has any right to exist, let alone assert itself.

      That’s the atmosphere within which the psychopathy of matter-of-factly referring to human beings having to “look for work” (as a commenter above said) becomes the norm, and no one even thinks twice about the fundamental depravity of that. (Not to mention how even by system standards, we should all comprise a leisure class by now. That’s according to mid-century capitalist propaganda. Well? The wealth for that exists. Where’s the omelette? What happened to that “invisible hand”? All we see is the very visible hand of a kleptocratic command economy.)

      Almost everything a state require, the only thing lacking is a people. Must be the politicians wet dream. And on the flip side the peoples of Europe is in a situation where their state, government and democracy is vanishing.

      They’re carrying out a form of secession. They want to secede with all real assets (i.e. everything nature and/or the workers produced; the “elites” themselves have never produced anything, only destroyed) and maintain big government only as thug and bagman. They want to leave all public government functions, and democracy and civil society itself, dissolved behind them. The people are to be tyrannized by brainwashing, debt indenture, and force. At that point, it won’t matter what language they speak. The elites want them to continue as fragments of Babel under an over-arching domination.

      This post-civilizational barbarism is slated to be the end of humanity.

      1. jake chase

        Marshall says: “At the time the euro was launched, there was much hopeful talk that a surge in trade and investment between the euro zone nations would create a truly unified European economy, in which national levels of productivity and consumption would converge on each other.”

        Of course the talk was all bullshit. The real idea was a paradise for bankers and monopolists. No more protected markets, no more public services, no more labor unions, no more capital controls. In other words, no more political control of economic exploitation. It generally takes a while for bullshit to be exposed by reality. Twenty years seems about right. It took that long to fully expose Reagan bullshit too, except of course for those immediately affected by it while the rest were all living out speculative wet dreams in stocks and real estate.

          1. Maju

            Nominal inflation may be higher in the 80s but real (hidden) inflation has been much higher now. I used to eat a menu for 6 euros or less (I recall menus for 500 ptas: 3 euros!) and now I pay at least 9, that’s at least 50% increase in 10 years. And other items like housing have gone much more crazy: I could pay the rent of a large home for 60,000 pesetas in the middle 90s and now you pay at least double for a fraction of the size. That’s at least 100% inflation in 15 years (most of which happened under the euro).

            The very year the euro was adopted we experienced a 66% inflation in many real prices, as 100 pesetas became 1 euro for many practical purposes (nominally worth 1.66 ptas.)

            Most of this inflation has never been acknowledged but happened anyhow. Not to mention the cost of tobacco, drinks and such with all the euro-taxes and euro-rules-for-dumbs.

            And in the 90s the peseta was not “pegged to the mark”: they all were pegged to the ECU (a virtual proto-euro), but with flexibility. I recall that there was a major crisis in Britain and they left the EMS temporarily so they could devalue the pound. They returned later at a new (lower) exchange rate.

      2. Tipo de Cambio

        common language be, what would the

        Their common language is now Babble Only, Ian! Never Regret Thatcher. Was her observation of a Union as a prevention to Lively Competition well taken? Will Chinese competition soon pick up to a high fever when they decentralize into more independent provinces? Would you suspect this to be their next tactic? Does 台灣 contribute more to competition as separate political entity. Would it loose equity from a mainland leveraged buyout?

        U B Judge

        U B T

      3. JasonRines

        Not the end of humanity but the loss of 2B citizens to stop 400-500 total criminals, rebuild and evolve forward. Evolution cannot be stopped and despite mankind’s cleverness to delay a fraction of time the effect of doing so only means the snapback and reorganization is that much more painful. Soros got rich speculating on this snapback effect, also known as the Theory of Reflexivity.

    2. Maju

      I don’t know you but I feel more European than citizen of my state. Maybe it’s not shared by most Europeans but that’s how I feel and I strongly support European Union, though surely not this one European Union where bankers and other capitalists, as well, as failed “nation-states” (think Belgium, Spain, the UK, France, even Italy… all broken in a myriad fragmentary identities) decide for the citizens.

      I support a EU of the peoples, in which the peoples decide by means of vote and self-rule at all levels, and decide above bankers and capitalists and police chiefs and US imperial proconsuls.

      That is not built with currency and markets alone we need Swiss-like institutions.

    3. Parvaneh Ferhadi

      I agree. Normally, new states or nations are formed by the concerned people agreeing on some principles and they establish a social contract by agreeing on a constitution.

      In the EU this step has never happened. It is the elites who want to form the place after their image. It is not the people of Europe coming together to form a ‘more perfect’ union.
      The people of the EU are only good for two things, as workers and as consumers.

      The elite completely forget to establish the same democratic rights and legal protections people are used to get in their national states.

      So, the elite has with the EU created something completly idiotic, or they really have a sinister design to do away with democratic national states and the legal protections they offer to their people, and replace it with someting that doesn’t have all those ‘problems’, and which will be run by the elite.

    4. DownSouth

      Reliving the former glories of the Roman Empire has been the dream of European intellectuals and politicians for hundreds of years.

      During its heyday, being attached to the Roman Empire brought its member states economic rewards. For this reason not all expansion of the Roman Empire was by conquest. The European Union has not been able to duplicate this success, the reigning neoliberal paradigm of the European Union being one of egoistic exploitation rather than sacrifice for the good of the group so as to “lift all boats.”

      Western Civilization is not Classical Civilization. In Classical Civilization, human groups were viewed as organisms, and individuals as well as sub-groups were expected to self-sacrifice for the benefit of the whole. Western Civilization, up until the advent of liberal economics at least, staked out a middle ground between viewing groups as organisms and viewing them as mere collections or aggregates that have no established traditions and no purpose of their own, whose members are expected to be as competititve in their relations with one another as they would be towards any member of an outside group.

      Since Margret Thatcher was a commissar of radical, egoistic individualism, her comment should come as no surprise.

    5. Maju

      Do you really need to recapitalize the banks? If something I have learned from the teabaggers is that money is created from nothing and that banks need no capital (no reserves).

      If they really need to be recapitalized, then nationalize them so small account owners do not lose all.

    6. JasonRines

      You just nailed it L, the people themselves are the political union. What is lacking is accountability at the top. When the top is looting it creates a shrinking pie and moral hazard, the people themselves become corrupt. This is why the EU is toast. They should keep the Euro and kill the EU brand name and start over. The people themsepves WILL whether non-accountable Lords wish it or not. The U.S. will also fall by the end of this devade monetary and political reforms fail.

      While some at the top see this as opportunity to further consolidate power such are delusional. Revolution will be the result and the Lords will redirect the serfs into WW3 instead. 2B losses and unimaginable suffering will lead the people to create an international tribune of hearings and subsequent hangings afterward. The world has changed with databases and modern communications. History cannot be so easily rewritten, this time is truly different.

      Each Kingmaker and King in each respective nation will make there own calls on doing whats right or not but accountability and justice are delayed, never avoided.

  5. someone

    If Germany leaves the Euro, the Euro will be done, since also Austria, the Netherlands, Finland, Slovenia, Slovakia, Estonia will leave it as well. Even Luxemburg, Belgium and France would then considering it, because they will never be able to support the periphery on their own, so it will be gone.

    1. Jimbo

      That’s precisely what I was thinking as I read this piece. Also, I’m not sure that Ireland would want to share a currency with Spain.

  6. charles 2

    YES, YES, YES !!! Finally someone in the blogosphere sees the light !

    This being said, Germany doesn’t need to get out of the euro as medium of exchange. It just needs to get out of the euro as a store of value.
    This can be achieved in the following way :
    a) The inflation constraint when expressed in euro is relaxed from the treaty and replaced by an economical and political stability mandate
    b) A Keynesian such as Papademos is put at the helm to ensure that
    c) Individual National Central Bank (NCB) become in charge of an indexation mechanism, and are solely responsible to refinance debt denominated in euros indexed by their own indexation mechanism. The refinancing rate will be specific to each nationally indexed euro
    d) Debt in Euros would NOT be grandfathered into indexed euros, only new debt issued by the european sovereigns and work contracts would be automatically indexed. Germans will probably choose a strict no inflation mandate under the indexation mechanism (German Indexation Factor * EUR = DEM). Other countries may decide to be more flexible, or even to achieve devaluation using the indexation.
    e) Banks in the eurozone would be forbidden to trade any forward pair between two indexed eurozone assets under whatever form. Failure to comply will mean immediate exclusion from the TARGET settlement system. We don’t need Soroses…
    f) We keep euro banknotes and coins, which have significant symbolic and operational value.

    The euro. Our currency, your problem…

    1. illusionist

      “This being said, Germany doesn’t need to get out of the euro as medium of exchange. It just needs to get out of the euro as a store of value.”

      If this comes to pass-

      There is an old saying ‘sit with dogs and get up with flees.’ The Germans may well have reason to think ‘sit with Pigs…..’

  7. RebelEconomist

    I think this argument is based on a misunderstanding of the motivation for the euro. Germany’s self-styled rivals, above all France, wanted to appropriate its economic success, and realised that a hard currency was a key part of that. Of course they thought that, in practice, they could soften the euro and bring the Germans down to their level, but they have only had limited success in doing so. If Germany looked like leaving the euro, a raft of northern european countries would insist on going with it one way or the other, and the marginal countries of France and Spain would have to decide which way to jump. I am sure that France would decide to go with Germany. And I dare say that any other country with aspirations to being a serious economy, including Spain and Ireland, would make whatever sacrifice was necessary to hang on to Germany’s coattails too. Basically, the Germans are right, and even the euro dreamers, when they are honest with themselves, know it.

    1. Diego Méndez


      I am curious about what you think Spain should do. Should it carry on with over 20% unemployment and let structural reforms do the job slowly over the next few decades? Is austerity the only way? Shouldn’t Spain raise taxes to finance public spending?

      As I see it, the euro has brough about a huge real-estate bubble and massive unemployment, while directing all resources out of manufacturing and into unsustainble services (like finance) and construction. Manufacturing industry has not grown at anythink like a similar pace.

      So why should we Spaniards think the euro is positive for a serious economy? As I see it, Spain is basically having to decide between becoming East Germany (an industrial desert, massive unemployment but the few remaining industries are very productive) or becoming the Czech Republic (with a not-so-strong currency, lower salaries, but full employment). Don’t you agree?

      1. RebelEconomist

        I think Spain should make whatever sacrifices are necessary to stick with Germany. I am not an expert on the Spanish economy, but I imagine that a combination of market-liberalising reforms – eg of the labour market – and socialist measures like increasing wealth taxes to load more of the adjustment burden on those with the most capacity, would be appropriate. It seems to me that the challenge of the emerging economies is so great that some developed nations need a wartime-style response, with an ideology-free range of pragmatic policies. Unfortunately, it seems that, in western democracies, it is difficult for politicians to (1) explain to the public that the world has changed to their disadvantage, and (2) adopt an eclectic policy mix. Things may have to get worse before they get better. Slovakia might be a better example for Spain than the Czech republic.

        1. DownSouth

          RebelEconomist said: “I think Spain should make whatever sacrifices are necessary to stick with Germany.”

          Let me correct that for you:

          I think Spain should make whatever sacrifices are necessary to make the bankers unbelievably rich.

          1. RebelEconomist

            Not really. As I say, I am no expert on Spain, but my inclination would be to expedite liquidation of bad property loans, and thereby probably wipe out the shareholders of many banks.

            By the way, my attempts on the previous Auerback post to provide you with evidence that default and devaluation have not been good for Argentina were rejected by the blog software. But you would not have been surprised to find that I do not think that Argentina is a good example for Greece to follow. Actually, it occurs to me that, given your financial fantasies and your blog handle, you could be from Argentina yourself.

          2. DownSouth

            RebelEconomist said: “…given your financial fantasies…”

            My “financial fantasies”?

            How can someone who speaks of “market-liberalising reforms – eg of the labour market” as being “appropriate” speak of “financial fantasies”?

            And to top it off, how can anyone whose dogmas are as orthodox as yours call themselves “Rebel”?

        2. Philip Pilkington

          Auerback’s point is that Spain’s main problem — like all those in the European periphery — is a lack of aggregate demand. Instituting labour market ‘reforms’ would only produce more drag — and hence feed back into unemployment.

          I don’t even know why I’m pointing this out — this has been tried too many times before (we’re doing it in Ireland as we speak) and it’s almost always a failure. Ricardo was wrong — get over it.

          1. illusionist


            “Auerback’s point is that Spain’s main problem — like all those in the European periphery — is a lack of aggregate demand.”

            If that be so the reason that the missing “aggregate demand” was fast forwarded in earlier years by debt fueled consumption. This is paying the piper so to speak.

        3. Philip Pilkington

          “Things may have to get worse before they get better.”

          That’s the essence of your argument. And there’s all too many echoes of Herbert Hoover in those words.

          Things don’t have to get worse before they get better — that’s like some rationalisation an alcoholic or a drug addict would make. Things have to get better before they get better (duh?). Allowing the crisis to further spiral out of control is complete madness.

          We’ve heard this logic before — in Russia, in Argentina… we know where it leads. When things get worse, they get worse. Simple as that.

          1. RebelEconomist

            Yes, that is the essence of my argument. A more sophisticated way of putting it is that the economy has complex dynamics, so that its initial response to the suggested change is the opposite of its final response. It is common sense that an uncompetitive country must reduce the costs under its control, of which the largest is real wages. While it might be comforting for the developed countries to believe that this is some repeat of the Great Depression, to which the correct response is to indulge the desire to consume, it is not. The emerging economies (China) and the countries that sell things that they want to buy (Germany, Canada) are booming. Ironically, you have it exactly wrong, the drug addict wants more heroin, but cold turkey would do him more good.

          2. DownSouth

            RebelEconomist said: “The emerging economies (China) and the countries that sell things that they want to buy (Germany, Canada) are booming.”

            This is pure, unadulterated neoliberal propaganda.

            Do you think if you repeat the lie enough times, it will somehow, as if by magic, make it come true?

            Germany may be “booming” for the banksters, but it certainly is not “booming” for German workers, as this article from the German Institute for Economic Research makes amply clear:

            Net real wages in Germany have hardly risen since the beginning of the 1990s. Between 2004 and 2008 they even declined. This is a unique development in Germany-never before has a period of rather strong economic growth been accompanied by a decline in net real wages over a period of several years. The key reason for this decline is not higher taxes and social-insurance contributions, as many would hold, but rather extremely slow wage growth, both in absolute terms and from an international perspective. This finding is all the more striking in light of the fact that average employee education levels have risen, which would on its face lead one to expect higher wage levels. In contrast to the prevailing wage trend, income from self-employment and investment assets has risen sharply in recent years, such that compensation of employees makes up an ever shrinking percentage of national income. Inflation-adjusted compensation of employees as a share of national income reached a historic low of 61% in 2007 and 2008.

            I wonder if there exists one single incident where workers have benefited from the imposition of neoliberalism.

        4. Philip Pilkington

          Two more things:

          First. Wartime response? Maybe. In wartime governments tend to run large deficits — they don’t ‘undertake pragmatic policies’. That’s one of the most airy things I’ve ever heard.

          Second. Raising taxes on the rich is not ‘socialist’. Tighten up your language, mate. Socialism is a system in which the state controls the means of production. Raising taxes is just raising taxes. No matter on what income group you do it on. I suggest once more that you tighten up your language — and leave your Tea Party binaries at the door.

          1. RebelEconomist

            What I mean is some kind of national solidarity in the face of a massive challenge. I make the point about taxing the wealthy in anticipation of the charge that I am some free-market right wing ideologue just because I am in favour of liquidating bad assets and cutting real wages where necessary. I am not; bigger government might well be part of the response to the challenge. For example, in the UK, I would advocate increasing inheritance tax and spending the money on schools.

        5. Lloyd C. Bankster

          RebelEconomist: “Things may have to get worse before they get better”

          For the little people, yes!!


          Qu’ils mangent de la brioche

        6. Diego Méndez

          @RebelEconomist: I agree with you to some extent (sorry, DownSouth :( ).

          Spain should still try to keep inside the eurozone. Reforms and higher taxes (particularly, on the better-faring) are the way, as you pointed out. However, in case of another leg of the financial crisis, or a banking crisis in Spain itself, a return to the peseta should not be ruled out slightly, even if it wipes out savers.

          Just the threat of it would do wonders to German solidarity.

        7. Maju

          No. Absolutely not. No sacrifice should be done to stick with such an egoistic and bad leader as Germany.

          Spain, together with Portugal and Greece and possibly Italy, France and Ireland, should initiate a socialist (and federalist) radical reform. If isolated for that reason, it should ask for a seat in the ALBA, keeping its relation with EU at similar levels as Switzerland or Iceland.

          That is unless EU changes path and goes social, solidarious and democratic.

          … “it is difficult for politicians to (1) explain to the public that the world has changed to their disadvantage”…

          That’s not the problem: the disadvantage existed before – now it has just become unbearable. 10% unemployment and near-zero welfare was very bad already, 20% unemployment and even less residual “welfare” makes Capitalism simply not acceptable.

          That’s it: if Capitalism wants to exist in Europe, it has to deliver. Else, it must accept extinction.

          It seems to be difficult for corporate advisors to explain this fact to CEOs and stockholders: that they cannot suck the blood of the people indefinitely, that the amount of blood each has is finite – and also their patience.

          1. Diego Méndez

            @Maju. I take your words as a sign of the times. I agree with your feelings, if not with your words. Unfortunately, your proposals would give Spain a Third-Wordly standard of living, and a Venezuelan-like “democracy”.

            Your feelings, however, are right. The burden of the crisis must be shared. Bankers and politicians are not sharing in. They must, if capitalism is to survive.

          2. JasonRines

            Maju, what the West has is State Capitalism or more simply, Fascism. Big differences between Fascism and free markets. We haver had them competely either anywhere in the world, including the U.S.

            The overleveraging and compounded interest are features of the Central Bank model, all leading to debt saturation, non-serviceable debt and no growth (which causes radicalism in the population and EASY manipulation of the sheeple for a time). The politicians are bought off and now your nation or union is Fascist. Such was the case in the 1920’s leading to Great Depression and World War 2. Both in Europe and the United States. The Rothchild banking model has conquered the world. Guess what though? Bankers do not enjoy fiscal policy making. They make loans it is what they do. The solution is in power sharing and capital formation which does require savings, sorry Illusionist. Credit is not a store of wealth no more than a dollar is, despite people being fooled into thinking these instruments are. Kingmakers which are bankers nowadays and Kings which are CFR politicians either assign power to fiscal agents or have their power diminished through war.

            Wonder who the new Adolph out seeking revenge will be this time around? Putin perhaps? Either way the Kingmakers also lose close family in world wars these days, this also wises them up to building Golden Calves where the masses can’t make it through the desert to the Promised Land but must worship and view the Golden Calf nonetheless.

            So choose Kingmakers and choose wisely on either power sharing now for fiscal policy tasks you hate doing anyways or face WW3 and extermination of loved ones and even yourselves. Successors with Save and Invest experience are out there.

      2. SidFinster

        This is NOT intended to be a nasty question, but I seem to recall that in your earlier posts here, you were a wholehearted supporter of the European Project.

        Have you changed your mind, or do I remember incorrectly?

        1. Diego Méndez


          your question is well-deserved. I do still support the European project.

          However, I’ve changed my mind on the current way of doing things. The EU needs full democracy, urgently. The lack of democracy is the cause behind its many problems.

          You may find this article of mine interesting:

          As far as the EU is biased, asymetric and undemocratic, Spain should think twice about any EU project.

    2. Maju

      No, that’s silly: the reason for the euro was to make a single economic area for real. That when I cross the border do not need to exchange currency as used to be the case but can use the same fancy bank notes in all the EU (or much of it at least).

      The decision to make the euro so strong was a demand from Germany. But it’s not sustainable anymore, largely because the US dollar has plummeted since then, making the euro some 40% overvalued in the international markets, what is bad for common business. So Germany has to decide: either to accept a somewhat weaker euro or to get out and resurrect the mark.

      Or to kick every other member state out of the Eurozone. In any case the less harmful case for all is to gradually weaken the euro until approaching USD parity or at least a less harmful excess value.

      This decision had to be taken several years ago and each day the ECB resists with a super-strong euro is a company that closes in Portugal or somewhere else, jobs lost, etc.

      Other good decisions could be to increase import taxes because some countries with very bad labor or environmental laws are dumping the EU with their cheap products, unfairly competing with local producers.

      Also adjusting the euro properly should be good if Germany wants to encourage the East-Central Europeans to join and not just remain indefinitely out, as seems likely they will do.

      “If Germany looked like leaving the euro, a raft of northern european countries would insist on going with it one way or the other”…

      Trivial: of all those countries only the Netherlands has some relevance – and not that much. Whether Sweden or Finland is in monetary union with Spain, France, etc. is almost trivial for both sides. We are talking of 120 million people in the Mediterranean Eurozone (not counting France) and only some 40 million in the Nordic one (not counting Germany, Ireland nor Belgium but including Austria and Slovenia).

      The Eurozone is largely a Mediterranean affair. And the circumstances of the “German euro” do not favor the incorporation of Poland or other Central European states, which fear to become the new “Greeces” if they do. Only a weaker euro and a more protectionist EU can encourage such an integration: we won’t build Europe destroying European industry.

      “I am sure that France would decide to go with Germany”.

      I’m not so sure. France is the more dependent of all big EU states from the Mediterranean markets.

      Anyhow, nobody wants Germany out, what we want is Germany in line, not arrogant and bullyish. Gemrany must be one more and if it wants to play leader, it must show it can lead and not just bully those around.

      “Basically, the Germans are right”…

      No, they are very much wrong and specially in times of crisis and global dumping like these.

      1. Diego Méndez

        @Maju, you may want to read *any* book on the origins of the euro. RebelEconomist is right on everything he said.

  8. bmeisen

    Good idea! The ECB would have to leave Frankfurt. Real estate prices in Nordend, Bornheim, Bockenheim would fall by 50% and we’d be able to buy an apartment.

  9. Kai

    What a load of nonsense. I used to think of Mr Auerback as a serious commentator. Not anymore. He obviously doesn’t know much about Germany or Europe.

  10. /L

    Already in April 2010 the German economist Joerg Bibow suggested “Germany is unfit for the euro

    There is talk that Germany’s constitutional court might get busy again, providing new landmark judgments on what constitutes “stability” and what does not. For Germans have a constitutional right to stability, they are made to believe. If Europe is not ready to comply with the standards of stability, Germany will be forced to pull out.

    Regarding Euroland’s economic performance since 1999, three stark facts or policy blunders stand out. First, while similar in size to the US economy, Euroland is remarkably export dependent and prone to domestic demand stagnation. The world economy boomed at record rate in 2003-7. Euroland for long was the “sick giant”. Joining late, it crashed all the harder as the global crisis hit.

    Sadly enough, Germany has been central to all of this. Germany is the biggest factor in Euroland’s export dependence, growing on exports only while domestic demand, especially private consumption, is notoriously stagnant. Among the first countries to break the Maastricht deficit limit dreamed up by its own lawyers, Germany contributed most to the ECB’s misses of its headline inflation mark by hiking indirect taxes. Worst of all, Germany reneged on the euro’s cornerstone to abstain from beggar-thy-neighbor policies.

    1. RebelEconomist

      “Germany reneged on the euro’s cornerstone to abstain from beggar-thy-neighbor policies”

      There is no such thing. Given its ageing society, Germany is wise to run current account surpluses to build up its net foreign assets. Now, in the case of Greece, Germany may have chosen an unreliable counterparty for German savings, and if so, German losses should be taken, starting with the intermediaries which placed money with Greece (banks and therefore bank shareholders). But Germany would be unwise to throw good public money after private bad. And then, I would expect Germany to move on, continuing to build its savings, more selectively this time.

      1. illusionist

        “Now, in the case of Greece, Germany may have chosen an unreliable counterparty for German savings,….”

        Maybe not – it would depend upon the value realized by the collateral. What value would you ascribe to Acropolis, Parthenon or the some of the Islands in open auction?

        1. DownSouth

          Thank you illusionist.

          This, in a nutshell, is what it all boils down to: destroying a country by selling off the crown jewels in order to pay off imprudent bankers.

          1. illusionist


            I had read somewhere this nugget;

            “Every morning in Africa, a Gazelle wakes up. It knows it must run faster than the fastest lion or it will be killed. Every morning a Lion wakes up. It knows it must outrun the slowest Gazelle or it will starve to death. It doesn’t matter whether you are a Lion or a Gazelle… when the sun comes up, you’d better be running.”

            That is life. Socialism or Communism or such nonsense cannot change this. You can waste your time any way you choose but surely as the day follows the night this is the way of the world.

          2. DownSouth


            That is social Darwinism.

            It is just one more hackneyed talking point of the kleptocrats.

          3. 16 shells from a 30.06

            illusionist: “You can call it what you will. It is what it is. It is life.”

            “I do not see why man should not be as cruel as nature”
            — Adolf Hitler

          4. F. Beard

            That is life. Socialism or Communism or such nonsense cannot change this. You can waste your time any way you choose but surely as the day follows the night this is the way of the world. Illusionist

            Do not let kindness and truth leave you; Bind them around your neck, Write them on the tablet of your heart. Proverbs 3:3

            And actually, nature itself, “red in tooth and claw” is often kind when it does not have to eat and sometimes when it does too.

  11. Parvaneh Ferhadi

    I can understand that the EU would strive for political unity, but social unity? What is meant by that anyway?

    Social unity in the sense of doing away with national or cultural, i.e. the EU becoming one big France or Germany? That would be futile to even try – besides it would be totalitarian.

    Maybe with social unity a more social distribution of wealth is meant, but that would be unachievable either, since the EU runs on a Capitalist socio-economic system, not a socialist one, and re-distribution of wealth from top to bottom is a no-no.

    In that light, the EU might be trying to achieve the unachievable, which, of course, will end in failure.

    1. jura

      It should not be so hard to understand. There is job mobility and easy migration. Intra-European cultures are not largely in conflict, and differences can be accomodated the same way people can enjoy both French and Italian food.

      1. Parvaneh Ferhadi

        Well, Europe is a bit more complicated than that. It’s not just about easy migration and food.
        Germans have a totally different work-ethics than Greeks do,and then there is the language issue.
        Social unity won’t work unless you want everyone to become the same, let’s say Germans – and that won’t work either.

  12. Jim Haygood

    Why limit EMU secession speculation just to Germany? John Mauldin quotes Anatole Keletsky:

    • The risks to the Euro come symmetrically from both debtor and creditor countries – this not just about Greece, Ireland and Spain or about Germany, Finland and Holland but about both – and a radical change in any of these countries’ politics would be enough to blow up the entire process.

    • “Powerful elements” in any of these countries would be sufficient to sabotage the system. To blow up the euro will not require a majority vote in a referendum — merely a change of mind by just one powerful political group in just one of the creditor or debtor countries — e.g., the trade union movement in Ireland or the Bundesbank management in Germany or maybe even a single political party, as we are seeing in Finland.

    In regard to the debtor countries, Marshall Auerbach asserts:

    [Growth in the periphery] wasn’t an issue prior to the creation of the EMU, during which each of the member states were sovereign in their own currencies and had their own central banks. That means they were not revenue-constrained and could conduct fiscal policy and monetary policy in a co-ordinated way to best serve the socio-economic interests of their citizens.

    True enough, but recall that the peripheral currencies — pesetas, escudos, lire, drachmas, et al — were weak sisters, endlessly devalued as inflation stayed uncomfortably high.

    Even the French franc was a weak sister back then. French inflation was so out-of-control that the French had to drop two zeros from the franc in 1958. As late as the 1980s, people would quote the price of capital assets such as houses and cars in francs ancien.

    ‘Monetary sovereignty’ is synonymous with inflationism.

    1. F. Beard

      ‘Monetary sovereignty’ is synonymous with inflationism. Jim Haygood

      There is an ethical and thus elegant solution to that – repeal legal tender laws for private debt. That way, government overspending relative to taxation would only hurt the government and its payees, not the private sector. It would be the government itself that would have a strong incentive to spend wisely. The government and its payees would watchdog themselves.

      So, there is no need for government borrowing and “bond vigilantes” to restrain government spending. What is needed instead is ethical money creation.

      Nor does the private sector need banks; it just needs the ability to create its own monies with no government privilege for any of them.

    1. Susan Truxes

      Question: Why is NATO so reluctant, requiring bribes and extra benefits and only when the US gets totally pissed off and demands that they live up to the original terms of the North Atlantic Treaty do they say, “Ok, Ok, we’ll help bomb Lybia. Anyway Lybia can’t bomb us back.” Deutsche Welle just did a broadcast about how Germany did away with compulsory military service and now its an all volunteer Bundeswehr! But nobody is volunteering. Funny. That should become interesting. Can anyone say Deutsche Militarische Complex? I wonder what Gunter Grass will have to say about this. Anyway, thank you Frances for pointing out that we should Never seek to know why Greece’s finances are so screwed up. It is because ours are.

  13. PMM

    Mr. Auerback,

    The EU is a long term project designed to help Europe compete in a world where there are 600-700 million people in a N-S America Free Trade Zone, China & India each with hundreds of millions of middle class ( i.e. car buying consumers) , etc. In the next few decades Europe will have the population and demographics to compete, but they need to build a stable currency & political union. The current situation provides the Germans with an ability to start the Piigs on a fiscal track that may be more sustainable and this costs the Germans little at present since the conflict is keeping the Euro in a lower range and thereby promoting an export surplus. The Greeks are playing a loosing hand and a few thousand out of work 20 year olds being encouraged by a few socialists and anarchists will not change the calculus. In the end, the Greeks will sell assets and the Germans & French will fully refinance the 110 Billion in Greek EU Sovereigns coming due in the next 3-5 year. You can count the the Greek maturities on two hands, this is not a huge economic problem, it is a political stalemate. When the German manufacturers ( who do the hiring in Germany ) decide it is time for more stability vs. weakness in the Euro (probably around 1.30 $/EU) the tone in the media will magically change, and the funding gates will open. Ironically, the German politician who seems to be so anti bailout has the last name Schaffler, a group whose debt and business position are helped drastically by a weeker Euro.

    1. DownSouth


      When you have a pathocracy like Germany does, that is rule by psychopaths and other emotional cripples, how do you expect them to keep Grmany from flying apart at the seams, much less the European Union?

    2. jura

      I agree. The anglo-american world is eager to predict the demise of the EU since it doesn’t want the competition. In fact, Greece is less of a problem for the EU than California’s state budget is for the U.S.

  14. F. Beard

    When will people realise that central banking is bogus? Governments don’t need it since the power to tax is the power to issue debt-free money. And the private sector mustn’t have access to a central bank because it allows the banks to over-leverage.

    1. Crixus

      Actually Frank, it isn’t central banking that allows banks to overleverage, it is fractional reserve banking. Central banks are around to stop the transfer payment crisis that occurs from the overleveraged accounts in fractional reserve banking like the panics of the 19th and early 20th century.

      and yes, governments don’t need central banking because they don’t need fractional reserve banking. Given that control would turn outright to government created,non-debt based money, would cripple private interest in money creation. Your own work on the benefits of multiple currency deserves much praise. I have “whined” about it for years, but all sides of monetary theory just laugh away.

      However, I believe as Thomas Jefferson did, the evils of fractional reserve banking must have a central bank. The inflation and then deflation as Jefferson noted of fractional reserve banking is horridness and will lead toward revolution. It is why during his Presidency he eventually and bitterly signed off on the central bank. It wasn’t to the Federal Reserve act and the “growing pain” failures of the Federal Reserve to counteract the great contraction that America saw a long wave of prosperity without panic and vast inequality. While most “liberal” reformers believe it was the new deal and other social programs that created the apparent camelot, it was the end of deflation thanks to the end of transfer payment crisis. Allowed businesses to keep organizationally intact and keep capital flowing into more and more innovation boosting more growth. Which was fine and dandy to 2000. Then came the Malthusian style problems as capital went fully global into population rich Asia with innovation slowing down, which has begun to drain resources faster than we can replace. It has slowed down developed countries first and will get the developing ones next.

      1. F. Beard

        it isn’t central banking that allows banks to overleverage, it is fractional reserve banking. Crixus

        Without a lender of last resort and open market purchases then the FR banks would need to be careful indeed. Leverage would be limited to about 2 – 1. Of course the more banks, then the lower the leverage each could get away with due to redemption risks from competitors.

        So yes, it is the central bank that allows massive leverage.

        But another enabler of fractional reserve lending is legal tender laws for private debt which are absurd and unjust on their face since government money should only be legal tender for government debts, not private ones.

  15. Paul Tioxon

    I am not sure what merits this overall hypothetical has in terms of getting some insight into what is going on with either Germany or its relation to a United Europe. In the face of India and China, a greater scale in terms of population and economy, political integration is not just some long term ideal of dreamers. Aside from almost every major war of the past 200 years being fought over who rules Europe AS A WHOLE and under what terms, Germany actually leaving sounds more a Philip K Dick story, a parable about appearance and reality.

    To think that German politics could be to reduced to little more than this generation of German politicians defending pension funds and savings accounts in the face of crushing geo-political revolutions across the Arab world, the surging BRIC competition, by Germany going it as a lone nation state seems to not make any sense at all.

    The final destination of many Libyan and other Arab refugees is typically Germany. The Great Powers of Europe always had burdens to bear, funded by taxing native subjects to promote some cause or another, gang pressing the male populace into the military, etc. With the here and now global constraints on even an economic powerhouse such as Germany, there is probably no easy solution for the economics, but going backwards, if it is possible in some way intellectually, seems to be too complex a calculus to consider and essentially be moot.

    1. DownSouth

      Paul Tioxin said:

      In the face of India and China, a greater scale in terms of population and economy, political integration is not just some long term ideal of dreamers…

      …in the face of crushing geo-political revolutions across the Arab world, the surging BRIC competition, …Germany going it as a lone nation state seems to not make any sense at all.

      Exploitation is sometimes naked, but more often it requires deception. Thus, we might expect neoliberalism to appear good for the group (the European Union) at first sight but to emerge as a tool of exploitation upon closer examination. Some features of other non-stealth religions undoubtedly can be explained in this way, such as many practices of the Catholic Church that led to the Reformation.

      You assume that the current economic and political leadership of Germany is normal. I would question that assumption:

      Schizoidia: Schizoidal psychopathy…

      Carriers of this anomaly…pay little attention to the feelings of others… They easily become involved in activities which are ostensibly moral, but which actually inflict damage upon themselves and others. Their impoverished psychological worldview makes them typically pessimistic regarding human nature. We frequently find expressions of their characteristic attitudes in their statements and writings: “Human nature is so bad that order in human society can only be maintained by a strong power created by highly qualified individuals in the name of some higher idea.” Let us call this typical expression the “schizoid declaration”.


      Their tendency to see human reality in the doctrinaire and simplistic manner they consider “proper”—-i.e. “black and white”—-transforms their frequently good intentions into bad results. However, their ponerogenic role can have macrosocial implications if their attitude toward human reality and their tendency to invent great doctrines are put to paper and duplicated in large editions.

      In spite of their typical deficits, or even an openly schizoidal declaration, their readers do not realize what the authors’ characters are really like. Ignorant of the true condition of the author, such uninformed readers tend to interpret such works in a manner corresponding to their own nature. The minds of normal people tend toward corrective interpretation due to the participation of their own richer, psychological world view.

      At the same time, many other readers critically reject such works with moral disgust but without being aware of the specific cause.


      In the psychopath, a dream emerges like some Utopia of a “happy” world and a social system which does not reject them or force them to submit to laws and customs whose meaning is incomprehensible to them. They dream of a world in which their simple and radical way of experiencing and perceiving reality would dominate; where they would, of course, be assured of safety and prosperity. In this Utopian dream, they imagine that those “others”, different, but also more technically skillfur than they are, should be put to work to achieve this goal for the psychopaths and other of their kin. “We”, they say, “after all, will create a new government, one of justice.”
      ▬Andrew M. Lobaczewski, Political Ponerology

      1. Paul Tioxon

        Without a complete reading of Lobaczewski, what I read so far is consistent with other analysis. In “THE STRUCTURE OF EVIL”, Ernest Becker sums up his frustration with a fragmented social science that sketches the outline of evil’s structure, the form and function of the nation state. Using many knowledge disciplines from the array of the university department titles we all know and doubt, he formulates a critique and then calls for a unified science humanity. Here is an excerpt from the Amazon review that is relevant:

        “In Part II of the book Becker attempts to square the existential circle by trying to determine exactly where “scientific moral man” went off the rails. More than anything else, what he discovers is that old cosmologies, when they die at all, always die hard. What happened is that the “new scientific moral order” was shaped by the same coalition of political and economic forces that “ran” the Middle Ages — the Church, the Kingdom, and the modern reincarnation of the feudal lords, the industrial corporation. And as a result, they turned science into just another empty abstract vessel to continue Medieval greed, politics and control, by other more novel means.

        In short, the “New Moral World Order,” was just the old “Medieval immoral order” in new “scientific bottles.” It represented the same old “spoils system” invented by the descendants of the old feudal land-owning elites. The old morality, had simply been repackaged in the Trojan Horse of science. The very hopeful morality that had “ushered in” the French and American revolutions with its grandiose ideals of freedom and democracy had already been fatally compromised and contaminated before it got out of the starting gate. Thus, it became, like the new religion that it underwrote, just another moral fetish – a byproduct and close relative of the same old medieval immorality.”

        So, I would only assume the current state of affairs is normal as posed in the M Auerbach posting and I respond to that with some brevity. But you seem to have a sympatico world view to mine. To further emphasize the need for the ruling class to set themselves up as the legitimate authority, they need to solely posses the power to declare what is or is not transgressive. The need to fabricate a digestible, at least to the middle class and the capitalist interests and keep the most reactionary former authorities, priest and king from making a come back, a new form of control, reason and science had to replace power ‘ex officio’.
        The best and the brightest from the new institution of legitimate authority, the university, was granted the role of producing the authoritative people to rule the new liberal governments, informed by the consent of the people. What we are witnessing now and for quite some time, from the right and the left is the collapse of that consensus. But the expanding suffrage, while seemingly progressive, and the congresses and parliaments, populated with their chosen candidates, was even more difficult to influence than the single monarch on the throne. Now, hundreds of representatives had to be convinced and thousand more bureaucrats needed to be herded in triplicate form, and here in America a handy voucher is also necessary to complete our freedom to choose from unending alternatives that all manage to lower our standard of living.

        1. DownSouth


          I like how Michael Allen Gillespie put it in Nihilism Before Nietzsche:

          The postmodern element in Nietzsche’s thought, however, is in many respects unknowingly premodern, drawing upon the nominalist notion of will. Dionysus in this sense is not a new God who rises up to replace the old God who has died, but that old God, who appears under a new mask. Dionysus, for Nietzsche, was the solution to nihilism, which he saw as the final form of Christianity. We have seen that Nietzsche was mistaken about the origins of nihilism and we see here that he was equally mistaken about its solution, for his Dionysus is not the great antagonist of the Christian God but only his most recent incarnation.


          At the end of modernity, we are thus brought face to face with this dark God that modernity was constructed to constrain. The possibility of coming to terms with modernity or passing beyond it depends on our capacity to fact this question.

          1. Paul Tioxon

            I’m optimistic simply because I’m alive. How knowable is meaning or ultimate purpose before or after this life, the only one I know, does not deter me from living this life to the fullest, in moderation of course.

  16. Eric

    the Anglo saxons keep repeating that the euro can’t work, the eurozone countries however want the euro to work and will take whatever steps needed to make it work.
    So this whole euro debate is not about economics but politics. Therefore let the Anglo-saxon economists please shut up, their claims did become boring and pointless.

    1. MyLessThanPrimeBeef

      I am not sure if Euro-zonists are really victims of Anglo-Saxon persecution though.

  17. nowhereman

    I have patiently read all the above comments and what strikes me is that they all accept the underlying assumption that somehow “economics” and “economic principles” are a “fact”. That the relationship between peoples and their forms of government and commerce are “complicated” and require some form of “expertise” and “manipulation”.
    This is, of course, exactly what the “elites” want you to think. That’s right people, “leave it to us, we’re the only ones that truly understand, and oh yes, we have your best interests at heart”.
    Several commentators touched briefly on the true fact that countries and economies and governments are in reality, the people. These institutions were created to moderate the interactions between people, to provide a framework for these interactions. Somewhere along the line we have all lost site of this simple reality, and now “economics” is no longer about people, but about wealth.
    Under “economics” wealth no longer means the productivity of individual people, or their collective endeavors, it has devolved into debt. Debt created by governments and the economic pseudo sciences meddling in the productivity of the people.
    Now this may all sound a little “socialist” but I assure you that that label as well as others like “free markets” and “capitalism” are all economic constructs designed to keep you distracted from true reality.
    What is that “reality” you ask? The reality is that the people have the power. The power to labor, the power to consume, the power to produce the type of government we want and the kind of economic interactions that benefit the people. The “elites” are deathly afraid that the people will wake up to this simple fact. That is why they make it look so complicated. That is how they convince the people that they need to be “in charge”, because they have the “expertise” to manage a system made so complicated for no other reason than to exclude the people from benefiting from it.
    I guess what I’m trying to say is that, if you play the game based on their rules and assumptions, you end up in their control, right where they want you.
    The only way there is any hope of rectifying the current situation is to deny their assumptions, and look at the problem from the bottom up (from the perspective of the people), not the top down (the perspective of the elites).
    It is imperative that we realize our underlying assumptions, and the fact that he who makes the definitions, is he who controls the conversation.
    Paradigm shift, anyone?

  18. Terry

    Hasn’t Germany introduced a constitutional amendment forbidding it from running the large budget deficits the author espouses?

    (I agree with what he says; it they have put through that amendment they are stupid).

  19. Zio

    I proposed this same “odd” idea months ago, so I can not avoid to agree :). Germany should quit. They want a too strong Euro that is damaging all the Countries that were not used to a strong currency.

  20. Hugh

    The European Central Bank is essentially the German Central Bank. Why would Germany divorce itself from an entity it currently controls?

    How would having a PIIG-euro help the PIIGS? They still wouldn’t be sovereign in their currencies and you would probably end up with Spain and Italy against everybody else, just repeating the problems we already see on a smaller scale.

    There are in this no profligate and no virtuous players. The PIIGS borrowed and Germany-France-Netherlands lent. The Germans exported and everybody else imported. Nobody forced anyone to do any of this. They did it because they saw it in their individual interests to do so, at the time. That the problem is even cast in terms of virtue and vice shows what a hollow construction Europe really is.

    The reason that there will be no resolution is because you need to look at this against the larger backdrop of kleptocracy, which operates at both the supranational European and individual nation-state levels. Kleptocrats don’t look to fix anything. They look for opportunities to loot. What we see in Europe is a competition among kleptocratic interests but the bottomline it will be the ordinary citizens who will end up footing the bill.

  21. Jim

    Questions about European Union:

    Can human beings live fully without belonging to a body politic that claims their allegiance?

    Does democracy, in order to become a reality, need a body, a population marked out by borders and other characteristics, namely a defined realm?

    Does Europe’s present course of indefinite expansion correspond to Europe’s inability to define itself politically?

    What is the relationship betwee democracy and the nation?

    Is the modern democratic regime inseparable from the national form?

  22. F. Beard

    Not only does each country need its own currency but businesses within each country should be free to issue their own private currencies too. That way, the strength or weakness of currencies could be adjusted individually without affecting the entire nation.

  23. some

    I once regarded your blog as quite a reference, but if you are tired of it then let it be. And just post nothing for some time but just dpn’t fill your blog with such nonsense it is really wasted time and damages your reputation. As I’ve written above the exit of Germany of the Euro would mean the exit of the Euro itself. I am against it, but ok. one can think about it, if it is better if everybody is on its own, though it dpesn’t work if you remember the interventions of the Bundesbank or Soros. But the imagination to save the euro in the way to push its most worthful asset out, is just ridiculous. That is Chavezeconomics.
    By the way, it is really a piece of germanphobia, and I’m anglphob. I see this as an attempt to keep attention away from the English indebtedness.

  24. Pat

    Auerback’s argument is not new. It was made for instance by Evans Ambrose-Pritchard in the Telegraph last year. EAP went through the various possibilities and suggested that there should either be a Eurozone North and a Eurozone South, or Germany should withdraw first. The advantage, if Germany, withdraws first, is that it would prevent capital flight, ie money in pesetas, drachmas etc from being transferred out the country in a flood, which would happen if the PIIGs withdraw one by one. The disadvantages are clear, as Auerback notes, namely, the New Deutschmark would go way up relative to the Euro and German exports would be much more expensive.
    IMO this makes Germany-leaves-first plan (?) completely impossible politically. If the export market is hurt, Germany is going to face a terrible crisis. So instead, they are going to follow this pretend-and-extend policy, wherever it may lead, which is to the breakup of the current Eurozone one country at a time. But this way the German politicians will be able to say, it’s not our fault, it’s the fault of those lazy Mediterraneans.
    In reality the only solution to the Euromess is to gather up all the Northern creditors and force them to take big haircuts, cancel out the CDS, and recapitalize the German, French and Dutch banks by printing up some funny-money. The Irish, Greeks, Portugese et al will never pay the loans back — those loans have already flown off to money-heaven. The Eurocrisis is like a dog trying to chase after a bird that has left the cage.

  25. M.G. in Progress

    I believe that to save the Euro Germans, and other bankers, have simply to stop making bad investments, in subprimes or sovereign bonds, creating money out of thin air.
    In “normal” financial markets banks should plan for a certain amount of their loans to go bad or their borrowers to fall into bankruptcy (default). It is a necessary cost of creating principal out of thin air but never issuing enough money for all of the interest to be paid back. There are no “too safe to fail” assets, not even sovereign debt.
    To save the Euro Germans should stop the Ponzi scheme…

  26. /L

    Europe’s Quest for Monetary Stability: Central Banking Gone Astray
    by Jörg Bibow* August 2005
    This paper provides an overview of central banking arrangements in those European countries that have adopted the euro. Issues addressed include the structure of the — Eurosystem“ and its central banking functions, the kind of independence granted to the system and the role of monetary policy that central bankers have adopted for themselves, the — two-pillar policy framework,“ operating procedures, and actual performance since the euro‘s launch in 1999. The analysis concludes that, given the current macroeconomic policy regime, trends, and practices, the euro is on track for failure.

    The crisis in Europe and the global financial crisis is mega failure of the so called independent central banking system. The central banks is supposed to be the supreme guardian of the banking system, an public authority regulating the banking system.

    They have failed miserably, it was supposed to be the best of worlds if they were “independent” and with absolutely no democratic checks and balances. They promised to be the benevolent “experts” acting in society’s best interest. Despite the obvious total failure they are still in charge and seem to be beyond critic by politicians and mainstream media.

  27. /L

    Breakup of the euro? Is Iceland’s rejection of financial bullying a model for Greece and Ireland?
    By Michael Hudson

    Politics is being financialized while economies are being privatized. The financial strategy was to remove economic planning from democratically elected representatives, centralizing it in the hands of financial managers. What Benito Mussolini called “corporatism” in the 1920s (to give it its polite name) is now being achieved by Europe’s large banks and financial institutions – ironically (but I suppose inevitably) under the euphemism of “free market economics.”

  28. pater tenebrarum

    There is absolutely no problem with several countries using a single currency. Auerbach seems to believe that devaluation is some sort of cure-all. But why should it be? The problem is that money is centrally planned and that the monetary system as it is currently constituted allows for massive increases in circulation credit and fiduciary media causing economic boom-bust cycles. This central problem is not even discussed by the chattering classes in Europe (or elsewhere for that matter). Auerbach is just another interventionist who thinks he has a ‘better plan’ when all we need is a truly free market.

  29. M

    This is a strange argument, as it seems to imply that it is only Germany who dislikes the idea of ‘profligate’ countries like Greece being ‘bailed out’ – that sentiment is shared by many northern European states.

    So, for this argument to work, the eurozone would need to split in a northern and southern half.

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