Germany Loses Its Grip

By Delusional Economics, who is horrified at the state of economic commentary in Australia and is determined to cleanse the daily flow of vested interests propaganda to produce a balanced counterpoint. Cross posted from“>MacroBusiness.

And so we roll on…

One of the things that amazes me about the European “crisis” is how symptoms of the underlying problems of the macro-economic system that is the Eurozone get confused with the actual problem. Let’s take the current situation in Greece for example:

So as of yesterday, the EU finance ministers , the EC and the IMF joined forces to demand that the Greek creditors take a larger hit on the countries debt forgiveness. The Institute of International Finance, that represents the creditors, said that its last offer is a 4% coupon on new bonds issued after the deal. The EU wants a better deal because the target is to get Greece down to 120% debt to GDP by 2020 and a lower rate is supposedly required to make that happen. The main reason there is so much argy-bargy about the rate is because every time someone looks at the state of the Greek economy it is worse. So basically, the EU is demanding more from creditors because their own policies have failed to turn the economy around. What makes this particular situation most interesting is that Europe has spent 2 years and literally hundreds of billions of dollars trying to avoid a Greek default, yet now they are making demands that have the potential to push the country in exactly that direction.

If a new deal cannot be struck that both sides can agree on then Greece may have no choice but pursue collective action clauses on outstanding bonds written under Greek law to force private creditors to take a deal. Talks are on-going.

However, although this particular problem is now the focus, it is just one symptom of the actual problem. That problem was highlighted overnight with the European flash PMI’s. Germany once again outperformed the rest of Europe, France treaded water, admittedly with its head held a little higher, while the periphery of Europe slowly drifts away. The latest Euro PMI was a little better than expected, in some part due to the ECB’s actions over the last month or so no doubt, put the forward looking indicators suggest more weakness to come and I expect the divide to grow as Europe slows further. As I have stated previously that the German data is a double edged sword because, although it is good for Germany that its economy is powering, it is a big negative for the rest of Europe because one of the major issues that brought on the crisis in the first place was the competitiveness imbalance of nations under the single currency.

What we are now seeing in Greece, and will continue to, is a symptom of this underlying problem. But Greece is not alone, it is becoming obvious that Portugal has got itself into a similar position:

The cost of insuring Portugal’s debt against default was at record highs Tuesday and its bond yields remained at elevated levels amid concerns that a possible second bailout for the country in 2013 would include a Greek-model haircut for private-sector bondholders.

Worries have mounted among experts that Portugal won’t be able to return to markets for funding next year, forcing it to request a second bailout package.

Portugal’s five-year credit-default swap—a derivative that functions like a default insurance contract for debt—pushed above its record closing level in the continuation of the trend that started last week after the Standard & Poor’s Corp. downgrade to “junk” status.

So now even if Greece manages a deal to write-off some of its debt the markets will quickly turn their eyes to Portugal who will no doubt require a second bail out, but increasingly a debt restructure as well.

With Spain also struggling and Italy under increasing pressure, the continuation of contagion appears to be taking its toll on the politics of Europe with Germany’s ability to control the situation diminishing. As Spiegel reports:

Berlin has been unflinching it its efforts to both increase fiscal discipline in the euro zone and to avoid throwing more money at the European debt crisis. Increasingly, though, Germany’s EU partners are unwilling to play along. Chancellor Merkel now finds herself confronted with powerful opponents


A large alliance of the finance ministers, heads of government and central bankers from almost all of the 17 euro-zone member states has been calling for the European Stability Mechanism (ESM) to be enlarged — significantly. The permanent euro backstop fund, which will go into effect this year and will ultimately replace the temporary European Financial Stability Facility (EFSF), needs to encompass fully €1 trillion ($1.3 billion) instead of the planned €500 billion, Italian government officials have told their German counterparts.

At the same time, widespread resistance in Brussels to German plans for a new system of financial regulation within the EU is becoming more assertive. Merkel’s proposal for all EU member states to pass balanced budget initiatives — known in Germany as a “debt brake” — has been torpedoed as has the idea to allow the European Commission to bring countries that stubbornly violate deficit rules before the European Court of Justice.

Indeed, the balance of power in Europe has shifted. As long as Italy was ruled by a clown like Silvio Berlusconi, it hardly had any voice in efforts to save the euro. But ever since Monti, a respected financial expert, took over, the front of Merkel opponents is stronger than ever, all the more so because quite a few experts endorse Monti’s position.


Sarkozy is now getting the support of prominent economists from around the world. Christine Lagarde, the head of the International Monetary Fund (IWF) is calling for more money for the euro backstop fund as is Mario Draghi, the president of the European Central Bank (ECB), who has been in regular contact with his compatriot Monti. In a Monday appearance in Berlin, Lagarde said “we need a bigger firewall.”

Germany also appears to be losing support from even its strongest allies. Last week the Dutch central banker Klaas Knot gave an interview blaming Germany for the failure of the EFSF in which he stated:

The most important obstacle lies in Germany, not in the Netherlands, we haven’t moved in the right direction and it’s also clear that measures needed are happening too slowly and are too limited in size.

To add to that, Luxembourg’s new foreign minister gave an interview with German media yesterday in which he called the fiscal compact a ‘waste of time and energy’.

Is the failure of austerity-centric policy finally taking its toll on Germany’s ability to steer Europe’s response to the financial crisis? This would certainly explain why Mario Monti seems so sure that his country will be receiving the fiscal and monetary backstops. The outcomes from next week’s EU summit will provide more clues.

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  1. kurms

    The question is, does it matter if the German position loses its support among the European partners. Chancellor Merkel’s stance is quite popular in Germany and neither in her own party nor in the larger opposition parties is her view challanged in any way. From her own personal point of view, chancellor Merkel has no incentive to change her stance at all.

    1. Maju

      Eventually reality pushes its way ahead and Germany (and its camarilla of small Northern and Alpine states) will be faced with the dilemma of either exiting the Eurozone or fixing it (if that’s still possible). Exiting the Eurozone would probably collapse Germany but it would also allow the rest of the Eurozone to apply more pragmatic and less fanatic policies, maybe fixing it (if still in time).

      The real problem anyhow is not Merkel or Germany but the lack of statesmanship in Latin Europe, which is the demographic and political core of the Eurozone. And I don’t see that changing unless the optimistic remarks some have made of probable next French President, F. Hollande, are correct (I remain skeptic).

      If anything the technocrat Monti is already showing sings of pragmatism when he announces that the application of such draconian austerity measures is politically impossible. Some have suggested that this means that the elderly botox-maniac Berlusconi is preparing a comeback but that seems very shallow journalism, what Monti actually fears is general strikes like the ones this week that collapse the economy even further and may eventually lead to a revolutionary change.

      The Bourgeois class has overestimated their hand and underestimated their rival and victim class, which they need and will always need (the reverse is not true).

  2. vlade

    Ultimately it will come down to what it always was going to come down. Will internal or external German politics win?

    If internal, we will have a EMU breakup. If external, Germany will cave in (and given the strong-arming up to now, that’s going to have some serious consequences too).

  3. Ignim Brites

    A lot of pixels have been used criticizing the German response to the crisis. If even a fraction of those had been devoted to lambasting the political elites in Greece, Italy, Spain, Portugal, and Ireland for failing to take their nations out of the Eurozone, the crisis would have been resolved by now. Similarly here in the US, the permanent recession in California can only be cured by secession and the establishment of its own currency. But does the commentariat take that commonsense view? No that is way too secular for them.

    1. Maju

      Let’s see:

      (1) Certainly more pixels have been used to claim what you say. Since the beginning the Anglosaxon media specially has defended that viewpoint and it’s taking a lot of effort by the “viral guerrilla” of common sense to debunk it.

      (2) If you take all those states out of the Eurozone, there’s no more Eurozone because you’d have taken out half of it.

      (3) The “leaders” (who do not lead, just manage under the command of Brussels and the IMF) are lacking but not so much to take their states out but to put Germany in its place, because it’s being a neocolonial bully and not the leader all hoped it’d be.

      (4) States like Spain have no debt problem… unless they are some day forced (pressed hard, their “leaders” bribed to) to assume private debts, as happened in Ireland.

      (5) There’s no problem that an orderly bankruptcy with massive state intervention (nationalization of the TBTF after due bankruptcy) and devaluation of the euro cannot solve… unless…

      … unless (A): all this is nothing but a distraction maneuver to extract greater plusvalue from the working class (certainly true)

      … unless (B): the Capitalist system is in a deep structural terminal crisis and no solution exists within the system (probably true as well)

      In case A, I still recommend the previous radical social-democratic medicine (point 5), in case B no medicine will work unless it is radically revolutionary (change of socio-economic paradigm) and the system will spiral into collapse until a revolution happens or Humankind goes extinct.

      1. Ignacio

        I wish I had written your reply. I fully agree with your view, specially with this concept:

        [b]… unless (A): all this is nothing but a distraction maneuver to extract greater plusvalue from the working class (certainly true)[/b}

      2. Fiver

        So I suppose the US and Russia should also forward unpaid debts to Germany, since this is apparently about Reparations?

        1. Maju

          It’s not about reparations. But you can’t claim Corfu, as some influential Germans did, and forget about those never paid reparations. Nor you can forget that countries like Greece or Portugal yielded very importantly in their communitary benefits such as development funds in favor of East Germany or Poland.

          It’s now for you, tomorrow for me… not now for you, tomorrow also for you and then again as well.

      3. okie farmer

        Maju, in support of your argument Eurointelligence blog this morning noted:

        Zoellick calls on Germany to propose a labour union

        Writing in the FT, Robert Zoellick has called on Germany to launch a broader eurozone revival plan to complement the fiscal pact. This plan would have to focus on labour mobility. Labour policies in the past were geared to towards protection. He said the EU should focus the European Commission on this new mission, which would ease unemployment, and build a real economic union.

        The EZ has the tools to solve their crisis, the question must be: Why won’t they use them? When you consider that Merkel (and Sarkozy) both originally campaigned on platforms of busting labor, and you see 3 years of continuous editorials and comment from the world’s financial press extolling “structural labor reforms”, one has to admit that the neoliberals do not wish to let “this crisis go to waste” in terms of busting labor. Diminishing democracy and furthering the financial takeover of the EZ isn’t spoken of very much since that has been mostly already accomplished.

      4. Jim

        Spain, even at its current debt/GDP, does have a debt problem. And even moreso for Italy.

        And they have a debt problem because they can’t grow with the Euro as its currency. Not when the Euro is being shared with a country like Germany.

    2. fajensen

      It’s all very well to criticize “irresponsible governments” but ALL the time? It is tedious and it sounds stupid – everyone knows it takes more than one to make an orgy!!

      France and especially Germany is blatantly using the “irresponsible governments” propaganda as the pretext for signing economic policy over to non-elected bureaucrats, fully owned by the banks, and thanks to the intervention by the EU it is the very same banks who lend all that money to all those “irresponsible governments” and leveraged it 50 times. Does the lender have no responsibility for lending prudently? Apparently Not – it’s all the fault of the taxpayers for electing “irresponsible governments”.

      It will be fun to see Merkels hissy-fit when Greece and DB goes tits-up, whatever will she do? Will she order tanks to drive across Belgium as tradition demands?

      Why all the noise about poor little Greece: The state of Denmark has secretly lend DKK 4600,000,000,000 to its banks (four years of taxation). They finally reported it in yesterday, now the article is gone. I could have told them that: I was “blackholed” together with many others for writing that in 2010.

      The Danish financial industry holds more debt than than all of the PIIGS and Ireland and Iceland together. And they are running a currency-peg to the EUR.

    3. Ian Ollmann

      Absolutely not. California’s problems will not be solved by succession. California’s problem has nothing to do with monetary soveriegnty and everything to do with broken tax sovereignty. If proposition 13 was repealed, then property taxes could rise, and the state could ween itself off of income taxes. The problem with income taxes, especially very progressive ones, like California, is that they are predominantly paid for by the wealthy. The income of the wealthy rockets up and down unreliably with the economy. Some years the wealthy may realize no gain at all. Consequently CA tax receipts rocket up and down with the business cycle. This causes a boom / bust cycle in CA budgeting that trails the performance of the stock market by a year or so.

      The fix would either be to repeal prop 13, or maybe draft a new constitution that makes it easier for the legislature to raise taxes. In principle it could be managed through a rainy day fund. Alas the parties involved will point to it as proof that they either aren’t spending enough or are taxing too much. The money will be lost, and will not be available when it is needed in the downturn.

  4. jake chase

    All this bashing of Germany makes very little sense. Politicians in the peripheral states have squandered billions (trillions?) they could only borrow so cheaply first by finagling their books with bankster help, and ultimately because Germany stood behind the Euro and actually produced something besides fraudlent accounts and hot air. Soon, the politicians will be bribed adequately to cave in and sell out their populations by offering the prospect of renewed free lunch at bargain interest rates. More extend and pretend. Germans will go back to work supporting everyone until the next manufactured crisis. Meanwhile investors will enrich the banks by buying default protection which will never pay off because the banks writing the protection cannot pay and will not be allowed to fail. Notice that throughout this ‘crisis’, Europeans continue eating regularly and indeed in many cases excessively. What is left of the European middle class will pay for all of this elite foozling. Most of the poor will eventually find some kind of job, and those who do not will hardly notice the difference, since European welfare economics is different from the American brand, featuring socialism for the rich and free enterprise for the poor.

    Did anyone listen to BHO blowing smoke last night about all the problems in America which he steadfastly has refused even to notice in the past four years? He sounded like a man running hard against an incumbent whose administration had failed utterly. Perhaps he didn’t realize that failed administration was his own?

    Are there still intelligent people who pay attention to any of this idiocy? They are well advised to find a stategy for personal survival, as each of us is going to need one. Emma Goldman told us that if elections changed anything they would stop holding them. Who wants to argue that?

    1. Maju

      Notice that I do not “bash Germany” for not willing to pay for rescues. That I can understand perfectly.

      What I criticize is:

      1. An extremely pro-German economic model of the Eurozone. This is not only fault of Germany but also and specially of Latin Europe (plus Greece, plus Ireland), which did not forecast that such a monetary model could not work for anyone else. ·> Patch: redefine the euro in realistic terms in relation to the international reference: the US dollar.

      2. A hypocrisy of not just Germany but every other state whose banks are heavily immersed in this or that problematic state (read France, read Britain, read the USA, Belgium, Netherlands and even Spain) by which these banks are to hold no loses, no matter what, no matter that they assumed risks by providing credits (which may always be defaulted) and no matter that banks are totally unimportant in relation to states, being mere chartered tools of society, which allows them to get a benefit in exchange of a service, service that can always be provided by state ownership (and often better that way).

      This way Ireland was forced to collectivize not the banks but their loses and toxic assets, banks and loses that mostly belonged to Germany and the UK and now are being paid by the Irish taxpayer.

      This way Greece is being asked impossibles because the option of bankruptcy, the only logical option, is simply not conceivable, not acceptable.

      3. Lack of leadership. Germany is the largest and richest EU state and as such is expected to take a leading role rather naturally. What you do not expect from a serious leader is that when a minor member of the gang, read Greece, has serious problems, they (who are yet to pay for WWII reparations to Greece in particular) begin claiming “Corfu” like true jerks. And the Anglos applauding such a stupid attitude, as if it was logical somehow.

      What the heck? A selfish strongman is not a leader, a bully is not a leader and without leadership the Eurozone and EU itself is doomed.

      For this I do blame Merkel and the sector of Germany and other Germanic (British, Dutch, etc.) society that has cheered such idiotic attitude, unproper of serious statesmen or in this case wannabe stateswoman.

      How quickly forgotten the sacrifices made for the German unification and the integration of the Central-Eastern European economies, all them German-led projects. Germany (and for the case also Britain) does not look at the EU as partners but as colonies to squeeze and that’s a serious conceptual and structural problem.

      That I criticize.

      1. jake chase

        This pro German model of the Eurozone seems to involve Germany manufacturing and selling goods in exchange for fiat money manufactured out of thin air and cooked books by Southern tier politicians unable either to tax their inherited rich or say no to their snoozy and bloated state bureaucracies or to find a way to manufacture anything of value for sale to Germany in exchange for its goods. You seem to think the Greek ‘population’ should get a free pass for electing and reelecting this kind of leadership, that Germany should accept all this boo hoo hoo and go on lending to countries which show no inclination to organize in any way which might plausibly service the debt. The Greek population can now travel freely within the Eurozone. How many are moving to Germany in search of work?

        Although a thin elite loots extensively with both hands throughout what is euphemistically called the Global Economy, most people who are not elite still expect to be forced to repay what they borrow and are not excused by the fact that they obtained the loans under false pretenses.

        The answer is probably not letting every creditor with a sob story completely off the hook. I am afraid your arguments, although extremely well put, amount to very little more than this, in the final analysis.

        1. Maju

          German manufactures are largely imports (cheap imports thanks to the too strong euro) and production of German brands (or components of the branded products) in other EU countries like Spain.

          Also Germany subsidizes (wisely) its own workforce with quite generous welfare and a policy of active containment of house price speculations. These are good ideas, however ideas that are deemed “bad” if practiced by Mediterranean countries (don’t worry that they do not). So how can Mediterranean workers compete with German workers who have cheap homes, top quality public education and a generous welfare system (and are still relatively expensive)? Eating rocks and sleeping in the streets apparently… and learning German to emigrate to Germany to work for peanuts, be pushed around by German racists (not all but too many anyhow) and maybe even murdered by a cell sponsored by the German secret services, as happened to Greek and Turkish emigrant workers this decade. WTF?!

          “Germany should accept all this boo hoo hoo and go on lending to countries”

          No. Germany, or rather the German oligarchy, should assume its loses and that includes a weakened euro and sucking the loses of wild speculation in Ireland and elsewhere.

          I’m all for bankruptcy but ordered bankruptcy with state intervention and private well deserved loses for the bourgeois speculators of whatever nationality. And that is what the Euro-oligarchs (not just ‘Germany’) are trying to impede at any cost.

          “How many are moving to Germany in search of work?”

          That’s impractical: I have an apartment here not there and without home I am nothing but a vagrant to be spit upon and beaten by police and fascist thugs alike, I speak the languages of here not those of there and there are no job offers for Germany anyhow: it’s a myth.

          Germany is not the welcoming country of your dreams anyhow: it is a harsh and quite xenophobic society (I’d have less qualms about moving to France or Italy or even the Netherlands or Britain surely). But it’s not easy anyhow to emigrate without contract or something: if you’re unemployed you may have difficulties to pay for the ticket, so what about the rent of a new apartment, etc. It’s not as easy for people to move: it’s much easier for companies to go where the workers are. Just that now they are everywhere.

          This you say is a petty excuse: what better place to invest than Greece where low taxes and tax evasion is just the norm? Well, I’d say that German or whoever businesspeople do not even want to learn Greek or even pay for an interpreter. If they are not willing to go to Greece why would they hire Greeks in Germany? Does any of all that make any sense at all?

          “most people who are not elite still expect to be forced to repay what they borrow and are not excused by the fact that they obtained the loans under false pretenses”.

          That is not acceptable: there is a right to bankruptcy, a right to begin anew if things go wrong, a right not to be abused or enslaved by some usurers.

          That’s what my arguments amount to and they are arguments that people understand and expect to be fulfilled. They think (wrongly) that their political leaders are there to enforce such a basic justice. When these expectations are not met, trouble arises – big trouble.

      2. Jim

        To address two of your points.

        (i) How would you “redefine” the Euro? By devaluing it, thereby precipitating higher inflation in Germany than in Italy? What’s the percentage of households in Germany who are homeowners? In Italy? How will inflation impact the German renter?

        (iii) Lack of German leadership? The vast majority of Germans have already spoken: they want less Europe, not more? Should the ECB simply ignore them? Does the German voter simply not understand what’s good for him?

        1. Maju

          (i) I have not worked out the details but I would have kept the euro low, more or less at parity with the dollar in order to keep international competitivity for all, not just Germany. And I would devalue it now and I think it is being devalued after some resistance anyhow.

          (ii) If Germans truly want less euro, then let them leave. I don’t think the issue is so clear cut and in fact Germany is surely a very divided country on these matters now. But not long ago Germany was a very europhile state and by natural weight it should be the leader or at least a leader of the union. If Germany is sabotaging the union, then it’s bad for all, including them.

          This dynamics are not sustainable: the EU is being broken apart and German irresponsibility is central to this negative self-destructive dynamics. It’s like Merkel is all the time showing a middle finger to all and I’d say it’s about time the rest show her the middle finger in turn and say “good riddance!”

          1. ebear

            >> (i) I have not worked out the details but I would have kept the euro low, more or less at parity with the dollar in order to keep international competitivity for all, not just Germany. <<

            ….assuming you could do that without an indignant response from the rest of the world who would then lower their currencies relative to yours. A race to the bottom in other words.

            Less handwringing and more focus on comparative advantage would be my approach. Europeans are good at many things, especially when they work together. As for social welfare and wealth (re)distribution, they should look to Canada as a model. There are parts of Canada that are never going to pay their way, yet no serious person would ever consider a breakup. We just suck it up and deal. It's a rich country. We can afford it. So can Europe.

          2. Maju

            That’s what China has done all this time and worked. Most of EU is not like China but it’s more like China than like Germany. It’s not our problem anyhow how the rest of the world takes it because it’s not been EU but the USA who has been dumping its currency anyhow and not agreeing to any international currency standards.

            Why would anyhow EU be the fool of the World and keep irrationally over-priced the euro? The only reason is internal: German industry (and a few others) wants it because it cheapens imports. But this can only work if exports are many and expensive and that’s not what happens in most of the Eurozone, so the Eurozone must be de-Germanized (with or without Germany).

            “We can afford it. So can Europe”.

            Tell that to the Germans. It’s time that Europe begins to work without being so subservient to German often too selfish interests. Besides Canada is not a truly autonomous country in practical terms: it only exists because of the protection and tolerance of its Southern neighbor – let’s be frank.

            The EU is more comparable to the USA in everything but one: imagine if each other US state spoke a different language. Can you imagine the problems if someone speaking ‘Alabaman’ or ‘Nebraskan’ would have to emigrate to a country where they speak ‘New Yorker’ or ‘Californian’, each language being mutually unintelligible and deeply rooted locally? And if the representatives of all these ethnically distinct constituencies would have to negotiate, never mind the expenses in translators alone.

  5. Ignacio

    I see this as a piece of fresh air, specially if it helsp to relax the enforcement of strict austerity measures in a too-short time span. This was increasingly looking as a latest version of the shock doctrine.

  6. Leverage

    It’s amazing how the moralizing creditors keep pushing the can until it all explodes, sometimes in blood and revolution.

    Such a terrible designed system for the pure extraction of wealth and power can’t be sustained for a very long time, you have a good example in the short-lived dramatic Greek authoritarian junta.

    If this is not allowed within your own people, how is supposed a toothless external power to impose their desires. Financial shenanigans and threats can you get so far without true coercion by force, as well as neoliberal propaganda. But at some point it all falls apart with people not willing to suck it anymore because the alternative starts to look like so much better.

    This sudden auto-attributed power by ‘private entities’ (cartels like the IIF, ISDA or other institutions) to be more sovereign than the people won’t stand much longer.

    1. Maju

      Very well put, Leverage. But if they succeed in this strategy (and so far they are succeeding: their dividends keep rising and they care not about the rest), I’d be most scared.

      I don’t think it’s a sustainable strategy in any way but I have yet to see how the People(s) can counter their almost total grip on the resorts of power (up to a point where we cannot really speak anymore of ‘democracy’ and not laugh nervously at how it does not work and seems unable to balance the oligarchs in any meaningful way – at least by the moment).

  7. Lafayette

    TIME TO GO …

    Der Spiegel Increasingly … Germany’s EU partners are unwilling to play along. Chancellor Merkel now finds herself confronted with powerful opponents … A large alliance of the finance ministers, heads of government and central bankers from almost all of the 17 euro-zone member states has been calling for the European Stability Mechanism (ESM) to be enlarged — significantly.

    If Der Spiegel can get this point across to the German political establishment then progress can be made. The reasons for Germany stonewalling the enhancement of the reserve-fund and the ECB’s role as lender-of-last-resort are spurious.

    Many seem to believe that a remake of the Weimar Republic’s hyperinflation is possible. Which stretches history lessons a bit far – the Europe of today is not the Europe of 1919 with a defeated Germany suffering from punishing war reparation payments.

    Besides, Germany may be doing well economically but the rest of Europe has so much spare production capacity that inflation is likely to take a great long while before it rears its ugly head.

    But, as the Economist notes, Angela must always be forced to take drastic decisions. So, I will write the unprintable: Maybe its time for Merkel to take a well-deserved retirement?

    Schroeder got just as stroppy – but was shoved off anyway …

  8. Schofield

    I’m not entirely sure why Germany should wish to destroy its export markets by letting its fellow Euro member countries leave the Euro. Afterall under Neo-Liberal global terms of free market trade by accounting identity accumulating a large surplus tends to begat deficits elsewhere! Ha-Joon Chang “Bad Samaritans” argument.

    1. Lafayette


      I’m not entirely sure why Germany should wish to destroy its export markets by letting its fellow Euro member countries leave the Euro.

      Politics is a world unto itself, often beyond logic or comprehenion.

      German politics is a place where two parties are encrusted into power and jockey with a third to stay in power as necessity may impose. Merkel has had a long run and is a competent leader. But, she is … uh, German. That is, when she has made up her mind, she tends to be inflexible.

      Her party has lost some side-elections and they are no longer a distinct favorite for the next national elections. So, Merkel is playing to her electorate …. which blindly thinks that German prosperity is due to German hard-work and need not be shared in times of dire need.

      Greek profligacy jars them considerably – not only because of Greece but the fact that the debt was incurred “off the books” – and the EU Commission in Brussels had no idea that such was happening.

      Most Germans, like most Europeans, like to say (responding to polling studies) that they are Europeans-first. The truth is apparently otherwise.

      In the negotiations leading up to the establishment of the euro as a currency, Germany was adamant about the 3% of GDP debt-limit rule. They are livid that the sanction also foreseen for flagrant abuse of the rule were never imposed by the Commission in Brussels.

      Given recent events, they feel vindicated by the apparent necessity of both rules – that is, capping debt that a country can incur and writing into national law the Golden Rule of balanced budgets. They thus feel justified in their “told ya so!”

      Having said that, German exports to the rest of Europe are hardly so negligible that a default on the euro would not provoke a recessional cataclysm that could very well affect Germany as well.

      It is taking a while for that verity to sink into German minds. Merkel is a lady, but she is also a very astute politician.

      And the lady is not for turning … not just yet.

  9. Fiver

    Germany should just exit. It is more than evident it will be completely pissed on no matter what it does.

    I find this constant demand for Germany to foot the bill for all of Europe’s elites’ stupidity as if this was a question of unpaid Reparations really too much. Show me ONE other country that is acting as “nobly” as the inverted moralism aimed at Germany demands. Just one.

  10. Hugh

    We should never forget there are no white hats here. Merkel, Sarkozy, Monti, Lagarde, Draghi, this is all about kleptocracy, the division of spoils and the apportionment of burden on to the 99%s of the various countries.

    We should also remember there are six issues that need to be resolved for any eurozone solution to work.

    1) a democratic debt and fiscal union
    2) an end to mercantilist trade patterns
    3) recognition and resolution of Europe’s insolvent banking system
    4) a much stronger/more active European Central Bank
    5) replacement of Europe’s corrupt political class
    6) taxation of Europe’s kleptocratic rich out of existence

    As in the US, the real problems are not even on the table. As long as this is the case, there will be no solutions just lots and lots of can kicking pretending to be solutions.

    1. LeonovaBalletRusse

      Hugh, you’ve put in a nutshell. You’re right, neither they nor we will go there. The Kabuki theatre goes on.

  11. zebulon

    The monetary union has failed. There is no point in denying this. In my opinion it is time to start thinking about how to end it in a controlled manner. The speed of social and cultural change that would be required allover Europe to achieve convergence is not feasible with ordinary people (not Germanic nor Mediteranean). At least not without giving up entirely on democracy.

    The ECB LTRO operation might be seen as a first step towards orderly dissolution. By providing massive loan support to periphery banks they are enabled to pay back their debts towards Northern banks. By that the Northern banks are increasingly able to insulate themselves from the troubled Southern financial firms and their sovereigns. If exiting the Euro will no longer mean immediate and total collapse of the entire banking system, the exit of nations from the Euro will not be impossible anymore. Just add some restrictions on cash transactions and suspend free capital movement between countries and the split is effectively done.

    Germany will suffer in a way as Switzerland now, with its own currency appreciating. But then its Bundesbank can step in and stop this very effectively as we all have learned.
    Countries like Italy and France maybe even Spain will have a fair chance to take the turn to competitiveness with their industrial base after some devaluation and inflation.

    The very weak countries like Portugal and Greece will unfortunately continue to suffer in such a scenario. Currency devaluation will not help them because there’s no industry whatsoever left if it ever existed, and on the other side they will import massive inflation which will make workers and pensioners suffer. But with the vastly larger policy space for European nations and some European solidarity resurfacing again, even those poor guys could probably be helped one way or the other…

  12. Francois T

    If Merkel wants to shat it her own nest by killing Germany’s export markets to the altar of financial orthodoxy and domestic politics, something’s gonna blow badly in the world economy.

    Everybody in the know is aware that quite a few German big banks are technically insolvent, but they’ll be destroyed if the world economy goes into a tailspin.

    1. Jim

      Why is it so difficult for so many to understand that the Eurozone is a flawed economic construct. It can’t work, and won’t.

      You want a viable Eurozone? Have every country vote on the following:

      A Untied States of Europe, with a central treasury, based in Berlin, comprised of 17 states. The official language is German. A permanent transfer union will follow.

      The northern European countries will have disproportionate representation in the legislative chambers, far more than the smaller states have over the larger states in the United States of America.

      If a majority of citizens in a country approve the referendum, the country joins the United States of Europe.

      If not, then the country leaves.

        1. Fiver

          “But this can only work if exports are many and expensive and that’s not what happens in most of the Eurozone, so the Eurozone must be de-Germanized (with or without Germany).”

          Look back at everything you’ve said and you’re all over the map. You demand Germany essentially pay for everything in one breath, deny that in another but then demand it also either leave the EZ or adopt policies that make it impossible for it to pay for everyone else’s consumption binge.

          And all the while, you completely neglect that Germany and every other Western nation REPORTS to Wall Street/Washington.

          Germany has been put in a vise and is being squeezed for all it’s worth. It is a top-down, GLOBAL squeeze. It did NOT create this situation. The only real solution is to abandon global corporatism, which of course would mean revolution and almost certainly a visit from the US military. No more of this BS “Germany should, ought..blah” when the plain fact is that Germany has been put in an impossible situation and is being forced to play the role of IMF enforcer or be economically obliterated. Don’t blame the pawn, and especially don’t blame the pawn when it did NOT cause this and has in fact already eaten an enormous amount of everyone else’s shit.

          1. Maju

            “You demand Germany essentially pay for everything in one breath”…

            I haven’t said that at all. In fact I’m mildly for outright generalized bankruptcy jubilee: nobody pays nuthin’ after all.

            “demand it also either leave the EZ or adopt policies that make it impossible for it to pay for everyone else’s consumption binge”.

            I don’t say they pay anything, just that they stop forcing the rest of us to live in a Deutsche-Mark corset. If they want their beloved DM back, they can remint it and let the rest manage the euro more like the French Franc, a more realistic historical currency: strong enough but not too strong.

            But I insist: nobody has to pay anything except maybe the bloodsucker speculators who expect all the rest to pay with their blood. Those should go to prison but that’s another story.

  13. Lafayette

    Maju: I haven’t said that at all. In fact I’m mildly for outright generalized bankruptcy jubilee: nobody pays nuthin’ after all.

    That would please a great many of us. Unfortunately it is a highly emotional response and overlooks the way debt grinds through an economy. Meaning the securitization of debt, if taken too far, seeps deeply into a national economic structure.

    Some banks, insurance companies and other institutions or corporations bought the securitized debt. They were looking forward to comfortable income streams to help with covering operational costs.

    Now presume those revenue streams from the securitized debt are suddenly cut off. Many of them are in very Deep Sneakers. It could lead to considerable lay-offs and the UI then necessary just adds to the National Debt.

    Which is why National Debt owed to banks must be used only as a last resort. It is far better to sell National Debt Bonds to a nation’s citizens (which is what Germany has done and even Italy). After all, where is the revenue being employed by a national government if not in the interest of its citizens?

    Besides, CRAs do not seem to get so upset when national debt is structured in this manner. They focus on National Debt auctioned to financial institutions that securitize it (like a virus) down throughout an economic system.

    1. Maju

      I don’t think it’s emotional but functional: debt is burdening the economy, society and politics – IF, by erasing or radically reducing the extant debt burden, these problems are solved or at least canalized into a more positive outcome, everybody wins. Everybody but ultimate creditors (i.e. those who are owed a lot but owe little, usually banksters of the worst kind who deserve no respect and should be in jail), of course.

      “Some banks, insurance companies and other institutions or corporations bought the securitized debt. They were looking forward to comfortable income streams to help with covering operational costs”.

      Society cannot be hold hostage of the speculating hopes of some individuals whose ethics are obviously substandard, to say the least.

      … “just adds to the National Debt”.

      National debt erased too. Actually that’s the whole point: the state and society gain some time while “the Fugger” of our time suffer a bit, after earning huge amounts. Should society be held hostage of “the Fugger” just because they are good playing monopoly? No way!

      “It is far better to sell National Debt Bonds to a nation’s citizens”…

      Actually the biggest holders of Greek debt, for what I have read, are Greek banks and the like. These banks would need to go bankrupt and THEN (only then) nationalized at zero cost in order for the state to guarantee current accounts and such (which is a cost in itself).

      “Besides, CRAs do not seem to get so upset”…

      CRAs (rating agencies) are part of the problem. And part of the problem is that the state is resorting to private banks for loans as if we’d be in the gold patron system and not in a fiat money one in which the money is a pure state product. States should normally only borrow from their own central banks: private banks are there to lend to the private sector, if the must exist at all. But states should never held hostage of this neo-gold-pattern manipulation.

      In any case states and society is where the buck should stop, not any private agent, whose existence is only legitimate for as long as it serves society (and not as these actors, conspire against it so cruelly and criminally).

        1. Maju

          Seems so and I stand corrected (although Greek banks are major debt holders), I could not care less anyhow – after all who owns those funds but the banks?

  14. Lafayette

    DE: To add to that, Luxembourg’s new foreign minister gave an interview with German media yesterday in which he called the fiscal compact a ‘waste of time and energy’.

    Yes, but what could you expect from myopic Luxembourg? Have you seen their Debt/GDP ratio? 19.1% …

    All they care about is that the banks that are the engine of their local economy remain in Luxembourg. With all the German savings that have been transfered there over the past 30/40 years.

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