Satyajit Das: The Euro-Zone Debt Crisis – It’s Now ABOUT Germany NOT UP TO Germany!

Yves here. Das’ post has a lot of useful information, but like a lot of finance people, he is hostage to a conventional markets-driven reading of the issues. Governments are not households or businesses. When the private sector delevers, unless a country is running a big surplus (as Germany is) you can’t have government delever at the same time. So Germany’s notion of virtue (that governments and private citizens should wear an austerity hair shirt) works only for Germany.

There are also ways to prevent an Euro train wreck that don’t involve using German’s balance sheet, such as having the ECB issue bonds, or do revenue sharing (say on a per capita basis, as Marshall Auerback suggested in a NC post). Or the ESM could be given a banking licence via the ECB so that it has the ability to deploy unlimited capital to sort out the solvency issue (as France has suggested). Yanis Varoufakis’ “Modest Proposal” is another approach. But if Germany continues to oppose having the ECB take a much more aggressive stance, Das’ concerns are germane.

By Satyajit Das, derivatives expert and the author of Extreme Money: The Masters of the Universe and the Cult of Risk (2011)

It’s now about Germany, not about Greece, Spain, Italy, Ireland or Portugal!

Germany is financially vulnerable. Irrespective of the course of events, it faces crippling costs.

Gas gangrene is a deadly infection that causes massive necrotic damage to tissue. Treatment is by antibiotics and hyperbaric oxygen therapy to inhibit the growth of and kill the bacteria. But if that fails, amputation is necessary. Germany may be in great danger, having left it to late to excise the gangrenous body parts of the Euro-Zone.

Oh What a Lovely Crisis…

To date, Germany has had a very good European debt crisis.

The German economy is one of the few economies to have grown since 2008. Unemployment is low and workers have received pay rises.

Interest rates on its government bonds, Bunds, are at a record low. On 23 May 2012, the two year note was issued with a zero coupon and gave investors a return of 0.07% per annum, prompting the Financial Times to post the headline: Oh Schatz: No Coupon (the German two year bond is known as the Schatz). A few days later the bonds were yielding zero percent. Shortly thereafter, the yield on the 2-year bonds was negative. The low rates reflect safe haven buying as investors flee other European markets.

Politically, Germany’s importance has never been greater. Chancellor Angela Merkel bestrides Europe as a female Bismarck (the German view) or a Gorgon (the Greek view).

Germany’s success is based on an economy, heavily rooted in manufacturing. It is also the result of Chancellor Gerhard Schröder’s structural reforms, especially of the labour market. The recent 4.3% pay increase won by the influential IG Metal union is the largest since 1992. Interestingly, the union made little headway in the recent negotiations on the area of greater controls on contract labour, which companies use for flexibility and managing costs.

But a significant part of Germany’s growth has been driven by the Euro-Zone.

Favourable conversion exchange rates upon introduction of the Euro artificially increased the purchasing power of countries like Italy, Spain, Portugal and Greece. The common currency led to a dramatic fall in interest rates in weaker Euro-Zone members as well as over time a compression of credit spreads. No longer exposed to the risk of devaluations, a persistent feature of the post war economic history of Southern Europe, lenders lent generously to these countries. Debt fuelled consumption and investment drove growth.

German exporters were major beneficiaries of this growth. German banks and financial institutions helped finance the growth. It was the European version of Chimerica, where China financed American buyers of its products by lending back its trade surpluses.

German exporters also benefitted from a cheap Euro, receiving a significant subsidy because of the inclusion of weaker economies such Italy, Spain, Portugal and Greece in the common currency. This cost advantage assisted German export performance, especially in emerging markets in Eastern Europe and Asia.

But the good times are ending. The question is whether the Wirtschaftswunder (post-second world war economic miracle) ends inGötterdämmerung (the twilight of the Gods) or Weltuntergang (the end of the world).

German Fetishes…

Germany’s strengths, especially its export fetish, are weaknesses. Exports are over 40% of its Gross Domestic Product (“GDP”), compared to less than 20% in Japan and about 13% in the US. Germany’s current account surplus, which is larger than China when measured as a percentage of its GDP, is a source of pride. Exports have provided the majority of Germany’s growth in recent years.

Germany is heavily reliant on a narrowly based industrial sector, focused on investment goods -automobiles, industrial machinery, chemicals, electronics and medical devices. These sectors make up a quarter of its GDP and the bulk of exports.

The improvement in German competitiveness may also be overstated. Germany entered the Euro-Zone with an overvalued exchange rate. This exaggerated the extent of Germany’s adjustment.

Germany’s service sector is weak with lower productivity than comparable countries. While it argues that Greece should deregulate professions, many professions in Germany remain highly regulated. Trades and professions are regulated by complex technical rules and standards rooted in the medieval guild systems. Foreign entrants frequently find these rules difficult and expensive to navigate.

An OECD study found that German regulation of professional services was stricter than in all but five of 27 countries examined. A European Commission study of three professional sectors in 13 countries found that Germany has more reserved professions than all but one. Germans argue that deregulation would be disruptive and lead to a decline in quality or pose risks.

Despite the international standing of Deutsche Bank, Germany’s banking system is fragile. Several German banks required government support during the financial crisis.

Highly fragmented (in part due to heavy government involvement) and with low profitability, German banks, especially the German Länder (state) owned Landsbanks, face problems. They have large exposures to European sovereign debt, real estate and structured securities.

Prior to 2005, the Landesbanken were able to borrow cheaply, relying on the guarantee of the state governments. The EU ruled these guarantees amounted to subsidies. Before the abolition of the guarantees, the Landesbanks issued large amounts of state-guaranteed loans which mature by December 2015. With limited access to retail deposits (primarily held with mortgage banks known asSparkassen) and no State guarantee, the Landesbanks’ ability to refinance maturing debt in international markets remains uncertain.

While it insists on other countries reducing public debt, German debt levels are high -around 81% of GDP. The Bundesbank, Germany’s central bank, has stated that public debt levels will remain above 60% (the level stipulated by European treaties) for many years.

German public finances are also vulnerable to the demographic problems of a rapidly aging and shrinking population. As increasing numbers of workers retire, tax revenues will decline and pension and healthcare costs rise.

Caught in a Trap…

Germany’s greatest vulnerability is its financial exposures from the current crisis. German exposure to Europe, especially the troubled peripheral economies, is large.

German banks had exposures of around US$500 billion to the debt issues of peripheral nations. While the levels have been reduced, it remains substantial, especially when direct exposures to banks in these countries and indirect exposures via the global financial system are considered.

The reduction in risk held by private banks has been offset by the increase in exposure of the German state which assumed some of this exposure. This was done either directly or indirectly through indirect support of various official institutions such as the European Union (“EU”), European Central Bank (“ECB”), the International Monetary Fund (“IMF”) and specially bailout funds.

For example, the exposure of the ECB to Greece, Portugal, Ireland, Spain and Italy is Euro 918 billion as of April 2012. This exposure is also rising rapidly, especially driven by capital flight out of these countries. The Financial Times reported on 21 May 2012 that the ECB had provided the Greek Central Bank with an undisclosed Euro 100 billion to assist Greek banks under it Emergency Loan Assistance (“ELA”) facility.

Germany’s guarantees supporting the European Financial Stability Fund (“EFSF”) are Euro 211 billion. As Spain could not presumably act as a guarantor of the EFSF once it asks for financing, Germany’s liability will increase further from 29% to 33%. France’s share also increases from 22% to 25%. Perhaps most interestingly, the liability of Italy, which is in poor shape to assume any additional external financial burden, rises from 19% to 22%.

The European Stability Mechanism, the replacement to the EFSF which is planned to commence in July 2012, will require a capital contribution from Germany which will push its budget deficit from Euro 26 billion to Euro 35 billion. If the ESM lends its full commitment of Euro 500 billion and the recipients default, Germany’s liability could be as high as Euro 280 billion.

Since 2010, the Euro-Zone has committed Euro 386 billion to the bailout packages for Greece, Ireland and Portugal. In June 2012, Spain is expected to request at least Euro 100 billion for the recapitalisation of the banking system, making the total commitment just below Euro 500 billion.

But the largest single direct German exposure is the Bundesbank’s over Euro 700 billion current exposure under the TARGET2 (“Trans-European Automated Real-time Gross Settlement Express Transfer System”) to other central banks in the Euro-Zone.

Designed as a payment system to settle cross border funds flows, surplus countries, like Germany, have been forced to use TARGET2 to finance deficit countries. Before 2008, deficits were financed by banks and investors. Since the crisis commenced, TARGET2 has been used to meet the funding needs of peripheral countries without access to money markets to fund trade deficits and the capital flight out of their countries.

Germany is by far the largest creditor in TARGET2. The Netherlands, Finland and Luxembourg are the other creditors with all other Euro-Zone countries being net debtors within the system.

Germany is now caught in a trap. Irrespective of the resolution of the debt crisis, Germany will suffer significant losses on its exposure – it will be the biggest loser. As Elvis Presley once sang in Suspicious Minds: “We’re caught in a trap I can’t walk out because I love you EU too much baby”.

No Exit …

Advocates of European unity believe greater monetary and fiscal integration is the solution. They argue that the Euro-Zone’s current account is nearly balanced, its trade account has a small surplus, the overall fiscal deficit is modest and the aggregate level of public debt is manageable.

Integration would require mutualisation of debt through the issue of Euro-Zone bonds backed jointly or severally by all member states. In late May 2012, French President Francois Hollande provided a curious argument in support of Euro-Zone bonds: “Is it acceptable that some sovereigns can borrow at 6% and others at zero in the same monetary union?” While music to the ears of Spanish and Italian leaders, Germany was understandably reluctant to embrace the mutualisation of European sovereign debt. As the largest, most creditworthy nation in the Euro-Zone, Germany would bear the largest financial burden. Its exposure would increase through its liability for Euro-Zone bonds.

Fund manager John Hussman summarised the idea of Euro-Zone bonds neatly (“This is like 9 broke guys walking up to Warren Buffett and proposing that they all get together so each of them can issue “Warrenbonds.” About 90% of the group would agree on the wisdom of that idea, and Warren would be criticized as a “holdout” to the success of the plan”

Germany’s TARGET2 exposure would also continue to increase, at a rate of Euro 80-160 billion per annum to finance expected trade deficits in the rest of Europe. The increase in exposure may be higher if needed to finance budget deficits of weaker Euro-Zone members and the weak banking sector. Germany’s TARGET2 exposure has increased by around Euro 237 billion or around 34% in the last 8 months alone.

Political will for integration is lacking. Germany is reluctant to become the ultimate guarantor of the Euro-Zone. Bundesbank President Jens Weidmann put the German position on Euro-Zone bonds bluntly: “You cannot give someone your credit card without having the means to control the spending.” He also appeared to indicate concern about further activism from the ECB: “The European Central Bank has reached the limit of its mandate, especially in the use of its non-conventional measures.” Most importantly, Mr. Weidman pointedly told Le Monde: “In the end, these [measures] are risks for taxpayers, most notably in France and Germany”.

As a result, Europe may be forced to rely on its current policy of partial solutions -austerity and monetary accommodation by the ECB. As the troubled economies are unlikely to regain access to commercial funding in the near future, the debt of peripheral nations will shift to official institutions via bailouts, funding arrangements and the TARGET2 system. Germany’s financial liability will increase in this case.

In the peripheral economies, continued withdrawal of deposits from national banks (a rational choice given currency and confiscation risk) may necessitate either a Europe wide deposit guarantee system or further funding of banks.

The amounts involved are substantial. Total bank deposits in the Euro-Zone total around Euro 7.6 trillion, including Euro 5.9 trillion from households. The euro zone’s peripheral countries, which are most susceptible to capital flight, have Euro 1.8 trillion in household deposits. In the first 3 months of 2012, Euro 97 billion of deposits were withdrawn from Spanish banks.

A credible deposit insurance scheme would have to cover household deposits (say up to Euro 100,000), which is around 72% of all deposits, in the peripheral countries. This would entail an insurance scheme for around Euro 1.3 trillion of deposits.

As noted above, in early June 2012, the Spanish government sought Euro 100 billion from the Euro-Zone to recapitalise its banks. A single Spanish bank – Bankia – will require Euro more than 19 billion of new capital. To date, including the Bankia commitment, the Spanish government already has injected to Euro 33 billion (3% of gross domestic product) into its banks, excluding asset guarantee schemes that had been provided to buyers of bailed out banks. Given that the Spanish Economy Ministry reports that Euro 184 billion in loans to developers are “problematic”, the additional recapitalisation needs of Spain’s banks may be as high as Euro 200-300 billion in additional funds (20-30% of GDP).

Any European deposit guarantee system, provision of capital or further funding of banks would potentially increase Germany’s financial liability.

If integration is not undertaken or the partial solutions fail, then some European countries will need to restructure their debt and potentially leave the common currency. Germany would suffer immediate losses. A Greek default would result in losses to Germany of up to around Euro 90 billion. Germany’s potential losses increase rapidly as more countries default or leave the Euro-Zone. The greater the delay in default or departure the larger the German losses as their exposure increases.

In the absence of a Lazarus like recovery in the peripheral economies, Germany’s current exposures are not recoverable. If the present arrangements continue or there is greater integration, the increase in commitments or debt levels will absorb German savings, crippling the economy. If Germany wants to leave the Euro reverting to the Deutschmark, it would suffer losses equivalent to its existing exposure as other European countries are unlikely to be able to settle their liabilities.

There are also real economy effects. Austerity or default will force many European economies into recession for a prolonged period. German exports will be affected given Europe is around 60% its market, including around 40% within the Euro-Zone. In case of a break-up of the Euro, estimates of German growth range from -1% to over -10%. It is worth remembering that the German economy fell in size by around 5% in 2008, the worst result since the Second World War, mainly on the back of declining exports.

Defaults or partial break-up of the Euro would also leave German banks with significant losses, potentially necessitating state support. This would further increase the State’s liabilities.

In the case of integration or partial solutions, the effects on Germany may be cushioned by the weakness of the Euro, which will maintain export competitiveness. But defaults and a break-up of the Euro will result in an increase in the value of the Euro, at least in the short term, undermining German exports.

Germany is being pressured to boost its own economic growth to assist the rest of Europe. This would force it to run budget deficits and increase its own debt. Higher wage rises would increase costs, undermining its international competitiveness. Higher consumption would also reduce the saving pool needed to finance itself, fund its banks and supply capital to the rest of Europe.

In the past, Germany has resisted efforts to incur fiscal deficits and increase domestic consumption to inflate the economy. The principles of thrift, prudence, a strong currency and a distrust of finance, often associated with the Swabian haus frau, are deeply embedded in the nation’s DNA.

Germany’s problems are likely to be compounded by a slow down in emerging markets. Recent German growth has relied on Asia, Eastern Europe and Brazil. German carmaker VW sell more cars in China than in Germany. Emerging market demand for high tech industrial machinery has helped German exports.

Germany negotiating position is weak. For example, Greece owes about Euro 400 billion to private bondholders but increasingly to public bodies, such as the IMF and ECB, mainly due to the bailouts. If Greece walks away as some political parties have threatened, then the fallout for the lenders, such as Germany, are potentially calamitous.

Doubling the Losses…

In 1999, Finance Minister Theo Waigel proclaimed that the Euro would be like the German Deutschemark it was replacing. In his bookFat Years: Why Germany Has a Brilliant Future (co-authored with journalist Dirk Heilmann), Waigel predicted that Germany would become the world’s richest country as measured by income per head by 2030.

Now, the entire project faces an unimagined crisis. As Lorenzo Bini Smaghi, a former Italian ECB executive board member, observed: “The assumption was … that there would be no crises.”

As anti-austerity parties gain support in the rest of Europe, German willingness to finance further bailouts is diminishing. Increasingly, Germans fear an unending commitment to preserve the common currency and the Euro-Zone. The resentment is evident in a headline in the popular tabloid Bild: “Sell your islands, you bankrupt Greeks. And the Acropolis while you’re at it”. But it may be too late.

Germany’s attempt to balance the benefits of the single currency and the advantages of preserving the Euro-Zone against its traditional preference for fiscal and monetary conservatism has failed, leaving the nation with severe financial problems which will curtail future growth. The size of the exposure is large, both in relation to Germany’s GDP of around Euro 2.5 trillion and German household assets which are estimated at Euro 4.7 trillion.

German citizens will have to pay twice for the Euro. In the early 2000s, they paid through internal devaluation – reductions in real wages, unemployment and labour market reforms. Now, they will have to pay for the bailouts. Once the artificial boom ends, voters will discover they were betrayed by Germany’s pro-European political elite. There will be an electoral revolt and, as in the rest of Europe, a strong challenge from radical political forces with unpredictable consequences.

Germany’s history is one of monumental reverses and extremes. In his 1901 novel Buddenbrooks, about a well-to-do North Germany family whose fortunes are in decline, Thomas Mann anticipated the present situation: “I know that the outwards, visible and tangible signs and symbols of happiness and achievement often only appear when in reality everything is already starting to go downhill again.The outer signs take time to arrive – like the light of a star which shines most brightly when it is on the way to being extinguished, or maybe has already gone out”.

As Friedrich Nietzsche knew: “…hope is the worst of all evils, because it prolongs man’s torments.” Germany may not, as widely assumed, offer a safe haven in the European debt crisis.

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  1. Daniel de Paris

    Thanks for pushing that properly constructed and argumented post. A very good one with an outsider view!

    “Germany is heavily reliant on a narrowly based industrial sector, focused on investment goods -automobiles, industrial machinery, chemicals, electronics and medical devices.”

    You need a person with a background in finance to address German industrial base as a “narrowly based industrial sector”.

    There is certainly matter to discuss the strength of German Industry. But first and foremost in terms of demographics. Both countrywise and on sectorial ground. But certainly not on the ground of over-specialisation…

    Since I understand that Das specialty is in banking and derivatives, that comment is certainly no problem. A great set of view in anyway:)

    “There will be an electoral revolt and, as in the rest of Europe, a strong challenge from radical political forces with unpredictable consequences.

    Germany’s history is one of monumental reverses and extremes.”

    This is where the article is missing the point as well. When you call for history as backup you need more than clichés. But I understand that Mr Das may not have significant contact with the German people at this stage.

    1. Enraged

      Something strikes me as odd with this picture: Germany is being held as the potential “savior”. True, Germany does have a very solid indistrial base and that has been its strength. And yet, Germany is the weakest link as well the link having the most to lose. What Spain, Italy, France and even Greece have is the ability to feed their people, should everything collapse all of a sudden. Those countries can and will revert to community-based economies in a heartbeat, should there be a sudden need. Germany does not have that luxury. Germany has, forever, based its existence on industries.

      When we look at basic needs, food comes first, no matter where. France has known that for centuries. In fact, Louis XIV’s economic system was rigid autarky: natural, economic self-reliance. He did deveop commerce and industries but not at the expense of the ability to feed the people. And deep down, the French have always remained faithful to what it genetically perceived as self-evident.

      Germany does not. The only way Germany can survive is by trading it manufactured products for food, should push come to shove. That is also what make England a very weak country: it is an island and it does not have the ability to feed its own people.

      The more I see the situation unfold and the more confident I am that Europe cannot and will not self-destruct. Likewise for the US. So long as it preserves the ability to feed its people, America is not going anywhere.

      1. Nathanael

        Louis XIV’s system collapsed a few generations later in the French Revolution. This was largely due to a crop failure.

        The crown owed foreigners massive amounts of money; because it had been funding luxuries for the rich and foreign wars by borrowing abroad. This didn’t matter until France suddenly needed to import food, and had little to trade abroad. There were the luxuries hoarded by the rich to trade, of course… but they refused to give them up.

        The result was inevitable: revolution, and in the wake of the revolution, the armies of the revolution swept into the neighboring countries and started just taking their crops.

        1. Enraged

          That is the reason I refered to Louis XIV and not to Louis XV or Louis XVI. The first one did develop the country’s infrastructures (most of the waterways date from his time) before succumbing to megalomania rarely seen before (the “Sun King”): he should have been removed then but it simply wasn’t done. The two following ones, however, simply picked up where he had left off.

          Ignoring the accomplishments owed to Louis XIV would be unfair and irresponsible, however. One of them is the imp-lementation of autarky. Which is a hell of a lot more than the US ever did…

      2. Jim

        There is no “Europe”. Nor do the majority of Greeks or Germans want there to be a United States of Europe. Why do so many insist otherwise?

        With respect to the UK, the most consequential action Thatcher ever took was to ensure that the UK not be part of the Eurozone.

        Germany thrived with the DM, and can thrive again with the DM. Will it suffer export deterioration due to an overvalued currency? Sure, but it can also become more productive.

        1. Maju

          The UK will not escape just because it’s not in the Eurozone. The real problems are often others and the latest British growth data was exactly 0%, worse than many Eurozone states. Britain may have gained some time but not avoided the true problems and, anyhow, what kind of economy can Britain have without EU? No economy at all. The British Empire is long gone, wake up!

          1. Calgacus

            The UK will not escape just because it’s not in the Eurozone. The real problems are often others and the latest British growth data was exactly 0%, worse than many Eurozone states. Britain may have gained some time but not avoided the true problems and, anyhow, what kind of economy can Britain have without EU? No economy at all. The British Empire is long gone, wake up!

            Nonsense. The UK’s problems are entirely self-inflicted by their austerity. They see the Eurozone strangling itself by the Euro suicide pact, say “that looks like fun”, and strangle their own economy by refusing to spend enough pounds they can create at will, and which their economy direly needs. Unemployment and the low growth & wealth destruction it entails is always & everywhere a decision of the sovereign.

          2. Maju

            They can create at will up to a point. Printing money in excess also has some disadvantages, like more expensive imports like oil or tea or whaveter the UK does not produce in the island, say, most food.

            Britain has already devaluated its currency a lot: in 2000 it was like 1.60 euros and now it’s like 1.20. However it’ has slightly appreciated vs. the US dollar in the meantime.

            “Unemployment and the low growth & wealth destruction it entails is always & everywhere a decision of the sovereign”.

            I’m not sure it’s so easy. I recall from when I studied what they call “Economic Science”, that there was empirical data showing that repated cycles of monetary expansion had markedly diminishing returns in what refers to unemployment reduction. I think it’s what they call stagflation.

            The reason is that there are hidden costs that purely monetary economics can’t measure and these hidden costs, which are essentially the exhaustion of Earth, increase with what we call “economic growth” (consumption).

            The reason is of course that all economic theories are wrong because they believe that “growth” is possible, instead of applying the principles of thermodynamics and other laws of physics which essentially explain that the only free meal is solar (and geothermal) energy, i.e. what we import from outside our econiche.

            The UK is not exempt from the laws of Physics, as such illustrious Britons like Isaac Newton could explain you: it is a relatively small crowded island and, as famously Robinson had to admit in “I, Friday”, coal can’t be eaten.

        2. They didn't leave me a choice

          I have this creeping feeling that the reason people want to pretend there’s an united states of europe is to simplify their world view. After all, the less players there are in the field, the less you have to think and remember about everybodys political goals and desires. It is, of course, nothing short of denying the multitude of opinions and goals to the vast majority who are not part of the ruling class that calls the shots. But hay, at least these people don’t have to consider alternatives, god forbid such thought might lead to apostasy and collapse of “conventional “wisdom””.

        3. Capodimonte

          Thatcher was a member of Edward Heath’s cabinet in 1973 which took the UK into the European Economic Community.

          Thatcher signed the UK up to the Single European Act in 1989.

          John Major, as prime minister, signed the Maastricht treaty after Thatch had left office.

          The inception of the Eurozone was in 1999 when the Labour chancellor, Dr Gordon Brown, fought successfully to keep the UK out of the Eurozone.

          Facts, dear boy, facts!

      3. Capodimonte

        England is NOT an island! Britain is an island and the country is called the United Kingdom! Grrrrrrrrrh!

  2. jake chase

    My biggest problem with financial types is their insistence on writing ten thousand words when three or four sentences will do.

    Europe needs to write off the unserviceable debt and force the lenders to take the hit. Then they can start the con game all over again. Nothing else can possibly work. Nothing.

    It seems to me that Das wants more than anything to prove how smart he is. I don’t think this kind of stuff is the best way.

    1. Jim

      My takeaway is different. If Germany commits to being a state within the United States of Europe, it is committing itself to be an above-average state within a so-so country. And its 80M citizens will be overwhelmed by the votes of the multiples more down south. I would look for, minimum, 10% of GDP from the German state flowing down to the southern states as PERMANENT fiscal transfers.

      And there’d be nothing “Germans” could do about it, as each citizen withing the Eurozone would be entitled to the same vote.

      Unless Germany insisted that its citizens would be entitled to some type of Google- or Facebook-like SuperVote, in perpetuity, which would ensure that German opinion never be marginalized.

      1. Joe

        Well, this is just one of the big questions– can you really imagine a federation of European states? It would be like herding cats. I mean, you couldn’t even say, “Hi, I’m from Spain,” outside of Spain, because the Spanish would be the only people in “your country” who understood you as a Spanish speaking person. Maybe everyone in Europe could speak English? As the official language. Or Latin, Esperanto?– that would be a great solution, right?

        Well, I guess, on a practical level you would have to redraw the map massively, removing national borders and keeping, modifying or creating administrative districts that could be effectively governed at a more regional level. The States of Europe wouldn’t be Italy, but Toscany, Lombardy, etc..

        I mean, it’s just not going to happen. Not now, not in 50 years. Never. The common economic zone was a nice idea, but none of the main players stuck to the rules and it’s a failure– like state communism, but even less stable.

        I mean, the next thing to do is to start putting some of these finance people in jail. The finance industry is just out of control and any discussion about European government etc. is just a distraction. If we didn’t have the likes of Goldman, Dimon and his company, if Lehmann had not been “systems relevant”, things might actually not be too bad. Even politically.

        1. Maju

          In India they solved that using English. Not everyone speaks Hindi, much less Tamil or Bengali… but almost everybody can speak English with a funny accent. In fact India is the largest English-speaking country on Earth by far.

      2. redleg

        I read somewhere today that the idea of Germany bailing out the EU is the wrong perspective.
        Instead, consider what price Germany might pay to buy the Fourth Reich.

    2. John Yard

      This crisis is going on forever because European bank bondholders refuse to write down bad debts and take a
      significant haircut. Why should they , when they can unload
      their debts on the population. Ireland is the best example of this.

      I can’t understand why the population will accept being a lost generation. It happened to my father. Laid off from
      his professional job in 1932, he worked off and on in the factories and fields until 1948, when he was able to start
      a new career as an enginner.

      This will be the future, unless we change it.

      1. chris

        the euro is dead but still walking. you may call it a zombie. and like a zombie, it will never be revived. it will continue to stalk governments until it gets blown up. eventually, there will be a currency reform.
        3 questions:
        -who will benefit?
        -whom will the debt be off-loaded upon?

  3. James

    The Deutsche suffer from attribution bias: they imagine their recent success is all due to their hard work and fiscal responsibility alone, while the periphery’s failure is due to their singular lack of. Illusions die hard and the stresses on a “union” with no common cause continue to build. The inevitable meltdown will be spectacular to behold. Don’t think anyone will be able to ring fence this one, but it’ll be interesting watching the US/UK money masters try.

    1. Maju

      Absolutely, James. The reality is that all societies and economies have their issues and, in any case, Southern Europeans (and notably Greeks) work much longer hours for much less salary and much much less welfare than Germans or Dutch.

      While there may be a seed of truth in the German archetype of focused, responsible people, there are other German archetypes that are also true, like people having long, well paid, vacations that they use to travel abroad, like their welfare system being quite good, only surpassed by the Scandinavians, etc.

      Something that drove down the German costs in fact was the welfare system, specially the ample public housing programs that kept the housing bubble at bay. I commend that but you can’t expect that Greeks could imitate anything German if you cut from them the true German engine: public welfare. Same for the rest of Europe in fact.

      1. Jim

        I believe that a Spaniard who immigrates to Germany would be just as productive as his coworkers within 3 years of his stay.

        The problem with Spain and Greece is not the people. It is the corrupt and incompetent pols who enrich themselves at the expense of their middle-classes.

        1. Maju

          Spaniards are more productive in Spain. Also Spaniards do not speak German, so they do not migrate to Germany: they speak English and migrate to Britain in fact.

          1. chris

            have you ever been to germany? tons of spaniards working there, among others. you will be surprised to see how many foreigners learn and speak german.

          2. Maju

            “Tons”? You go that wrong: that was in the 50s and 60s but then came the crisis of 1971 and they got kicked out more or less subtly. I was wacthing a documentary the other day: “my German friends suddenly began avoiding us”… when recovery came it was Turks and Kurds who took the ill-paid jobs.

            I also watched recently a documentary of wayward desperate Spaniard and Catalan workers migrating to Norway. They end up scavenging the trash bins and can’t get into the social services’ classes for learning Norwegian because the refugees from warzones (AfPak, Iraq and all those countries that we like to bomb down so happily) get preference (of course). Yes, they need qualified cosntruction workers but they build with wood (in Spain with bricks and concrete – totally different) and they want them to speak some basic Norwegian even to clean up the streets, logically. (in Spanish, I’m sure you can learn Spanish in a week or two, you can get a job as waiter in Acapulco)

            Anyhow, learning languages is a constly investment, so most people just learn the local ones and English (which is the lingua franca), and normally are not too good with English anyhow.

            Finally, as happens with the emigrants in Norway, emigrating itself is costly, the ticket, the housing… everything costs you quite a bit. And you can’t sleep in the streets in Norway, it freezes! Never mind nobody hires homeless for anything, anywhere. So you can only realistically emigrate IF there is a consolidated contract in advance, so you know your investment will not be a total waste and personal disaster.

            Emigrating is a big problem and most people would not unless they have contract in destination or are totally desperate (and a bit nuts). There are no more open horizons to colonize anywhere, even Germany has some 10% unemployment these days.

    2. tiebie66

      My money is still on Germany. Out of 200 or so nations, they have the wherewithal to survive. Even if they have to start from scratch. Why the feverish attempts to blame Germany – seems like envy! (Or anxiety because Germany is not acting as desired?)
      Greece per capita GDP ($28,000) and Germany ($37,000) with Greeks working more hours than Germans. Not a favorable comparison productivity-wise. Will be even worse if the lifetime wage-earning hours are used because retirement ages come into play.
      Also problems in the UK, Hungary, Japan, and Zimbabwe, none suffering from the Euro, make some of the prescriptions for Greece look less than credible. If Greece leaves the EMU, it will be able to generate its own tokens, but unless its productivity increases, it will, save transient effects, be no better off. Zimbabwe too is solvent because it can print its own currency. And so it ….does… (one of the benefits of not being a household). Yet printing is held forth as a fix!
      Germany, on the other hand, will print with moderation, adapt quickly, and produce efficiently. Where’s your money?

      1. Maju

        My money is in Greece if they are able to elect a Red government. It’s the only option for Europe now: socialism, true socialism.

        Germans print with moderation? Have you ever read any 20th century history. Germans are all but moderate, not in printing money either. Both under Hitler and under Weimar they “went mad” printing money. The latter ended in massive inflation and the former in WWII (as inflation can only finance expansion so much: they “needed” to conquer Russia for a colony).

      2. F. Beard

        Yet printing is held forth as a fix! tiebie66

        Banks “print” all the time (“loans create deposits”) yet their “money” (credit) is DESTROYED as it is repaid plus an additional amount, the interest, is withdrawn from circulation. That’s why government “printing” is necessary during a balance sheet depression – to replace bank lending.

  4. craazyman

    those German philosophers were unbearable — yada yada yada yada doom doom doom yada yada yada. How did they make that stuff up? They sat around all day with their knickers a whig and an ink pen and said to themselves “Let me first make myself as miserable as I can thinking about death and writing about it, then I’ll get drunk and laugh my ass off with some frauline from the bar.”

    While contemplating all this, a strange thought occurred to me. Whatever Germany would lose in the euro breakup from unpaid debt, they could make back twice by equity investments in the liberated PIIGS, if they went in now. They’d probably come out way ahead even!!!

  5. The Dork of Cork

    First tentative signs of weakness withen the German domestic car market with car regs down 4.8% this May when compared with May 2011…
    Could be a blip as it is stable since the beginning of the year Jan – May 2012 : at +.03%
    See ACEA

  6. Warren Celli

    Yves said; “Yves here. Das’ post has a lot of useful information, but like a lot of finance people, he is hostage to a conventional markets-driven reading of the issues. Governments are not households or businesses. When the private sector delevers, unless a country is running a big surplus (as Germany is) you can’t have government delever at the same time. So Germany’s notion of virtue (that governments and private citizens should wear an austerity hair shirt) works only for Germany.”

    Are we not also being held hostage here to the intentionally created, super divisive, and now very heavily promoted; private sector vs government sector meme? The divisive meme that divides and hides. Divides us as people and hides that we are in reality all one.

    Strive for the one sector.

    Deception is the strongest political force on the planet.

    1. F. Beard

      Strive for the one sector. Warren Celli

      Government is force and the private sector should be voluntary cooperation. They can’t be combined into one sector but they can coexist.

      And consider banking: The reason it is so dangerous is all the government privileges it enjoys such as government borrowing, government deposit insurance, a lender of last resort, legal tender laws for private debts, etc.

      1. Nathanael

        The private sector can quite easily become force too. Especially monopolies; monopolies have a form of force available to them immediately.

        But you know that. :-) I’m just explaining for the peanut gallery.

        1. different clue

          And Blackwater/Xe/whatever they call themselves now, Triple Canopy, Dyncorp, etc. to enforce the private force.
          And if the government is simply the fully owned butler and private policeman for upper class private interests, then the government is just more private force.

          Non-rich individuals and communities will have to attempt what voluntary co-operation against OverClass Occupation as they can.

      2. Warren Celli

        F. Beard said; “Government is force and the private sector should be voluntary cooperation. They can’t be combined into one sector but they can coexist.”

        Beard you have so deeply ingested this divisive ‘private sector vs government sector’ meme that it is falling out of your backside.

        Government is force, yes, because it has been co-opted by the wealthy elite through the Noble Lie and their corporate structure. They own and control the government(s) Beard, lock stock and barrel. Government, as it stands now, is a self anointed wealthy elite corporate force. The corporate structure, the “We the Stockholders” structure, is in direct conflict with the Constitutional structure of “We the People”. It is all about alliances Beard. They have hi-jacked the government and forsaken the alliance, and in fact have become traitors to it. They are anti-patriotic secessionist self serving Xtrevilist scum bags. They have, beginning with Reagan, and Thatcher in the UK, promoted this ‘private sector vs government sector’ to divide the people and deflect from the fact they are in control.

        Yes, Beard, consider banking. The reason it is so dangerous is that it is one of the strongest Xtrevilist factions that owns and controls the government, but there are others; military, agriculture, academia, etc. They own the whole enchilada. After Reagan’s ruse PATCO slap down (to draw attention to and to build the divisive meme) TPTB have allowed incremental strengthening of ‘government’ unions for a reason. To pit them against the ‘private’ unions. They were both a part of the intentional bubble blowing scheme to get to the greater herd thinning. They tanked the private unions first in the intentionally created bubbleicious ‘financial’ crisis. This left the now comparatively robust ‘government’ unions still standing as a scapegoat to demonize, deflect from the elite role, and to blame for the crisis. At the same time it is a great union busting tool. I know many past union members who now think unions are the problem when in reality unions are simply reactionary forces that were first formed to mitigate the rapacious effects of large companies and corporations.

        One for all, and all for one, in the one sector should be the goal. And if you drop the propagandistic divisive conditioning you will see that it — the one sector — is achievable.
        Maybe you will get it in scripture Beard…

        1 Corinthians 12
        New International Version (NIV)

        21 The eye cannot say to the hand, “I don’t need you!” And the head cannot say to the feet, “I don’t need you!” 22 On the contrary, those parts of the body that seem to be weaker are indispensable, 23 and the parts that we think are less honorable we treat with special honor. And the parts that are unpresentable are treated with special modesty, 24 while our presentable parts need no special treatment. But God has put the body together, giving greater honor to the parts that lacked it, 25 so that there should be no division in the body, but that its parts should have equal concern for each other. 26 If one part suffers, every part suffers with it; if one part is honored, every part rejoices with it.

        Deception is the strongest political force on the planet.

        1. F. Beard

          … when in reality unions are simply reactionary forces that were first formed to mitigate the rapacious effects of large companies and corporations. Warren Celli

          Especially banking otherwise companies would be heavily owned by their employees and the general population.

          Our money system allows the so-called “credit-worthy” to steal purchasing power from everyone else. That should not be!

          1. skippy

            The Human Sector beardo… there has only been – one – from the very start… DNA is empirical proof… until some decided they were better than others… sigh.

            Skippy… Aggrandisation is its calling card… Corporate logo feel good mental cortex injection deception emblazoned mental pedophilia… Corporate Aggrandisation – is – the will multiplied, to the power its VOICE wields, in an act of aggregate force. It does not negotiate, it proclaims, as a CREATOR of JOBS.

  7. Susan the other

    Wondering about Mario Draghi’s refusal to release info on the GS currency swaps to Greece. Bloomberg filed a FOIA request for the docs and the ECB is stalling. Remember when the Eurocrisis hit the fan the Germans were focused on getting an agreement from the holders of CDS and other arcane financial stuff that they would voluntarily take a haircut. So defaults wouldn’t trigger a payout. I’m wondering if there was a stipulation that Germany and the rest of the EU would not write the rest off? That would be weird because Germany seems to be dedicated to not being responsible for that debt, no matter how deceitful and odious it was. Regardlesss of whatever was agreed to, the money market funds cut Europe off and watched it circle the drain. The Fed stepped in and played some emergency shell game to maintain liquidity. Why is all this so complex? If the debt can’t be repaid, it will not be repaid.

  8. charles sereno

    “The [German] resentment is evident in a headline in the popular tabloid Bild: “Sell your islands, you bankrupt Greeks. And the Acropolis while you’re at it”. But it may be too late.” (Satjadit Das)

    “charles sereno says:
    January 9, 2012 at 1:40 pm
    I’ve mentioned it before but never got a response to “Merkel Marbles” (the Parthenon in the Pergamon).”

    Buying Greek islands is a capital idea. German tourists would then only have to deal with the natives as service employees. That’s why buying the Acropolis has its drawbacks. Better to transport the Parthenon to Berlin. Of course, the Pergamon would have to be expanded and the Elgin Marbles acquired from the British Museum.

  9. sunny129

    “…hope is the worst of all evils, because it prolongs man’s torments.”

    Well said! Extend and pretend along with the ‘kick the can down’ are part of that HOPE being enacted by CBers.

    Demand for HOPIUM is more than one can imagine b/c of ‘bailout’ drug doled out constantly for the past four years.

    The charade continues!

  10. LeonovaBalletRusse

    Aw, let’s cut to the chase: It’s reciprocation time. The sacrifice that the U.S. made for “Old Europe” (including the UK) and Global 1% .01% Banker DNA is WRIT LARGE in:

    “THE BUBBLE THAT BROKE THE WORLD” lby Garet Garrett (Boston; Little, Brown, and Company, 1932) —

    It’s way past payback time. From Germany to Liechtenstein, “Global Holy Roman Rentiers All” must “Just do it.” Unlike consuming the Moveable Feast of Rents enabled by the Versailles Treaty (summarized by Veblen), they now must EAT their own vomit for a change. We the Global 99% are NOT going to slurp up your royal mess again.

    As Martin Wolf is quoted: “German leaders will have to choose between a shipwreck and a change n course. I do not know which Germany will choose. I do not know whether its leaders know. But on that choice hangs the fate of Europe.” (quoted in: “GERMANY AND EUROPE: TOWARDS A NEW GROWTH PATH? A Workshop at the Mercator Project Center Berlin – Tuesday, June 19, 2012”).

    What will Germany’s choice be? Actually, should Germany be given that choce?For more, click on the pdf link given in the INET Blog entitled: “FTD and Global Climate Forum to Host Event at Berlin’s Mercator Project Center” on 14 June, 2012). Isn’t it time to get out from under The Iron Heel of Big Oil and the endless wars from which the Global .01% profit at our expense?

    Isn’t it time for the 99% to get out from under “The Iron Heel” of Big Oil and Big Wars that profit the .01% Global Master Class at our mortal expense? STUDY “The War Poems of Wilfred Owen” read by Kenneth Branagh on You Tube. Study them all! And LEARN, already: ” NO MORE!”

  11. craazyman

    I have to say I’m getting very bullish on Europe. I think Joymany will bail like a sailor in a sinking boat. Big bail. Big bilge pump called fiat money. What’s the legal problem when your sinking in the middle of the ocean? It’ll refloat that boat in no time and keep those exports cranking like saws-edges. I’m serious, they should take at least 1/4 of German Central Bank assets and invest it in PIGS equity and then go for the 3-bagger like me. Why just sit around and mope like the world’s something out of a Shopenhauer parlor discussion? Nada. Get down there and check out that Italian line on those statues in Florence. No Shopenhauer there. It’s mostly just sunshine. Weird to think they actually painted those suckers way back. It seems ridiculous, like most things do when you just consider them as freshly as possible.

    1. Warren Celli

      Craazyman said: “Why just sit around and mope like the world’s something out of a Shopenhauer parlor discussion?”

      Because this is not just another boom bust cycle — its a herd thinning. Maybe a little vineyard in the outskirts of Florence, out of range of the pick pockets, might provide a marginally stable place to watch the show. You could even raise carrier pigeons for when the internet goes down — to communicate with your broker in Rome.

      Deception is the strongest political force on the planet.

      1. LeonovaBalletRusse

        With robots, “herd thinning” is so yesterday. More like “herd extinction.”

        Goetz Aly: “HITLER’S BENEFICIARIES;” “Architects of Annihilation.”

        W. H. Auden: “September 1, 1939;” “Death’s Echo.”

        Wilfred Owen: “Greater Love;” “The Parable of the Old Man and the Young;” “Anthem for Doomed Youth.”

        Jack London: “The Iron Heel.”

          1. Warren Celli

            I would guess very real. Cowboy worship is very strong in America. It plays a strong role in keeping all of us ‘rugged individuals’.

            Deception is the strongest political force on the planet.

  12. Eric

    ”There are also ways to prevent an Euro train wreck that don’t involve using German’s balance sheet, such as having the ECB issue bonds, or do revenue sharing (say on a per capita basis, as Marshall Auerback suggested in a NC post). Or the ESM could be given a banking licence via the ECB so that it has the ability to deploy unlimited capital to sort out the solvency issue (as France has suggested).”

    all these plans have (potential) costs for taxpayers in Germany, The Netherlands, Austria and Finland. There is no free lunch in any of those proposals.

    1. enouf

      … There is no free lunch in any of those proposals..

      Sure there is, it just doesnt apply to You and I


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