What? Is German economy inefficient? Yes! How? By imposing austerity to the taxpayers in the periphery.
Read the article below, submitted by our economist friend Cheshire Cat
Schaeuble’s Macho-Economics & Frenzy Trade- Surpluses
Germany is a very inefficient economy – please send in the Troika
The European Union not so long ago received a Nobel (inventor of dynamite) prize for remaining in one piece. Before it blows up, let me take the opportunity to lob a stick of dynamic.The Germany economy is really inefficient…..there… you may now click and leaveSo let me begin by apologizing to German readers who are unwtting victims. It must be painful spinning around on Schäuble’s treadmill. And, as the “BIld” will tell you, we having such a jolly crisis at your expense. But….“The world should rejoice at the positive economic signals the eurozone is sending almost continuously these days”. Wolfgang Schäuble
So let me call it the Schäuble economy, as many Germans are being treated unfairly by it. Here’s his success story:“Take Germany. In the late 1990s it was the undisputed “sick man” of Europe – seen by domestic and international commentators alike as uncompetitive and condemned to decline …… A first wave of adjustment, starting in 2003, focused on strengthening employment incentives, streamlining the public sector, fixing social security and raising consumption taxes. Down to shop-floor level, companies and unions worked together to make labour more flexible……..” Wolfgang Schäuble
You may well ask why Germany was the “sick man of Europe” in the late 1990s – but lets leave that other monetary union (the German Mark and German unificiation) aside for now.What is the primary goal the Schäuble economy? To chase down little pots of gold, found at the end of the rainbow, called trading surpluses.If it weren’t for the euro or for agreements in the labour market that Schäuble mentions above, then this excess demand for “all things German” would have raised the price of German goods, increased the demand and the wages of the workers that produced these goods, and eliminated the trade surplus.
Schäuble trade surplus means that wages are lower than what they would be (without the agreements). It also means the wages are also lower that what they would be relative to capital (so we use less machines, robots etc in the production mix). So more labour (which Schäuble economy sucks in from the periphery’s pool of idle young) and less capital is being used than what would otherwise have occurred. In other words, there is less physical investment and this production mixed creates a lower or sluggish growth rate. This drags down the growth rate not only of the Schäuble economy, but the entire European continent with it.In other words the German or the Schäuble economy is highly inefficient one in its misuse of resources and dooms the European economy, by getting investment wrong, to lag behind the rest of the world. This inefficiency is paid by imposing austerity on taxpayers living in the periphery.So if surpluses are wasteful, Germany is Europe’s most inefficient economy.
Here is the statistical data showing the current (trading) account surplus moving in the opposite direction to the levels of capital stock.
The frugal German’s housewife’s chase for surpluses may be a very cute story, but what is she going to do with those damned surpluses?
Give them to the Greeks or hide them under her mattress? They didn’t go into real investment.
This is unfair on the taxpayers (and the frugal Athenian housewife who economizes by scavenging bins) of other economies who pay for the obsession until they go broke.
Usually one intervenes, when one’s friends is caught up some habitual immoral behavior. One is almost tempted to show solidarity and ask for the Troika to be sent in.
Author: Cheshire Cat
“From Washington to Athens, politicians and economists who often have little in common all agree that Germany under Chancellor Angela Merkel is largely wrong about economic policy. Germany’s apparent economic strengths—the lowest unemployment in two decades; steady, if low, growth; a balanced federal budget—mask weaknesses and policy errors, they say.”(full article Economist.com)
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Krugman wrote pretty the same and it is true : it is not possible that everybody exports so crazily and has so strong surpluses. But I would return to a boring story : if Germany did not have euro, their currency would go up and these salaries would stop being so low (low taking into consideration competitiveness). Many Germans are making sad jokes about the weak currency euro – they are not so happy with this. They have minimal unemployment, but according to some of them : they have holidays in Transilvania or other cheap countries instead of other places. I suppose many of them would prefer the situation more similar to the Swiss or Australians.
It has sense to remember that the Germans were forced to euro. What can they do ? They adapt to survive. “Abandoning the deutsche mark for the (equally) stable euro was one of the concessions that helped pave the way to German reunification,” Steinbrück (German minister of finances) wrote.
OK, I am defending the Germans, sorry, but all countries sit in this… At least, the Germans did not want the euro. They adapted to it in their way, but they should not be blamed as the only ones for the consequences.
if, if if.. if my granny had wheels, she would be a bicycle: good old German proverb
This “if” is a normal relationship. Such a big trade surplus would most probably bring a big revaluation with time. Germans could fight against it – but Swiss Central Bank also fought. And partially resigned.
Cheshire Cat wrote exactly what I mean:
“If it weren’t for the euro or for agreements in the labour market that Schäuble mentions above, then this excess demand for “all things German” would have raised the price of German goods, increased the demand and the wages of the workers that produced these goods, and eliminated the trade surplus.”
I wrote the same : if Germany did not have euro, their currency would go up and these salaries would stop being so low (low taking into consideration competitiveness).
“Wenn meine Oma Räder hätte, wäre sie ein Fahrrad”
Hehehe, a great phrase, ktg, but I actually never heard anybody here say that. A quick google search shows that this possibly was first mentioned in a Spiegel story in 1949 and that they quoted the colourful UK Labour politician Konni Ziliacus:
http://www.spiegel.de/spiegel/print/d-44435691.html
He spoke nine languages, but it’s not clear whether he said that in
German, English or maybe French. The Spiegel quote may be a translation.
By the way : one cannot be 100 % sure that it was like this (that the Germans were forced to euro), but this looks very probable.
But now more interesting is how to get out from this mess…
And yes, I think one of the problems is : different nations have different mentalities, but the same currency :).
I can quote also this :
“While Germans celebrated the collapse of the Berlin Wall, Helmut Kohl and Francois Mitterand were at war over the consequences of a united Germany. Secret government documents obtained by Der Spiegel appear to show that Bonn was forced to sacrifice the Deutschmark for reunification.”
http://www.spiegel.de/international/germany/the-price-of-unity-was-the-deutsche-mark-sacrificed-for-reunification
http://www.voxeurop.eu/en/content/article/351531-you-get-unification-we-get-euro
Whatever our opinions are, Germans and Greeks are sitting now at a negotiation table. And it is better like this :).
It’s also worth noticing the IT-bubble on the turn of millenia. Germany got hit hard, while most of the Southern Europe countries walked away with it. So, in addition to the unification cost, Germany was in really bad shape.
So called “Agenda 2020” presented by Chancellor Schröder in March 2003 was supposed to be the cure. It was more or less austerity.
However, meanwhile euro zone was formed, and capital flooded into South-Europe (The ECB claimed all EZ-countries as “riskless” via Basel Committee). While there was little demand in Germany due to austerity, German banks found loads of customers from the south. This masked austerity and therefore it worked better. It is because of the circumstances.
Compared this austerity in the middle of depression without external support (i.e. someone starts buying truckloads of Greek goods) austerity is doomed to fail.
Another point that caused this imbalance between EZ-countries are the differences in inflation differences. The higher wage raises, the higher the inflation rate. Of course, salary cuts lead into deflationary world. This is where we stand now. It rises the real debt value, and thus it is bad.
There are no currency exchange rates to compensate some EZ-country’s inflationary process. This happened in south, compared to Germany’s low inflation rate.
However, The ECB could overcome this by setting its base interest rate high, but The ECB has ALWAYS followed the need of the Germany. Because Germany was in bad shape in 2000 so were the interest rate low to give support. However, it made south go crazy on credit, unfortunately.
Now, to overcome this problem southern members must have lower inflation than Germany. This would turn the wheel back into original position. But because Germany’s inflation is low, so must the South-Europe plunge into deflation. And so it has done.
But if Germany accepted 5% inflation rate, and south targets 2% it would cure this problem we have right now.
There is no other way round, except dissolving the whole common currency.
When all is said and done, including the polemic the Cheshire Cat (all teeth but no substance) posted here, it’s still a fact that Germany’s economy is doing well while Greece is in a horrible mess. Many young Greeks see that, too, and apply for jobs here. Dogs bark, but the caravan moves on to the north!
😛
Germany’s “success” comes mainly for their devalued euro, which is dragged down by southern European countries. Alike, southern countries face way too high revalued euro, because Germany is pushing it up.
Additionally, Germany sent its banking crisis for other EZ-countries to pay (bail-outs).
However, it is inevitable that Germany will pay for this experiment huge amounts, one way or another.
1) They accept higher inflation rate than the rest of the EZ in order to keep euro intact. This reduce competetiveness.
2) The Eurozone is morphed from debt-transfer union to fiscal-transfer union. MacDougall report (from European Commission site) suggest the common budgetary as 10 per cent of GDP. That means a couple of hundred of billion euro for Germany. Per annum. This model excludes uncoordinated social benefits, health care and education. If they are included (“deeper integration”) it will require heftier fiscal transfers to the south.
3) Eurozone breaks up. Massive defaults follow leaving EZ-banking sector in ruins. Especially German banking system is fragile (due to Landesbanken-problem). Previous estimates mount up the cost for Germany as to 1300 billion euros. This includes the D-mark’s revaluation.
4) Heavier Euro-QE to transfer southern debt into The ECB’s balance sheet. Germany as the biggest shareholder has the greatest risk. Public opinion is against this, though.
Personally I don’t understand German people. The electrorate there is pushing the German government into unbearable situation, where in order to stay in power you need to drive policies that leads to euro break-up, which costs would be the biggest for Germany. As if Germans were asking: “Can’t we pay up even more?”
Sometimes people are right in the long run. OK, they may pay for this now, but they can think : let the future be better.
Germans are not beneficiaries of euro. They just adapted.
Let us honestly foresee what would happen if Eurozone broke ? German mark would revalue. Switzerland- with luxury of its own currency – is near. Denmark – with currency still pegged to euro, but already in “danger” of revaluation – is also bordering.
Why is enrichment so bad ? Even if it does not concern the situation inside the country (prices would adapt to revaluation), but just outside. Germans are the most touristic nation of the world.
PS. I agree that this would put unemployment in Germany up by maybe 3 % in the long run… But we cannot be sure.
Germany has fared well with its own currency for decades, and we didn’t want to join the Euro, which was a French idea. We were forced into it as part of the Reunification deal with the Allieds. The other countries joined VOLUNTARILY and knew it would be a stable currency, unlike the weak Pesetas, Lira and Drachme. It was obvious to everybody that this common currency would require additional adjustments of fhe economic systems of the member states. Germany did that homework in the early 2000s, other countries not so much, only Greece did nothing at all and went on a wild spending spree on borrowed money! Germany isn’t responsible for this madness at all, that was the fault of the democratically elected Greek governments. And no amount of spin can change that clear fact.
So, Germany is under no ethical or otherwise obligation to support Greece. We do that out of solidarity, but that reached its limits now. We won’t cover deficits that come from irresponsible spending and reform lazyness. No EZ government should believe more successful countries have to subsidize its unsustainable policies, the very opposite is true, the EU constitution explicitly says there’s no such duty. Any member state that wants to ignore the EZ rules will have to leave, sooner or later. Looks like Greece’s time has come now.
I know France was scared and Frenchmen thought they could “tie-down” unified Germany with common currency.
But, by being stubborn, German chancellor Merkel would be known as the lady who destroyed the euro. I don’t mind getting rid-off this dysfunctional monetary union.
The main problem is that the Euro works on two different levels. It is floating (and freely exhangable, excluding Cyprus), which means there is independent Central Bank (check) and free capital flows (check, again excluding Cyprus).
But because fiscal policies are not coordinated (taxes are paid into the centralised system, which then distributes money according to need, and which would make Germany a huge contributor) there is another, local level of the Euro: it works as fixed-rate mechanism.
Fixed-rated currencies are main cause of economical troubles: The gold standard (US and Europe until mid-30’s), Mexican crisis (mid 80’s) due to dollar-peg, as well as in Asian crisis mid 90’s (dollar peg).
This also caused havoc in the beginning of 90’s when the Euro’s earlier version crashed horribly, sending many countries in fiscal chaos.
The Great Britain learnt the lesson and is never considering to join again these European monetary experiments.
I only wonder why some people think that “Grexit” would be something Europeans can handle? These people obviously does not know hardly anything about economics.
No rIsk of destroying the Euro. A mere 11 million people exiting the currency and having to deal with the downsides of a national currency can’t realistically turn the common currency system of 330 million people upside down. What may be acceptable for the Greeks in their totally screwed up nation is not acceptable for people who invested a lot of efforts into reforms and enjoy a recovery now. Greece will be a warning example, not a role model at all!
And a Greek default, having been seen as possible since many years now, can’t create a crisis in the financial sector of the Eurozone anymore. Everybody has prepared for that eventuality. Quite to the contrary, after finally having gotten rid of the one member that created most of the bad news and sucked up time, energy and money from all involved, the Eurozone may finally manage to discuss the necessary changes to create a more level field for everybody and to overcome the North/South divide. The US have one single currency, too, after all, despite a very heterogenous economy and the states being rather independent from the federal government. There’s no unchangeable reason why the EU shouldn’t be able to create a system of its own that puts the Euro on a stable foundation!
As I said: people who think it’s no big deal are usually people without knowledge how economics and markets work.
If I were a big investor enough holding Portuguese or Italian debt seeing one country defaulting and leaving my fellow investors with empty hands… what should I do? I would get rid-off them while I can get at least something out of the bonds.
This sell-off will lead into bond-price plunge and thus, skyrocketing interest rates. It would mean even more (and heavier) bail-outs or another withdrawals from the eurozone, again with defaults.
This chain will consume almost everyone (I believe Germany with Benelux countries, and perhaps Austria could be saved from this.)
If the eurozone is not ready for big enough bailouts (maybe even 3000-4000 billion € at most)) then the illusion of “German credit card” backing up the investors’ faith disappears and the whole continent rumbles.
There is another solution that is called “eurobonds”, which could be working on existing debt also. This is massive Euro-QE, more massive than presented. But Germany objects that too.
I admit I don’t know which option German public likes the most: Euro-QE, massive bailouts or defaults and euro break-up, but time will tell. Until then it’s purely guessworking.
What do you think, which way of those three is the easiest for Germany?
There’s crazy investors even buying Greek stock now, apparently believing the prices can’t go much lower! So, I think the risk that there will be more than a short termed disturbance on the Portuguese or Italian stock market is rather negligible. It should be obvious to everyone weighing the risks that Portugal, Spain and Italy are not Greece. Some short sighted investors, like apparently you, may panic, but the pros will take advantage of that. Your loss will be a smarter guy’s profit.
So, as I see it, your question is framed and it will be neither of the three options. And in the medium run, the departure of Greece will create more leeway to support the others. This will strengthen the Eurozone, not the least because of the strong message that membership can’t simply be taken for granted, but depends on being a teamplayer and accepting the rules.
Wrong. These government bonds of other Mediterranian countries are all-time high values. So, selling at the top prices can’t be bad idea (although one can always argue that the prices will go even higher.)
I bought long 2012 and financed my move from Finalnd to Greece after two years profiting. Sure, I could have gone further, but this was enough for me to move. Pocketed 40% profit from two years. 🙂
It’s sad truth that the bond prices are not indicating “safety nets” in place. It’s purely The ECB’s promise to do “whatever it takes”. And it will mean massive bond-buying scheme, nevermind Germans crying The ECB is turning into “a bad bank”. Have fun with Alternative für Deutschland.
If you think hard, you will understand why everyone would still like to keep Greece in the Eurozone. There are two reasons. One: the massive losses get crystallised. Two: The eurocrats don’t want to see Greece fare very good outside the EZ, because it gives the idea of departing for other countries that struggle because of the Euro.
Btw, the Euro is not a fixed rate currency in any way. It’s a common currency, just like the dollar, but with a weaker central government. And just like in the US, payments into the system are NOT allocated according to need (anybody who knows the US has to see that idea as totally ridiculous), but rather subject to lobbyism (here and there, agriculture has huge leverage) and political considerations. Recent exchange rate developments prove the European currency to be indeed a free floating one. So, your concern doesn’t apply at all.
Nonsense. Fixed-rate mechanism works as the central bank can’t print money. It used to be decades back The Gold Standard, which prevented money-printing, because every note and coin had to be backed with gold.
The same mechanism caused collapses with currency pegs. Argentine wouldn’t be in problems if they didn’t lend in US dollars, but with their own currency (Peso?)
Likewise, EZ countries cannot print euros, so at their perspective, euro works very similiar to the fixed-rate mechanism, which means that all the money needs to be covered.
And if you think this: why on Earth the panic struggled in EZ because of high debts? Compared to the US, the panic has been caused every time the tea partyist fools start talking about debt ceiling.
It’s because the unworkable structure of the euro. Without license to print euros governments are in danger of insolvency. And that is something debtors hate the most.
Everyone is far too tolerant of the official stupidity passing as economic policy of Merkel’s government. It is a specific politics and a specific stupidity and should be thus named and shamed. Greece is regarded by these idiots (if they are honest with themselves) as collateral damage for the restoration of an imagined Germany that never was. Since their contempt for ‘southern’ Europeans is undisguised why should my contempt for their idiotic post-nazi mercantilist policies be disguised? Its not genetic; its the politics of Merkel and her pals!
You have to remember that leaders usually implement policies that pleases the electrorate.
If mrs. Merkel would drive policies that could keep euro intact the people would throw her out on next elections.
There’s a simple solution to escape the reach of Germany’s alleged “Idiotic post-nazi mercantilist policies”: Just get out of the Eurozone! If your theory is right, that should bring instant recovery to Greece, without the need to balance the budget or to reform anything. Good luck with that and don’t let the door hit you!
Not instant recovery, but with weaker currency imports will come more expensive, which encourages domestic markets (and need for work), exports would thrive (including tourism) immediately, though.
But if handled well, the recovery would take 1-2 years.
I have faith on mr. Varoufakis in this, because he is the only finance minister in the eurozone who really understands what’s this crisis is all about.
Well, I have no confidence in Mr. Varoufakis, since he not only has no political experience at all but evidently suffers under some weird delusions. Let’s not forget, he’s an expert on econ math, not even a manager.
Anyway, I agree that in the medium run a Grexit will lead to a recovery, too. There probably won’t be many reforms anymore, butbat least the economic situation for the people will improve. And that Germany won’t have anything to do with Greek politics at all, and can’t be blamed for the screwups anymore, will do wonders for improving the relationship between the people! I’m all for the Grexit.
This is mr. Varoufakis’ 2nd best feature: he is not (at least not yet) rotten to the core with corruption, or as you say: expertised in politics. 🙂
But we agree on the medium-term recovery, and most likely short-term unstability on Grexit. Although the drop wouldn’t be that big anymore compared to 2010-12.
But Grexit is in the hands of Greek government. Only outsiding part for doing it would be The ECB. Which reminds: be ready at Wednesday to see how the ECB’s governing council reacts.
There’s lots of honest people who would be lousy ministers, Henri. It’s not an easy job at all.
But, right, let’s see what this day brings. I suspect it will rather be the absence of a decision which will be the big news today. The lenders don’t have to say “No” to push Greece towards the Grexit, after all. Time is working for them, not for Tsipras, Varoufakis and the “I’ll do what I want, but gimme more money” movement.
Yep, I don’t expect agreement either today.
But the stubborn eurozone leaders must realise that the Europe is turning away from German hegemony. The leaders can only choose at which degrees it happens.
And, as Bloomberg tells: it’s not all about the massive multi-trillion losses. It’s also geopolitics.
http://www.bloomberg.com/news/articles/2015-02-16/greek-postwar-alliances-show-europe-has-more-to-lose-than-money
I wrote this polemic to change the narrative. But, please try and get away from the blame game.
The graph, and the basic argument I use, is from the GERMAN Institute for Economic Research
“OUR euphoria is dangerous. It makes us overbearing, blind and dull.” So writes Marcel Fratzscher, head of the German Institute for Economic Research, in a new book, “The Germany Illusion”.
Yes, Germany is Europe’s growth engine and Greece is just the taverna at the end of the road. But we all suffer when Germany suffers. When current (trading) account surpluses are seen as a goal or good, we ALL lose. A trading surplus exists when more resources are being sent out than what are coming in. In return for this surplus you receive bits of paper. Do these bits of paper go towards investment and growth? No, doing this persistently is a really bad deal for Germany. If you are a German worker, you are not only being rewarded less for your efforts but you have suffered and will suffer other difficulties in your economy (eg properties & housing market)
Shakespeare: King Lear, Act V, Scene V
Crowned with rank fumiter and furrow weeds,
With burdocks, hemlock, nettles, cuckoo-flowers,
Darnel, and all the idle weeds that grow
In our sustaining corn.
John Keats (1819) “Ode to a Nightingale”:
My heart aches, and a drowsy numbness pains
My sense, as though of hemlock I had drunk
Europe is in drowsy numbness
German economic politics is on the long term indeed unsustaineble. Read this from Ambrose Evans-Pritchard:
‘The United States has so far acquiesced in the surging dollar but there are growing calls for a shift in policy on Capitol Hill. Both Republicans and Democrats in Congress back new legislation that introduces binding currency rules for trade deals and imposes punitive import taxes on countries deemed to be “currency manipulators”. The move is explicitly aimed at China and Japan, but might also include Germany given the size of its current account surplus.’http://www.telegraph.co.uk/finance/economics/11408950/Sweden-cuts-rates-below-zero-as-global-currency-wars-spread.html
And this from Caroline Atkinson, the US deputy-national security adviser:
She praised the success of Germany’s export machine but said the country must do more to boost global demand and limit its current account surplus, running at over 7pc of GDP and now a bigger problem for the US than trade flows from either Japan or China.
“We believe more spending on well-designed investment and consumption would be helpful in trying to reduce Germany’s large imbalances and help support demand, not just in the eurozone, but also in the rest of the world,” she said.
http://www.telegraph.co.uk/finance/11411728/White-House-warns-Europe-on-Greek-showdown.html
That the US balance of trade showed yet another record deficit in December last year certainly is much more the fault of the US’ misguided “outsourcing jobs is great” policy than of Germany’s actions. And what are the US doing themselves to increase demand in the rest of the world? Their budget for foreign aid is at 0.19% of GDP, Germany’s at double of that, 0.38% (not really great, but at least better). To make thngs worse, US foreign aid is a very political issue, allocated not according to need or to chances of improvement, but subject to political considerations of the superpower, their selfish “national interest”. If anybody should do more to raise global demand, it’s the US. Even a slight reduction of their grotesquely high Pentagon budget could do wonders as investments in third world countries!