IT’S TIME TO KICK GERMANY OUT OF THE EMU
Okay, that headline is a little extreme (I actually laughed out loud as I wrote it), but I am trying to think like a European politician here. Let me explain. I’ve already said what I’d do if I was a member of the peripheral countries. I’d go right up to Angela Merkel and tell her that if Germany doesn’t start giving in to some of our demands that I’d take my country, leave the Euro and default on the German bankers. Really, they should all do this in unison although Alexis Tsipras appears to be the only one actually willing to make this threat. It’s time to turn the tables on Germany and start pushing them around. That’s what this has come to.
It’s now abundantly clear that austerity is failing. And it will continue to fail until a true resolution is brought to the table. That either involves a full dissolution of the Euro (resulting in full sovereignty with the former currencies) or a push towards fiscal union. These half hearted moves that we keep seeing just aren’t going to fix the root cause of the currency crisis. The single currency system is broken. Just like the gold standard was broken. There is no reviving it in its current form. It either needs major changes like the USA did when it created a full fiscal union or it needs to be busted up so these nations can regain monetary sovereignty and floating FX.
The sad thing is, Germany likes the way things have been. As long as they can avoid having their banks defaulted on then they continue to enjoy being the trade surplus nation within the single currency and the primary beneficiary of the EMU. They have meager growth, but record low unemployment. Things are pretty good on a relative basis! So they’re holding on for dear life just hoping that something turns around and the music continues to play on. But the music is coming to an end and Germany needs to start making decisions. They either need to leave the Euro and stop holding everyone in the EMU hostage to their demands or they need to start making some concessions and moving towards fiscal union. And since it’s becoming clear that they won’t make decisions then someone has to start making decisions for them.
There’s no provision in the EU for kicking a country out (as far as I know), but that doesn’t mean they can’t create one. The peripheral nations could all unify and I am certain they’d find support from France at this point since Hollande is pushing for fiscal unity as well. Together, these countries can all start pushing Germany around. In fact, they could threaten to kick Germany out of the EMU (though they clearly don’t need to go that far!!). It sounds crazy, but that’s the last thing Germany wants. If they were kicked out of the EMU they’d not only default on trillions in Euros, but they’d have to bring back the D-mark which would be a total disaster for their economy as the D-mark would soar versus the Euro and crush their export driven economy. Ironically, it would likely result in higher debt levels for Germany as automatic stabilizers would result in more government spending as recession occurred. So they’d not only lose their trade position, but they’d end up printing more money anyhow!
Now, part of this is a bit facetious. I really don’t think they should try to kick Germany out of the EMU. But they should certainly unify more tightly and begin pushing back very aggressively. There’s much more to the EMU than Germany, but for some reason everyone is taking orders from Angela Merkel. Europe needs leaders to start walking into meetings and making very serious threats. There are millions of people held hostage in a depression due to this inaction. Someone needs to start standing up for them and recognizing that the currency union needs very serious changes and it needs them YESTERDAY.
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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152 Comments
What Europe should really be working on is how to wind this monetary union down with minimal damage, if that is even possible. Still, in spite of the high stakes in this game, I think this is just an incentive to kick the can down the road for a while, but not a sustainable basis for union in the long-run. If stakes could really get too high, then events like WWI would never have happened. There is a limit ultimately… however, there are different paths I guess: slow demise or quick and short run painfull.
Thanks for your response Cullen. I very much appreciate the great content and debates on your site. I think Lance has it right in response to your quotes from Fischer and Gonzalez at the launch of the euro.
“The men you quote knew that true union was necessary. However that was never a political desire of the nations as a whole. The goal was to slowly accomplish what they couldn’t do then. Some cynically expected crisis would force union once the pain of breaking up was deemed to high. It was undemocratic and unwise.”
Well, they have definitely have got their crisis. What I find so troubling is that the inability of nation state politicians to take make hard choices since the onset of the crisis is leading to more undemocratic, Council of the European Union and European Commission, dictated policies. We currently have undemocratically appointed technocrats in Italy and Greece as well as a reliance on the LTROS, ELAS, PSIS, (you can go and on with these acronyms) to offer temporary solutions to enormous structural problems. Monti has now become the self appointed spokes person for the eurobond implementation program. These developments are pushing Europe down a very dangerous road in my opinion.
If the “European dream” of a fully integrated fiscal union is to be realized, it seems that the one thing European history has shown us is that it will not be done democratically. Today we see the slow dismantling of nation states sovereignty through a non elected supra governmental organization. This is a very high price indeed to pay for the “ultimate solution” of fiscal integration.
Are you sure the peripheral countries want to give up fiscal authority? If yes, to whom? To non-democratic EU bureaucrats?
This is ridiculous.
We are far far away from a fiscal union in Europe, because there is no United States of Europe.
http://www.bloomberg.com/news/2012-05-24/monti-says-majority-of-leaders-at-eu-summit-backed-euro-bonds.html
Were getting there. When Merkel mentions Eurobonds in a positive tone its time to go long europe
>>”Were getting there. When Merkel mentions Eurobonds in a positive tone its time to go long europe”<<
But she doesn't and she can't. She repeated again (for the umpteenth time) that for the Eurobonds to accept the laws in Germany need to be changed (and about 80 % of the german electorate exchanged).
Eurobonds just won't happen…
Germanys Mr. Meister brought it to a point: If other countries want them so badly, what is stopping them? Why don't they go on and issue them? Without Germany!
That in short is also an answer to the header of the article by Mr. Roche…without Germany there is no Euro.
But maybe Germany should really leave. We don't feel appreciated anymore. Being blamed and mobbed and bullied is nothing we need to accept.
Michel_Berlin, excellent point: “Germanys Mr. Meister brought it to a point: If other countries want them so badly, what is stopping them? Why don’t they go on and issue them? Without Germany!”
So true, great point.
The cause of the problem was cheap money for Greece starting with the Euro. Greece could avoid structural reforms via cheap credit. Now we solve the problem with more cheap money via eurobonds? Who will decide what to do with more money? Greece politicians? Eurcrats? I fear eurobonds will prlong and extend the problem.
I don’t view it as a solution, just a firewall that is way more solid than anything they have managed to come up with so far. EMU will still need to move towards full fiscal union, and I believe eurobonds is a first step that will enable them to slowly inch towards union in babysteps. The step from eurobonds to central treasury is not that big in my eyes, someone correct me if im wrong here (I guess you would actually need some form of central treasury to issue the bonds?). Then we get fiscal transfers from core to periphery in the form of current EU subsidies but on an increasingly larger scale to even out competitiveness etc. This will enable politicans to sneek a union upon the voters. The problem is somewhere down the line the national govs have to give up absolute power over their budgets, this will be the real test i guess.
To me it is either above or break up..
This still leaves the question who will decide about the allocation of the collected money via eurobonds? It’s hard in a single country now, but imagine a euro wide budget with hundreds of interest groups calling for money!
And there is still the problem of a uniform tax system and tax collection / tax enforcement.
I still think we are too far away.
Whats the old adage about lending and borrowing? When I borrow a little from you, you have the upper hand so to speak, when I borrow a lot from you suddenly I have the upper hand. Germanys banks are in the second position and trying to act like they are in the first position. I see this as the problem with too much privately created money. Private actors can only afford to write off so much debt before they become insolvent. If more of this were govt issued money then the idea of paying it back in full(plus interest) would be moot.
It seems to me that worrying about moral hazard at this point is foolish. Either way we go, continue bailing out banks or bailing out customers presents a moral hazard problem its only a question of which moral hazard allows us to move forward quicker. The third solution of letting it all fail, bailing out no one, is extremely foolish. We have zero idea where that will end up. It like refusing to throw a life preserver to someone who jumped off a boat and then realized they couldnt swim. If you dont have the life preserver, thats one thing, but having it and refusing to use it to teach a lesson is simply sick.
Well said!! Worrying about moral hazard is the last thing to do when you are staring into the abyss of depression/financial meltdown. Could not agree more.
So what if the greeks or the spanish get some “free” money they do not deserve for a couple of years, the alternatives for the core are much worse in my eyes. Its the classical economic caveat of fairness. Everyone (and especially the germans) are obsessed with fairness instead of doing what is most benefitial everyone.
That’s a great exercise, even if theoretical. But here, in Southern Europe, what else can we do? if we’ve cut everything and we’ve lost a huge amount of rights? Meanwhile, Germany is obtaining money from markets at 0% of interest. And it’s very confortable with that. But that’s not a EU at all, there’s only masters and servants. If ECB is not working to guarantee stability for every country in Eurozona, it’s useless. If EU Commission is not working for every country, and it’s just following German orders, it’s useless. If euro currency is not the best option for all of its members, it’s useless.
Germany entered the EUR-System with an exchange rate of 1,95 DM which was much too high for the German economy and its productivity at that time. It was indeed a huge burden for Germany`s industrial sector and led to a record high unemployment in 2005. The periphery of Europe was throwing a party while the growth rates in Germany were much behind average with plummitting wages.
Now, Europe is facing a transforming process and Germany goes out on limb and issues a lot of checks for the Greek public servants and retirees having much higher standards than in Germany or for the Spanish banks funded a housing bubble with ultra low interest rates which was a positive side effect for Spain when launching the EUR or for the Irish people having established oversized banks.
Merkel has right to say as long as there aren`t any budget constraints of sovereign countries, Germany cannot take liability in terms of Euro-bonds. Germany accepts its responsibility but it doesn`t deserve any bashing.
Germany only deserves “bashing” in regards to its hypocritical stances on other Euro govts spending. Germany insists on austerity from its Greek counterparties……… but not in regards to buying all the German made weapons Greece has become accustomed to. For them to act like Greeks are overpaid and lazy when they make less and work more on average than German workers is beyond the pale. But its not just Germans, the entire econ profession, full of supply side neo liberal indoctrination is uanble to conceive of any way forward that doesnt involve punishing Greeks or Italians or Spaniards.
“Spending” is not “Spending”. There are hundreds of ways how a government can spend money. And I understand everyone who does not want to guarantee for the spending of someone else, without any longterm target and target control. It’s natural and human. So why this anti-german discussion regarding eurobonds?
Deberíamos aprender de Alemania.
En USA generamos déficit y políticas acomodaticias.SE ESTÁ ACABANDO Y VA A PARECER GRECIA
Alemania sólo tiene su inteligencia,capacidad y superación permanente de sus individuos, desarrollos en ciencia y tecnología, entre otras cualidades, MERKEL (PROFESIÓN Dra en Física) pequeño territorio y otras cualidades.
Wie meinen?
Right and while you’re at it, let’s kick California out of the US of A. Trying to spend your way out of debt has worked so well for the US. Austerity may not be ideal but it’s the only medicine that will work. Americans don’t like the word because it might wake up the politicians over there to actually DO something about the economical mess. If it were an American state, the National Guard would already be stationed on every street corner. Quit propagating “the American Way”. The only reason the US keeps it’s head above the water is because the rest of the world still believes in the myth of value of the good ol’ US dollar.
Has more to do with the fact that we produce 25% of all world output really…..
The supposed strength of the USD and the US has to do with the fact that:
1. (nearly) all commodities are priced in USD. “”anyone who is long commodities is also short USDs”". Source: Richard Russell (Dow Theory Letters).
2. the majority of loans and stocks are denominated in USD. (long loans/stocks, short USDs).
3. The US runs the largest criminal money laundering scheme.
Patrick’s comment above on the resiliency and flexibility (as well as a more equitable distribution of power and wealth)that decentralization can provide, I strongly agree with, but only in part. As with so many other things there is a balance here; and half of it is left out by this comment.
Unless the units are to be largely autonomous and self-sufficient, they need to operate within a framework that can only be maintained by central authority. Thus a vibrant commerce needs a stable monetary regime, and legal and regulatory frameworks to establish property rights, contracts, and maintain a stable financial system, among other things.
The whole principle of federalism is about maintaining a balance between these; and defining and limiting the powers appropriate to the central authority, while supporting and protecting the spheres of authority and action of more decentralized entities – whether public/governmental or private/commercial.
Not only does Europe need to develop its own brand of federalism if the EU or the EZ are to progress and thrive, but in this country – its original home – it badly needs to be rethought and revitalized.
I think there is a good chance we are on the brink of an era as fraught with instability as the half-century the west endured after 1914. I predict that the prevailing response to what will be experienced as fundamental threat to people’s ways of life will be a hunger for strong leadership – but this could go one of two ways.
If the leadership that emerges is the real thing (FDR as a reasonable example), it will move toward forging unity – whether in a single large country like the US beset by division or within a group of countries such as the EZ/EU. If people embrace divisive and demagogic figures and ideologies (eg Fascism) a less than optimal decentralization will be forced by the disintegration of the center.
I frankly have seen clear demonstration of the first kind of leadership in neither the prospects for the US Presidential election nor in the current EZ/EU heads of state; perhaps they will surprise, or we will see what emerges in the future.
(In the hypothesized circumstances, people often turn instinctively to those with extensive command experience, or those whose family background has instilled an aura of confidence. If so, in the US, David Petraeus, and perhaps CR’s young Joe Kennedy might be figures to watch.)
I don’t know Joe extremely well, but I’ve spent enough time with him to vouch for his integrity, intelligence and potential. Hopefully he surrounds himself with the right people over the coming decades. His name will only take him so far. His potential is huge….
Clearly the name is not enough; among other things, the Kennedy family appears to carry a reckless or even self-destructive streak that has bedeviled most of its members.
However, one thing a real leader may need to be able to do is take major political (and if necessary, geo-strategic risks – if the alternatives are worse), even go for broke, when the stakes warrant it. In spite of his obvious intelligence and decency, this is something I have yet to see in Obama (the Abbottabad raid notwithstanding. It helps to come from a background where you never had to worry about money – I and close family members have been on one side of that divide, while people I more or less grew up with were on the other.)
Hopefully Joe has escaped the family curse, and can build on the advantages its position has provided him. Your assessment of his character carries significant weight for me.
Mr Market: Germany doesn’t suffer at all. Putting money under the pillow means hiding, no stealing it from the economy, the society. So actually low interest rates are a damn good thing: You get forced to invest your money. You get forced to help making the economy roar.
Since when is free exchange steeling? You are the thief demanding others do with their wealth what you want.
Yes, Germany should be punished for loaning the rest of the EU their saving. They work so hard and efficiently, how are the Italians, Greeks and Spanish supposed to compete and still retire early? Why should they expect others to keep their promises. The nerve.
I suggest that you change the name of your blog to the Pragmatic Thief.