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.
Follow Me:
152 Comments
Well said Cullen
It is like the British Empire. All the colonies when dealing with the mother country had to trade using the same value pound as in England. Everyone in the European fiscal treaty now has to trade with Germany at a Euro value in Germany’s interest. Southern Europe could escape their pseudo-colonial status by setting up a true fiscal union without Germany. Germany would lose much of its trade because of higher prices, while the new union would increase trade with each other, seeking to balance their consumption with their output; probably to the advantage of French Industry vs. Germany.
Hi Gerald,
You say “All colonies in British Empire used the pound”…I believe they tried to put India on the pound but failed….If you have a link about the larger Empire’s monetary history I would love to read it..thanks
“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.”
The central bank would control the exchange rate. They can set it to whatever value they want. Of course it would be worth more than the now slimmed-down Euro, but it might not be so bad for their exporters if they can control the rise and try to shift towards the US as a market. They could sell machinery to American companies and Americans could, you know, start making stuff again!
And as I said in an earlier thread, they just gave their biggest union a 4.5% raise — the biggest in 20 years. That could be seen as an effort to preempt the deflation that would follow a EZ exit, or as simply an attempt to rebalance their economy after so many years of mercantilism, or both.
Basically, I don’t think a German exit/north-south split would be all that catastrophic. I think it’s probably the quickest path to growth for everyone involved.
I don’t see how the rest of the EU can simply kick Germany out, but they can ignore the Germans and proceed to fiscal union themselves, full steam ahead. There is also the problem of the UK, since the EU is not the Eurozone, and this 2-tiered membership is an enormous barrier to full federal union. The rest of Europe has a voting majority on the ECB, so they could overrule Germany. They could implement Eurozone-wide deposit insurance and monetization of State debt without Germany’s consent. An alternative to deposit insurance (which as a fiscal operation could be improper for a central bank) would be to allow every EU citizen a deposit account at the ECB. If Germany does not like it, Germany can exit. They can call a constitutional convention, write a USE Constitution, then give the Germans and the British a choice – ratify the new USE Constitution or be totally cut out of the new union.
Of course, to do any of these things, the rest of Europe must agree on a concrete plan. I have yet to see them do any such thing. But Germany has already passed a law describing exactly how Germany would exit the Eurozone if it came to that. The Germans might be more willing to exit than you think.
Yes, Germany would suffer terribly with the D-Mark, just like Switzerland suffers with the swiss frank….
terrible terrible thing to have a stable or appreciating currency.
It actually is terrible for Switzerland. So terrible that the central bank had to peg rates to the Euro to stop it from rising and causing recession. Still, their 1.3% growth rate is not a shining example of economic strength.
Yes. The rising Franc is not good for Switzerland.
Why should Germany through good money after bad? The Germans have good international trade and good local economy
Leaving the euro would be good for Germany– be carefully what you wish for — you might get it
They already threw good money after bad. It was Germany’s banks who lent all that money to Greece and the other misfits. But they won’t let the market run its course and default because it would hurt German banks.
Well said… although I personally feel you also explained why this just isn’t going to happen (at least any time soon). There’s not the political and social will for a US of E – you’re explaining this yourself by saying everyone should threaten each other! That’s not a happy situation about to resolve itself in a happy union.
I agree with your overall assessment however – its ultimately full union or blowup. Sadly, I think full union is not the likely outcome here…
I agree – full union or complete breakup. That has been obvious for years now, even to them. A full (and orderly) breakup would probably be the best thing for the USA in geopolitical terms, so it is the outcome I prefer. But the whole rationale for the EU is to make a superpower as a rival to the USA. It isn’t really about trade and commerce. There are lots of Europhiles who are willing to make any sacrifice and bear any burden for the sake of creating that greater glory, and as long as they cling to this dream an orderly breakup is impossible. There is also a significant nationalist faction in all the EU States who don’t want a sovereign federal government. I have no idea who has the popular majority, and it probably doesn’t matter anyway. If Angela Merkel makes concessions toward full union, the full union will happen. If she (and her successors) hold firm, a disorderly breakup is likely. An orderly breakup is not in the cards.
“There’s not the political and social will for a US of E”
Plus there is no common language, which is a must for any US of whatever. There wouldn’t be the USA w/o the common language.
So they should pick a common language? That’s easy, just pick what the US of A uses… Spanish!
Sam, watch the rise in the use of Spanish in the US. 50% of the kids born in the US are now mostly Latino. Do you think the country will break up?
No, of course not. Point is that the USA would never have been founded w/o a common language. In the 13 colonies which were the nucleus, english was this language.
Comparing Eurozone to USA on the basis that a lot of US residents speak Spanish is absolutely stupid.
Here’s the key (and this is coming from an outsider – an Australian who visits the USA very regularly): The USA has a wonderful NATIONAL IDENTITY. You are all Americans! (Except maybe the Texans!!) There’s little antagonism with respect to sharing financial and other resources. You all love your country and to travel your country freely etc etc
Europe simply doesn’t have that national identity – the Greeks don’t think of themselves as “Europeans”, nor do the French, or the British. The only Europeans who want this US of E are the Eurocrat political elite – its not the will of the people…
Actually, not exactly. A huge percentage of the population spoke German at the time of the Revolution – so much so that some of the oldest examples of the Declaration of Independence that we have are German translations made immediately after the signing, so the people in Pennsylvania would know WTF was going on. There were still a sizable number of Dutch speakers as well. English dominated, but it was certainly less of a lingua franca than it is today.
India is an example of fiscal and monetary union without common language,culture or religion. Every state there speaks a different language (with different scripts to boot). Each state has it’s own unique culture. In fact each village has it’s deity all loosely brought together under an umbrella religion of Hinduism. Basically India was far more diverse than Europe. Yet it functions as one unit. I think homogenity is over-estimated. More diversity one has to deal with, more open-minded and creative one becomes
*like*
Very accurate observation, imo
“Basically India was far more diverse than Europe. Yet it functions as one unit”
Yes. Thanks to the British colonial regime. From Wikipedia: “…direct administration of India by the British government. Proclaiming a unitary state and a gradual but limited British-style parliamentary system, the new rulers also protected princes and landed gentry as a feudal safeguard against future unrest’ is IMHO the key to the existence of India as one nation. But such a unifying über-power doesn’t exist for the EU.
The degenerate borrower, the USSA, should reduce its debt.
Still not on telly Cullen huh? Sucks.
I sometimes wonder if people like you will one day realize that your attempts to tear down people actually lend them more credibility.
To be honest, I do not think that ‘threats’ are going to resolve anything in Europe, and neither do I think that Germany deserves it. The reason why Germany is tough and demanding is because Germany is pursuing its interests (i.e. wants to control what other union members do if they basically borrow from Germany – think covenants). Likewise, other union members are pursuing their pretty predictable national interests – euro bonds and no monetary/fiscal discipline where possible if you are in trouble, basically. This union game is really very predictable, and the outcome in that sense also seems quite predictable – and I doubt it’s this ‘fiscal union’ that you talk about. Europe is not USA and never will be, for simple cultural and historical reasons. The Euro is a flawed idea, therefore – if noble.
Lets just hope that the breakup will go smoothly. I don’t agree with your analysis at all that Germany is having such a great time, being stigmatized all over the place, economy in massive stagnation. And regarding the D-Mark, what leads you believe that it hurts Germany? Germany did just fine (and much better than since the Euro introduction) WITH a strong D-mark than with the Euro. I would wager that if we could go back in time, German politicians would not enter the Euro if they had known what they knew now, and neither would most other union members.
A very sensible comment (I live in Germany).
Germany is so strong, because after entering the EUR it was the weakest GDP growth country, the laughing stock of Europe with double and more the current UE. It was forced to make lots of structural reforms and go through an internal devaluation. Something that is now demanded from the other countries, but it is obvious that the latter are not only weaker from their productivity, but also in their will to reform (of course it has been anive from Germans to expect German discipline from Souther European countries).
InvestorX, perhaps you can help me out with a view I have (and relates to a comment I left above).
This is about NATIONAL IDENTITY. Do you think of yourself as a proud “European citizen” or as a proud “GERMAN”.
Do the Greeks/Spanish/French/Dutch/British etc see themselves as “Europeans”?
I believe this is the key – many like to talk about Germany’s willingness to pay for the integration of East and West Germany and that they will do it again. But the thing is they were integrating GERMANY – there was the political and social will there. They don’t have the will to integrate Europe and neither do the other nations have the will to be integrated…
I think Germans want the European integration, but they want that it is played by the playbook that was agreed a long time ago. Germans went through high unemployment and internal devaluation and now they expect it from the others, and this made them the stronghold they are now. The reforms were carried out by the socialist party, mind you.
I think there is a slippery slope being entered by Merkel in first denying that she will not play by the rules and then still breaking them anyway. Germans will probably not elect her again. Euro bonds are against the German constitution and the const court has ruled them out publicly already.
Finally Germans do not believe in something for nothing (or kick the can through inflation), which is played by most of the Western world (and China, Japan to a degree). They seem more American in that than the Americans, as they still believe in hard work (well not as much as their parents / grandparents), top-notch engineering of real things (not Zynga) and playing by the rules.
I think one C.R. still hasn’t got a clue what the REAL drivers were for german lending to Greece. It’s NOT a deliberate policy but one driven by market forces. And I have come to understand that a lot of folks in the US are so US centric.
There’re signs Germany is/could be already preparing to leave the EURO-zone. But IF/WHEN they would do so TODAY then the Netherlands would leave the EURO-zone TOMORROW. And then the EURO WILL (!!!!) become a third world currency the day after. Because the Netherlands and Germany give the Euro its current strength. But be careful what you wish for. A rising USD(X), and we all know what that means for the entire world’s financial system. Second half of 2008, anyone ???
The Germans will move to fiscal union as you think of it,but first they want to control the rulebook on how it will operate and basically they will want to know they have a lot of control over it. In other words,and here I sympathise with their view,they want to know that the proceeds of fiscal union do not get pissed up against the same wall which has already received a deluge of misallocated funds in the past.Greece,bless them are a continual irritant to the process i think the Germans want to follow. That is why I think we have arrived at a point where the Germans are actually inviting Greece to leave by explicitly not giving an inch.I think the Germans have told Spain,Italy,France etc bear with us and we will work with you once we have Greece out of the way.By work with you I mean they will still want reform,but I think they will get alot more flexible and very quickly when they are only dealing with the aforementioned countries and not Greece.
What the Germans don’t want and I don’t blame them I sum up with this little story.
I Fuertaventura (Spanish canary isles) I hiked miles over hills down to place called Puzo Negro. A handful of stucco by the sea with tiny little trailer park and one bar that opened on occasion. The picture is clear I hope. From there I walked back to my pickup point on the main highway which was 7km. This was at it’s junction highlighted by a large sign EU Grande Experimentale. The 7 km was fairly newly laid tramac with utilities etc laid alongside.7kms laid down to a handful of stucco containinga a couple of dozen people and dogs/hens.I leave you to do some maths on the payback period envisaged to recoup the cost of that Grande Experimentale.
Germans are right to fear what would happen if we simply agree to to a major change in funding WITHOUT first ensuring that we have the right control mechanisms in place to ensure the desired outcome.
I am with you in that I think the German austerity is far too severe,but I don’t think they intend to keep it that way once they have cleared away the obstacles that i think they see as a threat to relaxing their policy.Just my view of course,but their comments and the acquiesence of other stage politicans makes me wonder what has been said behind closed doors that got them to go along with the Germans to this point.
Forgive the use of the word “we” hwere I was actually referring to the Germans.
Greece has make up its mind. Either to stay in the Eurozone or leave the Eurozone.
The low productivity in Greece means that they WILL be forced to reduce their wages. Either through devaluation (=leaving the eurozone) or cut their wages by say 30, 40 or 50% (=staying in the Eurozone). Either way, the folks in Greece WILL see their PURCHASING POWER decline.
Germany is already suffering. Because german interest rates are going lower and lower (=lower income for “”savers”").
nice thougths
disclaimer: German citizen here.
it´s nice to judge “evil” Germany and our demands today.
but what you should look at in the first place is how things have become what they are now.
i fully agree that Germany is the main beneficiary of the euro currency.
but thats only half part of the story.
back in 2004 Germany did HARSH labor reforms that put the then ruling left coalition out of power.
unemployment benefits have been cut, the retirement age was raised to 67, the labor market was loosened resulting in a flood of low paying part time jobs and most importantly during the 2000s real wages didn´t rise.
http://www.handelsblatt.com/politik/international/realloehne-griechen-mit-groesstem-plus-der-eu-staaten/5753996.html
from 2000-2008 real wages in Germany declined by 0.8%.
over the same period they rose by 40% in Greece!
result: german costs per work hour rose by 1.9% anually, in Greece they increased by 3.8%.
here´s a table on real GDP growth over the last decade: http://www.dnet.at/elis/Tabellen/arbeitsmarkt/wiinter_bipinter.pdf
look at the phenomenal growth rates of Ireland, Greece, Spain from 200-2007 and then compare them with Germany…
Germany took a bitter medicine and now it is earning the rewards.
the southern countries have put themselves out of competitiveness by NOT reforming their labor markets and simultaniously borrowing at historically low rates without budget discipline.
and now you´re telling me that all this should be forgiven and forgotton? that there´s a free lunch without any consequences?
remember: austerity is not a thing that has been forced by Germany in the first place.
it´s been the bond MARKETS that back in 2008 have lost trust in PIIGS ability to fulfill their commitments.
AMEN !!!!!!
plus-1.
Austerity — living within your means, investing in the future, making reforms so your economy can be productive, etc. — works.
You can’t say that it’s failed when it’s barefly been implemented. Let the medicine start to work before you take it away.
Thanks ,I enjoyed you commentary.I holidays quite a few times in both germany and Greece over that periodand you have answered my questions at the time,basically why my money seemed to go so much further in germany than Greece.At the time I could never quite understand why that was so and especially when on a quality based assessment Germany provided way higher products/services as well. Mystery solved,thanks.
“No consequences”? These countries are in full blown depressions. That’s DEPRESSION with a capital D. 20%+ unemployment. 50%+ youth unemployment. We’re talking about a total nightmare economic scenario in some of these countries. How can you say there have been “no consequences”??????
“How can you say there have been “no consequences”??????”
Of course there are dire consequences, consequences of what they did and didn’t do. Self responsibility is a basic rule in life, only children and mentally handicapped are exempt.
What is fundamentally wrong in the whole story is that the finance industry who caused a lot the nightmare is not at all held responsible, unlike the nations.
What perverted sort of capitalism is it where banks are bailed out on taxpayer’s money, their losses are solicalised, and then they don’t even pay back, let alone with interest, what the people transferred to them?
It’s Germany’s banks who are being bailed out. That’s the whole point of the Merkel agenda. She knows she can’t let Greece default because it could cause a credit crisis which would suck Germany into the depression phase of the Euro collapse.
It is not only German banks, it is: banks all over the continent, in every country. Don’t you know that French banks profited most from the taxpayer funded rescue schemes, not German banks? It would be nice you took a less anti German biased look at the facts.
The only reason I am expressing an anti-German sentiment here is because they’re now the ones blocking any further progress on anything. France has moved to the side of the peripheral countries in supporting Eurobonds now. Germany is just blocking up progress. Shit or get off the pot as some people say. But don’t make everyone sit in the bathroom with you while you fail to make a decision. Germany needs to leave or help their trading partners out by fixing the broken currency. It’s that simple. I am not blaming Germany for all of this any more than I am blaming the periphery. Make no mistake, they all are in the wrong. The whole thing is flawed and all the actors are to blame to some degree. But Germany is the one now blocking any progress and they’re essentially holding Europe hostage. It needs to end.
“France has moved to the side of the peripheral countries in supporting Eurobonds now. Germany is just blocking up progress”
It is undeniable that there existed de facto Eurobonds between 2001 and 2007 (you yourself posted here in pragcap a graph once) and that they were a main cause for the desaster. Thus it doesn’t sound logical to re-establish them again.
BTW, Eurobonds are not allowed by the German constitution and the EU treaties, no matter if Germany (and the Netherlands, Finland, Austria…) block them or not.
Funding Eurozone debts via the ECB is also supposedly against the treaty. So is running these debt levels. So are lots of things. You don’t really think the Maastricht is stopping anyone from changing the rules at this point, do you?
Nobody can change the German Constitution so it allows Eurobonds. I explained already why.
And again the question: even if they would be re-established, what would be better? They caused/contributed heavily to the desaster. And, as you say, nobody sticks to the EU treaties anyway – so why would there be any reason to believe the GIPSIFs would not again use the (for them much to cheap) funding to continue with their irresponsible behaviour?
Well then the decision should be easy for Germany. Exit the EMU. If you can’t change the rules to conform to the necessary resolution for the monetary union then you should have never gotten involved in this to begin with. Everyone knew fiscal union would be necessary at some point. German leaders are on record saying this in the 90s. But you’ve created a silly law barring this from really happening. So what’s the point of being involved?
It seems like the decision not to join the EMU should have been made 13 years ago. So “shit or get off the pot” because you’ve been occupying the bathroom now for 13 years longer than you should have. And if you’d like to remain in the EMU then you need to make changes to your laws. It’s that simple.
“It seems like the decision not to join the EMU should have been made 13 years ago”
Yes indeed. Unfortunately, the German electorate was never asked, because if, there would be no EMU, at least not with Germany as participant.
“But you’ve created a silly law barring this from really happening”
Acutally, no. The German constitution is way older than any idea of a common currency, fiscal union and so on.
“And if you’d like to remain in the EMU then you need to make changes to your laws. It’s that simple.”
Actually, no. Nobody can change the German Constitution so it allows Eurobonds. I explained already why.
And again the question: even if they would be re-established, what would be better? They caused/contributed heavily to the desaster. And, as you say, nobody sticks to the EU treaties anyway – so why would there be any reason to believe the GIPSIFs would not again use the (for them much to cheap) funding to continue with their irresponsible behaviour?
The whole point is: you, like the GIPSIFs, want a transfer union (name it Eurobonds, fiscal union, whatever) and let the Germans pay for any nice things the other nations gave and give their people. But the Germans, understandably so, don’t want to fund other people partys endlessly.
They’ve already willingly funded a party. Default is a natural course of correction for a currency user whose economic situation has gone incredibly south. Right now, Greece is one giant debtor’s prison. They ARE paying the price, where a default would spread the risk relatively equally between the Partiers, and those who willingly over-funded them.
So it’s really Germany not wanting to accept the natural economic consequence of their malinvestment, not the country with 20%/50% unemployment & youth unemployment. Germany enacted reforms, but not in the midst of a global depression/recession. Plus, it things don’t necessarily work on a macro level like they do on a micro-level… Part of what helped Germany reform was foreign demand for their goods. If Germany doesn’t start using more of their Euros to buy gyros (see what I did there), and vacations, there’s no way for the entire eurozone to pull itself up by its bootstraps.
Or the !@#$ing ECB could just target rates for member countries – but no, that scares idiots who think it will be inflationary. Mass purchases by the ECB of peripheral debt are another thing that pretty much everyone is okay with…except Germany.
@I’llHaveADouble
“Mass purchases by the ECB of peripheral debt are another thing that pretty much everyone is okay with…except Germany.”
Understandably so, because this exercise by the ECB loads its balance with junk bonds. Which is debt racked up by 100% by the GIPSIFs, but Germany is on the hook for 27% of it via its stance inb the ECB. Would you cosign for 27% of a huge credit your neighbour took to fund a big party knowing he can nevery pay it back?
So the ECB does already what a lot of people dmeand: transnationalize the risks of the GIPSIFs debts.
@ DanM
“If Germany doesn’t start using more of their Euros to buy gyros (see what I did there), and vacations, there’s no way for the entire eurozone to pull itself up by its bootstraps.”
That’s another good exapmple how wrong it is to focus on Germany only. According to a recent report in a journal over here, the bookings for vacations in Greece went down by about 30% in Germany, but by about 50% in France and the UK. So, why is it always only Germany who is asked to spend more?
@Serious Sam,
But it’s not risky, really – and if the central bank announces target rates across the yield curve for different countries, that would probably assuage market fears without the ECB even needing to buy anything. Even so, if they did buy “junk” bonds, so what? They’ve transformed the bonds into reserves and guaranteed the solvency of the Eurozone as a whole, making the debt…not junk. They’ve just transformed debt into reserves, and then they sit on the bonds. If they have to write them off, so what? It’s a central bank. It’s not going out of business.
Even if (there’s that buzz phrase again) structural reform is needed in the European periphery, now is clearly not the time. It’s just making everything worse for everyone, including the Germans. Serious ECB intervention is a magic bullet that would eliminate the threat to the global economy, limit the enormous human suffering we’re seeing and not require one penny from Germany.
Those labour market reforms were also known under the keywords “”Har(t)z IV”".
Seems Germany is simply fed up with Greece:
http://www.telegraph.co.uk/finance/financialcrisis/9286309/Debt-crisis-Germany-holds-a-gun-to-Greeces-head.html
Everyone in Europe is told to prepare for the “”GREXIT”" when I read the newspapers correctly. The GREXIT would also send a clear message to other (spendthrift) countries (including the US). “”Don’t count on endless bail outs, make up your mind”".
dear GreenAB!
Thanks for the great info comparing Germany to Club Med countries!!
Oxford Professor Paul Donovan of UBS said Germany’s real growth rates have been comparable to Japan in their ‘lost decade’.
Even if seeming cheap to Cullen, northern politicians face further voter revolts in the “strong” countries, especially with such slow growth, and local sufferings.
It is the voter revolts in the stronger countries that really threaten an EU breakup.
The Club Med’s can go nuts in the streets but in the end, new or old leaders have to compromise with austerity demands, to keep getting money from the north. The present Club Med ‘political crises’ is mostly hot air and media drama…but more powerful and quieter anger should continue to build in the stronger countries as they get more and more sick of giving the money to ungrateful people.
I expect there will never be political union, after such a bad start, including high level accounting lies in Greece, …other bad leadership, strange labor history and corruption… not just in Greece.
Lieber GreenAB
Sie sprechen mir so aus dem Herzen. Vielen Dank für Ihren Kommentar.
Congratulations!
I have posted several times similar comments about German austerity in the 2000s and the party in the PIIGS, but nobody would listen. I should have provided the GDP table.
I also posted similar comments in this thread.
Germany didn’t order the GISPIFs to live far beyond their means on borrowed money, to build bubbles, to grotesquely inflate the public sector, to refuse to do necessary structural redesigns… So why should Germany fund their ongoing parties?
BTW, the german Constitutional Court made already runlings which make pretty clear that there are limits to the transfer of German taxpayer’s money to other nations.
“Es dürfen keine dauerhaften völkervertragsrechtlichen Mechanismen begründet werden, die auf eine Haftungsübernahme für Willensentscheidungen anderer Staaten hinauslaufen, vor allem wenn sie mit schwer kalkulierbaren Folgewirkungen verbunden sind”
which translates to:
“There may not any permanent international juridical mechanisms be established which amount to a guarantee to cover the decisions of other nations, especially if they are associated with unpredictable consequences”
and
“Jede ausgabenwirksame solidarische Hilfsmaßnahme des Bundes größeren Umfangs im internationalen oder unionalen Bereich muss vom Bundestag im Einzelnen bewilligt werden”
which translates to
“Each cost effective act of solidarity in large-scale international or european area must be approved by the Bundestag in detail”
Each of these rulings deem any form of eurobonds as against the German constitution.
And be assured that any political party who attempts to change the constitution in this respect, would be thrown out of power immediately and forever. We Germans don’t accept Versailles 2.0. The GIPSIFs have to learn that there is no free lunch.
As for the little communist blackmailer Tsipras: I expect he will be in power after the next greek election. And if he then breaks the binding contracts with the IMF, ECB, bilateral with other nations and with the EU, he will be remembered as the guy who kicked his country into failed state territory (it is almost there already, make no mistake).
Germany was the enabler. Like the guy selling crack on the street corner to the crack heads. Who gets arrested in that case? Most times, EVERYONE. Pinning blame on the debtor without acknowledging the error of the creditor is silly. It’s just like the housing bubble in the USA here. Everyone wants to blame the banks (the creditor in this case) and no one wants to blame the home owner. It’s ironic how the tables are flipped here and everyone still has it totally wrong on both sides of the pond.
It is a bit strange to compare the eurozone with a drug cartell. Because it was not Germany who acted as ‘enabler’, it was the common currency. BTW, to create this zone was an idea of the French, not the Germans.
Plus, if I’m not mistaken, there are 23 countries who joined this circle, and Greece is indebted with all of them. So they are all ‘enablers’ as well.
So it is nonsense to blame Germany only and ignore the contribution of the rest of the gang.
Sam, we all know who lent the most here and who benefited from the great profits those loans amassed….
Not sure what you know, but it was the French banks who were by far most exposed to Greece (and Spain, Ireland, Portugal…). Meanwhile they reduced their exposure significantly thanks to various direct and indirect rescue schemes, paid for by the EMU taxpayers.
See for instance here: http://www.spiegel.de/fotostrecke/fotostrecke-68964.html
France isn’t blocking the progress. Hollande is furious with Merkel. This used to be north versus south. But it’s become Germany versus everyone else now. That’s why I am focusing on Germany here. I’m not blaming you guys for the whole crisis. Far from it! But make up your minds about where this is all going because dragging this out like this is clearly helping no one.
That’s a different spin now, not anymore “we all know who lent the most here and who benefited from the great profits those loans amassed…” which was in fact France, not Germany.
I am not “spinning it”. I was wrong to say Germany lent the most. So it’s a clarification. Either way, Germany benefited from the loans. Whether they were the largest creditor or not is irrelevant. They were one of the primary beneficiaries of this arrangement. If you want to claim a pyrrhic victory over the fact that Germany lent a few billion less than France then be my guest. That doesn’t change the whole point of the post, which was, make a decision Germany and stop holding everyone else in Europe (and the world really) hostage to your indecisiveness….
The problem Cullen starts with FRL capturing the whole economic and political systems for over 100 years now (Fed established in 1913, gold completely left behind in 1971).
Now most modern economists pretend that FRL does not exist and people debate fiscal budgets and monetary policy in this manner. This is also the manner the EUR / Maastricht treatywere introduced. This is the way (sigh) Paul Krugman still thinks.
And sorry Cullen, but your beloved fiat currency is only an enabler (besides it allows bloating of the state apparatus and waging imperial wars)
So if we want to talk about the problems in the US, EU, and partially China, they all have this common root. And make no mistkae, the role of CBs is to protect the banks and as a side effect the bank-government cozy relationship.
So now do we want to change the German constitution, the EUR, the Maastricht treaty or do we want to tackle the assumed away FRL. I know that changing the former looks easier achievable, but it will not solve the root cause of the problems. And if we do not want to tackle the FRL, then at least let the banks eat the losses (protect the operating entity), apply the Swedish solution.
“If you want to claim a pyrrhic victory over the fact that Germany lent a few billion less than France then be my guest”
Cullen? 1st it was not just ‘a few billion’ but a whopping 33billion. 2nd, the deleveraging on taxpayer’s cost was just between Q1 and Q4 ten times higher on the french banks’s side.
During this period, they transfered 45,5 bn € of risk to the taxpayers, while the german banks only 4,3bn €.
As I said before, you are of course free to be anti-German as much as you want, but please don’t ignore the facts.
I agree with the first comment on top ; and I also agree with the fact that the Greek bailout so far has been a useful bailout for Angela and her banking sector. But as already stated, Germany has already crossed the line of no return ; if you have a “paper” claim on the system worth 650 bio eur, the last thing you want to do is to leave or let the system implode ; Angela may scream and shout, in the end she will have to comply somehow
Yes Cullen, youre right. But my country also lended money to Greece. And if they default, i will have to pay it in higher taxes. So its actually saying that the rest of the eurozone will baoil out the pigs of greece.
Its not Gemany who had biggest profit from being in Eurozone. It was Greece. Have you ever been there? Buses dont go on schedule, they think taxes are for Germans and most of them just live on social benefits. So no Mr. Tsipras, you dont have any right to press anyone.
JB, that is an excellent point: If Germany is willing to “pay the price” for letting Greece exit and then default, who is to argue with that?
Let the Greeks exit, let Spain exit, let Portugal exit. Default, all of them. Break the whole thing up. The cultural differences between Latin and Northern countries are staggering. I do not think the cross-border socialization of the EU makes any sense. There’s plenty of intra-border socialization that each country bears to begin with. If the right incentives are in place, behavior will change.
Bottom-line: the dissolution of the EU represents a huge opportunity for all countries IMO.
The only thing political leadership fears more than losing their elected positions is extreme social unrest. Therefore the German’s position will ultimately succumb or the rest of the EU will leave them behind (which is another way to the same result).
Either way – it will get rougher before it smoothes out.
The only way social infrastructure costs and wages will be brought down is through inflation (same or slightly increased wages and pensions that have far less purchasing value). Ultimately this will occur in the US as well. Gold prices reflect this.
The answers are so obvious, but the path is long and very frustrating. I think it was Churchill who said “ultimately democracies will do the right thing after they have tried everything else first.” Lots of things still to try yet.
Better headline: “Greeks demand Germexit!”
@GreenAB
You’re right Germans are very hardworking and productive and many of the criticisms are not about Germans as a people. (In the same way we all know Americans are green-house-gas polluting aliens, happy that 10% of their citizens don’t have healthcare, … but we still love them nonetheless!)
The problem is that the Germans want to have their cake and eat it too, ie they want to make and sell things very efficiently, and then lend the money for people to buy the goods, and then demand zero percent loss if the loan goes bad. Given the plethora (in the US) of credit scores, background checks, bankruptcy laws, … the onus has been on the lender not the creditor. It’s true, the attitude in Germany is the opposite. One way that Germany can show more faith in the PIIGS is to invest more there (rather than lending), or now, to do a debt-for-equity swap and recognize the loss. They could also propose more automatic stabilizers for unempployment benefits (which looks like a fiscal transfer), which happens naturally under a United States of Europe, even without Eurobonds.
debtor (not creditor); sorry
As a German, I constantly wonder where my cake has been for the past few years.
Probably me I just can’t help myself with cake and German and Austrian cake ,died and gone to heaven!
Well thanks for eating my cake
. Enjoy the diabetes.
Cullen,
As you know, we agree that the choice is ultimately between fiscal union or breakup. So I am 90% in agreement. However, the differences in our views may be small, but they are critical.
I think you and much commentary misplaces the blame when it is placed on Germany. I agree that Germany doesn’t want fiscal union, but then neither does anyone else. The debate, even when the term fiscal integration and eurobonds are brought up, is not about fiscal integration. It is over the ECB buying bonds, Eurobonds and other common debt issuance techniques to save the Euro in the short run. It is not about actual fiscal integration. None of the countries in the Euro have seriously suggested actual fiscal integration.
It is obvious why the PIIGS and socialists like Hollande want such a regime. It is also obvious why Germany and many other countries don’t. The first group either benefits from the free rider issues and moral hazard or doesn’t believe in such things as issues, they just want to be able to have a bigger state. The second group fears, and they are likely right, that they would end up massively subsidizing the profligate and the uncompetitive (all the while having their banks continuing raking up IOU’s that in the end they could never collect on, just like now but at a far higher clip.)
Both parties are delusional in their belief that there is some kind of middle ground, and they are all an obstacle to fiscal union. Since I don’t believe that even one country is willing to transfer the majority of their fiscal affairs to Brussels and in essence give up their sovereignty the answer is to break up. Nor do I blame them (whether Greece or Germany) for that. We wouldn’t transfer ours to a Pan American Government, nor would Canada merge with just us, and our two countries are a much better match than the EU. It is a rare desire to do such a thing. Our fingers should be pointing at the politicians who constructed the Euro without a true fiscal union because they knew that wouldn’t fly politically, not those balking at doing so now.
Lance,
Like you said, we mostly agree on these points. But I don’t think they were unsure of what they signed up for:
These countries knew what they were signing up for. North and south. And I think they waffled on the political unity part because they couldn’t come to terms. So they left the union incomplete hoping it would work. But no one twisted Germany’s arm to go into this. No one twisted anyone’s arms. They all willingly agreed on this because they saw the single currency as being more beneficial than the individual currencies. Personally, I think it was the right move, but they need to complete the union. In my opinion, going backwards would be a digression. These countries aren’t becoming less unified as time goes on. No, they’re becoming much more unified. Unity is the only thing that makes sense. But get on with it.
Actually we agree on that as well. That is what I meant by this:
“Our fingers should be pointing at the politicians who constructed the Euro without a true fiscal union because they knew that wouldn’t fly politically, not those balking at doing so now.”
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.
It still isn’t desired. I don’t think Germany wants it, but just as importantly Hollande and company are not proposing it either. In one sense you are absolutely right. They all need to decide whether they are truly all in or not. Hollande is proposing more half measures, so he isn’t in either. He deserves as much blame (assuming you see unification and fiscal integration as preferable to sovereignty) as Merkel. They are each just proposing a different set of half measures. I know it was facetious, but kicking Germany out just leaves a different set of stupid policies in place. The crisis would grind on. France will not give up their sovereignty, and for that matter neither will Greece. The crisis will just take on different forms.
If you have evidence that the political environment, or even just the leading politicians, support full fiscal integration in any of these countries(which as your quotes demonstrate means political integration as well) then I will say I am wrong on this and fiscal integration is a realistic case and Eurobonds make some sense. I think your opinions about what they should do may be leading you to interpret their statements as leading to the policies you support and Germany as pointing away. I see them as all heading in a different direction than you believe is wise, and careening to an even bigger disaster than breakup now. Hopefully I am wrong.
As always, you have one of the most interesting, civil and informed forums on the web. Thanks for being such a valuable curator.
Thanks Lance. I guess the one thing we know is that no one knows what will happen!
I think you make some great points, particularly with the “US of NA” metaphor and for laying blame at the feet of the original politicians who thought “it’ll work itself out eventually.”
That said, placing ultimate blame seems less useful than figuring out how to come to a solution. I think a grand, sweeping, over-arching set of policies being laid out over night is less probable than a series of smaller steps (e.g. the ECB buying sovereigns, LTROs, etc) that get you closer to a fiscal union eventually.
Steps like an EMU-wide deposit insurance program would be a big step forward, although asking European banks to pay in now might be a challenge of its own…
“As always, you have one of the most interesting, civil and informed forums on the web. Thanks for being such a valuable curator.”
And thank you and the other great posters for being part of that civil and informed forum.
I get the feeling that Europe is not at all realistically working towards an actual solution at all. It looks like at some point things will come to an unavoidable head and I fear the resulting political/social mess. Turmoil will really affect everyone, including the USA. Watch out.
The political leaders want European unification, but whenever it’s gone to a vote, the people have rejected the idea.
The leadership of the countries knew what they were doing, but I doubt that the majority of voters did. How many of them understand the long established historical relationship between “the money power” and national sovereignty. The British certainly did, and that is why they didn’t join the Euro. But even there it was a close call.
actually german leaders DO want a fiscal union. you read correct. that´s what they have said over and over again. like this: http://www.telegraph.co.uk/finance/financialcrisis/8880238/Angela-Merkel-EU-needs-more-power-to-rein-in-spending.html
what they don´t want is backing debt of other members without having a say about their budget.
like you said – no country is willing to give up budget control to Brussels.
one side has to give in and i still think that we´ll see a breakup with a northern and a southern euro in the future.
Looking just at Greece, the country cannot fund its government obligations without ….. a) borrowing Euros, b) getting bailouts from Germany or c) printing money.
The first is no longer possible, the second plan has broken down and the third leads to all kinds of political problems. They can’t print drachmas because the people won’t take them and printing Euros is politically impossible (for good reason.) If you print trillions of Euros, how do you decide who gets them?
So they’re stuck. Austerity and economic reforms are the only solution. If they are smart, they will plan for it; if not, it will be forced upon them and be long and probably violent.
…
Political union is not possible in Europe. Here in the U.S., if we go to war, California goes along. If we send money to Mississippi, New York goes along. None of that is possible in Europe.
So let’s focus on what can be done and stop with these utopian ideas (which Europeans are prone to believe.)
What is to stop Greece from reintroducing the Drachma and circulating it along with the Euro. As long as Greece requires its citizens to pay their taxes in Drachma, pays its employees in Drachma, and only pays its State debt in Drachma, the Drachma will have some value, and will find its own level alongside the Euro. They can eventually leave the Euro entirely, but that is not necessary for many years, or unless the ECB simply pulls the plug.
Cullen,
I agree the system is fundamentally flawed, but I also don’t see there ever being enough unity in Europe for a true fiscal union. Also, what’s the point to Germany of having a Euro if they have to spend all their extra export income on fiscal transfers to the weaker countries? One thing is for sure is that there will never be fiscal flow into Germany from the periphery. Another consideration is that being a sovereign currency issuer isn’t a panacea. Peripheral countries paid much wider spreads on their govt debt before the adoption of the Euro, and the massive devaluation of their currencies that would occur in a breakup scenario would actually be bad for many of the countries since they are net importers and would remain on the wrong side of the J-curve.
The point of the fiscal union is economic stability. Through unification you actually increase the stability of the entire system. Then Germany doesn’t suffer through periods of pathetic growth like much of the last 5 years. The model is the USA. I know it’s not perfectly analogous, but it’s a good model nonetheless. By sharing in the pain we all benefit from the increased stability. We have a federal tax and common bonds. We essentially guarantee state solvency by guaranteeing a federal level of spending. That money gets disbursed essentially on a per capita basis and plays an enormous role in stabilizing state budgets. The bigger states pay more in and they get more back. But the difference is that you don’t have a FUNDING crisis in Mississippi and California once every 10 years where the whole system gets thrown into a funk for 5 years. Why? Because there’s no solvency issue at the state level because they’re largely funded by the federal govt.
“there’s no solvency issue at the state level because they’re largely funded by the federal govt.”
Is there a way to see that measured?
I get that our federal taxes don’t necessarily control federal spending, but on a state level, we understand that our taxes, plus direct (and indirect) federal transfers DO fund our state government budgets. There are state bonds as well, but they are generally paid from revenues.
States CAN default on bonds and become insolvent, it just isn’t likley to happen, right?
Detroit has a solvency problem, being largely broke and not being put into recievership.
California has a solvency problem, but will probably balance its budget on the same lines as Wisconsin, for example.
The point being that federalism is keeping the states relatively healthy, more healthy than the federal government finances.
…
Unification makes any system *more* fragile, not less. … We need smaller, decentralized entities. Break up the banks, break up the multinationals, heck; break up Europe into even smaller entitites.
With unification comes temporary stability, but when the eventual bust happens it’s much bigger, and much more painful.
I agree that the solution is to reduce the size of these entities, not increase them. The only people that benefit in the long run under unification are the politicians and the people at the very top, who’s power and wealth are increased as they get to take slices from a much bigger pie, which at the same time makes it harder to notice that something is being taken.
True stability comes from a dynamic system with many parts, so if one part goes bad, the others can continue to function. Centralizing power only creates the appearance of stability.
Well said Patrick
Cullen,
Recently in the review IFR, a ex-colleague and friend, Anthony Peters in his daily article pointed out an interesting comment from one of his reader in relation to Martin Wolf’s recent comparison in the FT about the US and Alexander Hamilton. Please find below the comments of his reader, which I think are very interesting from an historical point of view.
On Martin Wolf’s comparison with the USA and Alexander Hamilton:
“Meanwhile, I should like to express my thanks to M2 Davies of Shepherdstown, West Virginia for the following comment on Martin Wolf and his excurse into US Treasury history in general and into Alexander Hamilton in particular. She wrote the following in response to my already critical comments on Wolf’s FT article of yesterday:”
“Wolf misses two important points:
1. Alexander Hamilton “got something” in return for assuming those debts. (And by the way, he didn’t take all of them.) Hamilton essentially gained complete control of monetary and fiscal policy from the previously sovereign states. He turned “federal”, in the sense of distributed power, into *Federal, *meaning nationally and centrally controlled. The recently-adopted Constitution had provided what looked like a porthole-sized opening for the national government to directly tax and to fund interstate projects. Hamilton turned that porthole into the Crystal Palace.
2. The debts the states tendered to the US were their shares of the expense of the Revolutionary War. They had already been deeply discounted in the secondary market and were mostly held in the hands of wealthy investors. The primary holders, soldiers and suppliers, had been legged over good and proper. Hamilton’s funding scheme actually redeemed the things at a premium to market prices. My point is that the states weren’t in the business of racking up still more debts – can anyone say the same about European nations?”
The eurozone confused having roommates with building a family. Families have joint bank accounts. Roommates divvy up expenses, but they keep receipts. Stavros doesn’t pay for Mary’s mascara, Mary doesn’t pay for Jacques’ lap dances, and Jacques doesn’t pay for Helga’s weed. Most of all, Helga’s mom Angela shouldn’t have to pay for any of it.”
I think the above in the interesting conversation and great comments on this thread make some interesting points.
Best,
Martin
The stability benefits don’t accrue to Germany though. They would be perfectly stable with their own currency. It’s the other countries that benefit from the stability. Now, maybe you could argue that Germany benefits indirectly by having more stable export markets, but then we’re back to the trade off of higher exports vs. funding the fiscal transfers to the periphery.
Of course they do. Stronger neighbors means customers that aren’t defaulting on them once a decade….
Cullen:
Maybe this is a dumb question, but why can’t the members of the Eurozone have a floating exchange rate between their countries? A Greek Euro buys less oil than a German Euro…
Cullen Roche: ” 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.”
No!
Germany can then print as many D-Mark as necessary to push its exports
.
Turkey should invade Greece. Re-unify Cyprus, sell the name Macedonia to FRYM. This solves 4 problems. UN Peacekeepers can finally leave Cyprus after 60 years. FRYM gets to use the Macedonia name. Greece returns to where it belongs, as a province of Turkey and the Turks get into to the EU. Then Germany can encourage its large Turkish population to move back home…solving a possible 5th problem.
I have seen the evolution of the EMU first hand, having lived here in Spain for the past 20 years as a small business owner. I have read your MMT and functional finance documents. First off, I fear that MMT and functional finance does not truly take into account the different cultural, political, or social aspects of each of the European nation states. Even within Spain, there are many divisions along these lines that make consensus building very difficult in its parliamentary democracies.
It also seems that point 1) from you Functional Finance statement would argue that the entire EMU is in fact not legitimate.
1) The government is an entity created by the people and for the people. It exists to further the prosperity of the private sector- NOT to benefit at its expense. If this entity is allowed to exist for its own benefit or become corrupted by a concentration of power, it will become susceptible to dissolution via the populaces rejection of the government.
I will let Nigel Farage help make the argument on my behalf. He can be quite rude, but he does a fine job in his critique of the EMU.
http://www.youtube.com/watch?v=HhGNoZfvRoA
I would argue that Spain should leave this flawed currency union. When individual countries have their democracies superseded and have technocrats appointed to lead them and referendums are not respected as legitimate. It is indeed time for all the countries to pick up their toys and go home.
1. I am not a supporter of MMT. It’s become MMR specifically because I don’t believe MMT describes the system. It rather describes a progressive system. A world they want. Not the one we have.
2. My paper covers the USA. Given that the EMU doesn’t even have a Treasury (I cover Tsy operations quite thoroughly) it wouldn’t apply. Only applies to autonomous currency issuers, which the EMU is not (yet).
What I really don’t get is why you propose eurobonds at all, since they caused the desaster. Eurobonds de facto existed between 2001 and 2008, see here:
http://pragcap.com/euro-interest-rates-and-the-inefficient-market-at-work
Yes, that is on pragcap. Yes, it shows the period during which the GIPSIFs refused to restructure, during which they build bubbles, during which they gave away incredible gifts to their people.
Cullen, you are of course free to be anti-German as much as you please, but why don’t you accept these facts?
I am utterly confused. I hold pragcap in high esteem since long. But this article and these reactions by you on perfectly rational comments in this thread are extremely disturbing.
But if Greek state would be restructured and got rif of corruption, how would all the macho German Firms like Siemens bribe the Greek politicians in order get most of the publicly funded construction (and other) projects?
So the plan was nicely structured, give loans to the South and find the “means” to get most of the money back by utilizng corrupt leaders or by forcing nations of the South to buy flawed weapons (case of Greece being forced to buy broken submarines from Germany!)…
So make this favor to the rest of the Europe and maybe the World, get out of Eurozone close down your borders and cut communications with the rest of us… You are not wellcome and we do want you to “play” with the rest of us anymore. You are a “good race” and you have proven it so you’ll not have any problems alone…bye bye
This was a great post and the comments were great thanks to CR and VSS for the back and forth which adds to the understanding of the issues and highlights the still bumpy road to solution.
Cullen,
“But no one twisted Germany’s arm to go into this. No one twisted anyone’s arms.”
Actually, a little while ago it surfaced that entering the Euro was the ‘cost’ Germany had to ‘pay’ to reunify, so don’t be too fast with this conclusion
. http://www.presseurop.eu/en/content/article/351531-you-get-unification-we-get-euro
I understand your perspective quite well – you look at the process, think that the fiscal union is some kind of ‘resolution’, see Germany blocking it, and therefore see Germany as the country to blame at this stage. But your analysis ignores the reality on the ground, unfortunately, particularly with regards to Europe’s diversity. I’m afraid ‘Europeans’ (really, Germans, Spaniards, Greeks etc.) will never give up their sovereign control, because they would still very much identify themselves on a national level, not European level. And this is not a German feature, but rather this counts for everyone in Europe. As I mentioned before, every country is following its predictable self-interest… or do you think French and Italians support Eurobonds because they want to further the idea of European integrity
. In fact, they support this plan because they are the beneficiaries of this plan, Germany opposes this plan because Germany is clearly the loser. And by the way, just for your reference, it’s not just Germany… Netherlands also is opposed, because Netherlands has been fiscally disciplined and does not want to pay for the others.
To be honest, you are bringing too much emotion into this… Just forget the ‘dictatorial’ Germans and lazy Greeks- the reality is that this is a cold, hard union which is built on the flawed idea that Europe can be one, in a fiscal, economic and political sense. Do you think the US could share one currency and one monetary policy with Russia and China?
We could with Canada…probably the Aussies too, may have to with Mexico in a few generations…
Probably right. All I am trying to do is describe the system and what can resolve this. Maybe I am naive about unification. Which is fine. But the options are clear to me and a decision needs to be made. That’s my bigger point….
I don’t agree that breakup of the EMU would be a disaster for Germany. It is true that Germany does have a large export sector. But would be perfectly possible for Germany to retool those export companies to produce goods for German internal consumption instead.
Suppose that Germans took the money that they are currently loaning to foreign governments, and loaned it to their own government instead. And suppose that the German government distributed this money to the German population in the form of a tax cut. This would enable Germans to purchase more goods, creating jobs for the people who had formerly been employed in the export sector.
Of course, debt would pile up and eventually the German government would likely run into the same types of financial difficulties that the southern European governments are hitting now. But at least the Germans would be getting the goods produced, rather than exporting them to citizens of other countries. And the experience of Japan shows that this kind of a system can go on for a very long time before it collapses.
There are two indisputable facts in this whole discussion:
1. Political unification of Europe would solve the economical dilemma.
2. Political unification of Europe ain’t ever gonna happen.
Sorry, Cullen, someone needs to think outside the box.
Okay, then the decision seems simple, no? Full break-up. But that also won’t happen, right?
Cullen, You said that they should “shit or get off the pot”. But they just seem to be “kicking the can down the road” instead. We may be in for a real “butt buster”, caused by some calamity or something unforeseen at the moment. The sticking together inertia is lost and we get a complete loss of gravity and a busting-up just as predicted by the Mayans. Enough of my metaphors. What will happen according to MMR if the “butt buster” occurs? It seems too complex to me. Should I sell everything and put my moola into the money market funds? That would be the center of the “buster” it seems to me. I’m not going into gold since I don’t have any guns and don’t think I could convince my busted neighbors to stay away from my worthless stack of bars. What…property, equites, commodity puts or calls?
So the way I see it is that EMU leaders won’t let the worst case scenario actually unfold. If Greece were to default they’d combat it with other stimulative measures of some kind. But not enough to fix the problem. So the big worry is a muddle through due to indecisiveness. Basically more of the same here as the crisis continues….Japan writ large across Europe….
My question was a “what if”. What will happen according to MMR if the “butt buster” occurs? I’m not going to bury my head in Maui’s sand.
The banks and other non-bank institutions have created too many debt dollars (horizontal money creation), in all currencies and the people of the world can not pay it back with interest. MMT used to say that horizontal money creation was not a problem because it remains within the banking system. But that is where 90% or more of the money in the world is from.
Greg (below) is correct. “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.”
“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, that’s one thing, but having it and refusing to use it to teach a lesson is simply sick.”
If they let Greece go without any firewall then we’ll see massive debt deflation as defaults cripple the whole system. Think 2008 all over again. Except I think govt’s have learned their lesson this time and will step in before that happens….
Thank you Cullen, very much. So the elephant in the room is deflation. That is what I thought. We need to kick Germany out of managing the world’s macro-economy. We are seeing this deflation on TV today with thousands of Greek workers getting fired or wages cut and prices dropping because there is no money (euros) in Greece. The write downs we have seen in bank after bank plus the orderly reversal of leverage by the world’s companies have taken out of circulation trillions and trillions in fiat currency of all kinds. Uncle Sam’s so-called $15 trillion in “national debt” is but a drop in the proverbial bucket.
My understanding is that Uncle Sam’s pal Ben (via QE/twist), now has “bought back” about $5 trillion of this and put it on the Fed’s books — interest payments going back to Uncle Sam. Why don’t you love Ben more? He needs to put in another $5 trillion and explain why this will not cause currency dilution (e.g. explain that $trillions in debt dollars have gone up in smoke via the Bank’s write downs and we are in a very tight fiat currency situation in the world). He needs to scare people out of the money market funds (“investments” in debt), and into equities.
@CR
“If they let Greece go without any firewall then we’ll see massive debt deflation as defaults cripple the whole system. Think 2008 all over again. Except I think govt’s have learned their lesson this time and will step in before that happens…”
Would be interested in your view as to how that might play out. Are you expecting some kind of coordinated Greek exit? Even if (huge if) they can come up with a firewall big enough to ‘protect’ Spain etc., how will they prevent EZ-wide bank runs? (There’s talk of a EZ deposit guarantee scheme, but one of those couldn’t stop Northern Rock’s UK run in 2007).
” MMT used to say that horizontal money creation was not a problem because it remains within the banking system. But that is where 90% or more of the money in the world is from.”
Hey Dennis
What is your source of that position? As I’ve always understood MMT, they say just the opposite. Its the Mankiws, Krugmans and others of the world that make the claim that private debt is not a problem. I’m not saying an MMTer hasnt ever said that but Ive never seen it form Mosler, Mitchell, Auerbach, Wray, MIke Norman, Fullwiler, Kelton…. those that I consider the leading lights of the movement.
Greg, I’m sorry. I am way over my head when trying to deal with this stuff. I’m very interested and but I’m just trying to “get it”. So far I don’t. I also have a tendency to exaggerate. I think my point was the MMT information on how our monetary system works and where “money” (e.g. fiat currency) comes from seemed to emphasize the vertical money creation, and that this potential of the governments to expand their own fiat currency was being underutilized. As to horizontal fiat currency creation, MMT seemed not to explain that this was way way larger than vertical. In other words–I can’t quote anyone.
From http://en.wikipedia.org/wiki/Chartalism
Horizontal transactions
MMT considers any transactions within the private sector includes the commercial banking system) as horizontal transactions. Specifically, MMT focuses on loan creation within the banking system.
MMT states that as a matter of accounting, loans will always necessarily create a liability and a deposit equal in magnitude. Thus the net amount of financial assets (deposits – liabilities) cannot be changed via banking actions. Of course, the deposits created certainly expand the money supply; subsequently, these deposits may flow away from one bank and into another, and this must be balanced at the end of the day to meet reserve requirements (see Interactions between government and the banking sector). But banks cannot create net financial assets without an attached liability. Only the government sector – specifically, the reserve bank – is able to do this (see #Vertical transactions).
As a result, MMT rejects the mainstream notion of the money multiplier, where a bank is completely constrained in lending through the deposits it holds, and its capital requirement. MMT does not argue that an individual bank’s reserve position is completely irrelevant to its decision to extend credit; clearly, an individual bank will weigh the benefit of lending money beyond its reserve position, and the cost of borrowing funds from the interbank market (or the central bank) in order to meet its capital requirements (see #Interaction between government and the banking sector). However, what MMT does argue (in opposition to the mainstream) is that there is no real constraint to a bank in creating any loan it likes. The decision will be based purely on creditworthiness and profitability – the reserve requirement is simply one aspect of profitability.[14]
But there is a constraint on banks and non-bank institutions on debt dollar creation! They are making everyone in the world broke because at the end of the day, we can’t pay the interest. http://wherestheinterest.com/
That is an interesting site Dennis, but I think it may be making a fundamental error. It seems to equate govt and bank debt as if they are the same relative to the citizen that holds the debt. They are not.
Relative to the citizen that holds the debt, the govt debt actually is an asset. It pays you to hold it whereas the private debt actually costs you to hold it. Think of it this way. If I have a Treasury Bill (which is what is created as a result of an increase in govt debt) and a mortgage payment (which is what is created as a result of a very common form of private debt) which would I rather own? The govt debt actually pays ME interest while I have to pay interest on the mortgage. I will trade anyone my 100,000$ mortgagae for their 100,000$ T Bill. Lets just switch the names on the two contracts. Ill bet no one will take me up on the deal.
I think the whole focus of “Wherestheinterest” is explaining certain problems with horizontal currency creation. I have met Paul Grignon who made this movie, he is also a great artist, and he did a fine job on this topic. “http://wherestheinterest.com/2009/07/12/money-as-debt-ii/”
So far the vertical currency creation aspect of MMR have not been utilized to the extent our system requires. I understand that putting my moola in the money markets is an “investment in debt” that pays very little interest at this time, and that a mortgage creates currency in the economy for a time, but I need to pay that back with interest. “Relative to the citizen that holds the debt, the govt debt actually is an asset. It pays you to hold it whereas the private debt actually costs you to hold it.” I think Wherestheinterest is pretty clear on this point. I would LOVE IT if they called the “National Debt”, our “National Asset”. Who named it that? It was the bankers who don’t want the Government involved with creating credit with real money; they want a monopoly on debt dollar creation. Ben Franklin totally understood this when battling the British banks that wanted to control America’s fiat currency. I hope I’m not exaggerating again.
No problem Dennis
We are all in different stages of our discovery process.
This site is a great resource to figuring out the mechanics of how the vertical and horizontal systems work. As Cullen has noted many times we are in a current reality where banks are creating virtually all the money in the system as a private credit. This of course comes with a variable interest rate. The end point is reached when, because of factors like job and income loss, people are unable to continue their debt servicing. This can also occur when the primary asset on an individuals balance sheet (a house usually) falls steeply in value and a person feels like its silly to throw good money after bad and they walk away. Mass defaults or threats of default are the poison that kills the private credit system. They figure in a default rate of X into their models. When the default rate goes to 2 or 3X we have a real outlier event that the private system simply cant deal with.
Our private credit system is broken and they wont admit it.
Its usually better to admit when you cant do somethng, others will usually rally around and help you but when you pretend you’ve got it under control and you dont you’re simply a moron and everyone knows it and doesnt trust you anymore.
Greg, I have to thank Cullen for this write-up
http://pragcap.com/understand-the-modern-monetary-system/how-is-mmr-different-from-mmt
I think this was the ultimate source of the idea for me that MMT kind of discounts the impact of horizontal fiat currency creation. I agree with everything (that I understand) in that write-up, except the idea of “diagonal” fiat currency creation, that I don’t get. But, it’s something to think about as we try to kick Germany out of being the boss of macro-economic issues.
It’s not that MMT ignores credit. But it’s certainly not the focus. In MMT, there is vertical and horizontal. This is really confusing for post Keynesian economists because these terms are used differently in MMT than they were by Basil Moore when he first used them. There are a lot of language problems in MMT and the usage of metaphor is often confusing if you’re not familiar with MMT. I’ve tried to correct these problems in the MMR primer. In fact, I’ve stopped using the terms horizontal and vertical in the primer because they’re confusing. I use inside money and outside money now. It’s cleaner and removes the confusion with the Moore reference. MMT focuses on net financial assets for the most part and in doing so they at times neglect the impact of credit and “inside money” (inside the banking system). This leads to lots of confusing and misguided conclusions in my opinion. I used diagonal to emphasize that MMRists are not really monetarists or Keynesians. We really want to emphasize the role of pvt banking and the pvt sector in general, but we also understand govt can have a meaningful positive impact if used correctly. I am not sure if I’ll use the term diagonalist going forward since it’s quite confusing.
You might want to read my big MMR primer again. It’s been totally reworked in the last few weeks to account for these changes. The MMR page has not been updated yet….
Actually, from a historical aspect, I see a break-up of the EU system as the most likely scenario. I still think your glaucomic view (that is, through economic glasses) is skewing the overall view of the situation. This is not just about economics; greed and need for power also occurs outside of economic boundaries.
I think Europe should indeed reduce the amonut of members of the Eurozone, but not a complete breakup. Then introduce eurobonds and the same fiscal measures for the remianing countries. If members of other countries wnat to join the euro-club then fine. But then they should take the entire package deal. Don’t let new members cherry pick what they like or don’t like.
E.g. same retirement age for EVERY member state. In France that’s currrently at age 55. Greek hairdressers can retire at 50 (55 ??) with full benefits. While in the Netherlands and Germany are increasing the retirement age in the coming years.
E.g. in France a significant amount of folks simply don’t pay taxes because their income is too low and don’t need to file a tax return. Whereas in the Netherlands those same low income people must fill out a tax return form.