This article is obviously proposing something that Germany would never agree to, but in doing so the article lays bare an important truth: the adjustments necessary to save the Euro zone should perhaps come from everyone -- including Germany. Along with Greece, Portugal, Spain, Italy and all other 'peripheral' Euro zone countries, Germany is partly responsible for the current crisis: it financed the consumption and housing booms in those other countries.
Let me offer a poor analogy which I find insightful: Germany acted like a rich neighbor who irresponsibly lends a ton money to his poorer neighbors so they can throw a really costly, drunken, all-night-long party, and then demands to be repaid the next day without acknowledging that he knowingly made a really stupid loan.
The main implication of the article: Germany is trying to force austerity and deflation unto the Euro zone's 'peripheral' countries, but the adjustment would be a lot easier and faster for everyone if Germany simultaneously forced profligacy and inflation unto itself. (A higher rate of internal inflation in Germany would have roughly the same impact as a revaluation of a newly reissued Deutsche Mark were the country to leave the Euro zone.)
Germany may have profited from the spending sprees of the southern nation, but it did not directly cause the problem. Lack of discipline is what caused the crisis. Germany passed difficult structural reforms in the 2000s and is now reaping the rewards, whilst the southern nations abused the availability of cheap money. Germany reformed and invested, whilst the southern nations didn't! And it is not like Germany was just sitting by doing nothing... That money going to Greece and Spain is coming from somewhere! German politicians are very hard at work keeping the German population from revolting about so much money being "transferred"!
My personal opinion is that the correct way is austerity, but not like it is being forced unto Greece at the moment. The greek economy is in shatters as is, the current austerity measures are not helping. I think the solution is that Germany should lend Greece way more money than currently so that they can build up their economy, whilst enforcing structural and governmental reform (ex: taxes must be collected, bureaucrats fired, etc)... Finally the money should be paid back over the next 40 years, as the economy recovers.
Most countries, including Spain ran surpluses. Their public finances were in order. However governments couldn't stop the flow of liquidity from 'the Centre' - because of the whole 'free flow of capital thing'.
At the same time Germany and France recovered from euro-sclerosis not only because they reformed, but because demand for its products expanded a lot from the increased trade and growth in the periphery.
Germans should be mad at their bankers who financed the whole bubble and now demand to be bailed out with their money.
Germany being mad at Spain for bank bailouts is like New York mad at Florida for the same. We are all in this together.
Why did the spending expand (or the tax go down)? I dont think there is one clear answer to this quiestion but it does not matter. Eitherway the government shuld have reacted and cut spending (or collecting more taxes).
> Germans should be mad at their bankers who financed the whole bubble and now demand to be bailed out with their money.
The EU made that difficult to default (imposible? we will se) and the EU created the insentiv to lend so much money to these countrys (bail out garantee).
Additionally the ECB broke there rules of not exepting junk as collateral. The just keeped exepting greek bonds.
The ECB made the hole thing worst (kicking the can down the road) and now it backfires.
Just blaming out the banks is simplistic, the just reacted to instentiv like anybody else.
> Germany being mad at Spain for bank bailouts is like New York mad at Florida for the same. We are all in this together.
2. Like we can see in spain or greek, not cutting it right away can have very bad consequences
3. The slump has been much worse by the thread of defaulting countrys. This would not have happpend if they had cut when they started to get a bad deficit.
Spain actually had better fiscal discipline than Germany during the boom, with lower government deficits and lower public debt, so "discpline/indiscipline" is definitely not the whole story.
The central government was. But historically as now the relatively weak central government wasn't the problem - the regional governments ran up (and some continue to run up) exorbitant deficits. This is in exclusion of private Spanish debts, which are very large.
I believe it's still true even if you add in regional debts. From what I can find, before the current crisis, outstanding central government debt hovered around 30-35% of GDP, while regional debt added up to around 10% of GDP, for a total of 40-45% of GDP, one of the lower debt totals among large economies in Europe. Lately it's been ballooning due to a mixture of: 1) interest-rate rises producing a self-fulfilling prophecy; 2) recession reducing tax revenue and increasing safety-net expenses; and 3) recession causing the GDP denominator to get smaller.
The main difference I can see is just that the German economy is much stronger than the Spanish economy, not any difference in fiscal discipline. Germany can afford to carry bigger deficits and bigger debts because it has a comparatively strong economy; same reason the U.S. can maintain much higher deficits than Spain without borrowing costs increasing.
But Spain had an absolutely massive private debt, that's now crashing down. Moreover this building bubble has been extremely obvious to anyone who's ever been to Spain in the last few years. A responsible government should have been stepped in a few years ago.
What matters in terms of financial responsibility is not public debt alone, or private debt, but both.
It did try to regulate building, but there was too much money coming in from abroad as loans. It couldn't stopped its inflow because it is against EU treaties.
What I meant with discipline is the general attitude towards spending. Germany has spent a lot of money, but they spent it smartly, building up to becoming one of the most powerful industrial nations in the world, whilst the southern countries built houses that now stand empty in the spanish ghost towns.
Actually, Germany did cause quite a bit of the problem. Without Germany, the Euro would have devalued much faster, much earlier, which would have easied some problems.
A Germany going it alone would also have a much more expensive currency. This is one reason Germany doesn't want the Euro to collapse I suspect (along with the massive disorganisation)
Changes in currency only have short time effets. The prices tend to new equillibirum. Your imports get cheaper and after a while it reaches a new equillibirum (balance) between the two.
Deflation(Inflation can only grant a short term benefits and that is without calculating in the distortionary effects
Switzerland has the same problem now, Germany would have after the Euro. In the Switzerland case it has been a much strong effect then it normal would have been, since people used the CHF as saving.
Most of Germany's trading partners are within the Eurozone. If Germany left the euro, then their currency would skyrocket relative to the rest of the Eurozone, making their exports much more expensive, and it would absolutely devastate the German economy.
Germany needs the Euro as much as the Euro needs them.
The entire situation is a disaster, because the only solution really is for Germany to support the rest of the EU through the issuance of Eurobonds. This will never happen. So the entire Eurozone is locked in this death grip.
How do you know? I'm German and I follow the German economic development for several decades now.
> If Germany left the euro, then their currency would skyrocket relative to the rest of the Eurozone
You mean to the level we had before in West Germany?
Check out the economic 'failure' of West Germany some time.
> The entire situation is a disaster because the only solution really is for Germany to support the rest of the EU through the issuance of Eurobonds. This will never happen. So the entire Eurozone is locked in this death grip.
Now it seems that you don't understand European economy.
If Germany left the euro, then their currency would skyrocket relative to the rest of the Eurozone, making their exports much more expensive, and it would absolutely devastate the German economy.
Huh? According to you, Germans currently work hard building products that will be enjoyed by others in the Eurozone.
Why would it be bad for them if that situation reversed, and suddenly they were able to purchase the fruits of other's labor? That's like saying it would be bad for me if my stock portfolio suddenly increased in value, and I were able to hire a cook rather than cooking for myself.
The answer: the exporters adapt to every exchange rate. What they really prefer is a STABLE exchange rate - high or low. What they prefer even more: no exchange rate. Trade in a large market with a single currency is even easier.
@lispm: imports would be cheap, and German labor would be very expensive. Germany (like most of Europe) imports raw materials, adds value with labor, and exports finished goods. BMW could not export made in Germany cars with a profit anymore; this could still be good for BMW (just like Apple, they could build everything in China), but it would be bad for the Germans.
We still have factories in Germany and outside of Germany.
Each BMW uses a lot of materials and energy for production. That would get a lot cheaper. Plus BMW imports lots of parts from other countries.
We really had that discussion years ago. When the West German Deutsche Mark was getting stronger all the time. BMW expanded in Europe and outside of Europe. Still it kept its factories in Germany. The quality of its workforce is extremely high.
@lispm: "the raw materials would get cheaper" doesn't mean anything for export. Raw materials for export get in, and they get out inside the finished goods - at the same exchange rate. The exchange rate is neutral for raw materials that get reexported.
Instead, relative labor cost would change. That labor is high quality? Yes, it is. But importers wouldn't buy it "at any cost". Higher price, same value -> less demand.
As for the DM getting stronger all the time: It did so in time, while German relative productivity was rising. On the contrary, this would create an incredible shock. I wish you not to see your dream come true. You could find out it's a nightmare.
The German manufacturing industry does not export raw materials. It exports cars, machines, tools, power plants, .... For building these things it needs all kinds of materials. Much of that is imported.
> relative labor cost would change
German has already a much higher labor cost than most comparable countries. Still we have industry here and Germany is the second largest exporter in the world.
Changes in currency only have short time effets. The prices tend to new equillibirum. Your imports get cheaper and after a while it reaches a new equillibirum (balance) between the two.
Deflation(Inflation can only grant a short term benefits and that is without calculating in the distortionary effects.
How do you figure? German banks very much fueled the housing and lending bubbles in the rest of Europe. This is one of the reasons Germany is so against debt holders taking haircuts on their loans.
Germany is very much a part of the neighborhood going south (so to speak) in that they were at the very least enabling all the loose lending, if not actively complicit in fostering such an environment (e.g. why weren't they vetting their loans better).
One could argue that they were in a way complicit, but not responsible. Is it Germany's fault that the representatives of a country made it seem that they were able to make good on their debts?
Representatives of a country aren't exactly magicians that can hide the anemic growth and money pissing (particularly in Public-Private "partnerships") that countries like mine - Portugal - had.
They were either fully aware or extremely incompetent, and the latter isn't plausible.
I agree with you that the German banks facilitated the spending, but the fault still lies with the countries that abused that money. You cannot blame the bank for your debt after requesting your 12th credit card!
Aside: I believe that the German banks have to live with their mistakes regarding due diligence, although even that isn't so clear as it seems that the greek authorities weren't entirely honest when it came to their financials.
You cannot blame the bank for your debt after requesting your 12th credit card!
Why not? I can and do blame banks for lending money to people who they know are submerged in debt. That does NOT mean those people aren't to blame too. Blame can be attributed to more than one party.
Arguing about faults here doesn't help. It appears that Greece has the bigger faults (but they're already paying a lot for them). But I would gladly save them to save us all.
"The Germans made just about every bad investment you could have made in the last 10 years. They invested in Icelandic banks. They invested in Greek government bonds. They were heavy into Irish banks, big into Irish banks, and they bought U.S. subprime mortgage bonds."
I didn't interpret knowtheory's comment as implying that German bank's were solely responsible, but I can see how you could make that interpretation.
However, I can't provide direct quantitative information on the quality of the loans summarised by those numbers. Lewis (who seems credible to me) gives accounts of how German banks appear basically to have been taken advantage of (hence the "stupid money" comment) as customers for particularly ill-advised investments.
> Lewis (who seems credible to me) gives accounts of how German banks appear basically to have been taken advantage of (hence the "stupid money" comment) as customers for particularly ill-advised investments.
That part of the story is correct, IMHO. There are a lot of stories around it.
It would be long story. Basiclly the DM stopped other contrys from devaluating (they had agreed to that). So most of all france wanted to get ride of it and have contoll over the euro. The would only vote for reunigicatin if germany agrees. This stuff is not well documented but it not a conspirecy theory either. I will update the post with some soures latter.
German politics is paid for by the manufacturing industry.
They needed a weaker DM and a stronger Franc/Lira/Peseta to sell stuff.
UK politics is paid for by the financial industry - they need more currencies to trade. A stable predictable and universal currency would kill the city.
Denmark stayed out because it was forced to have a referendum and sensible people always vote against anything that politicians are all in favour of.
Sorry not correct. Germany didn't want it. Im not sure about UK, I think they still have the pride of a I think they still have the pride of an empire.
So, you are basically proposing that Germany should ruin its own economy just because some countries irresponsibly spent more money than they had, and are now in debt?
That would make crisis even worse for everyone, and I can't see why Germany would do something like that.
Just note a pattern. There are some countries that were spending more than they have, and those countries are in big problems. Just take a look at Greece, Italy, Ireland, and, to some extent Spain. Then, there are countries that didn't spend more than they were able to service, and they are doing fine. Take a look at Germany, Austria, Netherlands, Sweden, Slovakia, Poland. Then, there are some countries in between, that are neither too good, nor bad.
It's easy to draw a conclusion what is the way out of crisis, and I hope Germany will be able to lead a way.
markokocic: when you say that some countries "spent more than they have," what do you mean?
I ask because, with the exception of Greece, the governments of countries in the Euro zone's periphery were not profligate prior to the crisis. That's right, their governments were not profligate. Look at the data, not at the propaganda.[1]
The private sectors of those countries, however, borrowed aggressively from the likes of German banks to finance unsustainable consumption and housing bubbles. And German bankers aggressively financed those bubbles.
> Just note a pattern. There are some countries that were spending more than they have, and those countries are in big problems.
Italy has had a massive government debt for the last 30 years, and has not changed much. And very little private debt.
Spain has had a lot of private debt only lately, but a very low public debt.
Greece _cooked the books_.
Netherlands have one of the highest mortgage debt in the world and a resounding AAA rating.
What's the pattern here?
Oversimplification and overgeneralization is always wrong for everyone.
"...some countries irresponsibly spent more money than they had, and are now in debt?"
German (and French) banks provided loans which inflated bubbles in the periphery. The profligate countries had to borrow from someone. This is largely absent from the discussion of the bailouts. No bubbles, no painful contractions. So the "core" isn't entirely blameless.
It's a little unfair to lump Ireland and Spain into the "PIIGS" group. Both countries are being blamed as if they ran up huge public expenditure deficits during the good times, when most of the problems lie with their banks going mad with construction loans.
In Ireland for example, our debt to GDP ratio would be something like 80% (high without being utterly unsustainable) without the bank bailouts, and it's 120% (unsustainable) including the bank bailouts. It's not like the ordinary people see any of the bailout funds either, just our banks. We do get austerity though.
At least the Spainish had more sense than to lump the bank bailout debt in with their sovereign debt:
An analogy is when the young United States federalised "war debts of the ex-colonies, issued new national bonds backed by direct taxes and minted its own currency. Hamilton’s new financial system helped transform the young republic from a basket-case into an economic powerhouse." [1] The argument is that the short-term costs will be outweighed by long-run benefits; similar logic allowed for the Deutsch reunification.
One doesn't hear much about how Texas and New York are transferring wealth to keep Alabama et al floating because everyone is stronger for being part of the United States (and have an American identity superior to their state identities).
This is a just-world way of thinking. Those peripheral countries were irresponsible, people say. They should be like the Germans! So the proposed solution is to fix their economic problems, grow some responsibility, and act the way fiscal conservatives want them to.
This is an old way of thinking--it's popped up every time there's been a recession coupled with a fiscal crisis. The results have almost always been bad.
The Euro crisis is macroecon 101. The periphery cannot manage their money supply to match demand. So you get deflation, unemployment, sticky-price stagnation, capital flight. People who knew their economics could have called this as it happened. Many did. Many were calling it when the Euro even began.
It's true that those with unstable debt situations have suffered more, but it's not caused by having an unstable economy, it's caused by having an unstable economy while on the Euro. "Fiscal responsibility" will only make things worse. The respective stories of Euro and non-Euro countries should make this obvious--consider Iceland, who suffered a debt crisis that caused their entire financial system to fail, yet are expected to recover better than the Euro periphery.
I do not like your line of thinking. It's moralizing in an odious way. Even worse, it's wrong.
DOWNVOTERS: please express your disagreement by telling me what's wrong with this post. I believe everything I'm saying here is factually correct. I furthermore think that this line of false moralizing, alive in the minds of central European politicians, is a major part of this crisis and a major cause of the resultant suffering. I will not run from it because I rubbed HN conventional wisdom the wrong way.
cynicalkane: I suspect many readers here agree with much of what you wrote, but nonetheless feel the tone of your comment doesn't quite meet HN guidelines: http://ycombinator.com/newsguidelines.html
jerf: I was deleting the old comment just as you posted this. I felt the substance of this comment deserved its own, separate thread. Sorry for any inconvenience this may have caused you.
Let me offer a poor analogy which I find insightful: Germany acted like a rich neighbor who irresponsibly lends a ton money to his poorer neighbors so they can throw a really costly, drunken, all-night-long party, and then demands to be repaid the next day without acknowledging that he knowingly made a really stupid loan.
The main implication of the article: Germany is trying to force austerity and deflation unto the Euro zone's 'peripheral' countries, but the adjustment would be a lot easier and faster for everyone if Germany simultaneously forced profligacy and inflation unto itself. (A higher rate of internal inflation in Germany would have roughly the same impact as a revaluation of a newly reissued Deutsche Mark were the country to leave the Euro zone.)