

Forget Greece: Europe's real problem is Germany - cwan
http://www.washingtonpost.com/wp-dyn/content/article/2010/05/20/AR2010052005278.html

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tc
While I don't disagree with some of the author's analysis, and the thought
behind some of his solutions, one premise of this article is flawed.

He promotes the notion that: 1) Germany creates wealth better than other
countries, and 2) by _saving_ and _investing_ that wealth rather than
_consuming_ it, Germany does a disservice to the world and impoverishes its
neighbors. [1]

By the same logic, we should applaud billionaires for building mansions and
enormous yachts rather than living modest lives and investing in startups and
other businesses. And what of all the arguments about the US and other first
world countries _consuming_ such a disproportionate share of the world's
resources? If we were to consume less, and by necessity save and invest
instead, we'd be impoverishing the rest of the world!

Germany is perhaps culpable here -- culpable for making _bad_ investments
which enabled wealth destruction. And they're further culpable for bailing out
Greece, which perpetuates the problem and supports our world's already out of
control situation with respect to moral hazard.

[1] I'm ignoring his point about currencies here, because I don't really
disagree with the notion that Germany engaged in a counter-productive vendor-
financing scheme on consumer goods. That's the same boat that China's in with
the US. What I'm trying to emphasize is that the problem is _who_ they loaned
money to and _for what purpose_ , whereas the author seems to imply that any
increased German consumption would have been better than increased savings.

[2] The author also seems to think it is misguided to blame the spendthrift
politicians in Greece. Whatever you think of the economy of Germany, I can't
see what's mistaken about blaming spendthrift politicians.

~~~
anonymousDan
> 1) Germany creates wealth better than other countries

No, his basic argument is that Germany creates wealth better than others in
large part because EMU has allowed it to benefit from unnaturally low exchange
rates. If it still had the deutschmark, it would be trading at a much higher
level, reducing its competitiveness.

I think he's pretty much spot on with his analysis, but who knows what the
solution is.

~~~
lispm
Wait, with the strong Deutsche Mark West Germany had trade surpluses all the
time.

German's core competitiveness is not based on price. Price has an influence,
but countries buying a German (Siemens) gas turbine for a power station don't
do it because it is especially price competitive. They do it because of its
technical qualities mostly. Same for the High Voltage DC lines that Siemens
sells to China. Same for the high-speed trains that Siemens sells to China,
Russia, Spain, ...

Siemens HVDC systems in China: [http://www.innovations-
report.de/html/berichte/energie_elekt...](http://www.innovations-
report.de/html/berichte/energie_elektrotechnik/benchmarks_hvdc_technology_siemens_puts_world_s_800_145973.html)

~~~
anonymousDan
That is indeed a valid counter-argument. I guess you'd have to quantify the
proportion of its exports that are price-insensitive to be sure. I'd be
interested to know if anyone has a rough idea?

------
Tichy
"Nor will they accept that German industry was able to thrive over the past
decade because of a common currency and a common monetary policy that, over
time, rendered industry in some neighboring countries uncompetitive while
generating huge real estate bubbles in others."

I don't really buy it. Germany was strong even before the Euro was invented,
and other Eurocountries were already struggling before that. And we see big
companies moving out of Germany into cheaper Eurocountries on a regular basis.

I am also not sure I entirely buy that there is a right or wrong way to handle
a strong export industry. I think ultimately what causes problems is just
wasting money (ie on bureaucracy and "bribes" a ka subventions for shoddy
businesses).

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sqrt17
I've heard the exact opposite point being made about the US: they have a
large-ish trade deficit, and quickly increasing debt, but everyone who sells
what the US people buy buys US state debt, so everything works out in the end.

As an entertaining thought, try to picture what would happen if Greece, or
even the US, would go bankrupt (i.e., default on state bonds).

I like the idea of "restructuring" bonds by asking people to give up a part of
the face value against being insured from the default. (This sounds a lot like
the scare game, though... if Greece defaults, the non-insured bonds are
nothing, and if enough people exchange their bonds, everything works out and
the folks who stuck to their non-insured bonds have the higher face value
_and_ get their money).

~~~
anamax
> As an entertaining thought, try to picture what would happen if Greece, or
> even the US, would go bankrupt (i.e., default on state bonds).

Argentina has done so at least once.

I prefer default to inflation.

With default, either folks stop lending to govt or their lending becomes a
donation. Since govts can't be trusted to borrow, either one is an improvement
over inflation.

------
smallblacksun
Re: public investment in banks: "That strategy worked in the United States,
and there's no reason it can't work in Europe."

Isn't it a bit early to say that the strategy worked in the US?

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aw3c2
I am german and that viewpoint is entirely new to me. Thank you for the link.

~~~
barrkel
That it is novel somewhat surprises me. I thought it was commonly known and
accepted that it was in large part German banks that were being bailed out
when bailing out Greece. Similarly, as I understand it - and have long
understood it, since perhaps 2005 or so (I'm Irish) - the property bubble in
Ireland was driven by historically low interest rates - only easily possible
with an influx of foreign capital denominated in Euro. Inflation in house
pricing was so extreme that relying on it became an accepted way of becoming
wealthy. Now, in Ireland, lots of people are pointing fingers, blaming
politicians, banks, property developers, etc., but the real theft was by the
property owning middle class themselves. When people wonder where the money of
the boom went, they need only look to people who owned houses.

And another problem with house ownership - especially in English-speaking
countries - is that it is seen as politically damaging to enact policies that
cause house prices to fall, because it reduces the perceived wealth of the
middle class. But this very same dynamic is what causes people to be upset,
screaming that teachers and policepeople can no longer afford houses on their
wages, ergo wages must rise, first time buyer tax rebates / etc. and other
stupid policies that just serve to push up house prices even further.

It's all pretty depressing, and makes one despair somewhat of democracy.

~~~
lispm
The number one lender, by far, to Greece is France, not Germany.

Germany is distant third.

~~~
barrkel
Indeed, the numbers I know about indicate that France is owed 66% more than
Germany, but that's not very distant. It's also somewhat hard to find a
breakdown of debt numbers private and public, owed to entities in other
countries.

For example, I understand the lump of debt owed to Switzerland was because of
a Greek bank being HQ'd there:

[http://www.read-
news.info/financial/switzerland%E2%80%99s-no...](http://www.read-
news.info/financial/switzerland%E2%80%99s-non-exposure-to-greece/)

The bank's deposits are backed by Greece; it's now HQ'd in Luxembourg.

Was Switzerland the one you had in mind for second?

~~~
lispm
France is then lending 66% twice as much as Germany to Greece. '66% more' than
Germany is significant IMO. So much for the theory that this was largely for
bailing out German banks.

Basically France' banks are being bailed out (plus a lot of other countries
incl. UK and US).

Germany is not especially exposed to Greece's problem. Germany also provides
only 11% of Greece imports (though Germany has 20% of the EU GDP). Greece's
problems are home made (lots of weapons imports, large military, corruption,
country run by a few families, ...). The decision to spend billions on
military ships, submarines, military aircrafts, tanks, etc. is entirely
political.

~~~
patrickk
Another problem is that tax receipts in Greece are way below what they should
be. The Greeks' view is that their government is useless at spending public
money, so they view it as their duty to dodge as much tax as possible. One
law, for example, allows Greek property owners to avoid paying tax on a
building until it is completed - so a lot of property owners don't build the
top floor on block of apartments, so it isn't "finished" and therefore
nontaxable.

We had a similar problem in Ireland up until the 1980s/90s where dodging tax
was practically a national pastime - if you rang up your bank, they would
advise you on how to dodge tax! They would encourage customers to set up
accounts in the Cayman Islands. Even the _former Irish Prime Minister_ was in
on the act:

<http://www.breakingnews.ie/ireland/ojidojsnmh/>

The key to solving the tax receipts problem is a strong body for collecting
tax and heavy penalties for non-compliance.

------
lispm
Yeah, there is an economy which is competitive on the world market and that's
a problem.

Sure.

~~~
anonymousDan
Yes but one of the main reasons it is so competitive is that it benefits from
an unnaturally low exchange rate. If germany still had the deutschmark it
would trade at a much higher level, making the economy less competitive. The
european central bank has kept the interest rate low for a long time,
benefiting mainly the german economy. Other smaller european economies were
left with interest rates that were much to low. This resulted in a flood of
cheap credit, leading for exmaple to a housing boom and subsequent bust in
Spain/Ireland.

~~~
heresy
Proof? In its years of existence the German Mark never reached parity with the
US dollar.

On the contrary, switching to the stronger Euro made Germany's exports less
competitive, not more, outside of the EU.

~~~
whakojacko
Not quite a fair comparison, as the DEM was exchanged to be ~0.5 EUR when the
Euro was first introduced. Thus the DEM reaching US parity would have been
equivalent to 1EUR being 2USD, which has yet to happen.

------
jasonjones
Oh, no! Not again!

