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    Germany's Bold Plan to Rescue Europe

    By Michael Wolraich on Sun, 12/04/2011 - 7:35pm | Politics, Business

    As Italy and Spain go tumbling after Greece into an abyss of insolvency, Germany has at last found the will to act boldly in defense of the European Union.

    According to the New York Times, Chancellor Angela Merkel has launched a courageous effort to bail out Germany's struggling neighbors...with the International Monetary Fund's money.

    Not that she's shirking responsibility. After all, Germany contributes a full six percent of the IMF pool.

    And really, why should Germany be any more responsible for bailing out European debtors than the United States (17 percent) and the other 159 non-European members (60 percent). So Germany and Italy share the same currency, what of it?

    Of course, some critics might point out that the primary reason Italy and Spain are in trouble now is that Germany has stubbornly prohibited the European Central Bank from devaluing the euro.

    But such critics fail to appreciate Germany's aversion to devaluation. In the 1920s, Germans' great-grandparents had to push around around wheelbarrows of worthless marks, so it's understandable that their brilliant 21st century economists should deny the fundamental principles of modern economics.

    The trouble is that it's one thing for Germany to inflict its prehistoric monetary policy on its own citizens; it's something else for Germany to impose such a policy on its neighbors. And to then ask the rest of the world to rescue those neighbors as Germany kicks them over the cliff... In America, we have a word for that. It's called chutzpah.

    Let's not be too hard on Germany though. Americans are practical people, and we're willing to cut a deal. We'll help you out with Italy and Spain, if you help us bail out California.

    Topics: 
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    Comments

    Last time Germany tried to "bail out" Italy, it wasn't better.

    Sorry, couldn't resist the cheap Axis joke.


    by Doctor Cleveland on Sun, 12/04/2011 - 9:18pm

    The only thing that can save Europe from a depression now is either a socialist revolution of an orderly dismantling of the eurosystem.  If they want to save the euro, then they need to socialize the banking system, kick their private sector landlords to the curb, set up a system-wide fiscal authority, tax the rich and run ECB financed deficits to put their countries back to work.

    Any solution which ends the bond crisis but keeps austerity programs in place will still drive the economies into the ground.


    by Dan Kervick on Mon, 12/05/2011 - 12:06am

    You made me curious enough to look up the terms of the punitive reparations Germany paid under the Treaty of Versailles after WW1.  You know,  the ones that lead to the 1920s hyperinflation and Hitler and WW2.  I found a very interesting factoid:  Germany just finished paying them.  They made the final payment October 2010.  It was probably a big news feature there.  I wonder how much that affects their feelings about austerity measures for their neighbors.  Sauce for the goose....


    by EmmaZahn on Mon, 12/05/2011 - 1:21am

    Until recently, I had always thought that hyperinflation brought the Nazis to power, and they stabilized the currency. But the hyperinflation was only in the early 1920s, and the Weimar Republic instituted the gold-pegged reichmark in 1924. The economic crisis that preceded the Nazis' rise was the deflation of the Great Depression.


    by Michael Wolraich on Mon, 12/05/2011 - 8:22am

    Going from hyperinflation to deflation.within a generation   Their chief rivals going on-again then off-again on gold standard within a decade.  These all have the same effect.  They undermine the confidence, the trust that is required for money to have and retain value.  Regaining or rebuilding that trust takes a very long time.  It is easier to transfer it to something or someone new.  

    Even without condoning Germany's current monetary policies, it is useful to try to see the situation through their eyes.  They survived and eventually thrived despite deliberately punitive reparations.  Surely their neighbors could endure a little austerity.  


    by EmmaZahn on Mon, 12/05/2011 - 11:18am

    I'm sorry, but that sounds sort of like, "My father beat me regularly, and yet I made it and I'm now a success ... so everyone else can endure a pointless whipping as well."


    by Dan Kervick on Mon, 12/05/2011 - 12:08pm

    It is what it is.  Better to recognize and deal with it than pretend it doesn't exist or exert influence.

     


    by EmmaZahn on Mon, 12/05/2011 - 12:39pm

    I think the best way to deal with it is to mock the Germans savagely for engaging in such stupid thinking.


    by Dan Kervick on Mon, 12/05/2011 - 12:55pm

    Yeah, that'll work.

     


    by EmmaZahn on Mon, 12/05/2011 - 1:06pm

    Germans tend to be very sensitive these days about what other people think of them.


    by Dan Kervick on Mon, 12/05/2011 - 1:21pm

    Really?

     

    Here's where I found that image.   Some good reading there and at the links.

    Decoding Euro-moralizations – Kantoos Economics: "There are some moral debates about the Euro going on in the international blogosphere with Tyler Cowen and Ryan Avent as the main participants, and Scott Sumner adding some interesting historical perspective.  In my view, Ryan and Tyler are not talking about the same thing, so let me offer a different take on the issue."

     

     


    by EmmaZahn on Mon, 12/05/2011 - 1:30pm

    This is a curious piece.

    Germany at 25% is by far the largest contributor to the EU budget. Even as Germany paid huge costs to East Germany to reassimilate, it continued subsidizing the rest of the EU - paying in more than 19 other EU countries combined. (back in the 90's Germany was paying 30% of the budget while spending huge amounts for an "Ossi" tax.)

    The UK meanwhile insisted on keeping its rebate of 2/3 of what it put in.

    Germany's big sin? Wanting other countries to balance their budgets and increase productivity?

    http://news.bbc.co.uk/2/hi/europe/8036097.stm

     


    by PeraclesPlease (not verified) on Mon, 12/05/2011 - 6:05am

    Germany's EU obligations are proportional to the size of its economy, just as the American share is the largest in the IMF and the UN. We might just as well ask why the IMF should bail out any other countries, since we're the biggest contributors.

    As for wanting EU countries to balance their budgets, that's a laudable goal, just as Republicans' interest balancing the federal budget is a laudable goal. But it's a very bad idea during a recession.

    An even worse idea during a recession is a tight monetary policy, which is the focus of this piece. Germany's insistence on this perilous and irrational policy represents their greatest sin in the current crisis.


    by Michael Wolraich on Mon, 12/05/2011 - 8:38am

    "Germany's stimulus spending was smaller than America's, but it was quite large by developed nation standards. Have a look at  this cross-country assessment of stimulus policies put together by the Brookings Institution. Meanwhile, Germany has committed itself to deficit cutting, but it is not cutting now. Germany is one of the few euro zone countries to increase its budget deficit from 2009 to 2010. And planned 2011 cuts are quite small relative to those in countries pursuing crash austerity programmes, which are also suffering very weak recoveries (Greece has yet to get out of recession, and Spain may be heading back in).

    This doesn't mean that stimulus is the key to German success. But Germany is absolutelynot an example of strong growth despite austerity."  The Economist

    So we're talking about other EU countries acting responsible, not going on a supermodel's diet. Of course that's enough for other countries to invoke Bismarck as well as that name that shall not be mentioned.

    ​You'd think that Germany successfully weathering the economic crash would invite people to ask what it did right. (having a good worker-employer cooperation system is one of the keys - they didn't go through cuthroat layoffs that have people out in the streets in the US)

     


    by PeraclesPlease (not verified) on Mon, 12/05/2011 - 8:52am

    Germany's domestic spending measures are irrelevant. We were talking about its austerity demands from Greece, Italy, and Spain.

    Or to be precise, you were talking about Germany's austerity demands. My article is about the EU's monetary policy.


    by Michael Wolraich on Mon, 12/05/2011 - 10:12am

    I was talking about Germany's expenses to prop up the EU. You were implying the Germans were just being cheap. Somehow I think they're a bit chagrined to find themselves propping up more and more uncompetitive economies, and frankly they're probably not able to.

    Greece of course is a basket case, which lied about the state of its economy.

    Italy has a debt of 2.6 trillion € , where 1 trillion € is needed to bail it out, more than the central bank has for this type of thing. Servicing the debt interest alone is already 300 billion € yearly.

    This isn't the case of a small Ireland that was actually doing pretty fine economically. It's about entrenched heavy debtors - too big to fail, too big to prop up.

    But anyway, Sarkozy & Merkel made up yesterday, so she's no longer being referred to as Bismarck.


    by PeraclesPlease (not verified) on Mon, 12/05/2011 - 4:02pm

    German-ECB monetary policy is screwing Italy and Spain.

    I repeat: German-ECB monetary policy is screwing Italy and Spain.

    http://worthwhile.typepad.com/worthwhile_canadian_initi/2010/04/the-euro...

    http://www.nytimes.com/2010/02/15/opinion/15krugman.html

    http://www.counterpunch.org/2011/12/05/there-will-be-blood-2/

    http://www.boston.com/news/world/europe/articles/2011/11/14/german_centr...

    And so on


    by Michael Wolraich on Mon, 12/05/2011 - 6:13pm

    The attitude to date has been "let ECB (Germany) throw money at it".

    Not likely to help long-term.

    The action taken yesterday, leading towards a real financial function of the ECB to bolster the region as a whole, not just contain inflation, will likely have the better effect long-term.

    Propping up Greece and Italy's profligacy? Not good - let them come under rules of the game. Spain, as the one article notes, is a more sympathetic figure, as is Ireland.

    Anyway, sounds like the Eurozone will get a real financial policy structure, not just another band-aid.


    by PeraclesPlease (not verified) on Tue, 12/06/2011 - 4:56am

    Perhaps I shouldn't have said "balance their budget" and instead said "act a bit less like Greece and Italy".


    by PeraclesPlease (not verified) on Mon, 12/05/2011 - 8:53am

    Maybe I'm missing something here. It occurs to me ... that this is not my fucking problem. IMO Germany's big sin is trying to dump this on the IMF when it's really their own responsibility to deal with through the ECB.

    Germany has dominated every other nation in Europe ... accomplishing through fiat what early 20th century attempts by force failed to accomplish. Fuck. They just flat-out removed the governments of two supposedly democratic sovereign nations and replaced them with unelected hand-picked servants to their will ... in the case of Greece, staffed with literal fascists who have a history of physical violence against their political adversaries.

    They broke it. They bought it. Should have stopped their bubbles when we bailed them out with TARP instead of doubling down in Ireland et. al. GERMAN bankers are right at the root of all that shit ... and we've been bailing out Deutchbank from the US Treasury for years now.  Clearly, the Germans are far less highfalutin about their dedication to these bedrock economic principles when the American economy is being devalued to help THEIR banks.

    Let them pay for once - and let them face their own people with the impacts of their greed. We have our own criminal bankers we're trying to deal with. As the world sits today, the Europeans have dumped ALL of the repercussions for their own bad actions on the citizens of America. Time admit their corruption and culpability and to shoulder their own losses. Their uber-wealthy are going to have to take a haircut too ... or explain it to their own citizens.


    by kgb999 on Mon, 12/05/2011 - 5:03pm

    Woah - the Greeks broke it, and don't want to own it. They want another bailout, no pain, just let us keep on as always. They wanted to reject any austerity and have a daddy come in and make it all better. And by the way, still keep railing against the Turks.

    Germany's been nice for a long time, much to show how they're making amends for WWII.

    Propping up other countries and paying more than their share and keeping quiet with most EU disagreements.

    The add-on of 10 new East European countries was a major concession by Germany, who footed much of the bill of accession.

    Greece has been a freeloader for a long time. Italy has been borrowing much  more than it should. Yeah, German bankers shouldn't lend to bums, but because of WWII the Germans feel obliged to not play hardball. At this point they're getting sick of it.

    Regarding $300 billion TARP loans to Deutsche Bank, maybe the Germans did what the Americans didn't - got the money in the hands of people & businesses to keep them moving. Don't know specifically, but Germany recovered much better than others.


    by PeraclesPlease (not verified) on Tue, 12/06/2011 - 4:48am

    More on Germany's contribution to the EU budget & the state of affairs:

    http://www.spiegel.de/international/spiegel/0,1518,348546,00.html


    by PeraclesPlease (not verified) on Mon, 12/05/2011 - 6:11am

    It's a very bad move to balance budgets in the middle of the severe economic deterioration that has occurred in Europe and the US.   Taxing people more and spending less will only intensify the recessionary pressures.   You can't depress yourself out of a recession.

    There is nothing wrong with European budgets that can't be fixed with growth - which will bring higher tax revenues and lower social welfare spending automatically as a result -  and growth requires expanded deficits, not shrunken ones.  Europeans shouldn't let their fiscal programs fall prey to need to the predatory attacks by the austerity class.  They should just say "no" the to attempts by concentrated private capital to use this recession as leverage to force European governments to dismantle social protections and delegitimize activist progressive government.  Revolutions have been fought over less.

    What Europeans need to do now is cut the private sector bond vigilantes out of the picture.  The ECB needs to buy up as much government debt as it can and keep borrowing rates low, and develop other facilities for direct injections of money into European economies.  The only "conditions" imposed for these monetary injection should be that the eurosystem governments put forward aggressive plans of public investment, hiring and purchasing of goods and services.

    The point isn't to "devalue" the Euro with these injections.  With such massive unemployment and underutilization of productive capacity as now exists, there is no inflationary pressure.  Increased money-financed aggregate demand will only increase production, not raise prices.


    by Dan Kervick on Mon, 12/05/2011 - 8:12am

    The ECB needs to buy up as much government debt as it can and keep borrowing rates low, and develop other facilities for direct injections of money into European economies.

    Dan,

    While it's fine and dandy for economists and bloggers to talk of the EU in theory as a union with all the same financial controls of the central government of the united states of america, and to prescribe solutions for them as if they were such a union, seems to me that the actual problem they are dealing with over there is that in their political reality, they ain't all there yet.

    Their situation in a way reminds me of this:

    (Note: the Daily News' story and headline were not accurate as to what actually happened. See

    http://www.nytimes.com/2006/12/28/nyregion/28veto.html )

    I.E. Perhaps many German citizens don't want to help out with Spain's problems. They didn't know/think that when they signed up to that union thing, that that is what might happen, they thought that it would always be happy times. They didn't envision they might have to do stuff like help out a bunch of tax cheats in Greece.


    by artappraiser on Mon, 12/05/2011 - 8:56am

    Yes, sure, but I don't think that Germany's hesitance is driven purely by electoral concerns. Bailouts make for bad press, but they could permit the ECB to ease the euro without much domestic pushback.

    And where the chutzpah comes in is when they ask the IMF to do what they lack the will to do themselves.


    by Michael Wolraich on Mon, 12/05/2011 - 10:17am

    Merkel's been dealing with strong pushback since early this year, including from many of her country's economists and German business associations. She reminds me of a skillful tightrope walker, that she's survived so long.


    by artappraiser on Mon, 12/05/2011 - 10:52am

    Sept. 16: Bailout Rebellion in Germany Heats Up

    For the first time ever, a clear majority (60%) of Germans no longer sees any benefits to being part of the Eurozone, given all the risks, according to a poll published September 16 (FAZ, article in German). In the age group 45 to 54, it jumps to 67%. And 66% reject aiding Greece and other heavily indebted countries. Ominously for Chancellor Angela Merkel, 82% believe that her government's crisis management is bad, and 83% complain that they're kept in the dark about the politics of the euro crisis.

    "There cannot be any prohibition to think" just so that the euro can be stabilized, wrote Philipp Rösler, Minister of Economics and Technology, in a commentary published on September 9 (Welt, article in German). "And the orderly default of Greece is part of that," he added. Instantly, all hell broke loose, and Denkverbot (prohibition to think) became a rallying cry against the onslaught of criticism that his remarks engendered.

    Even Timothy Geithner, who attended the meeting of European finance ministers in Poland, fired off a broadside in Rösler's direction. In the same breath, he proposed the expansion—through leverage, of all things—of the European bailout mechanism, the EFSF. According to Austrian Finance Minister, Maria Fekter, who witnessed the scene, he warned of "catastrophic" economic risks due to the disputes among the countries of the Eurozone and due to the conflicts between these countries and the ECB. Then he demanded in dramatic terms, she said, that "we grab money with our hands to stabilize the banks and expand the EFSF unconditionally."

    The smack-down was immediate. German Finance Minister, Wolfgang Schäuble, took Geithner to task and explained to him in no uncertain terms....

    by artappraiser on Mon, 12/05/2011 - 11:01am

    Help out in what way?   The Germans don't have to tax their citizens to send money to help out Greece, Italy and Spain.  They just have to support an effort by the ECB to keep borrowing costs very low so those countries can finance anti-recessionary fiscal policy.  Europe needs monetary easing, not more new taxes.  The deficits aren't even that high.  The whole problem is skittish (or predatory) bond markets that are elevating the costs of roling over the debt.


    by Dan Kervick on Mon, 12/05/2011 - 12:20pm

    Here's a much better plan:

    http://www.lemonde.fr/crise-financiere/article/2011/12/01/m-hollande-critique-m-sarkozy-en-evitant-d-attaquer-mme-merkel_1611837_1581613.html


    by Dan Kervick on Mon, 12/05/2011 - 12:58pm

    Citation tres drole:

    Mercredi soir, M. Montebourg tenait à rectifier le tir. "Ce n'est pas l'Allemagne que j'accuse, c'est l'annexion par la droite prussienne de la droite française que je condamne", assurait-il.

    That's what they call a walk back?!  M. Montebourg still seems to be fighting the Franco-Prussian war.  Long live all French parties left to right untainted by Prussian thinking! So much for a European union.

    A more useful news item for your p.o.v., I would think:

    France’s Hollande Woos Germany’s SPD to Rewrite ECB Rulebook
    December 05, 2011, 12:24 PM EST

    Dec. 5 (Bloomberg) -- The opposition socialist parties of France and Germany should broaden the European Central Bank’s mandate to influence economic policy if they come to power, Socialist Party presidential candidate Francois Hollande said.

    France’s Socialists and Germany’s Social Democrats, facing national elections in 2012 and 2013, should plan ahead to widen the ECB’s power to fight the debt crisis, Hollande said today in an address to German “comrades” in Berlin. He is leading polls before the May election and the SPD is seeking to win the September 2013 vote....

    Still, note the ending line:

    The SPD, led by party Chairman Sigmar Gabriel, trailed Angela Merkel’s Christian Democratic Union by 25 percent to 35 percent in a Nov. 25 Stern magazine poll.

    Aussi, le PS contemporain, il n'est plus parti socialiste de grand-pere. Wikipedia:

    In May 2011, the French centre-left think tank Terra Nova edited a "Left strategy for 2012" report[5][6], which suggests that workers should not continue to be a main subject of the Socialist Party's campaign platform, considering that the working class has lost its political significance and has moved toward the National Front nowadays. It advises the party to revitalize its platform and its voter base by emphasizing its progressive views on youth and women and by targeting ethnic minorities, precarious workers and academia.

    Edit to add: Should you be mistrustful of a "center left" opinion of where French working class voters have gone, check out what the World Socialist Website has to say on the matter.


    by artappraiser on Mon, 12/05/2011 - 11:23pm

    Let's not be too hard on Germany though. Americans are practical people, and we're willing to cut a deal. We'll help you out with Italy and Spain, if you help us bail out California.

    Well put!

    I plod through these economic lessons. But I understand this line!


    by Richard Day on Mon, 12/05/2011 - 11:28am

    More reasons in support of your P.O.V. (some of them admittedly over my head wink):

    Why The IMF Must Stay Out Of Europe’s Crisis: Mario Blejer & Eduardo Levy Yeyati, Economy Watch, Dec. 5

    Mario I. Blejer is a former governor of the Central Bank of Argentina and former Director of the Center for Central Banking Studies at the Bank of England. Eduardo Levy Yeyati is Professor of Economics at Universidad Torcuato Di Tella and Senior Fellow at The Brookings Institution.


    by artappraiser on Mon, 12/05/2011 - 11:30am

    Thanks, AA. Nice link.


    by Michael Wolraich on Mon, 12/05/2011 - 6:18pm

    Forget about that, end last chapter, start new book?

    Sarkozy and Merkel Push for Changes to Europe Treaty
    By Steve Erlanger, New York Times, Nov. 5/6, 2011

    PARIS — [....] Chancellor Angela Merkel of Germany and President Nicolas Sarkozy of France, meeting here at the start of a crucial week that will end with a European Union summit meeting on Thursday and Friday, called for amendments to European treaties that would include centralized oversight over budgets and automatic sanctions against countries that violate firmer rules on deficits.

    The changes are among the most sweeping proposed since European countries began coordinating their economic policies in the aftermath of World War II. They would effectively subordinate economic sovereignty to collective discipline enforced by European technocrats in Brussels. [....]


    by artappraiser on Tue, 12/06/2011 - 12:24am

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