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The Eurozone's giant sucking sound

by Migeru Wed Aug 29th, 2012 at 05:53:51 AM EST

Eurointelligence is running another column of mine: The Eurozone's giant sucking sound (28.08.2012)

As reported two weeks ago, Germany's current account surplus is projected to exceed 6% for 2012, likely triggering a warning from the European Commission. Such large German current account surpluses are not new, what's new is that since November 2011 the European Commission's Macroeconomic Imbalance Scorecard includes a 6% threshold on the three-year moving-average current account balance (the threshold for deficits is 4%). Here I will argue that Germany's persistently high current account surplus is dangerous for the stability of the Eurozone and corrective government action is needed (in principle concerted Eurozone government action, but in practice requiring that the German government 'own' the policy).
You can read it there, and comment here.

Previous columns:


This article fleshes out my comment in the Salon two weeks ago:

Modern monetary theory and the Eurozone
Germany's current account surplus may be so extreme in 2012 that it risks a warning from Brussels

FT Deutschland reports that Germany's current account surplus is likely to exceed 6% of GDP this year, the threshold which triggers a European Commission warning. The article quotes Steffen Elstner of the Ifo Institute as saying that this threshold will be reached with certainty. Last year, Germany's surplus was 5.9%. Ifo had previously forecast only a modest increase, but due to weaker import numbers, the surplus is likely to be significantly larger - larger in absolutely terms than China. There was no comment from the Commission yesterday. The German government maintained its position that there was no problem with current account surpluses. On the contrary, the German economics ministry sees this a "very positive" development. The German government spokesman said yesterday that the problem of imbalances was a problem for a countries with large current account deficits.

In defence of surpluses

The German debate on this is unreal. A good example has been a comment by Philip Plickert writes in Frankfurter Allgemeine, who says that the term of a macroeconomic imbalance was questionable in itself. It says it makes no sense to force countries to have balanced current account positions, and it is impossible to control it anyway, except perhaps in China. He also argues that it is absurd to talk about surpluses and deficits in the same way. He says large deficits are a problem because the debt accumulation makes this unsustainable. Germany's surpluses, however, were the consequences of structural strength of the domestic economy, which is not a problem.

(It is interesting to note that German commentators seem to reduce both economic success and failure to purely structural issues, which is strange given the structure of the German economy has not changed all that fundamentally in the last couple of decades. Yet, they hardly ever pay attention to the real exchange rate.)

Where to begin? The Eurozone current account balance is close to zero, so Germany's current accout surplus is, euro by euro, the net current account deficit of the other 16 eurozone countries. Since German GDP is over 1/4 or Eurozone GDP (it was 1/4 in 2009 and the ratio must have improved given the implosion of Spain and Italy), Germany's surplus is 1.5% of overall Eurozone GDP. This means the average current account deficit of the rest of the Eurozone is 2% of GDP, towards Germany.

Since, by accounting identity,

(current account deficit) = (government deficit) - (private sector net savings)

this means that, if the government deficit stays within Maastricht bounds, then the private sector of the Eurozone ex-Germany can only net-save about 1% of GDP.

If Germany's current account surplus hit 9% of GDP, then it would be impossible, on accounting principles, for other Eurozone governments to stay within Maastricht bounds while allowing their private sectors to net-save. Definitely a very positive development demonstrating Germany's inherent strength and leading to unustainable debt accumulation outside Germany.

Display:
Clear, solid demonstration, Mig, congratulations.

Isn't it interesting that probably the entire population (well, almost) must have heard by now of the 3% budget deficit limit, and the 60% of GDP public debt limit, but the media just aren't shouting about the +6%/-4% current account limits?

Who is going to wag their finger at Germany? Barroso? Juncker? Hollande?

by afew (afew(a in a circle)eurotrib_dot_com) on Tue Aug 28th, 2012 at 04:12:02 AM EST
I don't know, but the +6%/-4% current account limits essentially freeze into place the status quo of November 2011.

If you are not convinced, try it on someone who has not been entirely debauched by economics. — Piero Sraffa
by Migeru (migeru at eurotrib dot com) on Tue Aug 28th, 2012 at 04:19:54 AM EST
[ Parent ]
The new normal is a 6% German surplus?
by Metatone (metatone [a|t] gmail (dot) com) on Tue Aug 28th, 2012 at 04:29:07 AM EST
[ Parent ]
If they had set a 4% CA surplus limit, Germany would have been instantly in violation of it. As I say in the article, the data show a remarkably stable current account surplus, averaging over 5.9% over the past 8 years. So, when policymakers sit down to write down the thresholds, of course a German surplus of 6% is "the new normal".

Tweaking the Current Account surplus directly is exceedingly hard. The only way seems to be direct transfers, for instance having Germany just give an extra 2% of its GDP to the EU's structural funds (yeah, right!).

If you are not convinced, try it on someone who has not been entirely debauched by economics. — Piero Sraffa

by Migeru (migeru at eurotrib dot com) on Tue Aug 28th, 2012 at 04:34:06 AM EST
[ Parent ]
If transfers are the only mechanism, then it's hard to see anything positive happening. Some kind of automatic stabiliser might be possible, but direct transfers? Bild would eat the government that authorised that for lunch.
by Metatone (metatone [a|t] gmail (dot) com) on Tue Aug 28th, 2012 at 04:37:02 AM EST
[ Parent ]
An automatic stabiliser would be a sort of tax on current account surpluses exceedign a threshold, which is what Keynes proposed at Bretton Woods to add stability to a gold standard system through his "international clearing union". But whether you call it a tax or a fee, its net effect is that of a direct transfer, and somebody will sooner or later do the math and publish the results on BILD.

Just today, Eurointelligence reports:

Mayer and Gros call for eurozone sovereign wealth fund

Writing in the FT, Thomas Mayer and Daniel Gros says that the inability by German savers to invest their surpluses is becoming a real problem. As the savings are intermediate through the banking sector, and the banks are now reducing their peripheral risks - and unable to take on exchange rate risk - Germany's Target 2 surpluses are exploding. They write that the situation is not all that abnormal, since there are few countries were large external surpluses are intermediated purely by the private sector. Saudi Arabia and Norway are examples where the public sector created sovereign wealth funds, while Switzerland and Japan rely on the central bank. They advocate the setup of a German sovereign wealth fund which would invest in a diversified portfolio, including assets outside the eurozone. They acknowledge that this proposal will be seen as a resurgent German mercantilism, which transfers the burden of adjustment to the rest of the world. But under the current circumstances, this is the lesser evil, as it reduces the overall tensions in the system.

I don't know why they insist on a "balanced portfolio" investing "also outside the Eurozone". The problem is entirely within the Eurozone! The Eurozone has about zero current account balance so there's no reason for the Eurozone to invest any surpluses abroad. It's German surpluses that should be invested in the Eurozone.

I think the EU already has such a sovereign wealth fund: it's called the European Investment Bank. Current account surpluses in excess of 4% of GDP could go to capitalise the EIB.

If you are not convinced, try it on someone who has not been entirely debauched by economics. — Piero Sraffa

by Migeru (migeru at eurotrib dot com) on Tue Aug 28th, 2012 at 04:49:08 AM EST
[ Parent ]
I've previously argued that the internal imbalances of the Eurozone need not be a problem, as long as they materialize in the shape of equity transfers from the periphery to the center, rather than in the shape of debt buildups in the periphery. This German sovereign wealth fund idea sounds a lot like a form of regulation to make sure that happens, when individual German savers fail to choose equity over bonds.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Tue Aug 28th, 2012 at 09:27:13 AM EST
[ Parent ]
But the current account surplus already represents net new ownership of foreign financial assets (in this case, Eurozone-ex-Germany assets). Encouraging equity over debt is just a portfolio composition change, and would not change the current account imbalance. In particular, it would not make the macroeconomic balances of the Eurozone-es-Germany any more sustainable.

No, what is needed is a direct transfer. Currently the EU budget amounts to about 1% of EU GDP. A large fraction of the current account surplus (above a threshold of, say, 4%) of surplus states could be added to the contribution to the EU budget. If Germany doesn't like having to contribute to EU structural funds in excess of their GDP share, they can undertake domestic policies designed to reduce their current account balance below the threshold (such as, for instance, ending their domestic wage repression policy).

If you are not convinced, try it on someone who has not been entirely debauched by economics. — Piero Sraffa

by Migeru (migeru at eurotrib dot com) on Tue Aug 28th, 2012 at 10:19:16 AM EST
[ Parent ]
Forcing them to put their money in equity would, however, make the system fail not-catastrophically once the Ponzi equity pricing collapsed.

If you buy a firm's bonds, and the firm turns out to be worth only three quarters of what it used to be worth, then it sucks for both you and the firm. If you buy a firm's stock and the firm turns out to be worth only three quarters of what it used to be worth, then it only sucks for you.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Aug 28th, 2012 at 11:16:55 AM EST
[ Parent ]
If you buy a bond and it turns out to be worth less than you paid for it, then you get equity after bankruptcy resolution.

If you buy public debt of a sub-sovereign entity you're counting on the sovereign to make you whole. Too bad the Eurozone has no sovereign but the ECB and the ECB making German creditors whole gives Germans stomach ache.

If you are not convinced, try it on someone who has not been entirely debauched by economics. — Piero Sraffa

by Migeru (migeru at eurotrib dot com) on Tue Aug 28th, 2012 at 11:19:43 AM EST
[ Parent ]
But there's an important difference:

If you buy a bond and you have to restructure it into equity, society incurs a very real cost - at a minimum the cost of lawyer-hours during the bankruptcy proceeding. If you buy a share of common stock on the exchange and it drops to half the price, there is no particularly compelling reason for society to give a shit.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Aug 28th, 2012 at 11:29:45 AM EST
[ Parent ]
Well, it makes no sense to buy overpriced stocks. Say you are a German investor, or rather a German sovereign wealth fund, and you think Iberdrola stock is trading at to dear a price tag, so you won't buy any more shares. But you still like the idea of investing in Spanish power generation. In that case the step is not that great to start a company that orders, owns and operates new power plants in Spain.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Tue Aug 28th, 2012 at 03:14:43 PM EST
[ Parent ]
And you can easily imagine what effect such an increase in core-oringinated FDI to the periphery would have on the current account balance problem and the aggregate demand problem of the periphery.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Tue Aug 28th, 2012 at 03:20:56 PM EST
[ Parent ]
Foreign direct investment contributes to the current account deficit of the recipient and the surplus of the originator.

This is why the only solution to the current account imbalance is transfers.

If you are not convinced, try it on someone who has not been entirely debauched by economics. — Piero Sraffa

by Migeru (migeru at eurotrib dot com) on Tue Aug 28th, 2012 at 04:54:23 PM EST
[ Parent ]
Migeru:
This is why the only solution to the current account imbalance is transfers.

if that's the quid, what's going to be the pro quo?

what's a possible incentive get those ingots  evacuated?

if hard money BB plutocrats can block a euro-wide solution so long and effectively, what's a win-win end game that could be sufficiently persuasive to convert the recalcitrant?

what's the hook for public pressure to hang on? occupying banks ain't cutting it, yet the people are seeing their quality of life diminishing without fully understanding the mechanics of how it happened.

the good ship europe is listing, water's rushing into the hold, how to plug the leaks to re-accomplish reflotation? to repair what's broken may consist of reverse engineering the causation, with as little disappointment or damage as possible, or to try a whole new model of economic governance, but to get stuck sitting on a fence arguing sides is like waiting for the aliens to come down with a global budget plan. if a debt-rock burst your hull, using a bigger rock to try to fix the problem seems stupid. if growth of certain elements of industrial policy shudders to a halt without tax breaks and subsidies yet dear leaders cannot reconcile themselves to reconfigure policies to reflect new realities, what do we need?

some geithner/bernanke figure to find a burning bush to listen to and come down the hill with some new economic ten commandments.

even here there's so much still discussed... i know these knaves have covered their tracks well, have had scads of luxurious leisure time to hatch their plans, compliant media aid in the layers of obfuscation, and keeping us always feeling like it's some deus ex machina that's responsible, whereas everyone here seems to be clear that it isn't, this is clusterfuck salad of greed, injudicious bets, pathetic regulation, incompetence, malice, resource shrinkage/population expansion, not enough euro-babies/too many immigrants, any or all the above...

there seems to be a significant consensus we're pretty doomed, that this story cannot but end messily, some even speculating armed infra-european conflict.

if we're in a maze, what i would like to know is is there a thread, however improbable that could lead us out?

or are we really condemned to waiting for so much blood in the street that governments have to relent and a debt jubilee is the only way to stop the rage of those feeling utterly unrepresented by their political systems?

maybe we need olympics every year!

"We can all be prosperous but we can't all be rich." Ian Welsh

by melo (melometa4(at)gmail.com) on Tue Aug 28th, 2012 at 07:41:57 PM EST
[ Parent ]
The quo is the survival of the Euro-system. It is almost as bad as the situation in 2008 when the biggest banks were balking at the only solution on the table in the USA - taking the TARP money. If nothing was done the system implodes and them along with it. But they had a hard time getting beyond their entitled mentality so as to grasp the opportunity for survival. The current situation in Europe makes those involved in that fiasco look like geniuses.

I say 'on the table' because there were other, better solutions available, but they were not under consideration due to the dereliction of duty by 99% of the US population when it came to insuring that the US government was not subordinated to Wall Street.

 

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Aug 29th, 2012 at 12:23:47 AM EST
[ Parent ]
In the long run and if the investment are succesful yes,but in the short run, shouldn't the inflow of foreign equity cover the deficit?

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Sep 5th, 2012 at 09:43:40 AM EST
[ Parent ]
Why is the German private sector not doing that, then?

If you are not convinced, try it on someone who has not been entirely debauched by economics. — Piero Sraffa
by Migeru (migeru at eurotrib dot com) on Tue Aug 28th, 2012 at 04:52:20 PM EST
[ Parent ]
Because it prefers holding bonds over stocks? Risk aversion? Though given the expected behaviour of European decisionmakers such a strategy makes perfect sense...

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Sep 5th, 2012 at 09:45:52 AM EST
[ Parent ]
Because the people who fund the German export surplus are banks, and banks do credit, not equity.

I really don't think it's any more complicated than that.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Sep 5th, 2012 at 04:04:00 PM EST
[ Parent ]
They don't really do credit any more, they do derivatives.

If you are not convinced, try it on someone who has not been entirely debauched by economics. — Piero Sraffa
by Migeru (migeru at eurotrib dot com) on Wed Sep 5th, 2012 at 04:35:50 PM EST
[ Parent ]
Which are just credit with shady accounting.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Sep 5th, 2012 at 05:26:40 PM EST
[ Parent ]
They used to. They're now morphing into pure liquidity, with the actual credit business withering.

If you are not convinced, try it on someone who has not been entirely debauched by economics. — Piero Sraffa
by Migeru (migeru at eurotrib dot com) on Wed Sep 5th, 2012 at 06:23:26 PM EST
[ Parent ]


Austerity can only be implemented in the shadow of a concentration camp.
by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Sep 5th, 2012 at 06:33:37 PM EST
[ Parent ]
Could this be fixed some way? Cut German capital taxes on equity to 10% while raising capital taxes on bonds to 50%?

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Sep 5th, 2012 at 06:50:42 PM EST
[ Parent ]
A large enough incentive will cause some movement, sure.

But I would not care to place any expensive bets on the proposition that such drastic measures will less harmful to the domestic German economy than a transfer union. You'd be trading a harmless fix for a harmful one to avoid offending the eccentricities of a handful of Hayekian preacher men in the Bundesbank.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Sep 6th, 2012 at 03:55:32 AM EST
[ Parent ]
Jacking up inflation should hit bonds while not hurting equities, as well.

In other news:

In Germany, some media were already decrying the "death" of the Bundesbank after it failed to prevent the plan while some analysts said the ECB was taking on a role closer to that of the US Federal Reserve.

That is, the role of an actual Central Bank...

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Thu Sep 6th, 2012 at 08:41:01 PM EST
[ Parent ]
Well like I always said: The Bundesbank hasn't existed since 1999. All that is left is a branch office of the ECB that keeps the name of Bundesbank for traditions sake. And the director of this branch office has only one vote at the governing council of the ECB and can easily voted down.

But everybody always shouted at me that this isn't so and that the Bundesbank has as a part of an ancient conspiracy super secret powers and can somehow control the ECB by raising its brow.

I feel vindicated.

by IM on Fri Sep 7th, 2012 at 02:09:17 AM EST
[ Parent ]
This hasn't and doesn't prevent the BuBa from communicating non-stop its opinions on what the ECB ("independent" central bank) should or shouldn't be doing, while we hear from the other central banks of the Euro system much less often and much more discreetly.

Perhaps someone should inform the BuBa that it no longer has any importance and should shut up?

by afew (afew(a in a circle)eurotrib_dot_com) on Fri Sep 7th, 2012 at 03:31:21 AM EST
[ Parent ]
sticks and stones (and monetary policy) can break my bones, but words can never hurt me.

The wordiness is an compensation for the lost influence.

by IM on Fri Sep 7th, 2012 at 03:45:26 AM EST
[ Parent ]
If you imagine that communications have no influence on real events, and that the BuBa's communications have not been responsible (jointly with the press) for building a state of German public opinion that may yet prove an insuperable obstacle to either the development of a genuinely workable single currency or to a peaceable and cooperative return to national currencies, you are smoking the wrong stuff.
by afew (afew(a in a circle)eurotrib_dot_com) on Fri Sep 7th, 2012 at 04:50:34 AM EST
[ Parent ]
I you think a few utterances of the bundesbank are more relevant then the actual decisions of the governing council of the ECB, you are smoking the wrong stuff. Or dabble in conspiracy theory.

And as you admitted by throwing in along with the press, media is much more relevant.

by IM on Fri Sep 7th, 2012 at 04:56:46 AM EST
[ Parent ]
Well, there's the decision of the German Constitutional Court, which might yet kill the ESM and with it the ECB's policy announced yesterday:
54% of Germans want the Constitutional Court to say No

Most commentators are heavily discounting a Yes, or Yes but vote by Germany's Constitutional Court on the ESM next week. Spiegel Online reports of a poll showing that 54% of Germans want the court to say No. Only 25% want the Court to reject the case. The poll shows that the German public has become increasingly hostile (a sentiment no doubt whipped by the Bundesbank and comments such as those above.)  53% are against transferring further competences to the EU, while 43% want Greece out of the eurozone. Der Spiegel made the point that a No vote by the Constitutional Court would also automatically killed off Draghi's OMT.

In another article, Spiegel reports on the political reaction to the decision. Most of it is unremarkable. But we were struck by a comment from Jurgen Trittin, head of the Greens in the parliament, who said that the OMT would greatly increase the risk that Germany's ESM contribution and credit guaranties would be defaulted on. He said by refusing eurobonds, Angela Merkel has forced the ECB to monetise debt through the backdoor.

(Eurointelligence upthread)

If you are not convinced, try it on someone who has not been entirely debauched by economics. — Piero Sraffa
by Migeru (migeru at eurotrib dot com) on Fri Sep 7th, 2012 at 05:16:53 AM EST
[ Parent ]
The court isn't the bundesbank or the ecb.

And they have never said no to an european treaty before.

by IM on Fri Sep 7th, 2012 at 05:24:00 AM EST
[ Parent ]
The Court will have to adjudicate between the Bundesbank and its fans, and the German industry which has finally come out in support of the Euro. And, of course, Merkel has hedged her bets by supporting Weidmann publicly and having her man Asmussen support Draghi, so she will come out on top in any case. I suspect that Schäuble will burn out of this one, too.

If you are not convinced, try it on someone who has not been entirely debauched by economics. — Piero Sraffa
by Migeru (migeru at eurotrib dot com) on Fri Sep 7th, 2012 at 05:44:48 AM EST
[ Parent ]
They have to decide on constitutionality. There is a shift from parliament and its budget rights to the executive. Perhaps a shift too far.
by IM on Fri Sep 7th, 2012 at 05:53:11 AM EST
[ Parent ]
It would be great if the outcome of all this were to subordinate the ECB to the European Parliament.

If you are not convinced, try it on someone who has not been entirely debauched by economics. — Piero Sraffa
by Migeru (migeru at eurotrib dot com) on Fri Sep 7th, 2012 at 06:07:50 AM EST
[ Parent ]
Everybody who claims that there will be a "No" from the Constitutional Court next week, hasn't paid attention. (And, yes, I know that's all of our media.)

Das Bundesverfassungsgericht The Federal Constitutional Court
Die Anträge sind darauf gerichtet, dem Bundespräsidenten bis zur Entscheidung über die jeweilige Hauptsache zu untersagen, die von Bundestag und Bundesrat am 29. Juni 2012 als Maßnahmen zur Bewältigung der Staatsschuldenkrise im Euro-Währungsgebiet beschlossenen Gesetze zu unterzeichnen und auszufertigen.The requests are directed to ban the President from signing the laws adopted by the Bundestag and the Bundesrat on the 29th of June 2012 as measures to tackle the sovereign debt crisis in the euro area until the decision on the particular main decision.

The court will either decide the law can be put in force or it will decide there must be a ruling in the matter (next year or so).  I find the former is more likely. The court will NOT decide on the constitutionality next week.

by Katrin on Fri Sep 7th, 2012 at 06:32:40 AM EST
[ Parent ]
So if they decide to kick the can down the road for another 6 months, what happens to the ESM?

If you are not convinced, try it on someone who has not been entirely debauched by economics. — Piero Sraffa
by Migeru (migeru at eurotrib dot com) on Fri Sep 7th, 2012 at 06:39:22 AM EST
[ Parent ]
More likely yes, but not assured,

And in in the current situation a stay would be enough to wreck the eurozone.

by IM on Fri Sep 7th, 2012 at 06:41:26 AM EST
[ Parent ]
I'm almost rooting for the Court to give 54% of the German public the train wreck they crave.

If you are not convinced, try it on someone who has not been entirely debauched by economics. — Piero Sraffa
by Migeru (migeru at eurotrib dot com) on Fri Sep 7th, 2012 at 06:45:21 AM EST
[ Parent ]
But the joke will be on us all.
by IM on Fri Sep 7th, 2012 at 06:46:09 AM EST
[ Parent ]
Spain has already been destroyed.

If you are not convinced, try it on someone who has not been entirely debauched by economics. — Piero Sraffa
by Migeru (migeru at eurotrib dot com) on Fri Sep 7th, 2012 at 06:46:40 AM EST
[ Parent ]
Unless some sort of loophole is found, yes. The court is aware of that, though. I don't believe they will decide on (another) stay. And that means Merkel's strategy of postponing a decision until it is too late for a meaningful debate will have won again.
by Katrin on Fri Sep 7th, 2012 at 06:47:09 AM EST
[ Parent ]
There is no conspiracy theory. The Bundesbank's constant communication on the euro crisis (a few utterances, lol!) has had a real effect.
by afew (afew(a in a circle)eurotrib_dot_com) on Fri Sep 7th, 2012 at 05:55:01 AM EST
[ Parent ]
It did. It effected a total isolation of weidmann in the ecb governing council.
by IM on Fri Sep 7th, 2012 at 05:58:46 AM EST
[ Parent ]
What explains the public disagreement between Jörg Asmussen and Jens Weidmann?

If you are not convinced, try it on someone who has not been entirely debauched by economics. — Piero Sraffa
by Migeru (migeru at eurotrib dot com) on Fri Sep 7th, 2012 at 06:01:38 AM EST
[ Parent ]
Easy. As a social democrat Asmussen gets his marching orders out of the Willy Brandt-Haus.

Seriously:

I think Asmussen is because of his long career inside the finance ministry more used to public diplomacy and the necessity of compromise. He is also used to support his boss in public, in this case Draghi.

Weidmann is more a product of the absolute and irresponsible Bundesbank culture.

Not much of an explanation but the best I can muster.

 

by IM on Fri Sep 7th, 2012 at 06:28:47 AM EST
[ Parent ]
A man who plans his career as a Bundesbanker can only win if the Euro and the ECB break up. A man who plans a political career in the next grand coalition has a different angle.
by Katrin on Fri Sep 7th, 2012 at 06:38:59 AM EST
[ Parent ]
Yes, perhaps.
by IM on Fri Sep 7th, 2012 at 06:45:43 AM EST
[ Parent ]
Four years too late.
by Colman (colman at eurotrib.com) on Fri Sep 7th, 2012 at 06:15:07 AM EST
[ Parent ]
perhaps. But that is a matter of shifting majorities on the council, not mystical Bundesbank powers.
by IM on Fri Sep 7th, 2012 at 06:29:40 AM EST
[ Parent ]
The disproportionate political influence of the Bundesbank has been one of the core problems here. No one has ever put forward mystical powers, it's been a political problem.
by Colman (colman at eurotrib.com) on Fri Sep 7th, 2012 at 06:47:56 AM EST
[ Parent ]
What influence?

Weber (and Stark)

resigned. And Weidmann is outvoted again and again.

by IM on Fri Sep 7th, 2012 at 06:53:14 AM EST
[ Parent ]
From Eurointelligence today:
The reaction from Germany was one of outrage.

At the press conference, Draghi said that one member vote No - no prizes for guessing who. Draghi said different central banks expressed different views, but all converged to this policy. As reported by Frankfurter Allgemeine and others, a Bundesbank spokesman quoted him as saying that he rejected the OMT on the grounds that it was too close to monetary financing, and that they would risks for taxpayers.

The FT's editorial headline says: Mr Draghi's audacious gamble. The comment said that the SMP fell short for technical reasons, which the OMT has fixed. But it warned that the heavy lifting has yet to be done. Italy and Spain still have to apply for a programme. And the process of closer integration remains subject to political risks.

While the non-German press seemed mostly impressed, the Germans went on a verbal rampage.

Holger Stelzner writes in Frankfurter Allgemeine that the decision means a formal end of the separation between monetary and fiscal policy in Europe. The southern countries can now continue to amass at low interest rate, without having to worry about financial markets. The northern countries are also happy, not having to keep asking their parliaments for more money. He says the conditionality can never be applied in practice. Will the ECB stop buying bonds because Italy refuses to reforms its dismissal laws? He concludes with a reference to the German constitutional court, and wonders what the courts view on this policy will be?

Marc Beise, writing in Suddeutsche Zeitung, defends the Bundesbank. He said the truly bad aspects of Draghi's decision was that the ECB left no doubt that it wants the euro to survive (Yes, we, too, had to read that sentence twice.) He writes this is not a statement a central banker should make. This is for politicians. He says the ECB has crossed an important line with its decision, but it is not irreversible. They will not be able to save the euro against Germany.

Note that these are Germany's two most important newspapers, straddling a wide ranging of public opinion from the right (FAZ) to the centre-left (SZ).

Interestingly, Bild Zeitung was relatively more moderate than the "serious" newspapers. Nicolas Blome dressed up his commentary in a pseudo-factual Q&A, in which he says that inflation will come, of course, but not immediately.



If you are not convinced, try it on someone who has not been entirely debauched by economics. — Piero Sraffa
by Migeru (migeru at eurotrib dot com) on Fri Sep 7th, 2012 at 05:13:41 AM EST
[ Parent ]
They will not be able to save the euro against Germany.

Fascinating... Logically, if "Germany" doesn't want the Euro any more, it should leave, rather than destroy it.

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Fri Sep 7th, 2012 at 05:25:26 AM EST
[ Parent ]
Marc Beise, writing in Suddeutsche Zeitung, defends the Bundesbank. He said the truly bad aspects of Draghi's decision was that the ECB left no doubt that it wants the euro to survive (Yes, we, too, had to read that sentence twice.)
Does Marc Beise really expect the ECB council to vote for its own dissolution?

If you are not convinced, try it on someone who has not been entirely debauched by economics. — Piero Sraffa
by Migeru (migeru at eurotrib dot com) on Fri Sep 7th, 2012 at 05:47:56 AM EST
[ Parent ]
Marc Beise is a nimcompop.

the treaties assume a permanent euro and Draghi is obligated to operate on the basis of the treaties. Otherwise he is violating his duties in a way he could be impeached.

by IM on Fri Sep 7th, 2012 at 05:57:17 AM EST
[ Parent ]
Beise has just learned that "independence of the central bank" means they can take decisions he disapproves of. That hurts of course. Poor thing.
by Katrin on Fri Sep 7th, 2012 at 06:55:39 AM EST
[ Parent ]
I suppose we will run a "Euro death watch" thread on the day of the Constitutional Court decision?

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II
by eurogreen on Fri Sep 7th, 2012 at 05:26:04 AM EST
[ Parent ]
Sure, make it a diary. The Constitutional Court ruling is expected on the 12th (Wednesday).

If you are not convinced, try it on someone who has not been entirely debauched by economics. — Piero Sraffa
by Migeru (migeru at eurotrib dot com) on Fri Sep 7th, 2012 at 05:45:34 AM EST
[ Parent ]
[...] He said the truly bad aspects of Draghi's decision was that the ECB left no doubt that it wants the euro to survive [...] He says the ECB has crossed an important line with its decision, but it is not irreversible. They will not be able to save the euro against Germany.[...]

Am I actually reading these words?


-----
sapere aude

by Number 6 on Fri Sep 7th, 2012 at 10:47:10 AM EST
[ Parent ]
Increasing inflation should only work if the increase came unexpectedly and (irrationally) scared people away from bonds, as bond rates would adapt going forward, taking into account the higher inflation.

And as people (though not the markets) seem to expect higher future inflation already...

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Fri Sep 7th, 2012 at 09:03:52 AM EST
[ Parent ]
bond rates would adapt going forward, taking into account the higher inflation.

I'm not totally convinced that the long-maturity end of the bond market works that way (and I know for a fact that the short-maturity end does not).

In any event, it would denude the value of outstanding portfolios without precipitating cascading bankruptcies the way the alternative option for denuding the value of outstanding bond portfolios (which is to say default) would.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Sep 7th, 2012 at 10:12:13 AM EST
[ Parent ]
I agree.

Except I don't see why the short-run rates should not be affected by inflation. Except due to the current liquidity trap, I suppose.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Fri Sep 7th, 2012 at 10:52:28 AM EST
[ Parent ]
Because if you have liquid forward markets in bonds, then there's a set of arbitrage relations between the overnight rate, the expected volatility of the overnight rate, and the short-maturity end of the yield curve. And the CB fixes the overnight rate.

Empirically, this breaks down more and more the farther you go from the overnight rate, for various reasons that I will not pretend to fully understand (but which are presumably related to the absence of a consensus on long-term policy rate volatility coupled with credit constraints on potential arbitrageurs preventing the actual construction of the hypothetical tracking portfolios which could enforce the relationship). But it holds up quite well for the short-maturity end.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Sep 7th, 2012 at 11:09:20 AM EST
[ Parent ]
OK, re-reading that, it strikes me that I should probably break down the jargon a bit...

Basically, you can offer people a loan from today to tomorrow (where "tomorrow" means "a month to a quarter from now") at today's rate and from tomorrow to the day after tomorrow at the rate you think will obtain tomorrow, plus a payment for the risk that the rate you think will obtain tomorrow is not, in fact, the risk that turns out to actually obtain tomorrow.

If you know what the central bank is doing today (which you do, because the CB tells you) and you can predict the upper limit on how much it is going to change what it is doing tomorrow (which you can for small enough values of "tomorrow," because the CB makes changes in a gradual manner) then there exists an equation which will tell you what the arbitrage-free price of that risk you took on is.

But a loan from today to tomorrow and another loan from tomorrow to today (at a rate agreed upon today) is just a loan from today to the day after tomorrow. So they should have the same total interest cost.

Now repeat this entire setup to add a loan from the day after tomorrow to the day after the day after tomorrow.

Now, in principle you can do this for the whole yield curve, and it does hold very well for the short maturity end. But there are three places it can break down as you go further out the yield curve:

First, the equation that tells you what the fair markup of a forward rate is depends on knowing the boundaries of the variation in what the CB is going to do. You probably know that a month into the future. You might know it a year into the future. Five years? Not so much. Ten years? Fuggetaboutit.

Second, the equation that tells you the fair markup only holds if people are actually able to borrow and sell forward contracts that are overpriced and borrow cash to buy forward contracts that are underpriced. Now, if you were a loan officer at a major bank and some City puke came along and told you that he had spotted an opportunity for making free money, but it required that you let him borrow money for eight years, and that he was right about how much the central bank would change the interest rate during those eight years...

... then you'd tell him to go play on the highway.

So for the long maturity end of the yield curve the arbitrage-free price may not actually obtain, even if there is a consensus on what the volatility would likely be. Because people's credit lines are limited.

And third, even if the first arbitrage relation were in force (if nothing else then because every bond trader has read the same sort of books I have, and the only unpardonable sin for a bond trader is to fuck up while everyone else does not), the arbitrage relation between forwards and annuities may not hold. Because if you tell a banker that you've found an arbitrage opportunity between annuities and forwards, then he'll go "yeah, that's what Long Term Capital Management thought too," and tell you to go play on the highway.

(Incidentally, this is why I do not usually unpack the jargon until someone asks me to. I didn't even manage to get rid of all the financespeak in this one.)

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Sep 7th, 2012 at 11:58:00 AM EST
[ Parent ]
It would buy time, and lots of it, for wages to adjust so as to recreate competitivness in the periphery, and it would do it without creating massive debt-fueled bubbles.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Tue Aug 28th, 2012 at 03:10:41 PM EST
[ Parent ]
The problem with that plan is that the only wage adjustment that will allow the periphery to compete without dragging the whole Eurozone into permanent depression is for German wages to rise.

And there is no mechanism in your proposal that accomplishes that.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Aug 28th, 2012 at 05:19:10 PM EST
[ Parent ]
I agree they need to rise.
But even then, I think, much of the problem would remain.

Well, maybe not in the long run. Or medium run possibly, but long enough for implosion.

I can't imagine that production would move all that fast from Germany to the periphery once German wages rise -especially since regional economics are at play, and there is a need for clusters.
Plus, is that really desirable? Waves of industrial migration?

It does make sense to have some level of long term specialisation between countries, but then there will always be asymetric shocks and we'll need transfers. Significant ones at that.

It should not be a problem for a union. That it is one shows that we are anything but.

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi

by Cyrille (cyrillev domain yahoo.fr) on Wed Aug 29th, 2012 at 01:46:06 AM EST
[ Parent ]
The neoliberal agenda that is now made compulsory by the treaties (or by their usual reading, at any rate -there are articles that go directly against it but somehow they don't seem to be considered binding these days) is incompatible with the European project.

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi
by Cyrille (cyrillev domain yahoo.fr) on Wed Aug 29th, 2012 at 01:48:44 AM EST
[ Parent ]
I didn't see your comments before posting mine below, but we were obviously thinking along some similar lines.
by afew (afew(a in a circle)eurotrib_dot_com) on Wed Aug 29th, 2012 at 02:12:59 AM EST
[ Parent ]
we are anything
by PerCLupi on Wed Aug 29th, 2012 at 03:54:21 AM EST
[ Parent ]
I agree they need to rise.
But even then, I think, much of the problem would remain.

Then they aren't rising far enough, fast enough.

They don't need to rise far enough, fast enough to reverse the sucking of industry into Germany. But they do need to rise fast enough, far enough to halt it, and to make German wage-earners spend on whatever the periphery still produces.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Aug 29th, 2012 at 05:17:48 AM EST
[ Parent ]
There's no immaculate transfer.
Give them a big pay rise by all means but they'll mostly spend locally -or save.

And Migeru has repeatedly shown how Spanish wages are still weak even as they have risen. I don't want that to be the eternal status quo. We need to make sure that decent wages in the periphery become sustainable. With the current institutions it wouldn't work, that's why we need to change them.

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi

by Cyrille (cyrillev domain yahoo.fr) on Wed Aug 29th, 2012 at 06:11:54 AM EST
[ Parent ]
They don't need to spend mostly on imported goods. Spending even a quarter on imported goods would suffice. Which they will, because the share of imports in goods produced for local consumption usually amounts to a quarter to a third of the total price.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Aug 29th, 2012 at 06:46:36 AM EST
[ Parent ]
Neither do we want to turn the periphery into a massive Mezzogiorno.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Sep 5th, 2012 at 10:14:20 AM EST
[ Parent ]
Dash it, will you people stop making me look up words I don't know and learning about things?


-----
sapere aude
by Number 6 on Fri Sep 7th, 2012 at 10:49:38 AM EST
[ Parent ]
You are indeed correct. It's not possible to have adjustment through falling nominal wages in the periphery. Such an adjustment might take decades. German wages must rise. My proposal doesn't include a mechanism which will create such an outcome. But it would buy time for some other unspecified mechanism which would increase German wages.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Sep 5th, 2012 at 10:11:14 AM EST
[ Parent ]
That is in fact the neoliberal doctrine on the question, and is implicitly the German position : that the variable that must adjust is wages, in a downward direction for deficit countries.

There are a number of problems with that :

  • the moral problem that a mercantilist power is plundering the living standards of wage-earners in weaker countries (and that within a Union that purports to seek the improvement of living standards of all its members);

  • the "political" problem that the adjustment required is so brutal that those weaker countries may become impossible to govern (strikes, riots, instability), with uncertainty as to the final result (fascism, or, god help us, xtreme-left terra?);

  • the practical problem that wages don't just slide quickly and obediently down to provide a magic unicorn solution, as in the neolibs' dream world;

  • the "game" problem that Germany's reaction to increased competitiveness in partner countries (that hugely includes France) would be to hone its own competitiveness -- in other words, a downward spiral aka race to the bottom would be created, the bottom being somewhere adjacent to Chinese wages and living standards.

As Jake says, the only acceptable wage adjustment would be a rise in Germany.
by afew (afew(a in a circle)eurotrib_dot_com) on Wed Aug 29th, 2012 at 02:11:15 AM EST
[ Parent ]
I think one (short term, practical) question to ask is what set of policies would make life better for the ordinary/median German worker.

If German competitiveness has so far been bought at the cost of that ordinary worker's wage - what might be a different way forward?

by Metatone (metatone [a|t] gmail (dot) com) on Wed Aug 29th, 2012 at 03:37:47 AM EST
[ Parent ]
I think this ties into my diary about the 1970s, too.

How can we arrange an economy so that we get richer?

by Metatone (metatone [a|t] gmail (dot) com) on Wed Aug 29th, 2012 at 03:39:01 AM EST
[ Parent ]
The goal should not be "be rich". We should eliminate the concept of "being rich". The problem is that the rich want to be very rich and those who have some money want to be richer. If "being rich" equals "having money", the sociopolitical goal will be have money, get the money: that's why we are in this crisis.

What should we understand by wealth in society without this crisis?

by PerCLupi on Wed Aug 29th, 2012 at 04:18:09 AM EST
[ Parent ]
How can we arrange the economy so that we have a growing standard of living and declining poverty, and can sustain it long term?

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Sat Sep 1st, 2012 at 01:27:49 PM EST
[ Parent ]
I agree, except that "honing comepetitiviness" need not be synonymous to cutting or stagnating salaries. It that were so, North Korea and Somalia would be the most competitive economies in the world.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Sep 5th, 2012 at 10:16:33 AM EST
[ Parent ]
Tell that to the EU: Leaked: Troika requires 6-day working week in Greece (RT.com, 04 September, 2012)
A leaked email sent to the Greek Ministries of Finance and Labor from the Troika says Greek private sector workers should work six days a week and longer hours.

The letter, which was published on August 31, shows that the Troika expects the Labor Ministry to implement a number of other new measures. They include reducing the notice period before firing a worker, and cutting certain severance packages by 50 per cent by giving employers the right to reduce workers' time in service. Restrictions on overtime are also expected to come into effect.

"It also wants a dismantling of the labor inspectorate which is the public service that is responsible for implementing labor law. So it's not only about making the labor market more flexible," Panagiotis Sotiris from the University of the Aegean told RT.



If you are not convinced, try it on someone who has not been entirely debauched by economics. — Piero Sraffa
by Migeru (migeru at eurotrib dot com) on Wed Sep 5th, 2012 at 10:28:01 AM EST
[ Parent ]
Heh. I wonder why they don't just outright demand that all Greek salaries are cut by 30% straight away. It would, after all, work.

For a very theoretical given value of "work"...

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Wed Sep 5th, 2012 at 10:35:48 AM EST
[ Parent ]
You have to start wondering what the "goal" is. The policy is not consistent with the stated goal, and after 3 years it's evident it isn't, in practice.

If you are not convinced, try it on someone who has not been entirely debauched by economics. — Piero Sraffa
by Migeru (migeru at eurotrib dot com) on Wed Sep 5th, 2012 at 10:49:40 AM EST
[ Parent ]
The goal is 'reform' - i.e. wealth capture by the rich.

The crisis is a convenient excuse to introduce 'reform' not a solution for it.

The problem it is a solution for - i.e. popular democracy, worker power, and security - is never stated explicitly.

The Econo and the various Neo-Lib rags haven't exactly been hiding the aim, although they have done an excellent job of misdirecting the media since 2008, when there was at least a small danger that things could go the other way and the vampires would have their fangs pulled.

Arguably 'reform' and the destruction of Social Democracy has always been the goal, from at least the time of Maastricht onwards.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Sep 5th, 2012 at 11:10:14 AM EST
[ Parent ]
I'd say the goal and the plan is indefinitely kicking the can down the road while praying for divine intervention.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Sep 5th, 2012 at 11:17:16 AM EST
[ Parent ]
Survive until 2013? What then?
by Colman (colman at eurotrib.com) on Wed Sep 5th, 2012 at 11:39:32 AM EST
[ Parent ]
Then Merkel can start talking about the magical date of 2017.

If you are not convinced, try it on someone who has not been entirely debauched by economics. — Piero Sraffa
by Migeru (migeru at eurotrib dot com) on Wed Sep 5th, 2012 at 11:53:00 AM EST
[ Parent ]
I'm leaning towards the "bag of rats" theory, which I developed while involved in student politics.

I observed a tendency for a lot of the student union types to posit a "College" that was against them - in their minds there was a unified enemy  with a coherent plan to keep them down.

In fact, the various departments, academics and administrators were much more interested in fighting among themselves in order to maximise their own local and personal interests than in anything to do with bothering students.

I don't think there is a goal. There's a big mess and a lot of people, states and organisations trying to further their own agendas. Which, given the zeitgeist, is a recipe for horror.

by Colman (colman at eurotrib.com) on Wed Sep 5th, 2012 at 11:46:48 AM EST
[ Parent ]
I may rewrite that in coherent English at some stage. WTF?
by Colman (colman at eurotrib.com) on Wed Sep 5th, 2012 at 11:55:04 AM EST
[ Parent ]
Insightful. Good summary.

(Sounds like Ankh-Morpork.)

-----
sapere aude

by Number 6 on Fri Sep 7th, 2012 at 10:54:55 AM EST
[ Parent ]
That Germans are loathe to invest in anything but bunds is not surprising, given we are in a liquidity trap. Unfortunately their economic policy mandarins seem to be unable to admit to this fact.
by redstar on Tue Aug 28th, 2012 at 11:01:28 AM EST
[ Parent ]
Transfers are a non-solution. Giving the periphery money will sustain living standards, but neither employment nor any sort of economic and industrial development. Germany has to buy more goods and services from the rest of europe, which means they either need to maintain current comsumption and reduce production (this is not likely to go well!) or they need to increase german consumption. Which means they need to pay the average german worker more. Wage restraint in Germany has imbalanced everything. - The issue isnt that the periphery is living beyond its means, the issue is that Germany is living 6% beneath its means.
by Thomas on Wed Aug 29th, 2012 at 03:34:53 AM EST
[ Parent ]
Transfers directed at correcting the historical shortage of capital investment in the periphery relative to the core would go a long way towards improving the productivity of periphery workers. The same worker working with their bare hands is less productive than with the right tools. That's why one possible way for the transfers to happen would be to give the money directly to the European Investment Bank, and also relax the requirement that the recipient member state contribute matching funds to the EIB's.

If you are not convinced, try it on someone who has not been entirely debauched by economics. — Piero Sraffa
by Migeru (migeru at eurotrib dot com) on Wed Aug 29th, 2012 at 03:40:05 AM EST
[ Parent ]
This crisis makes the "matching funds" requirement look particularly crazy.

It's also crazy outside of crisis when you think of new entrants starting from a low base.

by Metatone (metatone [a|t] gmail (dot) com) on Wed Aug 29th, 2012 at 03:47:55 AM EST
[ Parent ]
Some level of funds-matching makes excellent sense, to avoid the recipient spending the money just to spend the money. Of course in the present situation, spending the money just to spend the money is objectively superior to not spending it at all. But that's not always the case.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Aug 29th, 2012 at 05:23:26 AM EST
[ Parent ]
The investment could also be undertaken entirely by the EIB, including the oversight of the project. If the recipient cannot take advantage of EU monies for one reason or other it is a failure to insist on an interpretation of "subsidiarity" that prevents the federal level from being "the closest instance that can get it done".

See, for instance, Cash dash: Tapping the EU funds Deadlines loom as officials struggle to retrieve millions of euros from Brussels (August 1, 2012)

Negotiations between the Nečas government and Brussels officials have prevented the country from losing billions of euros worth of European Union subsidies, but fast-approaching deadlines and issues of future disbursements continue to pose a risk for the Czech economy.

Some 60 billion Kč in payments for development projects will again flow into the country after government representatives agreed to address concerns over the administration of jointly funded programs July 23.

The funds were frozen by the European Commission (EC) in March due to misallocation, and some programs will continue to be on hold pending further scrutiny, Prime Minister Petr Nečas said.

If the Brussels/Frankfurt consensus is set on giving the EU power over national budgets in their entirety, why can't they say that in case structural funds are affected by issues of local mismanagement or corruption the EU level will direct the projects?

If you are not convinced, try it on someone who has not been entirely debauched by economics. — Piero Sraffa
by Migeru (migeru at eurotrib dot com) on Wed Aug 29th, 2012 at 05:41:07 AM EST
[ Parent ]
Which is to say, maybe the "carrot-and-stick" philosophy applied to local politicians by the federal level isn't the best way to ensure that the local population benefits from federal action.

More faulty "the state as a household" metaphors?

If you are not convinced, try it on someone who has not been entirely debauched by economics. — Piero Sraffa

by Migeru (migeru at eurotrib dot com) on Wed Aug 29th, 2012 at 05:43:10 AM EST
[ Parent ]
...why can't they say that in case structural funds are affected by issues of local mismanagement or corruption the EU level will direct the projects?

The important thing is that the funds get spent in the intended country in a manner that most benefits the local economy. The danger is that neo-liberal capture of EU institutions will lead to conversion of such funds to private looting by the most powerful interests.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Aug 29th, 2012 at 09:07:42 AM EST
[ Parent ]
Improving periphery productivity without increasing demand will just make unemployment worse. -
The basic problem is that productivity and wages have to follow each other, or the economy comes under ever increasing strain until it simply falls apart.

 This is so very obvious that it ought to be in the economy 101 syllabus, except economics is not actually about the economy anymore, but has degenerated into a branch of political retoric.

by Thomas on Thu Aug 30th, 2012 at 01:25:46 AM EST
[ Parent ]
You also need to improve German domestic demand, of course.

The point is that the wage differential between core and periphery, and the current account imbalance, is not going to go away unless you do all of these things.

Blowing the Eurozone apart would work too, of course, if and only if it is replaced by a floating exchange rate system.

If you are not convinced, try it on someone who has not been entirely debauched by economics. — Piero Sraffa

by Migeru (migeru at eurotrib dot com) on Thu Aug 30th, 2012 at 02:53:18 AM EST
[ Parent ]
It would certainly add a lot of financial fees and intermediates to inter-eurozone trade, as european industry tries to insure its supply chain against unpredictable currency shifts. Im not sure if this entirely predictable negative would be larger than the positives, but I do know that massive shocks have a strong tendency to not work out well for the common citizen, so as a solution, it sucks.

More constructively: It ought to be pointed out to the german people that what is needed is higher real german wages. I see arguments for more higher wages in germany in the press on occasion, but mostly this is phrased in terms of higher inflation, which is the worst possible rethoric one could possibly choose to sway the german public opinion.
What we need are arguments for a virteous cycle exit from the crisis that are as effective, intuitive and persuasive as the false "swabian housewife" analogy is.
"Economic austerity in a crisis is like tightening your tie because your pants are falling off. It doesnt help, and makes it very hard to breathe"

by Thomas on Thu Aug 30th, 2012 at 06:53:39 AM EST
[ Parent ]
It would certainly add a lot of financial fees and intermediates to inter-eurozone trade, as european industry tries to insure its supply chain against unpredictable currency shifts.

Have the CB act as market maker in currency swaps, at no charge.

Im not sure if this entirely predictable negative would be larger than the positives, but I do know that massive shocks have a strong tendency to not work out well for the common citizen, so as a solution, it sucks.

If you have the CB buy foreign currency in sufficient volume to match gross outstanding domestic hard currency liabilities (and take any bank that helps a Soros attacker naked short your currency out back to be shot), you won't get massive exchange shocks. Unless you have a massive supply-side shock. But if you have a massive supply side shock, the alternative to an exchange rate shock sucks even worse.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Aug 30th, 2012 at 07:46:04 AM EST
[ Parent ]
If instead of the usual exchange-rate-mechanism "snakes" or "bands" each country had a commitment to not allow its currency to appreciate more than x% with respect to any of the other ones, then you would have a system essentially invulnerable to Soros attacks. You can make x% as narrow as you like, though considering FX volatility is about 1% per day, anything narrower than 2 to 3% would require too frequent intervention by the central bank as a market maker (usually seller) in its own currency. Then you can add Jake's idea that the central bank could also be a market maker in currency swaps to help their domestic banks hedge the FX exposure of the domestic import/export sector.

And then you can have actual employment-oriented economic policies in each member state instead of a race to the bottom and games of chicken (always won by the central bank with the undervalued currency) when exchange rates get close to the edge of the "snake".

If you are not convinced, try it on someone who has not been entirely debauched by economics. — Piero Sraffa

by Migeru (migeru at eurotrib dot com) on Thu Aug 30th, 2012 at 08:46:06 AM EST
[ Parent ]
Both of these suggestions assume central banks that are competent and non-malign. And if we had central bankers like that, the eurozone would not be in trouble.

The fix you are suggesting is to first break up the eurozone, and then replace the boards of the national banks with people who give a frack about the real economy and employment. But if you are willing to fire central bankers, why exactly do you need to break up the eurozone? Just go directly to the part of your perscription that is actually helpful, and sack the board of the ECB on grounds of incompetence.

by Thomas on Fri Aug 31st, 2012 at 09:34:40 AM EST
[ Parent ]
Well, duh.

Which is to say, we actually agree on the fundamentals.

If you are not convinced, try it on someone who has not been entirely debauched by economics. — Piero Sraffa

by Migeru (migeru at eurotrib dot com) on Fri Aug 31st, 2012 at 10:01:55 AM EST
[ Parent ]
But if you are willing to fire central bankers, why exactly do you need to break up the eurozone?

Because sacking the board of the ECB is not legal under federal law, and changing the federal law in question requires 50 % +1 of the vote in even the most backwards, recalcitrant member state.

Whereas firing the national central bankers after withdrawing from the Eurozone would require only 50 % +1 of the vote in any state which wishes to adopt a sanity-based policy.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Aug 31st, 2012 at 10:19:22 AM EST
[ Parent ]
I'm not sure that's the case, though. The appropriate articles of the EU treaties apply to all EU member states as EU member states, not to Eurozone member states.

Which is why the EU could complain about Hungary infringing on Central Bank independence last year.

If you are not convinced, try it on someone who has not been entirely debauched by economics. — Piero Sraffa

by Migeru (migeru at eurotrib dot com) on Fri Aug 31st, 2012 at 10:21:46 AM EST
[ Parent ]


Austerity can only be implemented in the shadow of a concentration camp.
by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Aug 31st, 2012 at 10:29:10 AM EST
[ Parent ]
But there is another option then sacking the board. The Governing Council could issue new instructions and see what happens. To do that 50 % +1 of the vote is needed to replace CB managers in six to twelve member states, since the six members of the executive board also are members of the Governing Council.

Starting that and preparing for a withdrawal can be done at the same time, since grabbing control over the central bank is important in both cases.

And as usual I suggest firing the CB boss for taking part in a conspiracy to subvert the EU treaties, which probably constitutes treason under national law. Let the CB boss appeal that to the Court.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!

by A swedish kind of death on Fri Aug 31st, 2012 at 12:51:28 PM EST
[ Parent ]
You are assuming that a transfer will be used to increase productivity. I argue that "it depends" and actually has decreased productivity in some cases. One example:

In Portugal, the massive transfer that was made when joining the EU was used to build a motorway network and destroy the train network. This on the view that trains are for poor people ("and we are not poor anymore, we are European(tm)") and that cars are more efficient than trains.

I think most people in this discussion are thinking in "economese" terms, whereas the local culture makes a massive difference.

Yes, a transfer can be used (should be used) to increase productivity, but that is not always the case.

Actually the neo-lib argument of the need for "structural reform" makes sense. Of course, the needed reforms have little to do with what neo-libs defend. Example, what the periphery needs is a dose of colectivism (e.g. more efficient public transport, more respect for public spaces), not more individualism (more cars...)

by cagatacos on Thu Aug 30th, 2012 at 10:25:28 AM EST
[ Parent ]
The point is not that transfers are sufficient. The point is that they are necessary. No transfers implies no solution. It does not from this follow that transfers implies a solution.

But that is an internal Greek/Portuguese/Italian/Irish matter, that is really not my business. (And designing an industrial policy from the ground up is a non-trivial effort, and I insist on being paid for non-trivial efforts.)

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Aug 30th, 2012 at 10:32:38 AM EST
[ Parent ]
It is not just an internal problem if the money is used to dig an even bigger hole, this further increasing the divergence.

Why should surplus nations sustain silly policies (other than the interest of sharing a devaluated/more-competitive currency)?

by cagatacos on Thu Aug 30th, 2012 at 10:55:41 AM EST
[ Parent ]
Why should surplus nations sustain silly policies (other than the interest of sharing a devaluated/more-competitive currency)?

Because they want surpluses and fixed exchange rates at the same time.

They're perfectly free to pick another pair of objectives from the set.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Aug 30th, 2012 at 11:12:04 AM EST
[ Parent ]
Under the police regime of automatic transfers from surplus countries to deficit countries, if they do not wish to sustain those silly policies, they only need to abandon the aggressively destructive strategy of pursuing a surplus.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Sat Sep 1st, 2012 at 01:31:43 PM EST
[ Parent ]
Good piece.

I think a major problem is that Germany likes having a fixed exchange rate especially because it prevents the exchange rate from going up.

by Metatone (metatone [a|t] gmail (dot) com) on Tue Aug 28th, 2012 at 04:28:28 AM EST
This is what JakeS calls "having others pay for the Bundesbank's depressed currency policy".

If you are not convinced, try it on someone who has not been entirely debauched by economics. — Piero Sraffa
by Migeru (migeru at eurotrib dot com) on Tue Aug 28th, 2012 at 04:29:03 AM EST
[ Parent ]
Good stuff.
(You seem to be in good company at eurointelligence. several names there that even an amateur like me will recognize.)


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sapere aude
by Number 6 on Tue Aug 28th, 2012 at 05:13:17 AM EST
Had to google Transfer Union and found this from earlier in the year.

Here's an interesting comment:
"You also forgot to mention that there are transfer unions within some of the member states. Just think of Germany, where people complain about a transfer union, but they live in a state (e.g. Berlin or North Rhine-Westphalia) that gets more money than it gives thanks to richer states such as Bavaria (which then again has political reasons) or Baden-Württemberg."


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sapere aude

by Number 6 on Tue Aug 28th, 2012 at 05:29:56 AM EST
[ Parent ]
Of course, having whipped up a frenzy in Germany against EU-level fiscal transfer, Merkel and BILD have encouraged people to also criticise the transfers within Germany.

If you are not convinced, try it on someone who has not been entirely debauched by economics. — Piero Sraffa
by Migeru (migeru at eurotrib dot com) on Tue Aug 28th, 2012 at 05:54:45 AM EST
[ Parent ]
BILD conveniently forgetting that rich Bavaria was created by a transfer system from the norther states many decades ago, during recovery from WWII. But then...

"Life shrinks or expands in proportion to one's courage." - Ana´s Nin
by Crazy Horse on Tue Aug 28th, 2012 at 06:10:16 AM EST
[ Parent ]
Don't be a demagogue, bringing facts into the discussion...

If you are not convinced, try it on someone who has not been entirely debauched by economics. — Piero Sraffa
by Migeru (migeru at eurotrib dot com) on Tue Aug 28th, 2012 at 06:11:28 AM EST
[ Parent ]
It should be obvious that in a money based economy when one member of that economy, (in reducto ad absurdum), accumulates all of the money in that system the system will collapse. It should be equally obvious that moving substantially in that direction will produce noticeable strains and that there are such actual strains in the system - Ireland, Greece, Portugal, Spain, Italy. Yet few will make the connection, especially in the (corporate owned) media. To make matters even worse, this situation does not even benefit the vast majority of Germans, who have seen their wages frozen and benefits whittled even as a very few Germans become even more fantastically wealthy. The justification for Germans seems to be along the lines of: "at least you ain't no Greek, (or Irish, Portuguese, Spanish or Italian)".

Will no significant number of voters ever make the connection regarding the effects of wealth distribution? More likely we will start seeing the apotheosis of the wealty, much as the Emperors in ancient Rome were declared gods. It is enough to make one a misanthrope.  

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Aug 28th, 2012 at 10:12:01 AM EST
Is Plickert on crack?  Is he a whore for German hegemony?  Is he a crack whore for German hegemony?
by rifek on Wed Aug 29th, 2012 at 02:11:10 PM EST
He's a Hayekian economist and a Frankfurter Allgemeine staff writer.

If you are not convinced, try it on someone who has not been entirely debauched by economics. — Piero Sraffa
by Migeru (migeru at eurotrib dot com) on Wed Aug 29th, 2012 at 02:38:59 PM EST
[ Parent ]
Translating Plickert: "We are winning fair and square and won't have anyone spoiling our victory parade."

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Aug 29th, 2012 at 07:32:49 PM EST
[ Parent ]
Translating Plickert: "We are winning fair and square and won't have anyone spoiling our victory parade by questioning the fairness of the rules we wrote for the game."

FIFY.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Aug 29th, 2012 at 08:12:41 PM EST
[ Parent ]
Nah.  Plickert: "We don't need no stinking rules!"  (Blithely ignoring the fact that they ARE their rules.)

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Aug 29th, 2012 at 11:01:17 PM EST
[ Parent ]
SRW has a good post on the capital-labour-productivity issue:

http://www.interfluidity.com/v2/2968.html

by Metatone (metatone [a|t] gmail (dot) com) on Fri Aug 31st, 2012 at 12:05:15 PM EST
Excellent, thanks.

If you are not convinced, try it on someone who has not been entirely debauched by economics. — Piero Sraffa
by Migeru (migeru at eurotrib dot com) on Fri Aug 31st, 2012 at 03:30:09 PM EST
[ Parent ]
A commenter (by the name of a German citizen) on the Eurointelligence site writes:
Ah, the wonderful world of the keynesian paper-pushers where deficits are surpluses, surpluses are deficits and debt is money. Just pull one lever on a paper chart and - voilá - Europe is fixed.

You are living in fantasy land. The situation in Euroland is one of dramatically different competitiveness and solvency. Pushing a few billions of virtual paper euros somewhere is not going to change this. Spain, Greece and Italy are not going to become more competitve overnight just because a percentage on a paper chart has changed.

Your numbers are plain wrong. Per July 2012, the percentage of german exports to the eurozone has decreased to 36%, the Latin countries are probably zero by now. Germany couldn't care less about the insolvent latin countries.

If you want to have a blueprint for the future of the latin countries, go to eastern germany. The competitive companies were taken over, the non-competitive parts are kept alive by government transfers. But they make nice holiday resorts. Welcome to the new mezzogiorno. And the debt slaves keep on begging for more debt.

Germans are buying hard assets and gold while the paper pushers keep on pushing paper and looking at fantasy charts.



If you are not convinced, try it on someone who has not been entirely debauched by economics. — Piero Sraffa
by Migeru (migeru at eurotrib dot com) on Fri Sep 7th, 2012 at 06:26:53 AM EST
Gold, yes, I remember that. Anything Glenn Beck likes must be a good idea.


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sapere aude
by Number 6 on Fri Sep 7th, 2012 at 10:53:44 AM EST
[ Parent ]


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