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I read another comment on the Merkozy failed to save the eurozone-article in the FT. I'm not saying I'm agreeing with it, but I think it does induce some well needed balance here, as I think there has been to much "Blame-Germany-First". After all, not only does it take two to tango, but there also takes two to make a loan. Anyway, here I give you the thoughts of SUPERFRITZ.

"The Germans" totally understand that huge imbalances within the Eurozone are not sustainable. It's quite clear for everyone to see. But how, if not by way of increasing the periphery's competitiveness, are the imbalances supposed to be resolved? Germany CANNOT become less productive and competitive, because it needs to compete on world markets with players like the US, the UK (sic!), China, and others, not just with Greece and Portugal (unfortunately). In fact, the ressources that Germany will need to sort out the Euro mess need to earned somewhere. Germany needs to run a trade surplus with countries outside the Eurozone/the EU or else, it will not be possible to finance the consumption - lack of tax enforcement, pensions, blown up administration, useless prestige projects, etc. - in the periphery (another question is whether it wants to). It is clear that Germany will need to continue to subsidise the South for many years to come (much as it did with Eastern Germany), but it cannot do so unless there is a credible effort by the periphery to reform.

A credible commitment to long term remedies is the precondition for short term remedies. Why is this so difficult to understand, Mr. Wolf?

Otherwise, Germany could as well close shop and hand its assets over to the rest of Europe as a Christmas present. (I know this is what the periphery thinks we owe them, because we cruelly forced the Euro on them, made them buy BMWs and Mercedes, prohibited them from investing the cheap credit in their competitiveness, rather than beach front homes, and then we also invaded Poland only 72 years ago - essentially, it's all our fault. Wait for the Protocols of the Elders of Germany to pop up soon. Parts of the Greek press are already very close to that intellectual level...)



Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Fri Dec 9th, 2011 at 02:08:40 PM EST
[ Parent ]
Link?

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Dec 9th, 2011 at 03:09:53 PM EST
[ Parent ]
Google "Merkozy failed to save the eurozone" and you'll find the FT article. The comment is below the article.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Fri Dec 9th, 2011 at 03:11:58 PM EST
[ Parent ]
The comment assumes that there is something fundamentally flawed in Greek genetics that an investment there is automatically spoiled, and would better remain in Germany. I see no difference between that point-of-view and the current consensus.
by Upstate NY on Fri Dec 9th, 2011 at 05:29:51 PM EST
[ Parent ]
Nonsense. The comment assumes that being "competitive" is a must. That the hardships of the "agenda 2010" made sense and that the Greeks had to do the same, until all countries are competitive and we talk about the interplanetary trade. Wrong, but not in the way you imply.
by Katrin on Fri Dec 9th, 2011 at 05:59:00 PM EST
[ Parent ]
The commenter assumes that, in a union that incorporates eurobonds, people are asking Germans to become less competitive. Why would someone automatically assume that?

Why is that the only option? Why not investment?

by Upstate NY on Fri Dec 9th, 2011 at 07:25:56 PM EST
[ Parent ]
Because competitiveness, in this sense, is a zero-sum game: If Greece is to become more competitive relative to Germany, Germany obviously has to become less competitive relative to Greece.

The idiocy is in assuming that this will make Germany less competitive relative to China, the US and (snicker, giggle) the UK. Dealing with that is the reason God gave us floating currencies.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Dec 9th, 2011 at 08:07:54 PM EST
[ Parent ]
Right, but he used the words "less productive and competitive." I thought he was assuming that Germany would wind down or something.
by Upstate NY on Fri Dec 9th, 2011 at 09:29:27 PM EST
[ Parent ]
Well, one argument (forwarded by Krugman for example) is that resolving the intra-EZ competitivity problems should come through higher German inflation. This would radically weaken German competitivness not only against the PIGS (which is the very idea), but also against the UK, US, China, Japan, and so on. Which is quite unacceptable.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Sat Dec 10th, 2011 at 12:29:25 AM EST
[ Parent ]
but destroying the economies of the greeks and spaniards (and italians, and portuguese, and irish, and latvians, etc.) is quite acceptable.
by wu ming on Sat Dec 10th, 2011 at 02:58:54 AM EST
[ Parent ]
Of course, they are uncompetitive.

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Mon Dec 12th, 2011 at 09:32:57 AM EST
[ Parent ]
Well, they are. That's the problem, after all.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Dec 14th, 2011 at 06:15:08 AM EST
[ Parent ]
There are two ways to deal with uncompetitive industry. To dismantle it, or to improve its capital through investment.

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Wed Dec 14th, 2011 at 06:30:55 AM EST
[ Parent ]
Or you can devalue your currency.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Dec 14th, 2011 at 08:36:37 AM EST
[ Parent ]
Or cut costs.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Dec 14th, 2011 at 08:36:54 AM EST
[ Parent ]
That's "dismantling it".

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Wed Dec 14th, 2011 at 08:38:18 AM EST
[ Parent ]
Which is code for reduce living standards to third world levels.
by Colman (colman at eurotrib.com) on Wed Dec 14th, 2011 at 08:39:43 AM EST
[ Parent ]
For instance we can dismantle our substandard (compared to surplus countries) welfare states.

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Wed Dec 14th, 2011 at 08:42:42 AM EST
[ Parent ]
M: That's "dismantling it".

C: Which is code for reduce living standards to third world levels.

Dear friends, you know that I respect both of you highly, but those are just disingenuous comments. It might be that those things mean something entirely different to you than they mean in contemporary Swedish debate, like how we some months back found out that "competitiveness" meant completely different things to us. To me it meant a company that can successfully sell its products on the international markets, while to you it meant social retrenchments and neoliberal politics.

To me, cutting costs is nothing but the constant process of all businesses to lower the cost of their product through any means available, be it innovation, smarter organization, capital structure or whatever. Call it lean/kaizen or something else. It happens all the time in all companies to maintain their competitiveness. It's not about dismantling industry or introducing third world living standards.

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

by Starvid on Wed Dec 14th, 2011 at 08:58:31 AM EST
[ Parent ]
To me, cutting costs is nothing but the constant process of all businesses to lower the cost of their product through any means available, be it innovation, smarter organization, capital structure or whatever. Call it lean/kaizen or something else. It happens all the time in all companies to maintain their competitiveness. It's not about dismantling industry or introducing third world living standards.

That is because you have a protected domestic market in which the most productive Swedish industries can cannibalise the less productive Swedish industries.

Absent the protected domestic market, there is no guarantee that the dismantled industries are replaced by more productive domestic industries - they may instead be replaced by imports.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Dec 14th, 2011 at 10:15:24 AM EST
[ Parent ]
Absent the protected domestic market, there is no guarantee that the dismantled industries are replaced by more productive domestic industries - they may instead be replaced by imports.

Ironically, I once closed a debate with Starvid with just such an example.

Tough competition in the refrigeration and freezing appliances market is forcing Danfoss to move its production of refrigerator and freezer thermostats from Nordborg to Danfoss' factory in Slovakia. The relocation, which is expected to be completed by the end of 2005, will affect around 77 employees.

...

This event cannot be accommodated within Ricardo's theory. Under Ricardo's theory, Danfoss would use its capital and labour in Denmark to produce something else which can be exported to Slovakia, and some Slovak company would export thermostats to Denmark. Instead, what is happening is that Danfoss moves its capital to Slovakia, and its employees have to look for other jobs in Denmark without the benefit of Danfoss' capital also staying in Denmark chasing after labour. I suppose Danfoss' 77 employees could move to Slovakia to work for Danfoss there. I wonder how many of them would relocate to slovakia with a Slovak salary and benefits, if offered the chance. And this is within the European Union. There is no free movement of persons from Europe to China.


tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Wed Dec 14th, 2011 at 10:26:27 AM EST
[ Parent ]
This is due to the fact that Ricardo's theory requires capital (and other factors of production) to be immobile. Which Ricardo himself knew: "if capital freely flowed towards those countries where it could be most profitably employed, there could be no difference in the rate of profit, and no other difference in the real or labour price of commodities, than the additional quantity of labour required to convey them to the various markets where they were to be sold."

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Dec 14th, 2011 at 10:36:11 AM EST
[ Parent ]
Sweden is one of the most forceful supporters of free trade (which is only natural when trade is 50% of your GDP), so claiming we have a protected domestic market is quite rich. Norway, however, has. At least when it comes to agricultural products. The current butter deficit in Norway has resulted in considerable butter smuggling from Sweden, with black market prices of butter topping €150 per kg (yes, really). :)

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Dec 14th, 2011 at 10:33:38 AM EST
[ Parent ]
Sweden is one of the most forceful supporters of free trade (which is only natural when trade is 50% of your GDP), so claiming we have a protected domestic market is quite rich.

Floating currencies is a way to generate a protected domestic market.

Or, to be a bit more technical, by allowing the exchange rate to be the buffer variable that ensures balance of the foreign accounts, you obtain the Keynesian advantages of a closed economy and the Ricardian advantages of an open economy. At the same time.

(This is not a free lunch - it fucks over internationally active banks by subjecting them to exchange rate risk. But Hayek is the only one who cries for internationally active banks.)

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Dec 14th, 2011 at 10:38:20 AM EST
[ Parent ]
Oh come on. You can't argue that having a currency of your own is protectionism. Protectionism is quotas, tariffs, subsidies for domestic suppliers or discriminatory regulations for foreign suppliers, and so on.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Dec 14th, 2011 at 10:45:04 AM EST
[ Parent ]
Take a look at China's currency policy and tell me again that currency policy does not create a protected market.

The Chinese case is an extreme one, because they target a surplus rather than balanced foreign accounts. But the basic mechanics are not so different at all.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Dec 14th, 2011 at 11:23:24 AM EST
[ Parent ]
The Chinese have a fixed currency, the opposite of a floating currency. So I don't see how that makes a floating currency protectionism. Rather the opposite.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Dec 14th, 2011 at 11:26:38 AM EST
[ Parent ]
Not in the EU you don't.

(And the Euro has nothing to do with it - before that there was the Exchange Rate Mechanism and the bands, and before that fixed exchange rates and before that Bretton Woods - the Euro crisis is just like the string of devaluation crises we had prior to the mid-90s)

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker

by Migeru (migeru at eurotrib dot com) on Wed Dec 14th, 2011 at 08:42:03 AM EST
[ Parent ]
How does the EU deal with uncompetitive industry in accesion countries?

Cutting costs? Investing in capital improvement? Or dismantling it?

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker

by Migeru (migeru at eurotrib dot com) on Wed Dec 14th, 2011 at 08:43:26 AM EST
[ Parent ]
Having the EU decide such issues through diktat would hardly be in accordance with the principle of subsidiarity. That is, thankfully, still an issue for national governments.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Dec 14th, 2011 at 08:59:09 AM EST
[ Parent ]
What? You're telling me the EU Commission doesn't deal with accession countries by diktat?

Accession countries don't have the luxury of subsidiarity. That's a privilege they earn upon accession.

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker

by Migeru (migeru at eurotrib dot com) on Wed Dec 14th, 2011 at 09:00:45 AM EST
[ Parent ]
Then maybe accession countries should wait with seeking membership until uncompetitive industries they want to keep, have been made competitive. Off course, not all countries should do everything at all times. Sweden once was one of the leading builders of tanker ships. Not anymore. The Koreans and Japanese could build cheaper than we could, so we closed down our shipyards and freed up labour and capital which could then be used in more value-creating ways. But who cares, really? We do other things nowadays. Even earlier, we had a great textile industry. All gone. Missed by none.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Dec 14th, 2011 at 09:15:27 AM EST
[ Parent ]
Did the shipyard labour Sweden freed really get redirected to other uses, or did they join the ranks of the early retired and the long-term unemployed?

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Wed Dec 14th, 2011 at 09:23:11 AM EST
[ Parent ]
They went into the auto industry, which like the shipyards were located in the area around Gothenburg. Swedish business and (private sector) labour unions alike believe in creative destruction and dynamism. Instead of focusing on protectionism they are confident that lost jobs in old industries will swiflty be replaced by better paying-jobs in new industries, as this has been the historical pattern. This stoicism is further supported by the workers knowledge that there's a generous welfare safety net which I'll help them out while they wait for those new better jobs.

Which is why these news were so astounding.

   

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

by Starvid on Wed Dec 14th, 2011 at 09:31:14 AM EST
[ Parent ]
This stoicism is further supported by the workers knowledge that there's a generous welfare safety net which I'll help them out while they wait for those new better jobs.

Right, which is why dismantling the comparatively less generous welfare states in peripheral Europe is part of the medicine the doctor prescribed (after a frontal assault on the welfare states in core Europe, of course).

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker

by Migeru (migeru at eurotrib dot com) on Wed Dec 14th, 2011 at 09:34:27 AM EST
[ Parent ]
You won't find me saying isolated austerity makes any kind of sense whatsoever. :)

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Dec 14th, 2011 at 09:41:21 AM EST
[ Parent ]
You're providing me with a great opportunity for Socratic debunking of the Eurozone's architecture.

It looks almost scripted :P

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker

by Migeru (migeru at eurotrib dot com) on Wed Dec 14th, 2011 at 09:42:30 AM EST
[ Parent ]
The pleasure is all mine. ;p

Jokes aside, these are the best kinds of threads at the ET. A lot like a debate in the seminar room, except they leave room for less rhetoric and require more clarity as everything is written down.

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

by Starvid on Wed Dec 14th, 2011 at 09:44:55 AM EST
[ Parent ]
If Germany finds inflation convergence on the higher rather than lower structural inflation rates unacceptable, then Germany does not want a currency union.

Fair cop, I guess, but then they need to stop pretending that they care about the future of the Euro and start stress testing their banks for getting paid back in Drachma.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Dec 10th, 2011 at 04:24:44 AM EST
[ Parent ]
If Germany finds inflation convergence on the higher rather than lower structural inflation rates unacceptable, then Germany does not want a currency union.

I disagree. Germany wants the currency union it signed up to 10 years ago.

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

by Starvid on Sat Dec 10th, 2011 at 04:38:30 AM EST
[ Parent ]
And I would like a power plant that runs on magic pony piss. Difference is, I can accept that basic arithmetic says I can't have that.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Dec 10th, 2011 at 04:44:33 AM EST
[ Parent ]
Too bad each and everyone agreed to launch such a power plant 10 years ago.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Sat Dec 10th, 2011 at 05:05:44 AM EST
[ Parent ]
20. The whole thing was decided in the Maastricht Treaty. The first 10 years were the "convergence to the Euro" (convergence to low inflation, low interest rates, and low deficit, already).

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Mon Dec 12th, 2011 at 09:22:06 AM EST
[ Parent ]
The absurd thing is that it all might have worked if there had been some internal capital controls to reduce massive flows of funds from the core to the periphery. But the entire EU project is about the free flow of capital, goods, people and services. So ironically, to create a common currency, we would have had to roll back some of the basic principles of the union.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Dec 14th, 2011 at 06:19:30 AM EST
[ Parent ]
Internal capital controls would be one way. In their absence, you could have had explicit recycling of surplus.

The point is the Euro could not work as designed and is blowing up after encoutering its first (perhaps externally triggered) crisis.

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker

by Migeru (migeru at eurotrib dot com) on Wed Dec 14th, 2011 at 06:29:26 AM EST
[ Parent ]
As to the absurdity of using the single market as an excuse for inaction, see this thread, where I argue (on a topic not unrelated to the Euro crisis) that
They saw the build-up of "imbalances" and did nothing because "free movement of capital" prevented them from doing so.

In other words, Market fundamentalism, the belief that "the market knows best" and that intervention should be reactive and not proactive. Also possibly they believed (against all evidence from economic history and dynamical systems theory) that the "imbalances" would resolve themselves smoothly and not catastrophically.

Or they just didn't care.

Saying this

"There is nothing we can do to stop foreign exchange borrowing, and we don't even try. As members of the European Union, we have to respect the free flow of capital," he [Hamezc Istvan, director of Hungary's Central Bank] said.
in unconscionable in any case.


tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Wed Dec 14th, 2011 at 06:35:46 AM EST
[ Parent ]
The absurd thing is that it all might have worked if there had been some internal capital controls to reduce massive flows of funds from the core to the periphery.

That is what floating currencies do for you.

Replacing a market system that works with a ForEx rationing board that may or may not work is... perhaps to show an excessive enthusiasm for government solutions.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Dec 14th, 2011 at 10:19:55 AM EST
[ Parent ]
But how, if not by way of increasing the periphery's competitiveness, are the imbalances supposed to be resolved? Germany CANNOT become less productive and competitive, because it needs to compete on world markets with players like the US, the UK (sic!), China, and others,

The €-Mark floats w.r.t. the US$, GB£ and Yuan. There is nothing wrong with six per cent yearly inflation in Germany that a four per cent yearly depreciation of the €-Mark won't solve.

Don't like that? Tough cookie. Then you don't like the common currency.

(Yes, a common currency convergence must always be towards the highest structural inflation rates in the currency zone, because pushing your economy below its structural inflation rate creates financial imbalances of the sort we are seeing at the moment.)

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Dec 9th, 2011 at 08:10:49 PM EST
[ Parent ]
SuperFritz seems to be super neocon. He sees the need to "reform" but never the need to genuinely invest in the periphery (other, perhaps, than to engage in vendor financing schemes and then try to grab local assets when the loans go sour.) He either fails or refuses to comprehend that in order for Germany to have a surplus someone else has to have a deficit. Nor would he see that having German banks make loans to kleptocrats while expecting the middle class and those below to pay back the misspent proceeds of that loan is problematic. A very convenient morality and economics.

Had Germany pursued a policy of avoiding loans and forgoing sales to Eurozone deficit countries they would not have the problems. But the ability to squeeze EZ trade partners once they had no ability to depreciate their currency was a prime factor in Germany's willingness to join the EZ. Competitiveness is not a matter of physical or social infrastructure or business capital assets, you see, it is having the right morality - living to work instead of working to live and being a docile and even eager cog in a machine run for the benefit of a few, while, of course, suppressing any thought of their activity benefiting disproportionately a very few.  

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Dec 9th, 2011 at 11:57:43 PM EST
[ Parent ]
Curiously nobody (AFAIK) is making the point in a fer-real, instead of a pseudo, Common Currency whether Greece is in a current account deficit to other members of the eurozone matters not a whit.  Alabama is in "deficit" wrt California and nobody is fretting the US dollar is about to go bust.  If the eurozone would get themselves a real Central Bank, instead of a pretend CB staffed with loonies, the problems could be alleviated.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Sat Dec 10th, 2011 at 12:18:32 AM EST
[ Parent ]
But then Germany would feel compelled to leave. Instead of that being a good thing for the other members, as it could be, the existing pretend leaders would, instead, devote all efforts and policies to attempting to entice Germany back into the union.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Dec 10th, 2011 at 12:58:41 AM EST
[ Parent ]
"It takes two to tango" is a poor excuse for predatory lending, even if it is to be expected that a loan shark will use it.

Let's be clear, what has been going on over the life of the Euro has been German export subsidies in the (EU-allowed) form of private sector vendor finance as opposed to the (EU-disallowed) government export subsidies.

The government subsidy comes at the end, when loans are guaranteed, lenders made whole, and political pressure brough to bear internationally to ensure the debt is collected.

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker

by Migeru (migeru at eurotrib dot com) on Mon Dec 12th, 2011 at 09:04:08 AM EST
[ Parent ]
I still think it makes sense, because this has not been the classical case of predatory lending, which includes a lender on one hand an ordinary (and relatively clueless) guy on the other hand. In these cases, the recipients of the funds have in many cases been people who could have been expected to know better: governments, corporations and so on. You don't have the required asymmetry of information then.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Dec 14th, 2011 at 06:23:02 AM EST
[ Parent ]
The required asymmetry for "predatory lending" is of power, not of information.

You just need to look at the way Greece has been forced to take billions of new loans over the past two years and the conditions attached to them (billed as designed to return Greece to debt sustainability whereas any realistic assessment was already predicting from the beginning what has already happened: not only is Greece's ability to pay deteriorating, but it is descending deeper and deeper into debt).

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker

by Migeru (migeru at eurotrib dot com) on Wed Dec 14th, 2011 at 06:27:51 AM EST
[ Parent ]
That might be so now, but it certainly was not the case before the crisis as the imbalances were building up. No one forced the PIGS to buy all that stuff on their credit cards.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Dec 14th, 2011 at 08:43:36 AM EST
[ Parent ]
How interesting. If, after 1999, the periphery's private sectors hadn't borrowed heavily from the core private sectors in what amounts effectively to vendor finance, there would have been a Eurozone-wide recession on the order of the intra-Eurozone trade imbalances as a fraction of GDP.

Elsewhere you say

In any case, you continue to not address the issue of why the periphery should accept depression conditions rather than the core accepting some inflation.

I'm not arguing for any of those solutions, as I see both as unacceptable. I want to see widespread sovereign defaults, bank recapitalizations and the emergency funds of the ESFS spent on infrastructure spending in the periphery as a way of offsetting austerity.

So, how do you propose infrastructure spending in the periphery would have happened after 1999 in the absence of "credit card spending"? Let me remind you this happens in a putative free market environment where credit is intermediated by private banks and the public sector doesn't get (even prudentially) to tell the banking sector where it needs to direct credit other than by setting some crude ground rules or boundary conditions such as the Basel accords. Also see here.

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Wed Dec 14th, 2011 at 08:59:45 AM EST
[ Parent ]
How interesting. If, after 1999, the periphery's private sectors hadn't borrowed heavily from the core private sectors in what amounts effectively to vendor finance, there would have been a Eurozone-wide recession on the order of the intra-Eurozone trade imbalances as a fraction of GDP.

Which could have been met with lower interest rates, or that failing, financial stimulus.

So, how do you propose infrastructure spending in the periphery would have happened after 1999 in the absence of "credit card spending"?

The issuance of sovereign debt seems reasonable, as does private equity (not "private equity" as in LBO variety, but equity as in the opposite of debt) investment if the latter were not forthcoming at a great enough scale.

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

by Starvid on Wed Dec 14th, 2011 at 09:24:08 AM EST
[ Parent ]
Which could have been met with lower interest rates, or that failing, financial stimulus.

Low interest rates for all is what we got and it fed private debt bubbles in the periphery. As to financial stimulus... what continent have you spent the past 2 years in?

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker

by Migeru (migeru at eurotrib dot com) on Wed Dec 14th, 2011 at 09:30:21 AM EST
[ Parent ]
I meant fiscal stimulus, not QE.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Dec 14th, 2011 at 09:32:54 AM EST
[ Parent ]
Precisely, what continent have you spent the past 2 years in that would have allowed fiscal stimulus to counter a looming recession? Can't be Europe.

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Wed Dec 14th, 2011 at 09:35:36 AM EST
[ Parent ]
It's not my fault European elites can't get their heads around Econ 101.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Dec 14th, 2011 at 09:42:16 AM EST
[ Parent ]
As Theo Weigel said, the Euro speaks German.

And everyman believes that the Germans are good at Econ 101.

Which is why we're in deep doo-doo.

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker

by Migeru (migeru at eurotrib dot com) on Wed Dec 14th, 2011 at 09:47:26 AM EST
[ Parent ]
As Martin Wolf advised accession states: joining the euro is not about getting Germany-cheap sovereign debt. That's just the beginning. When you join the euro, you join Germany, with all that entails.

As someone said: would you like to be in a monetary union where Greeks run the fiscal policy and Germans run the monetary policy? Currently, only 8 % of Swedes do. And I'm not one of them. The only person I know who still wants to join the euro does so because he thinks it's a step closer to the United States of Europe, and damn the consequences. Which is after all also what the architects of the euro felt.

Or in the words of Romano Prodi back in 2001: "I am sure the euro will oblige us to introduce a new set of economic policy instruments. It is politically impossible to propose that now. But some day there will be a crisis and new instruments will be created"

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

by Starvid on Wed Dec 14th, 2011 at 09:57:29 AM EST
[ Parent ]
As someone said: would you like to be in a monetary union where Greeks run the fiscal policy and Germans run the monetary policy?

Beats the current arrangement where the Germans run both.

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker

by Migeru (migeru at eurotrib dot com) on Wed Dec 14th, 2011 at 09:59:42 AM EST
[ Parent ]
When you join the euro, you join Germany, with all that entails.

If only. Apparently Germany doesn't agree that the rest of us are part of them.

Or maybe they do. They don't seem to have much "solidarity" for the Ossies either.

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker

by Migeru (migeru at eurotrib dot com) on Wed Dec 14th, 2011 at 10:01:32 AM EST
[ Parent ]
So, how do you propose infrastructure spending in the periphery would have happened after 1999 in the absence of "credit card spending"?

The issuance of sovereign debt seems reasonable, as does private equity (not "private equity" as in LBO variety, but equity as in the opposite of debt) investment if the latter were not forthcoming at a great enough scale.

So, the Growth and Stability pact and the Illegal State Aid rules are unreasonable since you propose that during the Euro era peripheral Europe should have issued sovereign debt to fund equity investments in new productive assets...

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Wed Dec 14th, 2011 at 09:32:28 AM EST
[ Parent ]
The Growth and Stability pact makes no sense. When you introduce a common currency in an area which hardly can be described as an optimal currency area, it's economics 101 that the interest rate weapon will become blunter, and that fiscal policy will have to play a greater role. Both to stimulate the economy during downturns and to cool it at the top of the business cycle. This requires much weaker restrictions on deficit spending, but it also requires a much lower level of sovereign indebtedness over the business cycle, so as to not make the burden of debt overbearing and make stimulus impossible for that reason. The EZ required a 60 % government indebtedness to join. Clearly as events has shown, this level was much too high.

Also, I said the private sector should have supplied the equity, not direct-state investment in productive assets, even if such do make sense in certain industries. Power and infrastructure comes to mind.

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

by Starvid on Wed Dec 14th, 2011 at 09:40:31 AM EST
[ Parent ]
Which is why the Stability and Growth Pact is to be replaced with a Stability and Growth Union with constitutional debt brakes for all, in the middle of a depression.

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Wed Dec 14th, 2011 at 09:44:59 AM EST
[ Parent ]
Our great leaders are oh so wise. :p

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Dec 14th, 2011 at 09:58:16 AM EST
[ Parent ]
The total consolidated government debt (municipal, state, federal, cash, central bank reserves, insured deposits in excess of bank reserves and what have you) is to a considerable (but not complete) extent endogenous.

That is to say, if you want state-level (and below) consolidated government debt to be less than 60 % of GDP, you will have to let federal consolidated government debt (in the Eurozone that means central bank reserves and cash, but not ensured deposits in excess of the bank's reserves and cash position) to be in excess of 40 % of GDP (the consolidated government liabilities to GDP ratio is on the order of 100 % for most advanced industrial societies).

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Dec 14th, 2011 at 10:33:15 AM EST
[ Parent ]
I don't see why. Every debt is to another person a claim. As debt is reduced the claimant receives his cash back, and he certainly need not lend it to someone else. It can just as well be invested as equity, and the result is a society with less gearing.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Dec 14th, 2011 at 10:41:53 AM EST
[ Parent ]
Cash is a part of the consolidated government debt.

Or, to put it in another way: Government bonds are a part of the money supply.

With a properly run central bank, cash and government bonds held by own residents contribute precisely equally to society's gearing: Not at all. (Foreign government bonds are different.)

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Dec 14th, 2011 at 11:26:17 AM EST
[ Parent ]
But in the Eurozone things don't work that way, at least legally...

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Wed Dec 14th, 2011 at 11:45:57 AM EST
[ Parent ]

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