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To me, the most likely scenario is as follows:
  1. Popular revolt against austerity and reform measures topple a number of governments.
  2. Demands for public spending programs and debt cancellation result in a collapse of the EZone.
  3. World economy plunges into deep recession.
  4. Each of the former EZone countries tries to offload debts and losses resulting from the EZone collapse onto other countries.
  5. The resulting quarreling leads to a breakup of the EU.
  6. Without the regulatory framework of the EU, we'll enter a trade-war within months.
  7. Tensions about trade issues and border issues that have been muted since the war due to European integration degrade bilateral relations.
  8. There will be a period of hectic alliances building.
  9. Italy and France will split; one part joining a North European alliance, the other part joining a Southern alliance.
  10. Military is deployed to safeguard national unity.
  11. Joint US/Chinese forces intervene to stop an all-out war ;-)
by The European on Sat Mar 9th, 2013 at 03:05:50 PM EST
3 does not follow from 2. Indeed failure to break the €Z is much more likely to cause step 3.

4 has been going on since 2009, and has so far failed to break the EU.

There's no realistic economic or ethnic fault line along which France can split. Certainly not while Spain maintains territorial integrity.

The China does not have, and cannot in the time frame available for resolution of the present depression develop, the requisite capabilities for pt. 11.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Mar 9th, 2013 at 03:29:21 PM EST
[ Parent ]
JakeS:
3 does not follow from 2. Indeed failure to break the €Z is much more likely to cause step 3.

But you can put a deeper recession as a result of EU break-up and trade-war. So add the er and move it down.

JakeS:

4 has been going on since 2009, and has so far failed to break the EU.

But so far it has been one-sided. If you include step 2 you could get a two-sided conflict. Say that Italy and Greece gets governments that fire CB bosses and investigates them and by extension ECB for subverting treaties and conspiring to cause economic harm to the nation (which is high treason in Sweden at least). They also default on debt and blame Germany. Pressure mounts on all countries except Germany to leave the euro and they promptly do.

On the other side you have a German government trying to bloc the effect of the investigations by having the original sinners thrown out of the EU for breaking the EMU treaties. Plus a number of anti-austerity governments that support Italy and Greece while at least Netherlands and Finland backs Germany. The Council grinds to a halt and with it the EU. Member states start withholding their fees and eventually the cities reposses the EU buildings for not paying the water bill.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Sat Mar 9th, 2013 at 04:10:43 PM EST
[ Parent ]
If you include step 2 you could get a two-sided conflict.

It's a bit like a staring match: the one to blink first looses.
In this case, the party perceived to have caused EZone collapse will get the blame and will be shouldered with the lion share of the damages.
That is the motive behind the blaming game we have witnessed for the last couple of years.
by The European on Sat Mar 9th, 2013 at 05:34:14 PM EST
[ Parent ]
When the Eurozone comes undone, it won't matter who the talking heads blame.

Possession is 9/10ths of the law.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Mar 9th, 2013 at 06:04:15 PM EST
[ Parent ]
3 does not follow from 2. Indeed failure to break the €Z is much more likely to cause step 3.

The direct losses of 4 countries (Greece, Italy, Spain, Portugal) leaving the EZone are estimated at 17 trillion. This would be the worst economic crisis in modern times and take more than a decade to overcome.
4 has been going on since 2009, and has so far failed to break the EU.

So far the losses haven't been materialized, they are potential. The bill will be presented at EZone collapse.
There's no realistic economic or ethnic fault line along which France can split.

That is true. However, France is a split country in the sense that socialist supporters including intellectuals, civil servants and the like see themselves as the leader of the South, whereas the business and industry community is much closer to Germany and the North. That is why a split of the EU is going to very much polarize opinion in France.
by The European on Sat Mar 9th, 2013 at 05:19:38 PM EST
[ Parent ]
The direct losses of 4 countries (Greece, Italy, Spain, Portugal) leaving the EZone are estimated at 17 trillion.

Money you can print.

This would be the worst economic crisis in modern times and take more than a decade to overcome.

This is already the worst economic crisis in modern times, it will already take decades (plural) to reverse the damage, and rebuilding cannot even begin until present policy is scuttled wholesale and replaced with one that is not starkly insane.

So far the losses haven't been materialized, they are potential.

Going by the Russian experience, somewhere between 5 and 15 thousand people are likely to have died of austerity-related excess mortality in Greece alone since the beginning of the present depression. And that number increases by a handful every day.

That is true. However, France is a split country in the sense that socialist supporters including intellectuals, civil servants and the like see themselves as the leader of the South, whereas the business and industry community is much closer to Germany and the North. That is why a split of the EU is going to very much polarize opinion in France.

That doesn't mean that France will split north/south. It is much more probable, particularly given the French tradition for strong centralism, that France will commit fully to one side or the other, with the defeated fraction dragged along kicking and screaming, and, if the bad guys win that internal confrontation, occasionally rioting.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Mar 9th, 2013 at 06:03:09 PM EST
[ Parent ]
The direct losses of 4 countries (Greece, Italy, Spain, Portugal) leaving the EZone are estimated at 17 trillion. This would be the worst economic crisis in modern times and take more than a decade to overcome.

It is not the 'losses of 4 countries' that matters so much as the 'losses occasioned by the default and debt repudiation of 4 countries' and what really matters is who would suffer those losses. The answer is that the losses would be suffered by the wealthiest elements of Germany and France, along with pension funds that have been suckered into sharing that risk. The losses have already occurred, but TPTB have agreed that they do not have to be recognized as it cannot be said with total certainty that these losses cannot be recovered. Rebellion against the Troika by, say Greece, Italy, Spain and Portugal could break the denial that has kept the financial system semi-functioning.

The problem with such an event is that those owning the debt that is being defaulted won't just accept that their claims have to be written down and they have to lose money. OH NO! They will be demanding to be made whole until every poor person in the EZ has been thrown into a meat grinder and sold as hamburger, regardless of whether that will or will not make them whole.

The situation in the Euro-zone is similar to the real estate melt down in the USA. Much of the debt has been created by fraud, but it has all been mixed together or comingled, so now all is tainted. But the most powerful people, many of whom were responsible for the fraud, are demanding to be made whole and those they are blaming are not capable of making them whole. So what we have is an ugly drama of vindictive spite inflicted mostly on those who had nothing to do with the origin of the problem other than, perhaps, having voted for politicians who colluded with fraud. I guess the assumption is that the citizens are not like investors in a corporation who are only liable to the extent of the value of their stock.

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

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Mar 9th, 2013 at 11:01:32 PM EST
[ Parent ]
It is not the 'losses of 4 countries' that matters so much as the 'losses occasioned by the default and debt repudiation of 4 countries' and what really matters is who would suffer those losses.

The parenthesis (Greece ...) got in the way of comprehension. It should be "losses of 4 countries leaving", i.e., the direct financial losses including default and everything you mentioned.
The total economic damage is likely to be much bigger. Just imagine 2 to 3 trillion Euros leaving the Italian economy in a very short period of time because Italian savers aren't likely to cherish the idea of loosing 30 to 50% of their savings due to the devaluation that will invariably follow a EZone breakup. Such a vast drain of money will result in total economic collapse.
The fallout from a EZone collapse is likely to be worse, in economic terms, than the aftermath of WWII.
by The European on Sun Mar 10th, 2013 at 04:47:28 AM EST
[ Parent ]
Just imagine 2 to 3 trillion Euros leaving the Italian economy in a very short period of time

And the Italian central bank should permit this for what reason?

because Italian savers aren't likely to cherish the idea of loosing 30 to 50% of their savings due to the devaluation

Sucks to be an Italian saver, then. Why is this a problem for the Italian economy? Savers have no macroeconomic function.

Such a vast drain of money will result in total economic collapse.

Money can be printed. Please provide a plausible cause and effect story wherein "lack of money" is anything other than a purely political problem.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Mar 10th, 2013 at 06:55:18 AM EST
[ Parent ]
And the Italian central bank should permit this for what reason?

The alternative is to stop all cross-border transactions which would also result in a total collapse of the economy. But the savvy investors will park their ill gotten gains in safe havens long before that will happen. As always, it is the average Joe that's going to foot the bill.
Savers have no macroeconomic function.

Savings are necessary to fund industrial production.
Money can be printed.

Wealth cannot be printed. Printing money destroys wealth.
But if you just want cheap paper money to paper your walls, I dare say, the money printers have a point.
by The European on Mon Mar 11th, 2013 at 08:08:06 AM EST
[ Parent ]
Savings aren't wealth either. They are claims on wealth. Not exercising them now just leads to reduced demand in the present.
by generic on Mon Mar 11th, 2013 at 08:22:12 AM EST
[ Parent ]
Thus we are so sensible, have schooled ourselves to so close a semblance of prudent financiers, taking careful thought before we add to the "financial" burdens of posterity by building them houses to live in, that we have no such easy escape from the sufferings of unemployment. We have to accept them as an inevitable result of applying to the conduct of the State the maxims which are best calculated to "enrich" an individual by enabling him to pile up claims to enjoyment which he does not intend to exercise at any definite time.
(Keynes)

I distribute. You re-distribute. He gives your hard-earned money to lazy scroungers. -- JakeS
by Migeru (migeru at eurotrib dot com) on Mon Mar 11th, 2013 at 08:27:23 AM EST
[ Parent ]
Savings are necessary to fund industrial production.

Savings = Investment, eh?

I distribute. You re-distribute. He gives your hard-earned money to lazy scroungers. -- JakeS

by Migeru (migeru at eurotrib dot com) on Mon Mar 11th, 2013 at 08:28:06 AM EST
[ Parent ]
Oh boy, here we go again.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Sun Mar 17th, 2013 at 11:23:16 AM EST
[ Parent ]
The alternative is to stop all cross-border transactions which would also result in a total collapse of the economy.

This is not the Argentine nor the Icelandic experience.

But the savvy investors will park their ill gotten gains in safe havens long before that will happen.

Some of them undoubtedly will, but invasive and heavy-handed money laundering laws and selective default on central bank balances against known pirate banking states can go quite a long way toward retroactively enforcing a corralito.

As always, it is the average Joe that's going to foot the bill.

If the average Joe's losses from the present depression can be stopped at merely wiping out his savings (what savings? The average Joe barely has any), then he should count his blessings. Under current policy, about 1 % of the average Joes are going to be dead within ten years, and even the ones who survive are going to get a one-way ticket to negative equity.

Savings are necessary to fund industrial production.

Loanable funds fallacy.

Wealth cannot be printed. Printing money destroys wealth.

[Citation needed]

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Mar 11th, 2013 at 03:37:18 PM EST
[ Parent ]
The 'two to three trillion Euros' is highly unlikely to be even mostly cash. Most will be real estate, the price of which can decline but which still retains its use value non-the-less. Most adult Italians have a good idea of how to survive with a currency that is fairly rapidly depreciating. That was their reality for most of the second half of the 20th Century.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Mar 10th, 2013 at 12:13:34 PM EST
[ Parent ]
Most adult Italians have a good idea of how to survive with a currency that is fairly rapidly depreciating.

Yes, and that is why they are going to hold on to the Euro teeth and claws. Latest polls suggest that 67% of Italians want to stay in the Euro and only the lunatic fringe of 10% wants the Lira back.
by The European on Mon Mar 11th, 2013 at 07:58:28 AM EST
[ Parent ]
Did you remember to look beyond the headline to see what the response was when retaining the Euro was made explicitly contingent on continued austerity economic suicide?

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Mar 11th, 2013 at 03:39:25 PM EST
[ Parent ]
The 'two to three trillion Euros' is highly unlikely to be even mostly cash.

That is true, but even a fraction of that would be enough to completely floor the economy. Remember the bank run on Greek and Spanish banks last summer. Different from Greece and Spain, the ECB isn't going to put a single cent into Italy if the problem is perceived to be due to political instability in Italy.
by The European on Mon Mar 11th, 2013 at 08:16:10 AM EST
[ Parent ]
the ECB isn't going to put a single cent into Italy if the problem is perceived to be due to political instability in Italy
The ECB is going to do whatever it needs to ensure its own continued existence as an institution.

I distribute. You re-distribute. He gives your hard-earned money to lazy scroungers. -- JakeS
by Migeru (migeru at eurotrib dot com) on Mon Mar 11th, 2013 at 08:17:33 AM EST
[ Parent ]
Fortunately, if the ECB refuses to do its job as lender of first and last resort to the Italian government, the Italian central bank can recover a large fraction of the exiting money simply by defaulting on its outstanding Target balances.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Mar 11th, 2013 at 03:40:43 PM EST
[ Parent ]
Welcome to ET! If you are wondering about anything realted to the site the open thread (middle column on the first page, under the headline "a place to talk") is the place to ask.

Now on to substance. You are a bit more optimistic then I am, essentialy following the break-up of the Eastern bloc (at least until 8). My mental model is more of 1848 mixed with 1930ies.

If we see alliances, I don't think they will be north-south as then you largely ally with your neighbours, and it is with the neighbours the old border issues exist. Sweden could (extremely unlikely though) conjure up border issues with Finland (Åland islands) but not with Greece. A rise of Greater Hungary could quickly trigger a search for anti-Hungary alliances around Hungary, but Portugal would be uninterested. So if there is alliance building I rather think it will be a complex weave of enemy-of-my-enemy alliances.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Sat Mar 9th, 2013 at 04:21:28 PM EST
[ Parent ]
Thanks for the welcome. I hope I didn't put my foot in with my first post. There is too much information on each page to take in fully at a glance.
I think, on purely economic grounds, a Northern alliance will most likely follow an EU breakup. Most countries bordering Germany depend on the German market. This will create a bloc other countries will join by and by. Any Southern alliance is likely to be dysfunctional.
The big question is France, the French economy is very closely connected to the German economy. Yet, joining the German bloc as a junior partner is going to be very unpalatable to the French.
Border issues will arise in a later step if conflicts over economic issues escalate. There is after all a chance that any new alliance will incorporate many of the achievements of the EU and that thus the worst can be avoided.
Anyways, it seems that the South will probably be the big looser in any new arrangement. And France will face some very difficult decisions.
Incidentally, my mental model is more 1914, which is suiting since we are soon to celebrate its 100th anniversary. There is a new game of alliances, unthinkable a few years ago. The Berlin/Paris axis appears to be somewhat shaky and there seem to be a number of think tanks which try to put a positive spin on a new London/Berlin axis.
by The European on Sat Mar 9th, 2013 at 04:57:27 PM EST
[ Parent ]
The main problem with a northern trade bloc, nevermind a northern alliance, is that Germany has amply demonstrated that it is totally untrustworthy as a trade partner.

German policy has been driving basically all of the Eurozone's dysfunctions, which means that the successor bloc containing Germany is virtually guaranteed to be just as dysfunctional.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Mar 9th, 2013 at 05:06:23 PM EST
[ Parent ]
The main problem with a northern trade bloc, nevermind a northern alliance, is that Germany has amply demonstrated that it is totally untrustworthy as a trade partner.

Please explain.
by The European on Sat Mar 9th, 2013 at 05:26:23 PM EST
[ Parent ]
The German economic strategy of the last several decades has been to gain export market share through wage dumping. The (economic) problem with a wage dumping led export growth strategy is that it creates a shortfall of demand within your currency area (countries outside your currency area can defend themselves trivially by discounting their currencies). And since capitalists will not build factories that they expect to stand idle, a shortfall of aggregate demand harms your medium- and long-term industrial development.

The countries most likely to maintain a fixed exchange rate regime against you, and tolerate that you abuse it in this manner, are the ones most likely to be your closest economic or geopolitical allies or clients. In other words, Germany has been pursuing - consistently - a strategy designed to retard the industrial development and stunt the economic strength of the trade bloc in which they are the hegemon.

Think of it as a version of mercantilism. But dumber.

If an NEU bloc does not maintain a common currency or fixed exchange rate regime, then Germany's economic strategy will implode, and the raison d'etre for an NEU bloc will be gone. If an NEU bloc attempts to maintain a common currency or fixed FX regime, then that bloc will inherit all the dysfunctions of the €, and fall apart in turn in short order.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Mar 9th, 2013 at 05:51:24 PM EST
[ Parent ]
The German economic strategy of the last several decades has been to gain export market share through wage dumping.

How can that be? Prior to the Euro, the value of the DM has increased about fourfold in relation to the Pound. In other words, British labor has become cheaper and German labor has become more expensive. Even with the Euro, the Pound has lost more than 20% in the last couple of years, yet the UK has a record trade deficit.
If you devalue it means that you are not competitive. To compete on price these days (wage dumping) you would have to lower wages to Third World levels. The only way to maintain a high standard of living is by innovation.
With or without the EZone, the issue for Germany is not competition with Greece, the issue is competition with Japan, Korea and China.
by The European on Sat Mar 9th, 2013 at 06:08:20 PM EST
[ Parent ]
How can that be? Prior to the Euro, the value of the DM has increased about fourfold in relation to the Pound. In other words, British labor has become cheaper and German labor has become more expensive.

Only if the hourly wage in £ has not grown faster relative to the hourly wage in DM.

The European Exchange Rate Mechanism, the precursor to the Euro, would periodically experience crises in which appreciation pressure on the DM featured prominently. The German response was always to absolutely refuse to defend the DM exchange rate, insisting that it was a problem with the other currency of the day. When the DM is almost always involved on the same side of a currency crisis between pegged European currencies, you should start wondering whether perhaps this is because Germany is deliberately running a harmful, disinflationary policy.1

Which is evidence of the mercantilist strategy, not evidence against it. The depreciation of the £ is the British defense against German wage dumping. (Well, that and the fact that the UK has been systematically dismantling its industrial plant for thirty years solid, which must eventually show up in your ability to afford imported goods, which in turn shows up in your exchange rate.)

If you devalue it means that you are not competitive.

No, it means that you were not competitive before you devalued.

"Uncompetitive," in this context, is simply another word for "overvalued currency." Nothing more, nothing less. There is nothing inherently wrong with fixing that through devaluation. Nor is there anything inherently wrong with running a higher rate of inflation than your trading partners and compensating with regular depreciation or periodic devaluations of the currency.

That policy regime sucks for rentier interests. But that's a feature, not a bug.

To compete on price these days (wage dumping) you would have to lower wages to Third World levels. The only way to maintain a high standard of living is by innovation.

I know that and you know that, but when you look at the numbers (rather than the hagiography), that is simply not the strategy Germany has been following for at least the last twenty years.

With or without the EZone, the issue for Germany is not competition with Greece, the issue is competition with Japan, Korea and China.

No. With the Eurozone, China and the US have been playing middle-man for what was effectively Germany competing with Greece and Spain. Rather than with China and Japan. Which, of course, is a lot more fun for Germany (not so much for Spain and Greece, though).

Without a fixed exchange rate regime to prop up German exports, Germany's problem will be that German economic strategy requires that Germany is a net exporter. In the absence of a fixed FX regime it is only possibly to be a net exporter by discounting your currency. And Germany lacks the political will to get into a balls-to-the-wall competitive devaluation with countries who discount their currency to protect themselves from importing the unemployment caused by Germany's irresponsible policy mix.

- Jake

1The relationships between exchange rates and other macroeconomic variables are... non-trivial, and most contemporary attempts to model them quantitatively are, quite frankly, embarrassingly bad. So normally inferences of policy implications from exchange rate behavior should be treated with extreme caution. But in this case the effect is sufficiently large and persistent that a compelling case can be made.

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Mar 9th, 2013 at 06:37:56 PM EST
[ Parent ]
Only if the hourly wage in £ has not grown faster relative to the hourly wage in DM.

Big wage increases are no use if most of it is eaten up by inflation. Germany has pursued a policy of a hard currency with low inflation and low currency fluctuation in order to increase predictability necessary for industrial investment. In that context, even low wage increases will improve living standards more than high wage increase in soft currency high inflation economies.
"Uncompetitive," in this context, is simply another word for "overvalued currency."

  1. With soft currencies, devaluation is an ongoing process. I.e., one devaluation hides the next devaluation. Domestic industry can sell by price and does not have to increase productivity and innovation. Therefore, industry loses competitiveness.
  2. German industry has had to face regular increases in the value  its currency. It has become competitive by a) shifting from low-cost to high added value industries b) increasing productivity c) improving technological innovation. Therefore it has become competitive.
With the Eurozone, China and the US have been playing middle-man for what was effectively Germany competing with Greece and Spain.

As a percentage of total German exports, exports to the EZone have fallen from 47 to 37% in the last decade. That trend is likely to continue in the future. European markets will continue to loose importance.
But I agree that the Euro is too cheap for German industry. This will compromise German competitiveness in the future due to the mechanism I have explained under 1) and 2) above. Anyways, the Germans don't need the exorbitant trade surplus they have now. It's a disadvantage more than an advantage because it puts political pressure on them and they risk loosing much of their foreign held assets when the debt bubble bursts.
But there is no way of decreasing your competitiveness in relation to Spain while at the same time increasing your competitiveness to compete against China or Japan.
by The European on Sun Mar 10th, 2013 at 04:29:26 AM EST
[ Parent ]
Big wage increases are no use if most of it is eaten up by inflation.

On the contrary, big wage increases matching and matched by inflation serves to erode the debt burden on society.

Germany has pursued a policy of a hard currency with low inflation and low currency fluctuation in order to increase predictability necessary for industrial investment.

Inflation, so long as it is below roughly 10 per cent per year, does not materially impair investment decisions. Lack of aggregate demand, on the other hand, does.

In that context, even low wage increases will improve living standards more than high wage increase in soft currency high inflation economies.

That quite simply is not true of the German experience over the past forty years.

With soft currencies, devaluation is an ongoing process. I.e., one devaluation hides the next devaluation.

And the problem with that is?

There is nothing inherently wrong with running 5-8 % annual inflation and 3-6 % annual depreciation of the currency w.r.t. the D-Mark. It has a different distributional impact between rentiers, entrepreneurs, labor and mature industrial firms than rigidly running 2 % inflation and no depreciation versus the D-Mark. But it is not inherently worse. Just different.

Domestic industry can sell by price and does not have to increase productivity and innovation. Therefore, industry loses competitiveness.

Untrue. Domestic industry under a full employment and balanced foreign trade policy faces two pressures to improve:

First, wages, being kept high relative to the cost of capital by full employment, will push firms to substitute capital for labor. This will not cause unemployment, since the saved labor is kept employed via demand-side intervention. But it will increase the sophistication and extent of the capital plant.

Second, domestic industry is not homogeneous: Firms and sectors can gain at the expense of other firms and sectors in the domestic economy. If you do not innovate and improve, and your neighbor does, then your firm will lose market share. A balanced trade currency policy only ensures that the domestic sector will not lose market share in the aggregate, it does not protect any individual firm from competitive pressure.

German industry has had to face regular increases in the value  its currency. It has become competitive by a) shifting from low-cost to high added value industries b) increasing productivity c) improving technological innovation. Therefore it has become competitive.

b) and c) are simply flat-out false: German productivity per man-hour has grown slower than the rest of Europe.

With the Eurozone, China and the US have been playing middle-man for what was effectively Germany competing with Greece and Spain.

As a percentage of total German exports, exports to the EZone have fallen from 47 to 37% in the last decade. That trend is likely to continue in the future. European markets will continue to loose importance.

Irrelevant. The Euro floats against RoW, meaning that German firms do not compete against Chinese firms - any gain in "competitiveness" vs. China will be (and historically has been) immediately offset by an appreciation of the currency (and vice versa for losses of competitiveness). At the macro level, Germany competes only with those European countries who have pegged their currencies to the D-Mark.

(The argument is identical to the one about firms in an open, floating-rate healthy-inflation economy.)

But I agree that the Euro is too cheap for German industry. This will compromise German competitiveness in the future

That effect has never been observed in the real world.

Anyways, the Germans don't need the exorbitant trade surplus they have now.

They do if they wish to keep being able to pursue hard money quackery with a minimum of social unrest.

But there is no way of decreasing your competitiveness in relation to Spain while at the same time increasing your competitiveness to compete against China or Japan.

Permit the Euro to depreciate. Or depart the Euro, and permit the D-Mark to appreciate gainst the rump Euro, but not against the Yen.

There is nothing wrong with activist currency policy, and there is nothing wrong with a healthy 5-8 % annual inflation rate. Foreclosing on activist currency policy and attempting to push the rate of inflation substantially below where it should be to ensure financial stability in an economy facing 0-1 % annual real growth serves no purpose except to enrich rentiers.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Mar 10th, 2013 at 06:52:11 AM EST
[ Parent ]
Jake, I think we basically disagree on the virtues of inflation and devaluation. After a one-off event like war and the like, there is a case for erasing debt by inflation or whatever means you want because it is non-recurrent (unless you keep on going to war of course). But structural debt, which is recurrent as is the case in the EZone periphery, cannot be dealt with in that way. Investors (savers or whoever) will invariably factor in a country's propensity to erase debts by inflation/devaluation and make you pay through the nose. That's the beauty of credit rating. Different from politicians, the markets don't lie.
High inflation invariably has a negative impact on society. And to think that you can control inflation at 8 to 10% is absurd. High inflation invariably tends to spiral out of control and it can only be brought down again by very painful measures. High inflation also encourages high-risk investments, i.e. speculation, and discourages stable long term low interest investments need by the manufacturing industries.
Anyways, leaving aside the thin air of economic theory, the reality of the economic situation is that pumping more money into the periphery would reproduce the causes that led to the crisis in the first place and produce another consumer bubble without building domestic manufacturing industry. There would be no sustainable growth. The money would produce another even bigger bubble which would definitely put an end to the EZone. But if I understand you correctly that is exactly what you want. I'm sorry, but I cannot follow you in any such cynical enterprise as it would cause infinite suffering even in your country.
Also you are wrong on most other accounts. If I get some time in the next few days I will try to reply in greater detail. Just to resume: Germany has proven to be a very "trustworthy trading partner" for more than halve a century. That is why Germany is successful. In business, trust is everything, in politics it is optional. German labor cost is very high. Not just wages but also charges including insurance, solidarity costs, income taxes, corporate taxes, etc. And different from the UK, Germany does not practice "tax dumping" by offering the lowest corporate tax in any of the major industrial countries. Nor does Germany practice "currency dumping" as the UK has always done. If I have the choice of working for a manufacturer in Germany or in the UK, I will choose Germany any time. I spent 4 years working in the UK and I don't regret it as an experience, but I wouldn't want it for the rest of my working life. Productivity and innovation is also high. Germany files about 3 times more patents than the UK. If you include utility models, it is probably more like 4 times. And the depressing thing, new patent applications in the UK have been in decline for almost a decade. The reason is of course the loss of manufacturing.
by The European on Sun Mar 10th, 2013 at 05:03:28 PM EST
[ Parent ]
Jake, I think we basically disagree on the virtues of inflation and devaluation.

Yes, I gathered as much.

What I'm trying to figure out is why.

But structural debt, which is recurrent as is the case in the EZone periphery, cannot be dealt with in that way.

Why not?

Investors (savers or whoever) will invariably factor in a country's propensity to erase debts by inflation/devaluation and make you pay through the nose.

The central bank sets the interest rate of government securities. "Investors" have nothing to do with it, except when the central bank has grievously abdicated its responsibilities for macroeconomic planning.

High inflation invariably has a negative impact on society.

Can you cite a historical example.

And to think that you can control inflation at 8 to 10% is absurd. High inflation invariably tends to spiral out of control

Historical examples, please.

High inflation also encourages high-risk investments, i.e. speculation,

You have speculation when interest rates are high and inflation low. You have speculation when interest rates are low and inflation high. You have speculation when interest rates are low and inflation low. And you have speculation when inflation is high and interest rates high.

Preventing unwanted speculation requires heavy-handed and intrusive regulation of the financial sector. Attempting to prevent it by manipulating macroeconomic variables is like hunting bears by setting the forest on fire.

and discourages stable long term low interest investments need by the manufacturing industries.

The central bank sets the reference rates for borrowing in own currency.

Anyways, leaving aside the thin air of economic theory, the reality of the economic situation is that pumping more money into the periphery would reproduce the causes that led to the crisis in the first place and produce another consumer bubble without building domestic manufacturing industry.

Not if you simultaneously float the currencies involved, no: Under balanced trade (which is what managed floating does for you), consumption drives investment.

If you wish to maintain the fixed exchange rate regime, then of course no action which exclusively targets the deficit countries can resolve the structural cause of the crisis, because the structural cause of the crisis is that surplus countries are running unsustainable current accounts surpluses.

However, a policy of forcing the surplus countries to underwrite the current account deficits of deficit countries would stabilize the system, end the humanitarian catastrophe, and encourage the surplus countries to stop pursuing harmful surplus-generating policies.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Mar 10th, 2013 at 05:37:35 PM EST
[ Parent ]
The European:

And to think that you can control inflation at 8 to 10% is absurd. High inflation invariably tends to spiral out of control and it can only be brought down again by very painful measures.

Not really. It is as far as I can tell a common idea that inflation is driven mainly by expectations so inflation triggers more inflation until you get to hyperinflation. But I don't think it matches reality. Hyperinflation tends instead to be a phenomena of its own and high stable inflation is possible.

Here is for example Inflation in Sweden 1831-2012

You can easily see a number of external events there - WWI&II, the 70ies oil crisis - but even those do not lead to out of control inflation.

Do you have any examples of high inflation spiraling out of control from mainly internal factors like inflation expectations?

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Mon Mar 11th, 2013 at 07:04:11 AM EST
[ Parent ]
Inflation is one way for competing claims over resources to express themselves. Destroying the ability of a large section of the population to make those claims will get rid of it. Of course, that also destroys domestic demand and creates a large export dependency. The high profit/rent and low inflation approach came at the cost of increasing imbalances that had to give at some point.
by generic on Sun Mar 10th, 2013 at 08:32:48 AM EST
[ Parent ]
That policy regime sucks for rentier interests. But that's a feature, not a bug.

It also tends to result in weak productivity growth, which IS a problem.

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

by Starvid on Sun Mar 17th, 2013 at 11:28:00 AM EST
[ Parent ]
It tends to coincide with weak productivity growth. Because most states do not voluntarily pursue such policies.

I've not seen any good statistical evidence that the policy leads the drop in productivity growth, rather than vice versa.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Mar 17th, 2013 at 11:37:44 AM EST
[ Parent ]
Behaving in that way leads to a lack of competitive pressures for domestic industry. It leads to an explosion in wage costs. If you can devalue yourself out of any situation, you never have to adapt, especially when you are a small export-dependent nation. The result is stagnating incomes.

Floating exchange rate, independent central bank, central bank mandate including both inflation targeting and financial stability, and fiscal stimulus when you hit the zero lower bound, seems like a completely sufficient policy outfit.

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

by Starvid on Sun Mar 17th, 2013 at 11:47:20 AM EST
[ Parent ]
How does it lead to a lack of competitive pressure on domestic industry? From that it would appear to follow that the fact that the Earth is a closed economy (excluding the activities of space probes, which have yet to generate substantial export revenues) implies a lack of competitive pressure on Earth-bound industries.

Which is hardly the case.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Mar 17th, 2013 at 12:01:36 PM EST
[ Parent ]
Why would companies try to become better if there are not constant cost pressures? If you keep devaluing, status quo will seem ok, and there will be no reason to try to become better. Keep in mind that there won't be many, or perhaps zero, domestic competitors in a small, highly specialised and trade-dependent economy.

As Kjell Olof Feldt, social democratic minister of finance during the 80's in Sweden said: devaluation is like peeing your pants; first it feels good - then it doesn't.

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

by Starvid on Sun Mar 17th, 2013 at 12:11:16 PM EST
[ Parent ]
Because if you do not become better and your neighbor does, then the currency will appreciate (or depreciate too slowly for you, which comes to the same thing). It does not matter what sector of industry your neighbor is in: The private sector will, under a floating currency regime, be competing for a (from the point of view of the individual export firm) fixed export revenue set by the volume of imports. If your productivity drops, then someone else can grab your share of the export revenues.

Of course, the entire society could, in principle, decide that they want to not work so hard and just import less instead. But why is that not an acceptable policy decision? Sucks to be a rentier under that policy, but fuck the rentiers.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Mar 17th, 2013 at 12:15:00 PM EST
[ Parent ]
Germany Current Account to GDP (in percentage)

Notable events here are the reunification of Germany and the introduction of the euro.

If there is balanced trade you get a bit up some years and a bit down some years. Consistent surpluses as Germany has had since the introduction of the euro indicates a mercantilistic strategy.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Sun Mar 10th, 2013 at 03:45:03 AM EST
[ Parent ]
The Eurozone has broadly neutral external trade and current account balances, as the currency is allowed to float freely. Any Northern Eurozone or "Neuro" will likely have a hawkish central bank and broadly neutral current account balance. Since Germany will do its darnedest to retain a sizeable current account surplus and it will be an even larger percentage of the Neuro economy than it is of the Euro economy, there must be some Neuro countries with structural trade/current account deficits. The Euro crisis will reproduce itself within the Neuro unless the Neuro is deliberately devalued (i.e., the "currency war" that Germany accuses everyone else of engaging in).

I distribute. You re-distribute. He gives your hard-earned money to lazy scroungers. -- JakeS
by Migeru (migeru at eurotrib dot com) on Sun Mar 10th, 2013 at 07:07:11 AM EST
[ Parent ]
See also Joerg Bibow's: Draghi's Liquidity Bluff will be Called (December 31, 2012)
This ignores the key flaws in the Maastricht regime of the EMU and the true causes of the crisis. One original sin was to put no one in charge of minding the store of the giant integrated euro economy. No demand management was foreseen in good times, no lender of last resort in bad. Predictably, the Euroland economy has proved prone to protracted domestic demand stagnation and conspicuous reliance on exports for its meager growth, while crisis management has been by trial and error; and errors with no end it would seem. The second original sin was to forget what fifty years of European monetary cooperation were all about, namely to forestall the risk of beggar-thy-neighbor currency devaluation. The euro provided the coronation of that very endeavor in the sense that exchange rates disappeared with national currencies. But this only meant that under the EMU trends in national unit labor costs have taken on the role of determining intra-union competitiveness positions alone. The golden rule of monetary union therefore requires that national unit labor cost trends stay aligned with the common inflation rate that union members have committed to - when they didn't.

It is a well-known fact that Germany's unit labor cost trend departed from the 2 percent stability norm, settling for zero under the euro regime. As Germany turned űber-competitive, its euro partners lost competitiveness just the way they would have in case of 20 percent deutschmark devaluation in pre-EMU times. Alas, the EMU has actually complicated matters as diverging unit labor cost trends essentially dealt the currency union an asymmetric shock that undermined the "one-size-fits-all" monetary policy. With wage repression and mindless austerity suffocating German domestic demand, the ECB's stance became far too tight for the former "sick man of the euro." By contrast, set to suit the average of the euro aggregate, the ECB's stance became far too easy for other euro members, nourishing property market bubbles and growing current account imbalances as a result. Prior to the crisis, Germany's soaring current account surplus was concentrated in Europe, about two thirds with its euro partners. Lending flows from Germany were instrumental in allowing intra-area divergences to persist and imbalances to build up. Herein rests the source of Germany's exposure to solvency problems in the euro periphery.

While these basic facts should be well-known by now, their official reading pins the blame solely on debtor countries. Somehow everyone but Germany lost competitiveness. And somehow fiscal profligacy was the main villain in all this. A sober reading of these facts suggests requirements for crisis resolution that squarely defy the strategy currently pursued by the euro authorities.



I distribute. You re-distribute. He gives your hard-earned money to lazy scroungers. -- JakeS
by Migeru (migeru at eurotrib dot com) on Sun Mar 10th, 2013 at 07:57:03 AM EST
[ Parent ]
I think, on purely economic grounds, a Northern alliance will most likely follow an EU breakup. Most countries bordering Germany depend on the German market. This will create a bloc other countries will join by and by. Any Southern alliance is likely to be dysfunctional.
The Northern alliance (or "Neuro") would probably be a successor of the current Baltic Sea Region. The Southern alliance or "Seuro" would have naturally been organised around the Euromediterranean Partnership. However, as it happened when Sarkozy attempted to beef the moribund EuroMed up, Merkel insisted that every EU member state should be part of the Union of the Mediterranean, in that way ensuring it could not function (40-something 'Mediterranean' countries all the way to Scandinavia?). Unfortunately, Sarkoxy didn't demand as quid-pro-quo that France get a seat on the Baltic Cooperation...

(Yes, the name "Neuro" is an intentional pun)

I distribute. You re-distribute. He gives your hard-earned money to lazy scroungers. -- JakeS

by Migeru (migeru at eurotrib dot com) on Sun Mar 10th, 2013 at 07:07:03 AM EST
[ Parent ]
Members of the Baltic Sea region:

Sweden, Denmark, Estonia, Finland, Germany, Latvia, Lithuania and Poland

I don't think so. This includes only four euro members and that counts latvia.

Austria, the Benelux countries, Slovakia, Slovenia and the non euro using Czech republic are even more intertwined with the german economy then the members of Baltic sea region.

And that said, even with my "realistic" additions only one of the four largest trade partners of Germany - the Netherlands-  is included.

by IM on Sun Mar 10th, 2013 at 03:38:33 PM EST
[ Parent ]
Realistically, any supra-national Baltic Sea organization that includes Germany and excludes Russia would have the latter freaking out.  Russia has strong memories of WW 2 and from that a fear of a (what they would see as) German-dominated alliance on their western border.

Plus Poland doesn't exactly have warm fuzzies for either Germany or Russia.  

So it's complicated.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Sun Mar 10th, 2013 at 04:00:53 PM EST
[ Parent ]
Plus Poland doesn't exactly have warm fuzzies for either Germany or Russia.  

The relationship between Poland and Germany hasn't been this good since the siege of Vienna. That is not the problem.

by IM on Sun Mar 10th, 2013 at 04:04:55 PM EST
[ Parent ]
The relationship between Poland and Germany hasn't been this good since the siege of Vienna.

That is very true. In his speech on a possible Brexit, the Polish foreign minister made it very clear that the country's future is with Germany and continental Europe.
I don't see any Northern or Eastern country (except the UK, and Ireland) not joining a Northern alliance around Germany. The UK and France are the wild cards in this game.
by The European on Sun Mar 10th, 2013 at 04:17:26 PM EST
[ Parent ]
If it is about staying in a rump-EU, Sweden would stay. If it is a new alliance that comes close to EU in importance, I doubt Sweden would join. Both the nationalist right and anti-EU left is much stronger now then when Sweden joined the EU, and that was a close call. For Finland it depends on how much they got burnt when the EU collapsed vs how scared they are about Russia. Both Sweden and Finland could end up going back to EFTA.

The Baltic countries will probably cling to Germany for safety whatever austerity may come.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Sun Mar 10th, 2013 at 04:34:27 PM EST
[ Parent ]
If it is about staying in a rump-EU, Sweden would stay. If it is a new alliance that comes close to EU in importance,

The difference is in name only. Any new alliance would invariably integrate most of the things we have already in the EU. As to its potential importance, only time can tell.
by The European on Mon Mar 11th, 2013 at 07:38:55 AM EST
[ Parent ]
I find it difficult to believe anything like the euro or the EU-as-political-project would emerge if the EU collapses.  Those, in my mind, are based on a Top/Down Model of organization of human interaction during a time of increasing Bottom/Up P2P links.  

I'm no Techno-Utopian but it seems clear, to me, the global linkages allowed by the Internet will have profound consequences, some of which we can't even begin to imagine.  As an example, what happens to Big-Box Brick-and-Mortar Stores when customers routinely purchase commodity consumer consumables over the internet?  What happens to continual consumption (purchase) of consumer durables after somebody figures out they can make a bloody fortune by junking planned obsolesce and receive long-term income from parts and service?  

A major change in Communications must lead to other major changes, across the board.  See what happened after the invention of the moveable type, as an obvious 'bit of proof.'  

Granted TPTB, who became TPTB under the previous circumstances, are going to do everything they can to prevent a phase transition.  However under foreseeable meta-changes, e.g., Global Warming, I think, in the end, there is bugger-all they can do about it.  

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Tue Mar 12th, 2013 at 02:14:23 PM EST
[ Parent ]
I think anything like EU-as-political-project is unlikely if the EU collapse, but for another reason. The EU is as a project to build a federal European state a project that tries to create and depends upon a European identity. And when those fail competing identities are strenghtened, which would be the member states as Neuro/Seuro identities are not developed. If the project returns in force it takes a generation or so.

So if EU fails I predict member states going their own ways with overlapping, weaker intergovernmental collaborations.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Tue Mar 12th, 2013 at 04:21:30 PM EST
[ Parent ]
Why should Russia care about the Baltic? The Arctic is the future!

I distribute. You re-distribute. He gives your hard-earned money to lazy scroungers. -- JakeS
by Migeru (migeru at eurotrib dot com) on Sun Mar 10th, 2013 at 07:46:00 PM EST
[ Parent ]
The Baltic is their only sea route on their west coast.  Somebody in Russia thinks that is important because they held onto the Kaliningrad Oblast.  

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Tue Mar 12th, 2013 at 01:36:39 PM EST
[ Parent ]
In this respect as well, the Arctic may be the future...

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Mar 12th, 2013 at 02:30:43 PM EST
[ Parent ]
I don't dispute it.  

I'm saying it's not an Either/Or situation.  I submit Russia can manage to do two things at the same time.  

:-)

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Tue Mar 12th, 2013 at 02:36:06 PM EST
[ Parent ]
any supra-national Baltic Sea organization that includes Germany and excludes Russia would have the latter freaking out

One of the reasons we should fear a EZone/EU breakup is that Germany will look for new partners and find them in the East in Russia or even in the SCO (Shanghai Cooperation Organisation), which would dwarf the Anglo-Saxon trade empire. Both China and Russia will be among Germany's most important trading partners and German industry will depend on Russia and Central Asia for resources.
In fact the very raison d'être for the EU and the EZone is France's determination to "bind" Germany to continental Europe.
by The European on Mon Mar 11th, 2013 at 07:52:13 AM EST
[ Parent ]
This analysis raises a number of questions:

a) Under what geopolitical model is a Sino-German trade bloc possible independent of the American empire?

b) What does Germany offer as third wheel of a Sino-Russian trade bloc?

c) In which political universe is Germany going to accept being the (very) junior partner in a Russo-German trade bloc?

d) In what universe is the US going to tolerate a Russo-German trade bloc (remembering that the US has a number of current and potential clients in the ECE buffer states who will be more than eager to play spoiler on their behalf)?

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Mar 11th, 2013 at 03:50:12 PM EST
[ Parent ]
My mental model breaks Europe up "naturally" into the basins of the various seas: Baltic, North Sea, Mediterranean and Black Sea. There are a few remaining landlocked countries: Switzerland, Austria, Czechia, Slovakia, Hungary, Serbia, Belarus. Those can be satellites of the regions around them, or not. Right now, I see Czechia as almost as independent-minded as Switzerland, for instance. And the same may be true of Serbia or Belarus.

If you want Germany and the Netherlands in the same economc bloc, we're looking rather at the North Sea basin: Germany, Netherlands, Belgium, France, UK, Norway, Denmark. But that replicates the situation with the old European Community (minus Italy) and the EFTA (UK, Denmark, Norway, etc). It didn't work out then (the EFTA countries remain outside the EU or are eurosceptic or uncommited members of it) so why should it work out now?

I distribute. You re-distribute. He gives your hard-earned money to lazy scroungers. -- JakeS

by Migeru (migeru at eurotrib dot com) on Sun Mar 10th, 2013 at 07:28:31 PM EST
[ Parent ]
Human society, including economics, isn't natural. And an old name for the north sea in Britain was the german ocean. Anyway we could look at rivers: A federation of the Rhine would include Switzerland, Benelux, France and Germany. Almost the six founding members

That said, I just looked at current trade. And there Austria, the Netherlands, Belgium, Luxemburg, Switzerland, Czech Republic, Slovakia, Poland, Slovenia are more dependent on trade with Germany then any country in the Baltic, with the exception of Denmark. Austria e. g. 38.2% of imports came from Germany and 31.2% of imports did go there.

And of course the largest trade partner of Germany is still France.

German exports in 2012:

  1. France
  2. USA
  3. UK
  4. Netherlands
  5. China
  6. Austria.
  7. Italy
  8. Switzerland
  9. Belgium
  10. Poland

The first Baltic countries are Sweden (14) and Denmark (18). Out of the 8 european countries mentioned one isn't a member and two don't use the euro.

Now, if a North Euro without France or even Italy would make sense is another question, but the economic facts as of now don't hint to a Baltic Empire. The Hanseatic League won't rise again. :-)

by IM on Mon Mar 11th, 2013 at 05:57:49 AM EST
[ Parent ]
You forgot Liechtenstein. As their anthem used to say (until 1963 - tune is "God save the Queen")
Wo einst St. Lucien

Frieden nach Rhätien

Hineingebracht.

Dort an dem Grenzenstein

Und längs dem jungen Rhein

Steht furchtlos Liechtenstein

Auf Deutschlands Wacht.

Wouldn't a federation of the Danube be more interesting?
by gk (gk (gk quattro due due sette @gmail.com)) on Mon Mar 11th, 2013 at 06:07:36 AM EST
[ Parent ]
I intentionally left out microstates.

I distribute. You re-distribute. He gives your hard-earned money to lazy scroungers. -- JakeS
by Migeru (migeru at eurotrib dot com) on Mon Mar 11th, 2013 at 06:09:46 AM EST
[ Parent ]
And I just forget them.

Danube Federations were very popular in the interwar years. And while the biggest trade partners of Germany and Austria mostly are the same, there is one exception: Hungary.

by IM on Mon Mar 11th, 2013 at 06:17:44 AM EST
[ Parent ]
I quite like this map:


I distribute. You re-distribute. He gives your hard-earned money to lazy scroungers. -- JakeS
by Migeru (migeru at eurotrib dot com) on Mon Mar 11th, 2013 at 06:20:10 AM EST
[ Parent ]
And of course the largest trade partner of Germany is still France.

German exports in 2012:

1.France

That is a fantastic reason for France not to share a currency with Germany.

Imagine a core Eurozone with Germany and France alone, and Germany retaining its 6% current account surplus. If their common currency continued to float freely and the core Eurozone had a neutral current account balance, France would have an 8% current account deficit.

So either Germany gives up its current account surplus or the rest of the world allows the core Eurozone to devalue its currency so that it can run a 3% current account surplus. Or Germany accepts fiscal transfers to France comparable to the size of the current account balances.

As none of the three possibilities are politically plausible, there cannot be a core Eurozone consisting of Germany and France. In fact, there cannot be a Eurozone consisting of Germany and anyone else (as the successive failures of Europe's attempts to fix exchange rates without fiscal transfers over 40 years demonstrate).

I distribute. You re-distribute. He gives your hard-earned money to lazy scroungers. -- JakeS

by Migeru (migeru at eurotrib dot com) on Mon Mar 11th, 2013 at 06:17:42 AM EST
[ Parent ]
No, because imports in 2012:

  1. Netherlands
  2. China.
  3. France.
  4. USA.
  5. Italy

That is a two-way relationship. Note: The Netherlands run a considerable trade surplus with Germany and that is probably the case since the revolt of the Netherlands or so. And this:

"In fact, there cannot be a Eurozone consisting of Germany and anyone else"

Is simply magical thinking.  So Germany couldn't share a currency with the Netherlands because of their unbalanced trade?

by IM on Mon Mar 11th, 2013 at 06:27:58 AM EST
[ Parent ]
NL trade surplus = Rotterdam.
by afew (afew(a in a circle)eurotrib_dot_com) on Mon Mar 11th, 2013 at 06:32:20 AM EST
[ Parent ]
Even that is a tradition; that was the cause of the Navigation Acts after all

German trade surplus with eastern europe = Hamburg

by IM on Mon Mar 11th, 2013 at 06:48:32 AM EST
[ Parent ]
Nope.

The German trade surplus basically happens in the southern half of the country. And that cargo goes to Bremen, Rotterdam and Trias (in roughly that order).

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Mar 11th, 2013 at 03:54:25 PM EST
[ Parent ]
Even if we just look at trade balances the five biggest (trade) surpluses of Germany in 2012 are:

  1. France
  2. USA
  3. UK
  4. Austria
5.Switzerland

Two of these euro countries, three of those countries with a free floating currency.

by IM on Mon Mar 11th, 2013 at 06:31:57 AM EST
[ Parent ]
So the biggest trade surplus of Germany is with France, not just the biggest export figure. My argument stands. If the Eurozone consisted only of France and Germany, France would be in a current account crisis in a few years. The only reason it isn't already is that there are a few dominos to fall before France: Greece, Portugal, Spain, Italy...

I distribute. You re-distribute. He gives your hard-earned money to lazy scroungers. -- JakeS
by Migeru (migeru at eurotrib dot com) on Mon Mar 11th, 2013 at 08:11:28 AM EST
[ Parent ]
So either Germany gives up its current account surplus or ...

No, its the other way around: we have to give up trade deficits. That is the purpose of structural reforms, which are necessary irrespective of whether we have the Euro or not. It has nothing to do with the Euro. The problem is one of adapting traditional societies to the competitive environment of the modern world.
by The European on Mon Mar 11th, 2013 at 07:02:19 AM EST
[ Parent ]
One country can't have a surplus without another country having a deficit. And since the eurozone has largely balanced trade with the rest of the world, the problems of trade surplus and defiicits are internal to the eurozone.



Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Mon Mar 11th, 2013 at 07:08:49 AM EST
[ Parent ]
the problems of trade surplus and defiicits are internal to the eurozone

Some countries like Portugal have had a trade deficit for the last 60 years. That predates EZone and EU membership.
Anyways, jobs in the South are lost to China and the emerging economies not to the North.
The simple fact of the matter is that countries in the South have priced themselves out of low-cost manufacturing without managing the transition to high value added production. That is a structural problem that won't be solved by exiting EZone/EU. That problem cannot be solved by monetary policy.
by The European on Mon Mar 11th, 2013 at 07:31:29 AM EST
[ Parent ]
Some countries like Portugal have had a trade deficit for the last 60 years. That predates EZone and EU membership.
First there was the Bretton Woods gold standard, then there was the European Monetary System, then there was the Exchange Rate Mechanisms ERM I and ERM II. Throughout, Portugal ended up devaluing its currency. If there hadn't been a decades-long policy of fixed exchange rates, maybe Portugal might have had a gradual devaluing of the currency (not a periodic crisis) and a much smaller trade deficit (still a deficit, but within statistical error of zero).

Trying to keep your currency overvalued will produce the trade deficit, and then the devaluation crisis. An overvalued currency, however, is great for the local elite to take their rentier income out of the country.


I distribute. You re-distribute. He gives your hard-earned money to lazy scroungers. -- JakeS

by Migeru (migeru at eurotrib dot com) on Mon Mar 11th, 2013 at 08:00:12 AM EST
[ Parent ]
First there was the Bretton Woods gold standard, ...

First there was the Salazar dictatorship (Franco dictatorship in Spain) which pampered its domestic industry and made it noncompetitive. These traditional structures together with an over reliance on real estate speculation is what's wrong with these economies.
by The European on Mon Mar 11th, 2013 at 08:26:05 AM EST
[ Parent ]
Then why did France devalue serially, just as Portugal did?

I distribute. You re-distribute. He gives your hard-earned money to lazy scroungers. -- JakeS
by Migeru (migeru at eurotrib dot com) on Mon Mar 11th, 2013 at 08:29:12 AM EST
[ Parent ]
The simple fact of the matter is that countries in the South have priced themselves out of low-cost manufacturing without managing the transition to high value added production. That is a structural problem that won't be solved by exiting EZone/EU. That problem cannot be solved by monetary policy.

It must be solved by fiscal policy, and it can only be solved by fiscal policy if monetary policy doesn't work against it.

The EU allows no industrial policy, no independent fiscal policy, and has a monetary policy conducive to deflation, depression and unemployment.

I distribute. You re-distribute. He gives your hard-earned money to lazy scroungers. -- JakeS

by Migeru (migeru at eurotrib dot com) on Mon Mar 11th, 2013 at 08:01:52 AM EST
[ Parent ]
The European:
That is a structural problem that won't be solved by exiting EZone/EU

how can it be solved, in your opinion?

keynesian job creation? government investment of citizens' taxes to provide employment and teach skills to make them productive?

whose fault is it they don't get smart like the germans and invent more saleable stuff for the world economy, or price their labour cheaper than asia's?

if we are in a painful transition period between old and new capitalism, what is the goal the suffering is for?

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Mon Mar 11th, 2013 at 10:04:42 AM EST
[ Parent ]
how can it be solved, in your opinion?

The Andrew Mellon way:

liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate... it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people.


I distribute. You re-distribute. He gives your hard-earned money to lazy scroungers. -- JakeS
by Migeru (migeru at eurotrib dot com) on Mon Mar 11th, 2013 at 10:15:12 AM EST
[ Parent ]
whose fault is it they don't get smart like the germansBavarians and invent more saleable stuff for the world economy, or price their labour cheaper than asia's?
Fixed that for you
Edmund Stoiber once caused something of an uproar when he said "unfortunately, not everyone in Germany is as intelligent as in Bavaria".
(today's Newsroom)

I distribute. You re-distribute. He gives your hard-earned money to lazy scroungers. -- JakeS
by Migeru (migeru at eurotrib dot com) on Mon Mar 11th, 2013 at 11:23:36 AM EST
[ Parent ]
Anyways, jobs in the South are lost to China and the emerging economies not to the North.

Because of the overvalued exchange rate relative to where it would be if the south did not have to subsidize German currency policy.

The simple fact of the matter is that countries in the South have priced themselves out of low-cost manufacturing without managing the transition to high value added production. That is a structural problem that won't be solved by exiting EZone/EU. That problem cannot be solved by monetary policy.

The simple fact of the matter is that "structural adjustment" is making that problem worse, not better.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Mar 11th, 2013 at 04:12:00 PM EST
[ Parent ]
But the accounting is still based on national borders.  Which is a problem nobody seems willing to face.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Tue Mar 12th, 2013 at 02:23:14 PM EST
[ Parent ]
we have to give up trade deficits

Therefore, the Eurozone must run a trade surplus with the rest of the world.

And the rest of the world is going to accommodate that without allowing their freely floating currencies to devalue, exactly why?

I distribute. You re-distribute. He gives your hard-earned money to lazy scroungers. -- JakeS

by Migeru (migeru at eurotrib dot com) on Mon Mar 11th, 2013 at 07:55:58 AM EST
[ Parent ]
So either Germany gives up its current account surplus or ...
No, its the other way around: we have to give up trade deficits.
The surplus country has policy space, the deficit country doesn't. Therefore it's the surplus country that has agency. Especially in a fixed exchange rate regime.

If the surplus country won't play ball, the fixed exchange rate system breaks down. The story of the past, I don't know, 150 years?

I distribute. You re-distribute. He gives your hard-earned money to lazy scroungers. -- JakeS

by Migeru (migeru at eurotrib dot com) on Mon Mar 11th, 2013 at 08:14:56 AM EST
[ Parent ]
No, its the other way around: we have to give up trade deficits.

The sum of all foreign trade must be zero. Ergo, to give up deficits, you must give up surpluses.

That is the purpose of structural reforms,

No, if that were the purpose of structural reforms, then the structural reforms would include confiscatory taxation of extreme wealth, sharp discounting of overvalued currencies, picking strategic industry winners for aggressive state investment, and imposing restrictive joint venture and local sourcing requirements for high-tech imports.

This is not what is being done, therefore the purpose of structural reform is not to do away with trade imbalances (unless you wish to postulate that those who peddle structural reform are all idiots who do not understand elementary import substitution strategies).

which are necessary irrespective of whether we have the Euro or not.

Why?

It has nothing to do with the Euro. The problem is one of adapting traditional societies to the competitive environment of the modern world.

If adapting to the competitive environment of the modern world leaves a large fraction of the population substantially worse off, then why should we not simply throw up protectionist barriers against foreign competition?

Competition is, after all, a policy, not an objective. If we can protect the interests of the bottom three quarters of the income distribution at the "cost" of wiping out the accumulated wealth of the top quarter, then that's a feature, not a bug.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Mar 11th, 2013 at 04:09:43 PM EST
[ Parent ]
The sum of all foreign trade must be zero.

Never going to happen.  Latvia, say, is never going to have a viable domestic automotive industry and Germany, say, is never going to have autarky in food production.  The relative production costs, thus purchase price, for manufactured goods versus agricultural commodities means a steady trade imbalance between the two regions.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Tue Mar 12th, 2013 at 02:34:21 PM EST
[ Parent ]
And still the sum of all foreign trade must be zero, by the magic of double-entry bookkeeping: The exports of one state are the imports of another state. Sum up over the whole planet, and you have zero (so long as the rest of the galaxy does not pay us for the space probes we send them).

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Mar 12th, 2013 at 02:38:37 PM EST
[ Parent ]
Trade is the flow of goods and services thus we need to look at Cash Statements rather than Balance Sheets.  History shows there will always be a larger flow of cash from resource to resource-user regions.  (Tho' I concede the current situation increases that flow.)  Mostly, IMO, from the fact there are many more potential and actual resource regions producing, e.g., wheat, than resource-user regions producing, e.g., iPods.  Also resource regions tend to be over-populated with respect to the per capita current market value of their goods in international trade.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Tue Mar 12th, 2013 at 03:13:57 PM EST
[ Parent ]
Whichever way you look at it, at the macro level it has to net to zero. That's really not controversial, except to German politicians it would seem.

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi
by Cyrille (cyrillev domain yahoo.fr) on Tue Mar 12th, 2013 at 03:52:07 PM EST
[ Parent ]
Surely you mean "fine us for parking the space junk we send them"?

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II
by eurogreen on Wed Mar 13th, 2013 at 08:51:33 AM EST
[ Parent ]
Human society, including economics, isn't natural.
Yes it is. Societies are what humans do. Silly dualist rabbits.
by Colman (colman at eurotrib.com) on Mon Mar 11th, 2013 at 06:23:21 AM EST
[ Parent ]
Humans aren't natural but cultural. The natural human is pretty boring.
by IM on Mon Mar 11th, 2013 at 06:28:46 AM EST
[ Parent ]
Nope. Cultural is natural, for humans and a pile of other animals too.
by Colman (colman at eurotrib.com) on Tue Mar 12th, 2013 at 06:17:55 AM EST
[ Parent ]
Cultural is all the same a big pile of natural for humans.
by afew (afew(a in a circle)eurotrib_dot_com) on Tue Mar 12th, 2013 at 07:16:21 AM EST
[ Parent ]
No other species has external inter-generational memory or the ability to communicate abstractions to anything like the extent humans do.
by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue Mar 12th, 2013 at 07:42:30 AM EST
[ Parent ]
Quite.

No other species (unless our powers of observation are too limited for us to notice) has anything like the volume, complexity, and duration of human culture.

by afew (afew(a in a circle)eurotrib_dot_com) on Tue Mar 12th, 2013 at 08:16:18 AM EST
[ Parent ]
Which makes it not natural?
by Colman (colman at eurotrib.com) on Tue Mar 12th, 2013 at 10:31:56 AM EST
[ Parent ]
Is that what I said?
by afew (afew(a in a circle)eurotrib_dot_com) on Tue Mar 12th, 2013 at 11:14:57 AM EST
[ Parent ]
(Some) etologists define culture inclusively as socially transmitted behaviour. Of course economics is cultural. Of course culture is natural for humans. Of course nonhuman animals may have culture.

I distribute. You re-distribute. He gives your hard-earned money to lazy scroungers. -- JakeS
by Migeru (migeru at eurotrib dot com) on Tue Mar 12th, 2013 at 08:01:47 AM EST
[ Parent ]
German exports in 2012:

That is history. What is important for future policies will be future trade flows. The top ten destinations for German exports in 2020 are estimated to be as follows:

  1. China (15.6%)
  2. France (8.8%)
  3. Russia (7.0%)
  4. Netherlands (6.5%)
  5. US (6.4%)
  6. UK (5.6%)
  7. Poland (5.2%)
  8. Austria (5.2%)
  9. Switzerland (4.6%)
  10. Italy (4.3%)

China will become the most important trade partner. Russia will overtake the US. France will loose it's top position and the South will be insignificant.

But the determining factor for the formation of a German-centered trade block following an EZone/EU collapse would be the question where Northern and Eastern countries export to. I'm pretty sure that to most Germany will be the most important export market.

by The European on Mon Mar 11th, 2013 at 06:50:51 AM EST
[ Parent ]
I admit I didn't link either because I did find only german language sources. My source was the german statistical office, though. That said, I would like a source for that claim.

And 2012 is of course the present, not the past, except in a hyper literal sense.

Even so, this guess includes six members of the EU and Switzerland.

by IM on Mon Mar 11th, 2013 at 07:00:15 AM EST
[ Parent ]
I would like a source for that claim

It's a GS projection:

http://www.goldmansachs.com/s/GMeT_othermailings_attachments/63488662514238375059101.pdf

And no, trade figures for 2012 do represent the past of business that has been completed and payed for. File closed. Current order books and business plans have to take into consideration a horizon of 2020 at the very least.

by The European on Mon Mar 11th, 2013 at 07:14:38 AM EST
[ Parent ]
That is nonsense. We know about the recent past, in this case 2012. We only guess about the future. So if we want to know, the recent past is closest to the present we can get.

And Goldman Sachs - in 2007 they probably made projections how Ireland would grow into the largest european economy or something.

by IM on Mon Mar 11th, 2013 at 07:51:14 AM EST
[ Parent ]
You can wipe your arse with Goldman projections. If you have a particular hatred for your gastrointestinal flora.

Come back with a halfway credible source and then we can talk.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Mar 11th, 2013 at 04:13:16 PM EST
[ Parent ]
What would a credible source look like? Anyone making projections for 2020 is pulling numbers out of orifices usually reserved for excreting more solid waste.
by generic on Mon Mar 11th, 2013 at 04:42:10 PM EST
[ Parent ]
Well. I cannot categorically refuse to consider the possibility that there might, in fact, be a useful projection around somewhere that reaches all the way to 2020.

Proving a negative is hard, after all.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Mar 11th, 2013 at 04:44:18 PM EST
[ Parent ]
China will become the most important trade partner. Russia will overtake the US. France will loose it's top position and the South will be insignificant.
So Germany will export 6% of their GDP to the BRICs, and in order for the Eurozone as a whole to maintain a neutral current account balance, the rest of the Eurozone will import 4% of their GDP from the BRICs. And then Germany will tell everyone that because they don't export directly to the rest of the EZ, the rest of the EZ's deficit is none of its concern.

But the fact is, the rest of the world cannot be relied on to keep the Euro undervalued so it can avoid running a neutral current account balance. Because there's no way to coerce the BRICs, politically, to overvalue their currencies.

I distribute. You re-distribute. He gives your hard-earned money to lazy scroungers. -- JakeS

by Migeru (migeru at eurotrib dot com) on Mon Mar 11th, 2013 at 08:08:10 AM EST
[ Parent ]
Incidentally, my mental model is more 1914, which is suiting since we are soon to celebrate its 100th anniversary.

My analysis of events is confirmed by Jean-Claude Junkers, the former head of the Euro group. In a newspaper interview he said today that nobody should be about any illusion about the question of war and peace in Europe having been decided once and for all. He also noted that the situation in Europe in 2013 is remarkably like the situation in 1913. It is comforting to know that at least somebody is listening to me.
by The European on Sun Mar 10th, 2013 at 04:06:13 PM EST
[ Parent ]
Juncker and the Eurogroup have, of course, been wrong about just about everything else they have said publicly since before the beginning of the present depression.

So his value as an authority is, perhaps, somewhat questionable.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Mar 10th, 2013 at 05:39:51 PM EST
[ Parent ]
Juncker started talking (some) sense in his farewell appearance in the European Parliament.

I distribute. You re-distribute. He gives your hard-earned money to lazy scroungers. -- JakeS
by Migeru (migeru at eurotrib dot com) on Sun Mar 10th, 2013 at 07:18:34 PM EST
[ Parent ]
See Finally telling the truth - Juncker's shocking farewell statement to the European Parliament (Eurointelligence, 11.01.2013)
Now he is talking, shortly before leaving office. And this time, no one accuses him of lying. Jean-Claude Juncker delivered a furious valedictory speech at the economic and monetary affairs committee of the European Parliament. This was picked up by the Spanish press in particular. Cinco Dias calls Juncker's intervention "a furibund attack on Berlin". The BBC has footage of the full 90-minute session. He said:

  • that he disagreed with the rhythm of adjustments "imposed on certain countries", and that the Eurogroup has not made political valuations of the adjustments which too often were just rubber-stamping recommendations by the Commission, ECB and IMF "whose democratic legitimacy is not clear".
  • that "the choice was made to make the adjustment fall on the weakest";
  • that certain countries who benefitted from capital flight out of Greece were not doing anything about it;
  • that the mistake has been made to "underestimate the drama of unemployment" and to "give the impression that Europe is only there to punish" and by not rewarding the "program countries" for following through with their adjustment plans;
  • that his successor would be well advised to "listen to all Eurozone members on an equal footing" even if it takes a long time to go through a meeting, or else "we'll see the results in 6 months if my successor doesn't";
  • that the ESM should have "some degree of retroactivity" and be able to "recapitalise banks" and not just address "new problems that may apply in the future";
  • that the results of the latest European Council were "disappointing", because "the original idea was to present a road map for the following decades";
  • in respect of economic policy coordination, that "we can't carry on with a system where the Frankfurt monetary arm is strong and the economic policy arm is feeble" and "those who refused [in 1997] are now the largest voices calling for this idea". And "we have to make sure that every time a government recommends a structural reform it is explained to the Eurogroup and that the ministers in charge explain the consequences and others say what the consequences of such reforms will be  on policy in their countries";
  • "there's a need for all member states to agree on a 'minimum social wage'", a need for "a basis of minimum social rights for workers", as "otherwise we're going to lose the support of the working classes". There's a need to "agree on the elements of solidarity", "principle and ways and means of bank resolution", and "a deposit guarantee scheme";
  • that the Green party in Luxembourg will vote against the Fiscal Treaty because "they are fed up with what they see as a German diktat";
The BBC video is quite good.

I distribute. You re-distribute. He gives your hard-earned money to lazy scroungers. -- JakeS
by Migeru (migeru at eurotrib dot com) on Mon Mar 11th, 2013 at 05:38:44 AM EST
[ Parent ]

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