Germany’s choices

All countries have choices — even our own, despite assertions to the contrary — but some countries have more choices than others.

Faced with solvency problems around the European periphery, and quite possibly in core banks as well, and also with the underlying reality of intra-Eurozone imbalances, how should Germany react?

Continuing to do as little as possible, and hoping that we can all muddle through, is one option. This risks destroying the euro.

Having the ECB step in via some sort of overt or covert QE is another.

Moving towards fiscal burden-sharing, implying deeper Eurozone integration, is another.

And a big-bang approach to restructuring debts in Europe is another.

In my view some combination of the last three options is probably optimal, if you want to keep the euro. But none of these options are particularly attractive, one assumes, from a German perspective. German industry would be a major loser if the Euro collapsed. The ECB option could undermine the credibility of the euro as a strong currency. Burden-sharing is going to cost the German taxpayer money. And as for the collective restructuring option, Germany is a creditor country.

Today’s article in the FT by Frank-Walter Steinmeier and Peer Steinbrück is a good contribution, from a pro-EU-integration perspective, that can help us see how one section of the German political spectrum views these trade-offs. They are attached to EMU, and so rule out doing nothing. Nor do they like the prospect of the ECB becoming ‘Europe’s “bad bank”‘, a nice political turn of phrase. Unlike Merkel, however, they understand that ruling out these two options has logical implications, pushing the burden of adjustment onto the other two options. For Steinmeier and Steinbrück, this means haircuts for the periphery and the introduction of Eurobonds:


In the case of Ireland, abolishing full state guarantees for private banks would allow their debt to be cut off at the root of the problem, while also letting private investors take their fair share of the burden. A new European framework for bankruptcies of financial institutions should support this.

There are conditions of course:


empowering European institutions to establish tighter controls over fiscal and economic stability, alongside common minimum standards on wage and welfare policies, as well as capital and corporate taxation. In short: we need European government bonds, but we must put an end to beggar-thy-neighbour policies and harmful tax competition within the eurozone too.

It is perfectly understandable that this would be the German position, and anyone who thinks these issues are going to go away is living in cloud cuckoo land. (What our position should be if presented with such a bargain is an interesting question: plenty of costs and benefits on both sides to be considered, which is why God gave economists two hands.)

On the other hand, the Steinmeier-Steinbrück reforms would probably require a new Treaty. Anyone on the Continent who thinks that there is a hope of getting a referendum passed in Ireland, so long as the ECB and EC continue to rule out burden-sharing with senior bondholders, is probably also living in cloud cuckoo land. Time is running out as regards the remaining unguaranteed debt: federalist Europeans should logically be arguing for this issue to be dealt with, satisfactorily, as quickly as possible.

63 thoughts on “Germany’s choices”

  1. Interesting post and article, effectively. I think Mme Merkel is constrained in what she can say in public by her position and the need to navigate over the remaining term of the government’s mandate.
    Re “no hope of getting a referendum passed in Ireland”; excuse my ignorance, but what referendum is that meant to be ?

  2. Isn’t economics about choices over scarce resources. The ‘there is no alternative’ argument is simply bad economics.

  3. It is coming very close to decision time. Given that the decision will change everything for Ireland’s busted banks, does today’s vote mean anything?

  4. @ Kevin

    Re. ECB intervention, you state

    “The ECB option could undermine the credibility of the euro as a strong currency”

    As the Euro’s credibility is shot anyway, is it possible that the ECB option might signal to the markets that the Euro is here to stay and add to its credibility, especially as the Fed is currently engaging in QE2 and the BoE is reluctant to raise rates despite rising inflation.

    In any case, from a German exporters point of view, wouldn’t a weaker Euro be beneficial?

    Re. tax harmonisation and eurobonds.

    Tax harmonisation and fiscal union don’t necessarily have to go hand in hand and tax competition works within other countries (e.g. Switzerland) although I accept that the Germans would not buy this either.

    Any analysis of tax harmonisation should focus on the total tax take and the not just on the headline rate. As has been pointed out here before, Germany affords large corporates various tax breaks despite its high headline rate and has a comparable corp tax take to Ireland. It is possible that if it came to it, we could negotiate a modest uniform corp tax rate, while maintaining the current corp tax take as a % of GDP. Given our labour market flexibility we should be able to maintain a reasonably strong advantage over our EZ neighbours.

    Having said that, fiscal union and a Eurobond would be far more likely to result in a germanicized Europe rather than a europeanized Germany. This will be unappealing for most EZ members and therefore, Germany will probably not get all the assurances it will require in order to sign-up to a Eurobond.

  5. Presumably by “beggar-thy-neighbour policies ” they do not mean an ECB interest rate policy that always suits Germany?

  6. The bit of Steinmeier-Steinbruck that needs a new treaty is fiscal harmonisation. The resolution of the banking mess does not require fiscal harmonisation. Tax competition keeps some taxes up too, to compensate for the low ones.

    Either success or failure by EU institutions constitute arguments for greater integration, it would appear. What’s missing from the following save-the-Euro package?

    1. Haircut bank bondholders, where excess lending to banks was the problem.
    2. Haircut sovereign bondholders where there was excess lending to governments.
    3. Centralise bank supervision.

    No unearned extra powers for Brussels, and no need for Euro-bonds.

    The enormous moral hazard created by the response to date would be adressed at least retrospectively, and the bond vigilantes assigned their proper role, now that they are paying attention.

  7. @Colm

    I agree with your suggestions as the most sensible and practical, but…

    1) haircuts on bank debt will lead to massive bank recap in Germany
    2) haircuts on sov debt will make it very difficult for Italy, Spain and Portugal to remain in the market.
    3) bank supervisors couldn’t even agree on a decent Basel III framework (mostly because of the German position).

    So, all in all, I am pessimistic that any of your points will be implemented.

  8. I’m for QE (of sorts). I’m against rushing through Eurobonds.

    Various European integration projects have been too rushed. Forcing disparate economies to share a common monetary policy doesn’t look too smart right now.

    @ Ciaran O’Hagan,

    Bank in 21 September ’10, your Irish Times article was quite bullish.
    “Ireland’s credit for now is as safe as houses. The Exchequer is swimming in cash. And it has ultra-strong backing from the European authorities. A 6pc+ yield today on government bonds will prove a bargain, as long as the Government digs the Exchequer deficit out of its hole. ” http://www.independent.ie/opinion/analysis/our-credit-is-safe-as-houses-but-we-must-plug-the-deficit-2345498.html

    Has your opinion changed?

  9. “In the case of Ireland, abolishing full state guarantees for private banks would allow their debt to be cut off at the root of the problem, while also letting private investors take their fair share of the burden.”

    Hang on a second, the only people who are still guaranteed are people who loaned our banks after the crisis started on the basis that they were getting a guarantee.

    The others, who put their money in before the guarantee and availed of the blanket guarantee (now expired), were replaced by the ECB. I am not aware of the ECB deposits being guaranteed although I am open to correction. Isn’t letting the banks default on the ECB deposits the logical thing to do? The ECB operates by its own rules in its dealings with national banks. That was their call.

  10. Herren Steinmeier and Steinbrück want a more European Germany rather than a German Europe, but it appears their voters have decided they are yesterday’s men. That seems to mean (as per Colm McCarthy’s recommendations) no more transfer of powers to Brussels, a profound unwillingness to prejudice any aspect of their successful economic model (which has a buy-in by most of their neighbouring countries) and a deep reluctance to spend treasure to bailout any of the peripheral laggards.

    Some deal will be done to maintain the EZ and the EU, but it will be dictated by a more hard-headed Gremany than the one Europe has relied on for more than 50 years. Any threats by Ireland to throw its toys out of the pram, might find the pram left out in the cold.

  11. *IRELAND’S PARLIAMENT BACKS IMF/EU ACCORD
    *IRELAND’S PARLIAMENT BACKS IMF/EU ACCORD BY 81 VS.75

    Eh, so who didn’t show up?

  12. @Paul H

    “Any threats by Ireland to throw its toys out of the pram, might find the pram left out in the cold”.

    +1

    @ KO’R

    I’m intrigued by your view that we still have choices. I think we have two: play or don’t play. Some of the debate about other choices, IMHO, verges on the simplistic: a bit like children who don’t like the outcome of the irrevocable choices we a have already made. Like immature children we have failed to understand that every choice does involve consequences, some admitedly unintended. But consequnces nonetheless.

    It is fair to rail about the rules that are being made by others. But thems the rules. It is wrong to pretend we can change the rules at half-time. Play or don’t play.

  13. ‘Continuing to do as little as possible, and hoping that we can all muddle through, is one option. This risks destroying the euro.’

    Nouriel Roubini comments on the above option-

    “The risk of something disorderly happening is still significant,” he explained. “At the moment, the policy is still lend, pray and hope this is a liquidity problem and not a solvency problem.”

    Lets hope they come up with something substantial tomorrow but I wouldn’t be overly optimistic.

  14. The phrase “harmful tax competition” reminds me of the New Zealand referendum question that sought to legalise “a smack as part of good parental correction”! It is a dangerously ambiguous phrase that allows its framers to beg the question.

  15. From afar it looks like Germany is about to get mugged by the Europroject. As
    noted EMU is in trouble and the pauper states are looking with hungry eyes at
    Germany’s fat wallet. Merkel is being blamed by all for being stingy and now with this FT article the German opposition parties are joining the chorus and claiming Germany is being isolated. No matter that when you have a fat wallet being ‘isolated’ from those who don’t can be a good thing.

    I see that a financial transaction tax is being mooted about for discussion. I am curious about this. How much could this raise and could not the revenue derived from it be used to ‘cushion’ the EU mandated austerity programs it is enforcing on the PIGS. That is, use such tax revenue for infrastructure improvements to boost the lagging competitiveness of the periphery. I note Ireland, e.g., does not rate high in this category amongst European nations.

  16. Simpleton,

    “Any threats by Ireland to throw its toys out of the pram, might find the pram left out in the cold”.

    So unilateral burning of Senior bank bondholders is verboten then?
    When should not try the Sheriff Bart maneouvre from Blazing Saddles ?

  17. @tull,

    Though Simpleton has agreed me with, I think I should take the rap for this. My point, which I’ve made previously, is that the willingness of core EZ politicians and voters (primarily, but not exclusively, German) is expend treasure to relieve economic pain in the peripherals is extremely limited. And they’ve probably had a bellyful of Irish hubris and bragging over the last decade. Any hint that Ireland might be contemplating unilateral actions – or turning its nose up at what might be on offer – could be greeted with a clear indication of where the exit is.

  18. @tull
    Your knowledge of legendary threatened suicides is remarkable.

    We can review the game we should have played. Fun but essentially pointless unless you are trying to learn lessons rather than decide where to hurl your pitchfork.

  19. BIS data on bank exposure to the peripheral countries apparently presents an exaggerated picture.

    The Bundesbank says German banks exposure to Ireland is €25bn.

    A Deutsche Bank report says that banks’ exposure to the current Eurozone hotspots seems to be limited if measured against total bank assets.

    http://www.finfacts.ie/irishfinancenews/article_1021232.shtml

    @ bazza

    As the Euro’s credibility is shot anyway…

    Any analysis of tax harmonisation should focus on the total tax take and the not just on the headline rate. As has been pointed out here before, Germany affords large corporates various tax breaks despite its high headline rate and has a comparable corp tax take to Ireland.

    There are 2 main reserve currencies and the EU is China’s biggest trading partner.

    China for good reasons doesn’t want the renminbi to become a reserve currency, while the other 2 take their turns in being ‘shot.’

    In the past decade, profits of US companies have been increasingly concentrated in Ireland, Netherlands, Luxembourg and Singapore.

    As a group, Canada, France, Germany, Italy, and the United Kingdom saw the profits of U.S. companies operating in their borders fall 25%-from $72 billion in 1999 to $54 billion in 2002 (a drop from one-third overseas profits in 1999 to a little more than one-fifth in 2002). While these five countries accounted for 44% of foreign sales, 44% of foreign plant and equipment, and 56% of foreign employee compensation in 2002, they accounted for only 21% of foreign profits. In countries where effective tax rates have fallen, profits of U.S. companies operating within their borders have risen significantly.

  20. As a matter of interest, how did the Eurozone banks’ exposure to Icelandic banks compare to their present exposure to Irish banks? How did it compare to the ECB’s current exposure to Irish banks? How come the collapse of the Icelandic banks did not cause contagion?

  21. Zhou,

    the Icelandic banks collapsed at around the roughly same time as Lehmans so they got lost in the fog of war. If I recall correctly, the Permo had a relatively large exposure but everybody owned a piece of them

    http://www.youtube.com/watch?feature=player_detailpage&v=g2oz2PHdzlA

    If I recall correctly, the Duck in the above commercial owns 500m of Irish senior bank debt.

    Simpleton,

    Like me, i sense you vacillate on the issue of BSBH. As Prof O’Rourke sez, that is why we have two hands. However, you are honest enough to admit that if we do a Sheriff Bart we better prepare for the consequences. That would require an emergency budget to cut 15bn now, a huge programme trade to put the NPRF into an Iranian bank deposit a/c & probably the emergency imposition of exchange controls.

  22. The Euro was/is a political rather than an economic project. It needed a very good economic climate, leading to obvious improvements in living standards in all the countries concerned before it moved to the next stage of further integration. This has not happened and there is no popular support outside the European political class for a federal state.
    It is very unlikely that the types of measures imposed on the peripheral states can be maintained in democracies or that treaty changes, allowing burden sharing, could be passed in the core states.
    Some way of managing the exit from the Eurozone of Spain, Portugal, Greece and Ireland needs to be found. Possibly this will lead to a restructuring of the EU itself in which case the UK will probably leave after agreeing “Associate” Membership, as it is the largest market for Germany and France.

  23. As zhou wonders in a post above, and various (me included) have previously wondered, how much of the bank debt that we’re now faced with covering is not covered by either a sovereign guarantee, or owed to the ECB, or both?

    Steinmeier and Steinbrück feel that the pain of lending to our idiot banks should fall on the idiot lenders and not on the Irish taxpayer (or German taxpayer), but isn’t it already mostly too late for that?

    If we – or our banks – default on the ECB, then the ECB needs to be recapitalised by the Euro states, i.e. taxpayers.

    If someone loaned money to an Irish bank after the guarantee was introduced then I see very little moral grounds for defaulting on that debt and claiming that this is an appropriate thing to happen to risk-seeking-investors.

    Is even Steinmeier and Steinbrück’s proposal based on closing a gate where the horse has already bolted?

  24. Kevin O’Rourke.
    Thank you for posting the FT article from two well respected politicians. It is the most encouraging article that I have read, even more so as it comes from Germany. It has most of the ingredients for success.

    1. Leadership and direction
    “Now we need a signal that Germany wants a more European Germany, rather than a more German Europe. ”
    2. Takes Initiative. “The time for stumbling through the euro crisis is over. Piecemeal approaches …”
    2. Assigns responsibility. Bank bond holders to take losses.etc
    3. Solidarity. A guarantee od State bonds, even though as we know from Ireland, guarantees are to be avoided. Nevertheless the principle of solidarity is evident.
    4.Challanges the hardliners in the ECB. In fact I read it as a direct challange to the disastrous policy of the ECB hardman Axel Weber.
    5. I don’t know enough about the eurobonds to comment but they are seen as only one element of a package.

    This is the most encouraging article on the banking/ economic crisis that I have read to date.

  25. Hugh Sheehy: “If someone loaned money to an Irish bank after the guarantee was introduced then I see very little moral grounds for defaulting on that debt and claiming that this is an appropriate thing to happen to risk-seeking-investors.”

    Scrambled eggs cannot be unscrambled. The promisses made by the government evidently exceed what can be delivered. The moral problem is to determine who gets less than they were promissed. I don’t think there is any way to duck that, other than taking the line that we are a baby in a pram who must be quiet and leave it to Nurse to decide what is best.

  26. @ Ahura Mazda
    Every article I’ve written over the past 2-3 years has been a plea for austerity in order to avoid much worse. Idem other sovereigns. And by austerity, I don’t mind hysterity – in the case of Europe, I mean commitment to treaty obligations as per the SGP.
    The European Commission foresees a public deficit for Ireland again in the double digits for Ireland relative to national income in 2011. That’ll be the third year in a row. Ireland over the past 3 years has already seen the highest ever net deficit per capita, per worker, per whatever, ever in absolute terms, anywhere, anytime. And that’s before we even get on to the costs of the incumbent Irish government to support domestic banks.
    As for ‘safe as houses’, I think anyone in Ireland can appreciate the ambiguity of that statement. One average house I know well in an average Dublin housing estate is down some 60% since peak. Not a safe investment.
    Last September (before that article) was the time when the official talk saw a major change, towards meeting budget targets measured in billions, just when a renewed commitment to meeting the convergence programme agreed with the EC was more critical than ever.
    I was surprised by how quickly the EU and the IMF did take control in the end. I did see that outcome as avoidable – not just in economic but also in political terms. And i thought the government’s sense of self-interest would have led it to do the necessary.
    Today it is still true that the Exchequer is swimming in cash. But less cash can lead to more discipline. I wrote an article here back in September too saying such holdings are “unusual among sovereigns. However this is also very much a double edged sword. It buys the country time to get its affairs in order. But it also gives governments the opportunity to just dig a deeper hole for itself”. And it is still true today that Ireland has ultra-strong backing from the European authorities, and now the IMF. The alternative would have been ‘tough love’ policies. If we’d gone that road from the very start (something which the US has had more success in doing), economic prospects I reckon would be far better today.
    I’ve argued for the past years in favour of tough action, only to be told it was ‘too painful’. The dwindling number of options are not only ‘too painful’, but become more threatening and probably more painful, as long as the tough decisions are continually put off.
    As Steinmeier and Steinbrück put it “In the case of Ireland, abolishing full state guarantees [Zhou, I think they mean “support” here, not gtees] for private banks would allow their debt to be cut… , while also letting private investors take their fair share of the burden.” S&S clearly envisage (from the latter part of the sentence) default on bank debt (as Hugh Sheehy notes, and so myabe not quite verboten, as Zhou suggests). That would still help protect the sovereign, even if the potency of such action is dimished with each new buyback, redemption and coupon payout. Burden sharing measures mentionned by S&S (e.g. e-bond and reprofiling of government debt, or Colm’s suggestions) must be accompanied by responsible fiscal policies, as I read S&S. And they’re right. In the case of Ireland, that requires the partying in public finances to come to a sharp end, with consequences for living standards.
    What surprises me just now is that the political forces outside the present government don’t lay the figures bare. I’d have thought it is very much in their longer term interest, if they are responsible, to call a spade a spade, and prepare the public for the very tough choices that lie ahead.

  27. I wonder what a Austrian German thinks………………….
    Hochreiter: If the Euro Were Backed by Gold, One Ounce Would Cost …

    It is becoming obvious that the ECB was created to protect and enlarge the shadow banking sector through criminal monetory hyperinflation and subsequent asset price inflation – enriching its clients.
    This monetory system is coming to a end – it came to a end when these criminals created massive non-productive loans on their books – we just did not know it as we were obsessed with fiscal fetishes created by the ECB to prevent treasuries cutting in on their private debt party.
    Its over – hyperinflation is now baked in the cake – now it is only a question of when it is cooked.

  28. @Ciaran O’Hagen

    ‘And it is still true today that Ireland has ultra-strong backing from the European authorities, and now the IMF. The alternative would have been ‘tough love’ policies. If we’d gone that road from the very start (something which the US has had more success in doing), economic prospects I reckon would be far better today.’

    Ultra-strong backing?
    Tough-love alternative?
    Success of US ?

  29. If Ernst & Young’s EZ growth forecasts report for Ireland, -0.8% 2011, +0.8% 2012-14 (pa, ave,), is any way accurate, the IMF/EU/4yr Plan will fail. But not without further disastrous dimunition of Ireland’s prospects & considerably more undeserved impoverishment. Given the strategy of ‘austerity’ everywhere, E & Y’s forecast may even be optimistic.

    And if the present efforts by EU/ECB are any guide of their approach to other EZ states, it’s when, not if, the EZ unravels badly.

    Considering the present fix a done deal, so let’s ‘just move on’, is therefore more likely than not to be another appalling mistake to add to the littany of incompetent global economic management thus far. Not just for Ireland, tho’ ‘banjaxed’ seems a fair description, but for the EZ, rest of EU & beyond.

    So something +must+ be done, the sooner the better for Ireland, & frankly, if needed, the ‘default & exit’ card should be applied to our EZ/EU ‘partners’ in any way that gets their attention. A proper resolution is demonstrably in everyone’s interests too.

    It’s high time the interests of ordinary citizens were asserted over those of the financial sector. If not done now, it’s hard to see that ever happening.

    It’s arguable Ireland’s bank guarantee was granted on a fraudulent basis & the banks at that point were insolvent, which fact was not declared. (And last time I heard, continuing to trade on that basis is illegal.)

    The creditors at that time should be forced to aknowledge those facts & accept appropriate haircuts.

    Picking up on Kevin’s ‘QE’ point, Richard Douthwaite (Feasta) has proposed an interesting ‘Deficit Easing’ solution here: (pdf download)

    http://www.feasta.org/forum/viewtopic.php?f=13&t=956#p1579

    Essentially, funds are ‘gifted’ not to banks, but to EZ governments in proportion to population, with conditions perhaps applied to their disbursement.

  30. Ciaran,

    “What surprises me just now is that the political forces outside the present government don’t lay the figures bare. I’d have thought it is very much in their longer term interest, if they are responsible, to call a spade a spade, and prepare the public for the very tough choices that lie ahead.”

    No, if they get more than a couple of yards ahead of the public the leadership elastic band snaps and they don’t get their turn in office. They way Ireland works I reckon half way through the next parliament maybe.

  31. @Ciarán
    Political forces outside the govt are still trying to convince the electorate that if they get in, they can make everything ok again.

    There is no political motive (or incentive) to lay figures bare, or to tell anything like the truth.

  32. @all

    Europe is a bit all-over-the-place politically at the mo – I go with the BIG solution http://www.irisheconomy.ie/index.php/2010/12/10/eichengreen-and-the-european-commission-on-haircuts/#comment-107041

    e-bond, bank haircuts, some socialization throughout Europe. A price for small peripherals unfortunately ahead of the curve to pay. The ongoing Tango between Angela and Nicolas, and the unilateral nature of joint tango directives, represents a wall of power that will only change, if at all, in one fell swoop of an overniter. 2012 before French election; 2013/4 before a German one …. so others and markets or maybe even DSK might have to force the issue. I never really took too much notice of ‘nurses’ during the early years (a most amazing discovery in later yrs of course) nor did I ever leave meself without the means of kicking the pram – a small well tied boot (-;

    Who is representing the Irish at these meetings? Do we have positions? Who are we forming alliances with? Why do we pay EuroMPs? What are they doing? How’s the form in the Parliament? etc Anyone looking for an army of half a million paddies/particas on a short term contract/ etc

    On Europe, and Euro, I’m probably far more optimistic than I have any reason to be … and I suppose I have to thank the history of German thought for that – bit like Bishop Brennan kicking Nietsche up the arse (-;

  33. The holy of holies, sacred and untouchable, our one trick pony the 12.5% corporate tax will not last long in the political turmoil that lies ahead. A lot of sacred cows will be slaughtered in the next five years. Faith is lost, politicians are discredited that is the recipe for chaos out of which will emerge a new order. The IMF, ECB and every government in the EU are well aware of what is in store for the failed states. They also know that the odds of one or more states withdrawing from the Eurozone are quite high. Ireland playing its quaint referendum games will be seen for the bluff that they are.

  34. Herr Steinbrück as finance minister had made Angela Merkel seem like Frau Charm!

    There has been much discussion on haircuts but little specifics: so what is expected on senior bank debt? 50%, 75% or 100%?

    On sovereign haircuts, Spain and Italy would also be burning their own investors and likely private sector pensioners.

    This would be a lesser problem in Ireland, as the ratio of local debt is about 25%. However, all you public sector guys on your lavish pay-as-you-go system would not be affected; those in the private sector have already seen negative real annual average returns over the past 10 years and that ain’t going to change soon.

    In the good times, I thought it a little weird that staff of the Pensions Board on guaranteed payouts, used to turn up at race meetings urging the punters to sign up for pensions while the Government refused to support a mandatory system. The punters who signed-up have been burnt and may await a double whammy.

    As to Colm McCarthy’s point about haircutting “sovereign bondholders where there was excess lending to governments.”

    That would be an interesting issue to prove.

  35. Today’s UK Guaridan has an interesting overview:
    http://www.guardian.co.uk/business/2010/dec/15/euro-fights-for-life-after-traumatic-years

    I found this reported observation by a retired German serviceman who keeps a shrine to the Deutschmark to be quite perceptive.

    “Of course, the southern countries have got big problems and they’ve had it too easy for the past 10 years. But you can’t kick them out,” he said. “It’s not nice that we Germans have to pay, but we have to see that Europe gives us something back. If they brought back the Deutsche Mark and the franc and all the rest, it would be the end of Europe. Everyone would be a loser.”

    We can only hope that this view secures wide support among voters in the core EZ countries – and that Ireland doesn’t do anything to prevent this. Becasue that’s all we’ve got – hope.

  36. @Paul Hunt.

    Agreed.

    The comment you quoted mirrors the FT Your report on the guarding article mirrors the Steinmeier / Steinbrück thinking. These developments are very positive.
    Maybe Europe will survive this crisis.

  37. @ Michaael Hennigan
    “The DBR report says Bundesbank estimates that instead of the reported $139bn, German banks have only €25bn actual exposure to Irish borrowers overall.”

    Surely there is a very important body of work here to be done by somebody (anybody) to expose who the Irish systems Creditors are.

    It is only when the public and oppositionpolitical parties know who the bank bond holders are that they will be able to give some kind of assessment on the moral hazard involved in burning them.

    My belief is that a large proportion of these bank Bond holders are very high wealth individuals and corporate Profit who like to avoid the losses associated with normal investment.
    Company shares are for the plebs!

    Someone on the site said before that this information was freely available. If that was so it would not be possible with any ounce of credibility to make 2 such contrasting estimates as those made by the DBR and the German banks.
    Any chance someone could open this can of worms please?

  38. @Joseph Ryan,

    Being fearful of the alternative provides no basis for certainty, but I remain sanguine. Two factors, however, dent my optimism. First, the ratings agencies and the markets are maintaining thier onslaught and having over-run Greece and Ireland, have moved on from Portugal and are now focusing on Spain and, closer to the core, on Belgium and Italy. The ability of the EU’s institutional and politcial forces to respond is at variance with the speed at which the markets are moving.

    Secondly, the palpable shift in favour of a German Europe (which has the support of many of its neighbouring countries) as the best strategic option for the EU in a multi-polar world will place even more strain on the peripherals who failed to read the writing on the wall that was becoming ever more decipherable over the last decade. The risk is that their voters will be repelled by the additional pain required to become more Germanic. The last thing we need in Ireland is a knee-jerk, ‘sinn fein’, autarkic insularity that will sink us into even more cultural and economic dependency between the US and Britain.

    It makes it even more pressing to have a general election to ensure we have a government that can speak to and for the Irish people – and can engage effectively with our EU partners.

  39. JtOWatch:

    Q3 GDP up 0.5%, Q2 revised to -1.0% vs -1.2% previously stated.

    Q3 GNP up 1.1%.

    This marks the first time that both GNP and GDP have been positive since Q4 2007, and first time since Q1 2008 that GNP has registered back-to-back GNP growth for 2 quarters. GNP now flat on the year, though with the EU/IMF bailout, the budget and the bad weather, obvious danger of Q4 falling back due to poor sentiment across the economy. That said, imagine hotels and restaurants have been doing impressive business as a result of all our foreign visitors in recent months…

    Export led recovery still continues impressively, exports up 3.8% q/q, 13.2% y/y.

  40. @ Paul Hunt

    The risk is that their voters will be repelled by the additional pain required to become more Germanic. The last thing we need in Ireland is a knee-jerk, ’sinn fein’, autarkic insularity that will sink us into even more cultural and economic dependency between the US and Britain.

    While I agree with the first part of your sentence, I disgree profoundly with your conclusion. I see nothing wrong with deep cultural relationships between Ireland and its North Atlantic neigbours. The lessons of this crisis are that if you want to get anything done, look at the roadmap followed by the Us and UK. It has been pragmatic and involves a measure of can kicking, writing down, injecting capital, use of the public balance sheet, QE etc. Contrast that with the paralysis of the EU.

    If you want a crisis sorted, do not ask the Europeans. The question should be asked post crisis, what are we in the EU for-access to markets is fine and about as far as you should go. All this mallarkey about political integration and closer union is BS. It should be kicked to Row Z where it belong.
    Give me the cradle of US demoracy over the seat of power of the Junkers every time.

  41. @ Ciaran,

    You’re someone who is well worth listening too. I referenced that article because at the time I was surprised with how upbeat it read. Or, to be more precise, that your sentiments were the same as the optimism reflected in the article. For a wider audience, the use of ambiguous phrases (‘safe as houses’) smacks of sophistry v2.0. I like articles that offer a straightforward opinion rather than those that potentially serve a purpose. For example, Peter Sutherland should have a good opinion but I don’t expect to hear it.

    A secondary point is that I’m all in favour of people changing their opinion. I wish Irish politicians weren’t so path dependent. I wonder how many billions have been wasted by pigheaded politicians ‘proving’ they were right. When the US embarked on QE1 I thought it was too risky. Now, given it appears they got away with it, I’m all for some QE balm for the PIGS.

    There is no argument on the need for greater austerity. Unfortunately I believe that the amount required is not achievable. The big problem is the aggregate public and private sector debt is too high. My target level of austerity is the amount of adjustment required to balance the budget excluding the costs of fixing the banks.

    Although I blame the Irish government and regulators for the bank crisis, it would be useful to peg some blame on the ECB and the euro. It’s a bit like suing the church for the crimes of a priest – go after the ones with some cash. And (trying to convince myself here!) many problems have been caused by the ECB; in particular for Ireland and Spain. The ECB set negative real interest rates for these countries for a sustained period. As currency risk was removed, funds from the core chased a little margin and flowed in to create asset bubbles. When things collapsed, the ECB facilitated the safe passage of funds back to the core via emergency liquidity ops. I’ll admit I need to work more on this, but it’s a start.

    I don’t see the 4yr plan working. Our EU partners charging 6% is not exactly taking one for the team. I suspect that even in the event of an Irish default, the Germans would still get they’re money back (either through printing presses or some other means). If so, why should the Irish taxpayer help swell the German exchequer?

    As a country, we need our nappy changed. It wouldn’t be right to let us run around in this state for the next 3 years.

  42. If we take the thread back to the original topic…on Germany’s choices…I’d like to wonder out loud how we can influence Germany to take choices that are likely to be good for Ireland.

    If we need Germany’s government and people to support an argument that German creditors of Irish banks, or indeed the German taxpayer through the ECB, should forgive or forget Irish debt or be haircut on Irish debt, then how can that best be done? Again, remember Germany did not like the Irish guarantee….our predicament is self inflicted.

    Right now a lot of the dialog in Ireland is still going on what seem largely faulty premises – that the Germans have somehow caused Ireland’s problems. I don’t see that they have caused or are causing our problems. How can we turn the discussion to the point where Germany convinces itself that its interests and ours are both better served by being even more charitable to Ireland, again?

    Right now, in many German eyes we don’t even rank as deserving poor, although we probably get better feeling than Greece right now.

    This is a political problem of the first order – for them and for us.

  43. Why don’t we say to the Germans: we will implement whatever fiscal and banking policies you demand (is there any difference?). In return we demand funding at your bond yield and a German guarantee of our sovereign debt?

  44. @tull,

    Now, now, are you not being a tad pejorative? I have no problem with the US as its inistitutions are sound – and it will get its current dysfunctional politicis fixed eventually. I just sense that Britain, so long after empire, has still failed to find a role. It seems to have tired of being the location for off-shoring banking and shadow banking practises at which even the Americans turned up their noses and is unsure of the next stage. Germany is crafting the strategic direction for Europe and that’s where we belong. And you seem to forget that Germany has been a model modern democracy for the last 60 years.

  45. Hugh Sheehy: “Right now a lot of the dialog in Ireland is still going on what seem largely faulty premises – that the Germans have somehow caused Ireland’s problems.”

    True, but your own comment, like many others, takes it as given that the creditors we need to be concerned about are predominantly German and that Germans are particularly interested in steering Irish policy. Maybe this is so, but I haven’t seen much evidence of it.

    Lately I’m often reminded of the 1992 currency crisis, when we kept hearing that Ireland couldn’t devalue because the Bundesbank was adamantly opposed. It eventually became clear that real-life Bundesbank officials didn’t greatly care what Ireland did and, if anything, they were puzzled as to why it took us so long to accede to market pressure. The first clear inkling of this was when some commentator (was it Colm McCarthy?) had the inspired idea of phoning the Bundesbank and asking.

  46. From Citi: “Comments by the Irish opposition parties they may want to reconsider the EU/IMF bailout package if they win the elections next year also added to EUR gloom. The Irish situation has become an increasing market focus. Despite Ireland’s aggressive fiscal package and acceptance of responsibility for unsecured bank debt they are paying rates that include a significant premium over German rates. Dissatisfaction with this outcome could produce election results that euro zone policy makers would find difficult to deal with. Hence the market may be looking beyond this issues on the agenda today and looking for a broader commitment to support sovereign debt in countries where the authorities are doing the ‘right thing’ with respect to fiscal policy.”

  47. @Kevin D
    In this context I’m going with the premise of the thread and other discussions, where “German” represents both actual Germans and other figurative Germans. Not all our creditors are actually German. Not all our paymasters are actually German. Agreed.

  48. @Hugh
    Indeed London is more exposed then Frankfurt to the best of my knowledge – maybe the medias concentration on the Germans is to keep buried old nationalist skeletons

  49. @Tull

    I trust you haven’t been to the US recently. The political system is broken.
    The plutocrats who run the country are neo Junkers. And loving the extension of the Bush tax cuts which benefit the top 2% of the population.

  50. @BEB
    “Hence the market may be looking beyond this issues on the agenda today and looking for a broader commitment to support sovereign debt in countries where the authorities are doing the ‘right thing’ with respect to fiscal policy.”

    Should we read “looking for a broader commitment to support bank debt” Haven’t heard Enda (or noonan) suggesting we will default on sovereign debt. Both of them are saying now that the ungteed senior and sub debt is on the line. About bloody time.

    Noonan reckons byw that the Gerans and French are largely exited any exposure to Irish debt, having passed it on to the hedge funds on the secondary market and taken their hits.

    @Paul Hunt

    “I have no problem with the US as its inistitutions are sound ”

    Obviously you aren’t a fan of Max Keiser. This one is worth watching – Colm McCs “irate Irishman” features as well as David “Godzilla” Drumm

    http://rt.com/programs/keiser-report/episode-104-keiser-report/

  51. @ tull

    ‘The lessons of this crisis are that if you want to get anything done, look at the roadmap followed by the US and UK. It has been pragmatic and involves a measure of can kicking, writing down, injecting capital, use of the public balance sheet, QE etc. Contrast that with the paralysis of the EU.
    If you want a crisis sorted, do not ask the Europeans’

    We have to compare like with like. The EC is an attempt to go beyond nationalism. A proper desire not to repeat the horrors of the past, including world wars and colonialism. The EC can’t just do what a national government can do, because it’s a new sort of animal. All sorts of differences have to be accommodated. It ain’t simple and it takes time.

    The US economy is in many ways a marvel, but I really wouldn’t like to be poor there. The ghettos, and the prisons are brutal. I’ve lived and worked in the UK too, and I recognise the many achievements, including the industrial revolution, liberal politics and the welfare state.

    I also recognise the central part played by Greenspan’s Fed in inflating the damaging credit bubble of the last 30 years. The financial regulatory (mal) practices in the City of London were none too edifying either. If it weren’t for the toxic derivatives pushed from those ‘dynamic’ quarters, big EZ banks wouldn’t be looking so pale and wan today. And we wouldn’t be paying 6% for a digout.

    While we get lots of corporation tax from the US MNCs, we are not going to resolve our problem of economic underdevelopment by that route. St Patricks’ Day parades notwithstanding, they simply don’t care enough or know enough about us. We are a step on the path to something else.

    Regional imbalances are not just an Irish problem or a German problem, they are a European problem. Mainland Europeans make great efforts to overcome barriers of language, law and custom. Despite the fact that we teach two languages in primary school, we are not yet comfortable in that polyglot universe.

    Freedom of movement for capital and labour. Internal trade within the EC massive and increasing. Why not us ? Our saints and scholars showed the way long ago. There is no contradiction between our historical affiliation to the US or to Britain, and full participation in the European project. It’s a win-win surely.

  52. @ Ahura/Ciaran

    Very cogent

    ‘There is no argument on the need for greater austerity. Unfortunately I believe that the amount required is not achievable. The big problem is the aggregate public and private sector debt is too high. My target level of austerity is the amount of adjustment required to balance the budget excluding the costs of fixing the banks
    …As a country, we need our nappy changed. It wouldn’t be right to let us run around in this state for the next 3 years’

    Is that nappy full of debt deflation and sovereign default ? Public sector layoffs, SME credit restriction, mortgage defaults and high emigration ? Civil disorder and diversion of MNC investment ?

  53. @ Ciarán O Hagan

    “In the case of Ireland, that requires the partying in public finances to come to a sharp end, with consequences for living standards.”

    Yes, Public spending increased and PS salaries have got too high but I’d agree with Jim O Leary’s anaysis that the biggest cause of the structural deficit was the shift from realible taxs (such as IT) to boom sensitive taxes (Stamp duty and CGT etc).

    Out of interest – Was there any relationship between the benchmarking pay awards and the low inflation requirements in the lead up to the launch of the Euro (i.e had a the Govt promised the PS pay risis post 1999 in return for lower rises in the mid 1990s)

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