German Economists Against EFSF

Via Vox,eu, here is a link to a translation of an open letter objecting to the EFSF that has been signed by 189 German economists. Rather than making the current mechanism permanent, they prefer the idea of setting up an insolvency scheme for EU states combined with EU funding for states that enter this scheme.

The economists may be presuming that the proposed permanent European Stability Mechanism is intended as a direct follow-on from the EFSF. However, it has been my understanding for some time (i.e. at least since Mrs. Merkel’s comments on burden-sharing last Autumn and the Deauville declaration) that the ESM could well be a vehicle that facilitates sovereign defaults and then provides conditional funding. So the position of the economists may not be far off what the German government is looking for.

25 replies on “German Economists Against EFSF”


Interesting! But a focus on 2013 … much to agree with from my vulgar_citizen_serf perspective

“A long-term strategy …… A debt rescheduling does not require that the insolvent country leaves the euro, and it also does not endanger the stability of the euro system.

A permanent rescue mechanism, however, that excludes state insolvency and debt rescheduling leads to an unjustified redistribution from the taxpayers of the solvent euro countries to the creditors of the debtor states.
Under no circumstances should the EU completely assume the default risks. …. might be desirable to shift the determination of insolvency to an independent institution, for example the IMF. ……. the ECB must again concentrate on its contractual obligation of monetary stability and leave the solution of excess debt problems to the governments of the Eurozone countries in accordance with the responsible agent principle.

The debt crisis of the EU can lead to three conceivable results.
•First, it can be overcome by means of real growth in the over-indebted countries.
•Second, it can be defused via insolvency procedures for the affected states with subsequent remedial measures. And,
•Third, it can lead to a “communitarisation” of the debts of individual member states, be this through higher taxes or through higher inflation throughout the EU.

The risks of a policy that exclusively concentrates on the first and most favourable of these possibilities are considerable. No one can foresee today whether the affected states will muster the strength to pay off their debts, which have been increased even further by the European Rescue Mechanism.

For this reason we call on the German government to take precautions for the case that the European Rescue Fund fails and – together with its European partner countries – to develop immediately a detailed insolvency plan for over- indebted euro member states that corresponds to the above-stated requirements. This alone can prevent the EU from heading towards the third alternative, with fatal long-term effects for the entire project of European integration.”

Back to the present – around here – a little of the third [soon imho] will not be fatal to EZ. Irish Sovereign cannot survive without a good slap of the second. The first is ongoing – if insufficient on the ‘concretised vested interests’ and better distributed ‘burden sharing’ …

No mention of the present and EZ banking crisis!

I await enlightenment from others more savvy than I ….

An engineer I know once said to me “There are two types of engineers; those that are very good in an office with a CAD programme, and get-you-out-of-the-shlt engineers, they are harder to find.”

Seems to apply to economists also.

Following on from grumpy’s last point, there seems to be no recognition of the variation of insolvency challenges – from Ireland with a dud bank system and a viable sovereign bolted on to Greece wirh a dodgy sovereign and a few dud banks (and Portugal, Spain, Belgium and Italy located between these extremes) – the EFSF has to deal with. And, like most economists, they fall into the gap between the sound proposition that ‘sunk costs are irrelevant to future decisions’/’bygones are forever bygones’ and the determination of rate investors to enforce legal and contractual repayment provisions.

I fear there’s no cigar for these exponents of the dismal science; German taxpayers will have to take some pain as well.

And I also remember that 364 economists (almost double the assembly here) condemned Maggie Thatcher’s swivel-eyed sado-monetarist experiment in 1981. I wonder what happened to them.

@Paul Hunt

“We, who are all present or retired members of the economics staffs of British universities, are convinced that:
a) there is no basis in economic theory or supporting evidence for the Government’s belief that by deflating demand they will bring inflation permanently under control and thereby induce an automatic recovery in output and employment;
b) present politics will deepen the depression, erode the
industrial base ofour economy and threaten its social and political stability;
c) there are alternative policies; and
d) the time has come to reject monetarist policies and consider urgently which alternative…..”

Or, “Don’t do that, lets start an endless debate about doing something else instead.” Would 364 economists ever agree any policy action? 😉


The third (no pun intended) type avoid the sh1t in the first place.

We rarely hear of them, or from them – but they do exist: and no shortage of them around here …


To beat once again one of my almost worn out drums: the forum to test and contest public policy proposals in any area is before an appropriately empowered and resourced Dail Cttee where evidence for and against is advanced, rebutted and counter-rebutted.

These German economists are as much outside any effective engagement in policy formulation as are any here – and their impact is likely to be the same as that of their 364 British predecessors 30 years ago.

@Paul Hunt

Not with the market-fundamentalist FDP – who are scuppering CCCTB from the inside – and any push to force co-ordinated corp gov tax rates across EU.

Strange as it may seem – in our interests at present time.

Our German colleagues have spotted that there is no longer a European banking crisis, which is really good news. Let Fasching commence!

@ PH: “To beat once again one of my almost worn out drums: the forum to test and contest public policy proposals in any area is before an appropriately empowered and resourced Dail Cttee where evidence for and against is advanced, rebutted and counter-rebutted.”

I am reluctant to disagree with you on this, but I sincerely do. People lend and people borrow: Its in the nature of things, but!!! If well-meaning or un-wise attempts are made to prevent the process of bankruptcy of a failed borrower – who was either imprudent, crooked or just plain unlucky, and further attempt to make lenders whole buy getting them to emit even more credit, then you enter the mathematically impossible domain of Hopium World. And we are currently perched on the frontier of this world. The math will trump all – including sentimentality, which normally trumps reason. In Hopium World things are upside-down, inside-out and the Arrow of Time faces toward the past.

Its time, as the late John Healy said, “Go out and fish or sit on the pier and cut bait”. Its time to ‘go fishing’. Very unpleasant, will take about 3 years, but we exit with null debt (or more likely a level that our diminishing economic activity can sustain).

Its not if, but when. The ‘can-kicking’ is worthy of a Miraculous Medal.



I’m not entirely convinced by your assertion that ‘there is no longer a European banking crisis’. Yes, Greece, Spain and Portugal are primarily examples of common-or-garden fiscal incontinence – with a bit of banker irresponsibility (internal and external) thrown in. Belgium’s and Italy’s fiscal incontinence to allow internal transfers has long been indulged. Only in Ireland has a banking blow-out mutated into a sovereign crisis, but EZ country banks have ‘warehoused’ a lot of dodgy stuff that will have to see the light of day eventually. And the ‘private creditors’ fingered by our new German friends won’t take all the heat.

“No one can foresee today whether the affected states will muster the strength to pay off their debts, which have been increased even further by the European Rescue Mechanism.” Actually our Morgan can. Ireland wont!
Take that! 189 German Economists.


Irony dear boy. Must remember not to make jokes in print. For the avoidance of doubt, the failure of The 189 to even mention the ongoing banking crisis is extraordinary, even for academics.

@colm mccarth

Read your first comment above and was goint to suggest ant transient German readers might by application of national sterotype, take that literally 🙂

Have you been standing to close to any Germans recently, Paul?

Apologies, Colm. Your usual brevity and economy gave me little notice that your tongue was firmly planted in your cheek. I think I’m up to speed now.

And my earlier thought might be wrong. This intervention could be politically useful as it chimes with the political desire in the core EZ countries to focus on the fecklessness of the peripherals as a means of deflecting attention from their – and their banks’ – complicity.

If I understand correctly your German colleagues ,the interest rates were not punishing enough and the ECB should not have bought sovereign debt .If this is close to the German delegation position this should be an interesting renegotiation.

@colm mccarthy
Yes I read through that and was about to make a similar comment . I know many of us have been attemting to stop the continuous conflation of bank and sovereign debt by careless commenters here – but for 189 prominent German economists to ignore the banking crisis, or pretend it isn’t a critical factor, calls into question any solutions they propose. Karl (was it Karl?) needs to get his red biro out and draw that line.

“To support states with liquidity crises that are not yet insolvent, a rescue fund is not necessary since these states are able to arrange with their creditors a restructuring of their national debt at an unchanged present value.”

Come again? If the debt’s present value isn’t changed then it’s not much of a restructuring is it? I guess they mean “unchanged book value”.

And they seem unversed in EU arcane lore and the differences between EFSF and ESM, as the ESM will indeed “provide for a case by case participation of private sector creditors” as the EU says (by the way I like the EU’s coy way of referring to defaults).

They think they’re smart but it looks like they were just repeating what they read in the Spiegel.


The real ‘IRONy’ was the Deauville Tango – what a tactical error of timing, real politik, and judgment …. The Humpty-Dumpty School couldn’t have performed it better …. or p1ssed off more …

… as Mae West might put it – You’re no Willie me dearie! And who’s the lovely little boy with you? Is he yours?


You’ll make the invite to Listowel yet (-; U might try synechtoche next – even if only to confuse!

@David O’ Donnel
“Favourable credit conditions and the liability of the European community of states would give over-indebted countries a powerful incentive to repeat the mistakes of the past and to continue a policy of indebtedness at the expense of their EU partners.”
Your interpretation?

@Dominique Jean-Raymond

Interpretation? Certainment, mon garcon.

Nicolas is running out of dosh due to a bit of a deficit, and terrified of the resources of the I’mF backing Dominique S-Ka_hn in 2012, [not to mention the decent people of France] is on his bended knees in front of She_who_really_must_always_toujours_toujours_be_OBEYED begging for an exemption (un autre?) from the er .. Growth & er .. Stability Pact so that he can run a budget deficit of circa 33% on an .. er .. stimulus package for himself and his falling apart administration …..

Creditors/ECB: “Sinner taxpayers (and maybe saintly taxpayers) should pay. Creditors must not pay; otherwise the financial system will collapse.”

Saintly Taxpayers/German Economists: “Creditors and sinner taxpayers should pay. Saintly taxpayers must not pay; otherwise the EU project itself will collapse.”

Sinner Taxpayers: “We cannot pay everything, so creditors and/or saintly taxpayers must pay something; otherwise our economy will collapse (under debt servicing load).”

Should be an interesting month, unless the can-kickers get very creative.



Ireland 329 for 7


I’d agree with these Germans inasmuch as we must stop bailing out bondholders and refocus on restructuring then bailing out States. But I’m not sure why we need a Eurozone institution to do this when the IMF is already doing it. As far as I’m concerned, the EFSF has only managed to do what the IMF normally does -only worse and without necessary burden-sharing. Even if the ESM includes burden sharing it’s difficult to see why we would replicate the IMF inside the EZ.

Frankly, all this talk of adjusting the interest rate is irrelevant to me. We don’t want to borrow this money at any rate in order to pay off investors.

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