Troika Review Statements Post author By Philip Lane Post date April 15, 2011 The Irish government statement is here. The EC/ECB/IMF statement is here. Categories In Uncategorized Tags Troika review 59 Comments on Troika Review Statements ← A Tale of Two Trilemmas → Paul De Grauwe on austerity and implications of the ESM 59 replies on “Troika Review Statements” IMF: “Core inflation is forecast to remain subdued but rising energy and food prices are increasing headline inflation.” Doesn’t mortgage inflation account for almost half of headline inflation in Ireland? Too diplomatic to mention it in an ECB-involved context perhaps? Why is everyone using this buzzword “Troika”? Is it meant to signify something? Does it have some special meaning? What exactly was wrong with “trio” or if you wanted to give things an authoritarian ring “triumvirate”? It seems the media is determined to cast the people paying our wages in the guise of I guess either Tzarist or Soviet oppressors. Not that I’m objecting to that, but I’d prefer to see both the media and commentators resorting to reasoned analysis and careful debate before they resort to name-calling. @ObsessiveMathsFreak Perhaps a more apt term would be “triad” Re “The objectives of the program are to address financial sector weaknesses and to put Ireland’s economy on the path of sustainable growth, sound public finances, and job creation. Maintaining social fairness in shouldering the burden of adjustment is one of the program priorities.” The program is a disaster. Moody’s downgrade of Ireland to a notch just above junk status today is a far more reliable index than the Orwellian Squealer propaganda in their statement. There’ll always be some who believe “Black is white” in spite of irrefutable evidence to the contrary:) Their austerity drive is failing here maybe even more so than it is in Greece. The IMF/ETC statement is brief. I still don’t have a clear view of what the ECB plans to do with Irish banks re emerging funds being provided. Only the other day we had Jurgen Stark with what sounds like a warning: “”The role of the ECB is to provide liquidity but you cannot say, okay, it is all up to the ECB to fund the Irish banks. It is not a healthy situation that we are providing liquidity of up to 100 pct of GDP to the Irish banks.” and “”An emergency case cannot last permanently, it cannot last for years” This contrasts with Mr Daly (NAMA) saying NAMA might start lending to purchasers. My understanding is that if NAMA starts such lending, it will delay the redemption of NAMA bonds. This, in turn, will prolong banks accessing the emergency ECB funds. So, who’s talking crap here? It’s interesting that the ‘notes to editors’ is more informative than either statement. And these notes start off very well and progress in a brisk and crisp manner. But they run out of oomph when they hit the ‘structural reforms’. When you get into this territory you can’t swing a cat without hitting a sacred cow or upsetting a deeply embedded vested interest. It is a bit dispiriting though that the briskness and crispness is most evident where the government is following precise and detailed external instructions and that this briskness and crispness evaporates when it has to consider areas where it retains considerable sovereignty and discretion. I suppose we should be glad that the Troika won’t allow the fiscal fudging that characterised the last FG/Lab coalition that was actually elected. But there is every risk that, in the absence of rigorous external direction, their penchant for fudging will manifest itself in their approach to structural reform. This is what is truly depressing and dispiriting. These priests should get the dirty business over with and cut the balls off every Irishman. Although the passive submissive nature of the New Irish eunuch makes it perhaps unnecessary Its so sad really. We are a broken people and perhaps always were. @ The Dork of Cork Cheer up! I work in the culture sector in which we are genuinely world class. http://www.guardian.co.uk/books/2011/apr/12/impac-dublin-award-shortlist-irish We remain unbroken and unbowed. @ Gavin Kostick Great, our own literary ‘troika’. 🙂 @Rob S “Doesn’t mortgage inflation account for almost half of headline inflation in Ireland? Too diplomatic to mention it in an ECB-involved context perhaps?” Not included in HICP at all, IIRC. @Hogan Absolutely true. I assumed they were talking about the CPI but it was unclear. I’m confused. Perhaps some economist contributor on here can sort out my confusion? I fail to see how the FG reduction in employers’ PRSI plan, which, to be fair, has been around since FG published its alternative Budget 2011 in November last year equates to a compensatory mechanism for employers affected by the reversal of the Budget 2011 one euro cut for the estimated 60,000 workers who are on the minimum wage? As I understood it, the cut to the minimum wage primarily about future wage competitiveness in the Irish economy, or at least that’s how it was portrayed. And given the overall cost of halving the lower rate of employers’ PRSI, is it not a bit excessive as a compensation mechanism? For example, the Employee Job (PRSI) Incentive Scheme introduced by the previous Government in Budget 2010, and extended in Budget 2011, exempts employers from their share of PRSI for new employees who have been previously registered as unemployed for six months. To date, 1,300 employments have been supported at a cost of some 2.6m in PRSI forgone according to the Department, which has been considering applications from a further 160 employers since the beginning of January up to mid February this year. The 2.6m euro lost to the PRSI fund from operation of the scheme in 2010 does not take account of tax revenue to the Exchequer arising from the increased employment generated under the scheme, though 1,300 jobs suggests the gain may be relatively modest. One assumes that the new Government’s intention is to replace the existing scheme with its own plan to halve the lower rate of employer’s PRSI as compensation for reversing the cut in the minimum wage, or maybe the idea is to run the two schemes in parallel? According to a PQ response from the Minister for Social Protection on 7 April last: “It is estimated that reducing the rate of employer’s Class A PRSI from 8.5% to 4.25% would reduce Social Insurance Fund income by €174 million in 2012 and €168 million in 2013.” Meanwhile, the brief provided to the new Minister on taking office notes that: “Social Insurance income in 2010 was €6.7 billion. Accordingly, the SIF had an operating deficit of €2.74 billion in 2010. This was funded by the remaining SIF surplus of €0.89 billion (built up in previous years) and by a subvention from Vote 38 of €1.85 billion.” Presumably, the requirement for a subvention will be increased if the plan to halve the employer’s PRSI rate is implemented? Or else, the money to square off the cost and prevent any impact on the Exchequer has to come from elsewhere. This suggests that the real ‘quid pro quo’ is to be found in wage cuts for low paid employees – about 240,000 of them – whose wages and terms of employment are currently protected by EROs? “Unfortunately, this romanticized and sanitized vision of the economy led most economists to ignore all the things that can go wrong. They turned a blind eye to the limitations of human rationality that often lead to bubbles and busts; to the problems of institutions that run amok; to the imperfections of markets — especially financial markets — that can cause the economy’s operating system to undergo sudden, unpredictable crashes; and to the dangers created when regulators don’t believe in regulation.” http://www.nytimes.com/2009/09/06/magazine/06Economic-t.html @all “Personally I believe Scrap …” Joint Labour Councils & REAs: Moore McDowell (Radio 1) “The Troika will be Thrilled”: Gregory Connor (RTE1) The auction today in the Shelbourne was interesting. Came as we found out 250,000 people have no disposable income and also the day we found out the landlord for the lighthouse cinema charged them 200,000 rent and caused them to close down. Far from equal burden sharing going on. It’s a right mess @David O’Donnell. So Moore McDowell wants to scrap JLC’s and reduce the wages and conditions in those industries covered by JLC’s . Fair enough. Now how about the “industry” Moore works in or is retired from. Has he published his proposals for salary/pension reduction in that area yet, in order to be more competitive? I can’t say that I have of them! @OMF re TROIKA Most of the dictionary references to Troika seem to give it a Russian meaning. Webster’s definition given below should not entice any Irish person to sleep too comfortably in their bed. Websters NKVD troika or Troika, in Soviet Union history, were commissions of three people employed as an additional instrument of extrajudicial punishment (внесудебная расправа, внесудебное преследование) introduced to supplement the legal system with a means for quick punishment of anti-Soviet elements. It began as an institution of the Cheka, then later became prominent again in the NKVD, when it was used during the Great Purge period in the Soviet Union @Joseph Ryan Don’t seem to recollect any mention of the legal eagles, the medical privates, or the pharmacists either – as noted in the IMF release. Strange all this focus from two of our ‘leading economics professors’ in the national meedja today on the low-lying serfs – 250,000 of whom have €70 to spare at the end of the month, and another 250,000 who make insufficient to pay all bills at the end of the month – according to Credit Union survey released today. But then again there is no such entity as ‘labour market flexibility’ for the upper-echelons – they mustn’t do labor! Davis Begg says bailout renegotiation is crucial. Is this in his Central Bank role? Transcript of a Press Briefing with IMF European Department Director Antonio Borges Washington, D.C. Friday, April 15, 2011 http://www.imf.org/external/np/tr/2011/tr041511.htm 3rd IMF press release on Ireland in one day! Is this a record? @Joseph Ryan & David O’Donnell, I can go part of the way with Moore McDowell in the sense that the JLCs/REA system should have been reformed when the Minimum Wage was introduced. It wasn’t. Also, there has to be a problem with a Minimum Wage system where the assumption is that it can only ever be adjusted upwards irrespective of changes in the state’s economic circumstances and the requirement to restore competitiveness. But it’s hard to allay the suspicion that what FG is currently at is about opportunistically killing off all wage and conditions of employment protection for the lower paid under the guise of so-called reform and, more importantly from their own point of view, so that they can portray FG in Government as delivering on at least one election promise. Unlike the highly vocal and well-organised lobbies of the professional classes, low paid workers in hotels, catering, retail, contract cleaning etc. are individually isolated and collectively not well-organised. So they’re an easy target. Nor do they enjoy ease of access to the mainstream media either, who in any case appear reluctant to mount any serious critique of the direction of government policy and its implications for fairness and justice in our society, never mind its economic rationale. The Dail Opposition is too weak and too divided to effectively challenge the Government on their approach. As for Labour, a large part of their problem, I believe, is that they made no serious effort to develop alternative economic policies when they were in opposition, being wholly wedded to a populist negativity as a political strategy, with the result that, in Government, they have no option but to tag along with FG’s proposed actions. Considering how vocal – even hysterical – they would have been twelve months ago in denouncing such ‘attacks’ on the ‘hard working people’, their silence now is deafening. @ DfromC: “We are a broken people and perhaps always were.” Never. We just did our (real) fighting elsewhere. When we fight here we only suceed in trashing the place. @ Veronica: The Min Wage nonsense is just that. Empirical evidence is so iffy its akin to a sieve with holes. In respect of econs. Please do attempt to hold your breath on this one – Model: Perf Com Market: All are rational, etc, etc etc. Problem is humans are genetically programmed by evolution to be irrational. That’s how we arose to be sentient ;-). Now it appears we are on the way down! 🙁 ” . . . with the result that, in Government, they have no option but to tag along with FG’s proposed actions.” They do. But, sure the poor dears are in power now and have opted for voluntary castration. But. On second thoughts. Did they ever have a ‘pair’ in the first place? Hmmmm “State passes first fiscal review” (IT headline to-day) Teacher passing out the stars then! Turner (spelt with a Y!) seems to wrap it up. BpW The 10 year bond rate closed at 9.7% on Friday, up on the week from about 9%. The people who matter, those who might lend to us in the normal way, still seem to be sceptical. By the way, does any one really believe that the IMF would come here and say anything other than “You are doing a great job. The Department of Finance is wonderful. We see you have a new democratically elected Government, so, of course, we’ll vary the terms”? If words like that are the price for keeping us with the programme, then of course they’ll say them. Pat Rabitte on Radio 1 roight now: ‘… our homework is being corrected by The Troika … we are not masters of our own destiny at the moment … we are committed to making changes …. … within the strictures that The Troika have imposed on us ….’ Maith an buachaill Pat!! – “The Troika will be Thrilled” (G. Connor, 2011: yesterday) at such diligence and subservience. @Veronica ‘Unlike the highly vocal and well-organised lobbies of the professional classes, low paid workers in hotels, catering, retail, contract cleaning etc. are individually isolated and collectively not well-organised. So they’re an easy target. Nor do they enjoy ease of access to the mainstream media either, who in any case appear reluctant to mount any serious critique of the direction of government policy and its implications for fairness and justice in our society, never mind its economic rationale.’ +1 Restoring the €1 on the minimum for 60,000 used as a latently strategic ploy, under cover of projected Troika, to reduce the earnings of 260,000 others. Ultra-roight neo-con meedja friendly economists literally salivating live at such neo-kon orthodoxy. Socialize the banks on the serfs, then hammer the serfs … then hammer them again for good measure … as if one hundred billion were not enough ………. Very hard to figure out what this means … but has the CPSU rejected CPA? http://www.rte.ie/news/2011/0416/pay.html @Frank Galton CPSU never ‘accepted’ CPA in first place – taking its cue from Upper-Echelon which it does not represent, it has been on ‘constructive ambiguity’ … TUI tried similar for a while … @David Don’t worry it will not succeed in the long run. First you cut wages – make extra profit from new surplus , then increase credit to increase demand for your products – when this falls what does a oligarch do. He cuts wages again but cannot give credit – his currency losses value when the goverment he owns replaces the credit and wages with goverment money when taxes no longer can sustain a big enough trade surplus to service the interest expenditure. All that credit is coming home to momma. This era of globalisation is so over. The central bank war model is obsolete for now. The euro masters realise this but want to remain in the game. Hence their freegold mechanism In the immortal words of Daffy Duck – its despicable. http://www.youtube.com/watch?v=xphiYdfd-Tg Looks like the Germans are up to the usual trick of leaking their currently preferred outcome to the hacks and thus making it inevitable http://news.yahoo.com/s/nm/20110416/bs_nm/us_germany_greece_debt @ObsessiveMathsFreak If you had read the Gulag books of Solschenizyn you would know that the Troika was an NKVD tribunal that reviewed political prisoners at the end of their sentences and almost always handed out new 5 and 10 years sentences to “enemies of the people” for their various “crimes” against the state. Once inside , there was no escape. No matter how innocent you were or what the letter of the law was. So very apposite in the current circumstances. Both parties knew the whole process was a charade and merely a device to give a facade of official propriety on what was little more than those with power crushing those without power. Does anybody think that the auction in the Shelbourne might actually be a sign that banks are going to increase the levels of repossessions on foot of its “success”? @eureka The auction showed, IMHO, how little hard money is about that can/will go into property. If the government gives generous lump sums to PS employees, maybe this will change. Also I fear that the firesales proposed (which were a better idea two years ago) will only harden very conservative (atavistic) investment patterns in favour of property. One can forget about an indigenous industrial revival unless something radical is done to push investment into industry. @ Eur They can cleanse their books alright, but what affect will that have their god book, in that if they sell my neighbors house for pennies, how much is mine worth? @Pat Rabitte Someone set the ‘wrong’ homework in Frankfurt/Berlin/Paris; ergo, not good that you gettin second class honours on the wrong homework … !!! Europe needs to get real about its debt crisis Saturday, April 16, 2011 Irish Examiner Europe will continue to delay its recovery as long as debt restructuring and worst-case-scenario bank stress tests remain taboo, writes Daniel Gros. [who continues to make sense] Europe is making a fundamental mistake by allowing the two key elements of any resolution of the crisis — namely, debt restructuring and real stress tests for banks — to remain taboo. As long as successive EU summits persist in this mistake, the crisis will fester and spread, eventually threatening the stability of the eurozone’s entire financial system. * Daniel Gros is director of the Centre for European Policy Studies. http://www.irishexaminer.com/business/kfojkfgbkfau/rss2/ This dance isn’t going to last for much longer — WSJ The International Monetary Fund believes Greece’s debt is unsustainable and has told European government and central bank officials that Athens should consider restructuring by next year, three people familiar with the situation said Saturday. “The IMF believes the debt situation in Greece is unsustainable,” one of those people, who has direct knowledge of the matter, told Dow Jones Newswires. “Senior (IMF) officials have told the parties involved that restructuring should be considered soon,” including the European Commission and euro-zone governments. IMF spokesman William Murray denied the IMF was recommending a restructuring of all Greek debt including that held by private holders, but the IMF has said the fund has considered extending the loan repayment schedule for Athens, a form of restructuring. http://online.wsj.com/article/SB10001424052748704487904576267173833529958.html Furious Greeks press for country to default on debt. “It’s better to have a restructuring now … since the situation is going nowhere,” said Vasso Papandreou, whose views might be easier to discount were she not head of the Greek parliament’s economic affairs committee. http://www.guardian.co.uk/world/2011/apr/17/greece-debt-default-bailout . @Eureka – “Does anybody think that the auction in the Shelbourne might actually be a sign that banks are going to increase the levels of repossessions on foot of its “success”?” Given that half of Dublin’s legal and accountancy professions were there ‘adding to their property portfolios’ I’m sure that the banks will be mightily encouraged. It’s quite disheartening to watch the ‘haves’ fighting over the remains of the recently made ‘have-nots’. But I guess we will see a lot more of it in the future – and not just in Ireland. @Joseph Yes – it’s a bit depressing alright. It looks like we’ll have a small cohort of property owners with a large cohort of people stuck renting due to inability to access funds. When you add poor public services, neglected infrastructure and little disposable income for the majority you can see how the transition to a second world economy unfolds. @ C O’D Is this not the more pertinent quotation from the Guradian article as far as Ireland is concerned.? “The normally mild-mannered prime minister has vehemently rebuffed the prospect of Greece failing to meet its debt obligations, saying restructure would not only be catastrophic for the country – blocking its access to markets for years – but also for the eurozone’s delicate economy. “Our problems will be addressed in depth not if we restructure our debt but if we restructure the country,” he said, announcing the “road map” that would lead Greece out of crisis”. The only point on which he is wrong is the reference to the eurozone’s delicate economy where he is confusing the economic situation of Greece (and that of Ireland, Portugal and, possibly, Spain) with that of the rest of the eurozone. Berlin evidently feels that their economy is strong enough to cope with any developments on the periphery, if recent official statements are any guide. But, as I have suggested on another thread, the explanation for the statements may lie in the difficult negotiations in relation to bank stress tests where it might suit Germany not to awaken too many sleeping dogs just now. @DOCM At this stage the ECB is little more than a debt collection agency sent by the European banks to scare and extract as much as possible from the hopeless cases on the periphery before they eventually restructure. Europe is conducting its monetary affairs with a mix between Don Corleone and Donald Duck. The Economist says: Sovereign exposures nevertheless look manageable when set against total assets in the German banking system of some €2.5 trillion. Most of the burden of a peripheral default would fall on banks in the defaulting countries themselves. A deep home bias has made many of them the largest holders of their own governments’ debt. Calculations by the Bank of England on losses that would arise from haircuts to Greek, Irish, Portuguese and Spanish debt suggests that a 50% haircut would wipe out 70% of the equity in Greek banks, almost half of it in Portuguese and Spanish banks and about 10% of the equity in German and French banks. @all Had the bowl of rough German Oaten stirr-about …….. let’s see what Colm McCarthy has to say this fine morning … ‘A banking system with thin capital and illiquid assets, financed with short-term deposits, is an unexploded bomb.’ A Cluster one, I assume, lobbed into the ordinary lifeworld of the Irish serfs …. Gettin heavy – Lorenzo again, poor dear eejit, & Stark, whom one expect to know better, and a few other sane Germans … http://www.independent.ie/opinion/analysis/the-blame-for-financial-crisis-is-not-all-our-own-2621897.html Wonder has Colm not read Jurgen Habermas yet? Surprisingly did not get a mention here …. Blind Biddy is available for a tutorial (-; Overall – one must agree. Send it to Der Spiegel – Ms M. Cooke in UCD will do the Jurgen! An interesting analysis piece from the NYT by Tyler Cowen, of Geaorge MAson Univ. http://www.nytimes.com/2011/04/17/business/17view.html?_r=1&emc=tnt&tntemail1=y He focuses on the banks and how the euro tried to equalise assets of unequal value – deposits in core countries versus peripheral. His advice to americans watching – “To track the risk of a new financial crisis, focus on whether the troubled euro zone economies are seeing bank runs and capital flight. Then comes a fundamental question about human nature, namely: Why do we so often postpone admitting that short-run patches simply aren’t going to work?” @Michael Prob changed by now – but Irish was 70%external ……….. see earlier thread …… most of local now socialized on the vichy_banked_sovereign_to_be_defaulted ON. @ All Colm McCarthy states: “On both counts, the performance of the European Central Bank through the crisis has been unimpressive. Regulation and supervision were delegated from the outset to national bodies in each eurozone member, with catastrophic results in Ireland and substantial failures also in Germany, Spain and elsewhere”. This assumes that the ECB had the power and delegated it unwisely. The very opposite is the case. Article 127.6 TFEU states that “the Council, acting by means of regulations”..”may unanimously”…” confer specific tasks upon the ECB concerning policies relating to the prudential supervision of credit institutions and other financial institutions with the exception of insurance undertakings”. Indeed, such was the attachment of the larger countries in particular to their national prerogatives in this area that the exception in relation to insurance undertakings was maintained from the original Maastricht text. It is pointless to criticise the ECB for not exercising powers which it does not actually have. Were to attempt to do so, it would, presumably, be acting illegally and be open to challenge. Needless to say, Ireland was one of the smaller countries most strongly advocating light regulation. Apart from the unfortunate title to the FT article by Smaghi, what he was saying to member countries of the eurozone was that this situation needed to be changed by giving the powers needed to the ECB if they wished to avoid the risk to their taxpayers. On the issue of who must carry the can for the errors made, it is a fact of life that all of the burden falls on the debtor, the issue for the creditor being to assess the possibilities of recovering the money. German politicians are as wary of their taxpayers as are their Irish counterparts. They will not allow them to end up carrying the cost of bailing out their banks because they lent it to fund a totally feckless boom in Ireland. Neither will the Finns and neither would we were the boot on the other foot. The fact that a series of of English speaking financial newspapers support a different view is not proof of anything. The comments of Weber are also very nuanced. “‘Holders of Irish bank bonds should take losses instead of the Irish Government footing the bill for their bailout,’ European Central Bank governing council member Axel Weber said today. Mr Weber, who is stepping down from the German Bundesbank at the end of April, said it was a big mistake for governments to make taxpayers liable for all bank risks. ‘To save a country’s banking system, it is not necessary to write a blank cheque for the total balance sheet of the banking system,’ Mr Weber said. “‘In Ireland, the question is whether the banking sector has to be saved as a whole,’ he added. ‘Would it not be a better route to isolate deposits, to minimise losses to Irish taxpayers and to find a complete solution . . . with private sector participation instead of buying them out.'” Of course, there is as much anger in Germany at the behaviour of their banks as there is in Ireland as regard to ours and there is no difficulty in getting support for the idea of burden-sharing according to normal capitalist principles in normal capitalist times. But these are not normal times and the risk that burden-sharing would simply be a euphemism for additional injections of capital by the German taxpayer is currently too high. But that may be changing as far as Germany is concerned given the booming economy – which must be improving the financial situation of German banks – and the dramatic improvement in public revenues (which are likely to allow Germany to meet its new constitutional debt brake). But it is it true of other creditor countries whose banks are large holders of Greek, Irish and Portuguese debt? That is the most pressing current European financial and political question. “The German Government Is Designing Plans For A Greek Default (Debt Restructuring) against the wishes of the European Central Bank.” http://www.findingoutabout.com/?p=19554 . @Michael Hennigan See Chart 4 here – http://www.ecb.int/pub/pdf/other/art1_mb201104en_pp61-77en.pdf On Radio 1 roight now: Roight Honourable William O’Dea TD, Fianna Fail, does not agree with restoring the minimum wage to €8.65 or so; apparently, he also seems to believe that the ‘hospitality sector’ is low-skilled. May we expect yet another schmozzle on the fringes of a Limerick bar? @DOCM Germany’s role in this crisis goes back more fundamentally to the design of the Euro, ECB, Stability and Growth Pact etc. ~Perhaps more fundamentally, the problem of an economic area of such scale based primarily on export growth. Germany’s insistence on imposing its model on a quite different entity – and then breaking its own legalistic rules when necessary – has shown it is, in the words of Joerg Bibow “unfit for the Euro” A year ago Joerg Bibow wrote.. “…the brief history of the euro saw the emergence of stark divergences and buildup of grave imbalances within an economic area that can no longer rely on exchange rate realignments to solve them – imbalances the implosion of which have left Euroland stuck in the mess it is in today, once again hoping for strong global growth to pull it out. Sadly enough, Germany has been central to all of this. Germany is the biggest factor in Euroland’s export dependence, growing on exports only while domestic demand, especially private consumption, is notoriously stagnant. Among the first countries to break the Maastricht deficit limit dreamed up by its own lawyers, Germany contributed most to the ECB’s misses of its headline inflation mark by hiking indirect taxes. Worst of all, Germany reneged on the euro’s cornerstone to abstain from beggar-thy-neighbor policies. Germany likes to see its international competitiveness as the fruit of hard work and productivity. Yet, German productivity growth since 1999 does not stand out. What stands out is wage stagnation. Germany’s improved competitiveness was derived from reducing German wages relative to its European partners; the equivalent of a beggar-thy-neighbor devaluation in pre-euro times. The consequences of this strategy have proved disastrous: domestic demand stagnation in Germany, housing bubbles in partner countries with higher inflation, given that the ECB sets one rate that has to fit all. One way or another, the country that runs up trade surpluses must either lend or grant transfers to the deficit countries that make its own surpluses possible. Today, German policymakers refuse to do either. Fooled into believing that beggar-thy-neighbor was the right thing to do, popular demands appear to be just that. One cannot fail to see that insane austerity in the periphery serves to keep the euro low enough so that Germany can now grow on external exports.” http://www.eurointelligence.com/article/article/germany-is-unfit-for-the-euro.html?tx_ttnews%5BbackPid%5D=901&cHash=d34eb4c6c25fffe2723a215341770c45 A Rolling Stone gathers no moss…. http://www.finfacts.ie/irishfinancenews/article_1022105.shtml @ Rafa Hijo Have a look at recent German trade data, which may update your view ie the import trend. Germany’s improved competitiveness was derived from reducing German wages relative to its European partners; the equivalent of a beggar-thy-neighbor devaluation in pre-euro times. German engineering firms have an unrivalled reputation for quality and they operate in niche areas which most people have no awareness of. Germant underwent painful welfare and labour reforms in the early years of the last decade. During the recession, it flexible labour system enabled firms to save up to 1.5m jobs through the Kurzarbeit shor-time working scheme. Europe’s biggest industrial group, Siemens, has undergone significant reform under its current CEO; should it apologise for it? What would be a better story?; Nokia having its reputation thrashed by Apple? @ Rafa Hijo If you have followed other comments by me, you will see that I share the concerns of Bibow and have, indeed, drawn attention on many occasions to the negative aspects of German economic policy over the past ten years. There is no mystery either in its motivation or its outcome. A number of highly competitive sectors (chemicals, automobiles and machine tools) support an export-led economic policy which, in turn, is supported by an unholy alliance between entrepreneurs (the famous “mittelstand”) and well-paid organised labour. Coupled with this has been the growth of what Professor Sinn has described as the “bazaar” economy i.e. German trading houses that source what they sell all over the world and avail of the internal market to distribute their goods. In the highly competitive sectors, lower wages have been accepted in return for guaranteed employment. But the picture with regard to the rest of the labour market is quite extraordinary. 5 million part-time workers, 5 million with so-called “mini-jobs” (400 euros for 20 hours work a week in order to retain social security benefits) and 1 million agency workers. Added to this, has been the action of both Germany and Austria in restricting free movement of labour which has enabled the country to steal a march on its competitors in terms of installing industry in the former Communist bloc and also benefiting from the absence of a statutory minimum wage at home. But nothing in this approach is contrary to EU law. These are the rights that countries have retained and Germany has simply been better at using them. But the downside is now also evident. The proceeds of huge commercial surpluses had to find a home somewhere and often not very wise ones. Also, the electorate is waking up to the situation that the Schroeder era has given rise to to. Growing economic inequality and inadequate trained labour against the background of an overall deteriorating demographic situation. But these errors of economic policy are matched by errors in other countries. The task is to collectively put them right and only Germany has the means to achieve this. There seems to be, in particular, a reawakening in the body politic which has benefited the Greens more than the Socialists. And Merkel is, of course, now manouevring to allow her to dump the FDP and create an alliance with them (as Schroeder successfully did in his first administration). I think that the prospects for a successful outcome for all but the peripheral countries is very good. The Euro Plus Pact now allows for a confrontation of the different policy positions which, coupled with the drive by the Commission to complete the internal market (where Germany has also been expert in defending entrenched national limitations), should see a dramatic improvement in the overall situation in the next few years. Where I disagree with Bibow is in relation to cause and effect. We did not have to live beyond our means (and we still owe the money!). And his argument about the level of the euro does not hold water as an examination of exchange rate movements will reveal. @ Michael Hennigan I had sent my post before I read yours. The argument that one hears continuously from German representatives is that Germany cannot be asked to lower her “competitiveness” and “reduce her exports” as these are matters out of the hands of the government, it being left to employers and labour to establish wage levels. But Germany is not being asked to to do either. What she is being asked to do is to cease administrative measures which promote exports to the detriment of other sectors of the economy and to allow these sectors a normal growth pattern which would, in turn, increase German imports. Who, for example, funded the Kurzarbeit scheme which enabled the German “export machine” to take off again once the world economy began to pick up? The Economist remarked wisely some years ago that Germany had forgotten that the purpose of exports, in the heel of the hunt, is to pay for imports. The policy currently being followed is simply a continuation of a long tradition of mercantilism (in its various definitions). @ DOCM Deutsche Bank Research report, June 2010: One of the reasons why some Anglo-Saxon and Asian economies, for instance, boast larger services sectors than Germany is that, in these countries, more people are employed in less productive, low-skilled jobs. Due to Germany’s extensive social-security network there are fewer incentives here to take up such jobs. This limits the employment potential in the low-wage segment and hence potential domestic growth. Also, there is little willingness in Germany to pay people for doing simple jobs like packing shopping bags in the supermarket. If such jobs were created, this would – ceteris paribus – lead to higher product prices as companies would pass on higher wage costs to customers to the extent that this is tolerated by the price elasticities in the markets. Another way Germany could boost employment in labour-intensive services sectors would be to abolish its Zivildienst, community service to be carried out in lieu of compulsory military service. Young men doing community service are crowding out private-sector companies thanks to unmatchably low, government-subsidised wages. The Bundestag voted to scrap conscription last month, http://www.dbresearch.com/PROD/DBR_INTERNET_EN-PROD/PROD0000000000259115.pdf @ Michael Hennigan Deutsche Bank is just dancing around the problem. Why not introduce a minimum wage as in France (a topic tactfully avoided in the Euro Plus Pact)? And why pay slave labour wages to Hartz IV welfare recipients without any regard to the impact on general wage levels? The explanation lies in the “unholy alliance” to which I referred, most recently made evident in the compromise reached in relation to the reform of Hartz IV insisted upon by the constitutional court. This includes the introduction of a minimum wage in certain “sensitive” areas when the intention is simply to exclude foreign competition. It is no accident that the various legal cases in relation to “social dumping” have had their origins in cases taken by labour unions in Germany, Sweden, Finland and Luxembourg. These governments may have ceded the legal right to employers and unions to stitch up their labour markets but that is no reason for other countries in Europe to follow suit. Meanwhile, unions in Ireland wander around in a daze thinking Ireland can maintain the second lowest minimum wage in Europe. @ Michael Hennigan Oops. Second highest minimum wage. @DOCM You will be glad to hear that the TrueFinns command at least 20% of the vote in Finland. Personally, I’m happy to note that 80% of the decent people in Finland voted for other democratic parties. & Yes, we really do need to something reactionary about maintaining the second highest maximum wage in certain sectors in Europe. @DOCM So you want to increase the trade surplus even more ? The 80s are the past my friend – the fiscal austerity of that time was a ploy to increase credit and thus demand while not paying wages so the oligarchs could gain income on both ends of the economic and financial spectrum. However it depended on reduced capital spend and globalisation whose goal was wage deflation. This era of globalisation is over as there is no more capital to run down – monetarism is dead now. Without paying wages the gated communities that the rich reside will have to become castle keeps – they are cold damp places. The rich have lost their rationalism it seems. Role on the dark ages for a rest. @ All The following is an extract from an article by Tony Barber in the FT which is worth putting on the record. “It is all but impossible for Greek, Irish or Portuguese policymakers to challenge this narrative. The blunders committed in these countries during the euro’s first decade are un-deniable. In any case, just as military history is written by the victors, not the vanquished, so economic history is written by the creditors, not the debtors”. How right he is! http://www.ft.com/cms/s/0/4ed1d54a-6915-11e0-9040-00144feab49a.html#axzz1JrbNQFwr According to the German press this morning, tax receipts in Germany are running nearly 18% above expectation with income from corporation tax having doubled. This situation may be contrasted with that in France where the crisis in the public finances continues to deepen. Despite all the good news, the popularity of the CDU/CSU – FDP coalition continues to drop like a stone. The German electorate senses that something is not quite right. Unlike the era that ended with Kohl, they have ordinary run-of-the-mill politicians in charge, not statesmen. The feeling is not confined to Germany. The sight of the French government blocking the train tracks at Ventimiglia to prevent Tunisian migrants getting into France, on the basis of travel documents issued by Italy, seems from a bygone age. Meanwhile, in Libya the chances of Sarkozy having avenues named after him are evaporating. @ All Correction: corporation tax “up 50%”. [b]Extent of house price falls.[/b] Rental yield at peak of bubble 4%. Equilibrium around 8%, but rents have fallen by 25% so far: implies price falls of around 60% from peak. Prices often overshoot: fall of 70% to bring 10% yield. However, this assumes rest of economy continues to function normally. Collapsing employment implies many will be unable to meet mortgages, leading to forced sales at all levels of market. Many heavily indebted households will disappear abroad. Liquidation sales of unsold stock by bankrupt builders. Many households, including the very wealthy, that invested in apartments and commercial property will be forced to sell all assets to cover debts. Internationally unprecedented falls of 80% or more are therefore a real possibility. Comments are closed.