Did Wolfgang Schäuble really say this?

I’ve seen various explanations for the 2008 crisis: global imbalances, dodgy financial innovations, lack of proper financial supervision, the interaction of all of the above. And a few others besides.

But this is a new one to me, I must confess.

59 replies on “Did Wolfgang Schäuble really say this?”

Hmm, either it’s a dodgy translation of his speech, or he’s re-writing history to make the case for a common financial policy.

Maybe he has a very philosophical understanding of the term “public debt”, i.e. that when private debt becomes unbearable for large institutions they can always depend on a dig out from government.

Does Schaeuble really believe this, or is he being deliberately misleading?

I don’t know which is more worrying, but given what he has said in the past, I have to believe that he is playing to the gallery here.

It reminds me of the time when David Trimble said that the republic was a pathetic little country.

@ All

Easy there a sec., I can’t see any actual source for this, not even with Google translator and my mighty o-level German.

Anyone got an actual reference?

It might have been in a live speech, not transcribed.

It is rather disingenuous of Mr Krugman not to recognise
1) that there was a large build-up in public debt in the West in the years prior to the recent crises
2) that forecasts of the impact of demographics -alone – on the future burden of public debt in the West (with unchanged policies and reasonable growth scenarios) are off the wall entirely
3) that the first large country to see a substantial worsening of public finances – Japan – has the worst demographics, with Greece leading the way in Europe.

Of course, the 2007 crises and later developed in different ways in different countries, with diverse proximate culprits. But it is worthwhile to place the crisis in Western public finances in a much longer term global context. So you want to have in mind factors such as the accrued build-up in debt and probable future public liabilities, along with the varying impact of globalisation and competition. Economic historians doubtless can contribute usefully with considered analysis, and there should be no room for ideological nitpicking.

@Ciaran O’Hagan

It is interesting to that you focus on supposed fiscal causes of the crisis and talk about placing “the crisis in Western public finances in a much longer term global context”.

How about placing the excessive (and incompetent) risk taking by, and socialisation of losses of oversized financial institutions in a much longer term global context?

What is that Upton Sinclair said about getting a man to understand something when his job depends on him not understanding it.

@Gavin: hence the title of the post! I agree, you’d have to wonder, it sounds so odd.

Looks a little to blatantly surreal to me. Where is the source?


And private sector debt…..?

Allow me to bring back to memory that this is the very same Wolfgang Schaeuble who was Interior Minister in 2007 when he tried to build the legal foundation to introduce what became known as the ‘Bundes Trojaner’. the ‘Federal Trojan Virus’, or in other words, a remote forensic program to enable the state to read data on the computer infected.

The implications I leave up to your own fantasy to paint in vivid colors such Huxley/Orwellian nightmare.

One thing is for certain, the political class is loaded with twisted and dodgy characters, not only in Ireland that is.

Well I have to admit Krugman is right but there is so much credit deleveraging out there it seems public debt can’t take much more captain.

Besides Krugman comes up with some strange concepts also.
Bill Still has a interesting take on Krugmans anylasis although he is wrong about the similarity between loaning credit & spending real money in my opinion.

@ All

According to the FT Brussels blog, the “offending” comment was made at a Die Zeit forum on 18 August and was almost certainly taken out of context. Schaeuble has made no secret of the fact that he sees Germany as also having a major public debt problem (over 80% GNP if I am not mistaken).


Does it really matter? Public and private debt are now inextricably intermingled. The low debt figures for Ireland during the FF era were attributable to ephemeral bubble state income from property, financed by cheap loans on the basis of so-called “light regulation”. This was also true of the sub-prime bubble in the US. Could Irish economists not, at least, be agreed on that, even if Krugman chooses to ignore it?

Typical straw man from Krugman…set up the opposition as one dimensional Neanderthals, intent on destroying the world for the sake of philosophical purity, to make your own policy suggestions appear moderate.

I have yet to see him mention, once, the downside of “print it and spend it” not even inflation, it seems, is a risk to this policy…

I believe it was a barrons article that said, Krugman is so clever that he’s never wrong…indeed, even when he wrong, it’s because he’s right! So the US economy is not growing despite “never before in history” levels of printing and spending, but apparently the economy is not doing well because it wasn’t enough. Never wrong and never in doubt….our leader!

Keynesian solutions can no longer work because the private debt load is too high – the solution is to default on all private debt contracts and give people goverment tokens in place of their credit deposits.

Transactions can clear again as at the moment people don’t want the debt ogre on their shoulders.


I think you should be able to get people to agreed there was too much spending of borrowed money.

You might get quite a few to agree you can characterize Germany and China as vendor financing schemes.

It is strange though that “printing” by the banking system was never criticised by those who queue up to criticise as dangerously inflationary, printing by CBs.

Similarly, criticism of too much borrowing only emerged after it went out of vogue in the private sector.

It’s as if most commentators censor their own thinking about this in the same way a Fox News reporter might in reporting on Israeli/Palestinian disputes.

That’s right, because they pretend it’s all science when often is all politics. That’s what is so infuriating.

@bazza On Ciaran O’Hagans inability to use the word “bank” in a negative context.

What is that Upton Sinclair said about getting a man to understand something when his job depends on him not understanding it.


Ciaran’s use of the words “disingenuous” and “ideological nitpicking” is particularly rich.

Cue DOCM, another person with a similar though milder strain of global financial crisis blindness.

Does it really matter? Public and private debt are now inextricably intermingled.

Oh dear. This is Krugman’s point (as you well know), it does matter – nothing matters more. The two central features of the global financial crisis were that the financial markets failed badly in their role of allocating resources and the banks failed in their role of evaluating risks – the state ended up rescuing the latter to protect the former while also having to contend with the results of the misallocated labour and inequality that they both produced. This is a crisis of capitalism and we need a reformed capitalism to deal with it.

If Schäuble believes otherwise he is a part of the problem.

Says the FT Brussels Blog:

On his New York Times blog, Krugman takes issue with the German finance minister’s claim at a panel discussion in Frankfurt on Thursday that “economists worldwide” agree the 2008 eurozone crisis was triggered by excessive public debt “everywhere in the world”.

That suggests that the FT blogger recognizes the statement referred to, but it was made in a panel discussion, not in a speech as Krugman claims. Ministers are much more prone to gaffes in discussions than in speeches.

Almost relatedly…

Krugman takes a swipe at the economic dogma that enabled the majority of the profession to sit blithely by as our free markets turned out to be rather expensive to maintain, and while our ever more intense competition seemed to generate a lot of losers.


Money quote:

In short, there’s no reason at all to consider microeconomics the “real” economics and macroeconomics some kind of flaky impostor. Yes, micro is a lot more rigorous — but if it’s rigorously wrong, who cares?

The phrase “rigorously wrong” could have been made to describe the ECB.

@Shay Begorrah at 1:15pm

Sorry, unterminated html tag, the words ‘The phrase “rigorously wrong” could have been made to describe the ECB.’ were mine and not the Great Krugmans.

Actually Krugman is too generous. To me, “rigour” simply means proving theorems properly, without “handwaving”. AFAICT economists are typically about as careful with their proofs when doing macro as when doing micro. Unfortunately, economists have taken to using the word to mean something like: argument in a style acceptable to Robert E. Lucas.

@Kevin Donoghue @ 13:31

Without wading into an area I have no expertise in I believe that any argument can be restated in a Lucasian way by adding as the final clause “and given that the actors are all avaricious remorseless omniscient killer robots.”

There is debate over the use of the word “killer” with some saying the word should instead be “hermit” but I find that too, eh, dismal.

Throughout this (protracted) crisis German officialdom has shown little appreciation of the markets or real economy. Whilst they are right to be against a transfer union, they seem to have few other positions – hence Helmut Kohl’s smackdown of Merkel this week.

There is a deficit of leadership and understanding in Germany, which is why Ireland needs to be heard. Michael Noonan snoozing towards retirement on the sidelines, enthusiastically praising each Franco-German fudge, is neither a friend of Ireland, Germany, Europe, nor indeed the World given the global financial shock being caused by Europe.

My understanding is that Noonan has appointed a fiscal advisor (John McHale of this parish), but for economics and banking he relies on Andrew McDowell, John Moran and other DoF types.

Surely given that we are at the eye of a storm, that we might have a few heaveyweight advisers for him ?

@ All

For those interested in the issue of the overall reform of the international financial system, Der Spiegel has a translation of an article on the subject, including some informative graphs.


Reading it one understands the sense of grievance that is driving popular opinion in Germany. People there work hard, make excellent products and can hardly be blamed if the rest of the world wishes to buy them.

This is all true but an incomplete version of the reality as huge commercial trade surpluses simply do not arise by accident. They are created by policies deliberately designed to favour the export sector of an economy over the domestic. It is these policies that have to change in Germany’s case and there is now considerable evidence that this is beginning to happen, not least because many sectors of German society have woken up to the fact that they are major losers from this policy with their living standards being held artificially down while the proceeds of trade surpluses are frittered away on mistaken “investments” abroad.


However, being made a patsy of by the international financial system as it is run at present is not a pleasant experience for any party that happens to be a victim but it can only be changed by collective action. There is no sign of this happening. Indeed, Germany seems to have ranged herself, under Merkel, with China. Simply another major error of judgement among the many identified by Kohl in his recent article (appearing in the kiosks today and which has put the cat truly among the political pigeons of the CDU/CSU Union).

Merkel has, however, conceded that it is time for “decisions”. Greece, according to press reports, is invoking her own version of the ELA.

But of course china and Germany are on the same side, they are creditors…and the arguments they make are no different today than those of the US were in the 1920’s when it was the worlds major creditor.

We, the debtors, argue that “they” are making a mistake by insisting that debtor countries adopt some mixture of a) repaying debt and b) curtailing consumption and we say NOOOOOOOOOO! This is a mistake!…..our policy appears to be, allow US FX policy to destroy the debt (I.e. Destroy the purchasing power of the credits built up by china) and b) have Germany absorb the losses on the debt, forgive it and allow the system to reset as if nothing happened.

But something did happen, we over borrowed and over spent, we took the party too far, and the time has now come to count up the losses. In the natural negotiation around loss sharing, we say Germany should take the actual losses because, by reducing future consumption to meet balance the books in the future, we are already absorbing substantial potential losses in our quality of life….it’s a good try, but you can’t blame Merkel for having her suspicions..

In case anyone popped out to the moon for a snack and hasn’t noticed, looks like Ben has decided to take on the GOP and political tacticians in the White House, oh and that German bloke.

Less emphasis on ramping up asset prices – hasn’t worked as supposed, back to fiscal action.


“In case anyone popped out to the moon for a snack and hasn’t noticed”

How did you know where I was? Well, the Ely Bar/CHQ in the IFSC is very similar – it hasn’t got any atmosphere.

‘The markets’ sure don’t like it… and in conjunction with other bad news that’s going to be sloshing around this weekend, I can see the FTSE going back under 5000 early next week.

@DOCM at 14:56

The Spiegel article is a very good read, if predictably depressing.

I especially liked the former trader who set up the “Paul Woolley Centre for the Study of Capital Market Dysfunctionality” at the LSE with five million euro of his own money.


It could be mis-translation, but its an odd co-incidence that Noonan mis-spoke similarly recently, blaming our own problems on excessive spending by McCreevey.

Could it be tha the great and the good are staring a co-ordinated drum-beat of blaming public spending for the crisis to distract us from the fact that they are too cowardly yo address the real cause of the crisis, an out of control financial services ‘industry’.

If they all say the same thing,again and again, it will be receivied wisdom very quickly, like the Tea Party’s ‘discovery’ of the USA’s impending insolvency. Don’t let us fool ourselves that Europeans that much brighter than Yanks.

@Ciaran O’Hagan

So Japan’s public debt problems have nothing to do with the massive private sector credit bubble that preceded it? A short history lesson seems to be in order:

Fueled by low-interest mortgages, real-estate prices in Japan had risen so high that by the end of the 1980s just the land under the Imperial Palace in Tokyo was nominally worth more than all the real estate in California. Then, in late 1989, the bubble burst and real-estate prices plummeted, leaving Japan’s financial institutions saddled with toxic mortgages and facing bankruptcy.

Despite the common misconception that the Japanese government neglected the crisis, it intervened from the outset. In 1990, the Japanese Central Bank cut interest rates until they reached absolute zero. So money was free for banks to borrow. Nevertheless the Japanese stock market continued its fall, with the Nikkei index going from a high of 40,000 in 1989 to a low of 12,000 in 2001. So did real estate, which lost 80 percent of its value during this period.

The government next tried the classic Keynesian tactics, spending and tax cuts. Between 1991 and 1998, it pumped 100 trillion yen into the economy through public-works programs and, to further stimulate spending, cut taxes by 2 trillion yen. All that these measures succeeded in accomplishing was raising Japan’s public debt to 100 percent of its GDP.

To deal with the ever more ominous threat of bank insolvency, the Japanese government injected public funds directly into Japanese banks, investing first $100 billion in 1996, and then in 1998, under the Obuchi Plan, another $500 billion to pay for bank-loan losses, bank recapitalizations, and depositor protection. The bailout, which amounted to more than 12 percent of GDP, resuscitated the individual banks but not the financial system.

And there’s more, but that will do.

I guess the first rule of private-debt-club is not to talk about private debt.

The build up of public debt in the post 1970s west has been to prevent default of private debt malinvested.
This malinvestment began when Central banks targeted interest rates rather then the base to curb inflation which is its true cause.
This monetarist dogma has been catastrophic to real investment and capital growth.
You can easily avoid public debt expansion if you default on private deposits although it could cause poltical chaos.
Every crisis since then was “healed” in the hope that we could earn our way out of this but we just increased the TOTAL debt loads.

The long term public debt problem can be solved by eliminating the private sectors ability to issue criminal levels of credit aggregates.
Unfortunetly Japan has not learned – their post office savings is beginning to be privatised and soon another bout of malinvestment will cripple that nation.
Same as it ever was , same as it ever was.

Its easier to focus and hammer the salient facts than to stand back – a considerable distance, and carefully analyse how we got our collective financial and economic underwear into such a twist. Bryan G advises a well worthwhile history lesson. I concur, but it is a specific manifestation of a much larger (ie: global)problem which has been incubating for – lets say about 120 years, give or take a decade.

Permagrowth economies mandate annual, incremental increases in aggregate output, expressed as a trend line over decades. The occasional bubbles and depressions even out. This gambit works fine as long as productive output (which garners a surplus) exceeds the accumulation of debt. When the gambit inverts – as it did in the 1980s, then real trouble will eventually ensue. Like now.

For over two decades now, there have been an increasing cohort of folk looking to get a return on their ‘investment’ – aka: financial gambling disconnected from the productive side of an economy. That’s a Ponzi scheme, and these schemes burst badly. Like now.

So there’s the conundrum. How do you re-start the productive cycle, which requires the formation of capital and the sustained investment of said capital in a productive process that will yield a surplus? In the present circumstances you cannot.

Inflation (of money supply) has been going on since 2009. To what effect? To counter debt writedowns? Its not that no-one is in charge of this financial asylum. Its that they are attempting to re-start the economic engine by flooding it with fuel. We are in a stall, and without rapid and drastic remediation, we regress

@ Bklyn-rntr

I was addressing the issue of how Germany became such a large creditor nation and the consequences thereof. It has taken a different route to achieve this position to that taken by China but I cannot see any political future for the key nation in a European monetary union – and an even wider single market – in any alliance other than with its European partners. Neither can Helmut Kohl and, I think, a growing number of the German people.

Discussion between Wolfgang Schäuble and Helmut Schmidt (former german Chancellor, now 92 years old) will be broadcasted and streamed over the Internet on Sunday. Then you can find out, if Schäuble really said it (in german).

Die Diskussion – ZEIT-Konferenz: Finanzplatz
“Währungs- und Finanzstabilität in Europa”
Moderation Josef Joffe
13.00 – 14.00 CET Livestream
I think you live in another time zone (GMT). Your problems arrive a little earlier than ours.

Thanks for clarification. It is interesting that the standard “road to industrial development” appears to begin with “export over internal consumption”. in Japan, Korea and then china, India, that was arbitrage labor costs, but germany has been about exporting excess high end production.

My comment was meant to highlight the natural give and take between creditor and debtor…the Anglo world was creditor in the 1920’s and again in 1980’s to Latin America and in both cases the refrain was , to gain respectability, the debt must be repaid. Today the anglo refrain is, it is not possible and the irresponsible side is the creditor.

The how is interesting too, but the present reality is that Germany produces stuff that others want and, even outside a euro framework, it is likely to continue to produce stuff that others want/need. If Anglo countries default on their debt, German banks are finished and German savings are toast, but German productivity will restore them quickly. If Germany leaves the union, the rest are in a more precarious state. Thirty odd years of over consumption and industrial decline have left us in the position that, if we had to live within our means all of a sudden, the gap betwwn where consumption is and where it would need to be is so vast, that to close it risks social havoc.

We are in a negotiation, a horse trade, in which the consequences of losing are painful for a Germany that has carried a two monkeys on it’s back for the last 20 years (e Germany and the the PIGS). The consequences of losing are catastrophic for the other side.

The power always ends up in the hands of the creditor, I suspect this is inevitable,

@ Bklyn-rntr

The comment by Dan O’Brien provides a background to the debate.


He is right on most points but wrong, in my opinion, on two fundamental ones. The first is the unthinking acceptance of the myth that Kohl traded introduction of the euro for German unification. There is little in the historical record to support this view and, indeed, it has been denied by those directly involved. Kohl saw through the initiation of the introduction of the euro as part of his broader vision of, as Thomas Mann put it, a European Germany rather than a German Europe.

This leads to the second error in the analysis, the idea that other countries in Europe have to mimic the German model of economic development. Apart from it being an impossibility – all countries cannot run large trade surpluses at the same time – it would deny the fundamental bargain underpinning the European Economic Community viz. the four freedoms – goods, services, labour and capital – in order to implement a regulated internal market (with a common external tariff) in return for solidarity in terms of the promotion of balanced economic development.

This is the bargain – accentuated in terms of its implications by the introduction of the euro – which the present generation of German leaders has either forgotten or is choosing to ignore. Far from monkeys on Germany’s back, the countries of the periphery have been major markets for German exports.

The internal market is far from complete. All countries indulge in protective administrative actions but Germany has been a champion – as in many other areas – in this league. This has also got to change.

It seems that we are about to find out whether Kohl was right or wrong. I would be optimistic. Other ountries are beginning to play Germany at her own game and the near farce of the Finns looking for collateral for their participation in the second Greek bailout has shown with total clarity for even the most blinkered politicians that the intergovernmental approach simply does not work.

The situation is complicated by the fact that the entire attempt to resolve the crisis got off on the wrong foot because of German insistence on acting outside the treaties. The pending judgement of the German constitutional court will, it is to be hoped, clarify the situation and help make clear that Germany’s constitutional problems with her involvement with Europe – assuming that they exist – are for her to resolve and not anybody else.

German demands have been indulged on the assumption that the country knew where it was going. It is time to prove that this assumption is correct.

What funds excessive debt, public and private? Oh yeah, excessive savings. Now who has been banging on about a global savings glut?

Mr. Schauble, if he did indeed say this, is agreeing with Mr. Krugman. It is rather ironic that Mr. Krugman cannot see this just because it is enunciated from the borrower side rather than the lender.

Of course, some of us believe that both sides are wrong and that inappropriate central bank interest rates, unfettered free trade and monetarism in general are to blame, but then, even unorthodox economists stick to that orthodoxy.

@ All

It hardly matters whether or not Schaeuble said what he is supposed to have said. What matters is the future direction of German policy. It is become increasingly evident that a change of direction is under way triggered largely by the debacle of German foreign policy in relation to Libya. It seems that Westerwelle, the luckless FDP foreign minister, may be for the high jump as he is being disowned not alone by Merkel and the CDU but alos by party colleagues in the FDP. “Deep respect” is now being expressed both by Merkel and her probably soon to depart foreign minister for the NATO contribution.


@ hoganmahew

“What funds excessive debt, public and private? Oh yeah, excessive savings.”

Nicely put.

Does that mean the job is to get the cash out of the savers and get it to the debtors?

Is it not the case that the levels of public debt in Germany, France, Japan, Greece and possibly the USA are leaving us in a dificult position now? What caused those levels of debt is another question. The build up of Greece’s publci debt and even Ireland’s private debt are not the problem. They are the more visible symptoms of a broader illness that has done much greater damage than it did in those countries.

Japan and Germany (and Ireland) have incurred public debt while trying to dealing with structural and social issues (Economic crises, Unififcation). These seem to be legitimate reasons to incur public debt but in the case of economic crises, they are properly avoided. Also, in the case of Ireland, public expenditure was a problem even if it had not led to Public debt while the problem was developing.

It is not clear that the same genuine reasons for incurring high public debt apply to Italy, Greece and France, although it would be interesting to hear whether people think the high debt was properly incurred in those countries.

“What funds excessive debt, public and private? Oh yeah, excessive savings.”

Is inequality of wealth the real problem?

@Gavin & zhou
“Is inequality of wealth the real problem?”
Absolutely. Or rather, inequality of earnings and inequality of redistribution. Capital taxes are too low, income taxes (in general) are too high. Capital is less important in a world flush with it. Incomes are important in a world where net incomes are too low.

I suspect we disagree less than it appears, but I would take the other side of the “German choice” and the “far from monkeys on germany’s back, the countries on the periphers have been major markets for German exports”

I agree wholeheartedly that there can be only one Germany and I fully understand that Germany has used it’s overly numerous banks, operating at sub economic levels of returns, to subsididize to it’s export sector. I even understand the Frustration of the debtor countries at Germany’s intransigence.

Here’s my worry. That Dan O’Brien piece in the IT is a hack job of know nothing propaganda wrapped up in a veneer of historical understanding. The underlying message, that only Germany gets to decide the future, yet only it suffers the consequences of its actions and we must fight a German Europe and hope for a European Germany.

Germany is Europe, it always has been. It is a country that was manipulated and bullied for centuries as the French and UK built their empires. The 80 or so years from independence were particularly harrowing for all of Europe and Germany was more aggressor than victim, but it was always a mainland European power fighting for its place. Its blood and its iron forged what Europe is today as much as any other country’s. We, liberal anglo’s can try to forget that, but its true.

The periphery did make a good export market for German goods, and it borrowed from the German banks to fund their lifestyles, but the PEriphery chose not to manage their consumers or banks, and they chose, whatever the pressure from abroad, to assume private sector debt…to portray the problem today as one which only has consequences for Germany is irresponsible in the extreme, and is actually dangerous.

When Germany finally defaulted on reparations in the 1920’s the US, which had funded the whole reconstruction of Europe through debt that it expected to have repaid, was hit with a whopper depression, but it did better than Germany and it won the war, why was that? Well lots of reasons, but the main one was that the productivity that the US enjoyed in 1929 still existed in 1941, it took it’s hit and was still stronger than everyone. Germany was a destroyed entity in 1919, loaded with debt and stripped of it’s most productive regions, and yet, it came back even more dominant once it shrugged off the shackles of it’s debt…..this is reality, it won’t change

A narrative that says, well its up to you Germany, you either absorb the losses and (by implication reset the debt machine at zero so we can all go again) or the Euro falls apart, is irresponsible and dangerous.

@ Bklyn_rntr

We should not drift too far away from the central point which is the undeniable fact that Germany, once again, has entered centre stage and, whether one likes it or not, the direction the country chooses to go in really matters.

It is a matter of fact that, apart from the bailout of some of their own banks, German taxpayers up to this point have not paid one penny to other countries. What they have accepted is a contingent liability in relation to the provision of certain guarantees and the promise of some cash up front for the ESM when, and if, it comes into existence.

A former head of the Bundesbank, Poehl, is on record as saying that the Greek bailout is a scheme to save German banks and rich Greeks. I agree with that assessment.


Given the success of your previous correspondences, perhaps you should write to Schauble and ask him if he said it. 🙂

DOCM, fair enough re staying on topic, I completely agree with you that Germany is acting to defend it’s banks. I don’t accept that the main topic of the post is in any way a serious assertion by schuable, except in the sense that it suited Krugman’s article.

The Germans are, understandablyacting to defend their banks, we, the Greeks, the Portuguese etc, all did the same thing. German politicians likely understand that their banks are toast already, so they are trying to establish a new set of rules which will prevent a repeat of the current debacle. Without those rules it will be politically impossible to forgive debt or to proceed with Any solution to this crisis.

We are frustrated that the Germans are not rolling over and “fixing the problem” to the satisfaction of the markets (and incidentally to Krugman’s satisfaction too), but why should the ordinary German accept that it was their fault for lending too much? Especially, when the subtext is that they should now forget the debt and leave the system as is…..


In my opinion, you have a distorted view on Germany, which I doubt that facts would change it.

You should however try better than linking to an article where someone is calling for higher tax rates, as evidence of domestic policy failure.

The Germans are risk averse given the evidence of low direst shareholdings and yes, low fertility rates – – given the history of the 20th century , we should welcome risk aversion when there is also serious caution about military engagements.

Germany does not have a low debt; it still has problems with convergence of the East where GDP is 30% lower than in the former Federal Republic; as for the domestic side, check the trade data since the recovery started.

As car production has increased in overseas markets, it also has resulted in increased production at home; should the government promote higher earnings to prompt more work in Warsaw?

In fact the trade with the Poles shows that neighbouring countries are also benefiting from the quality brand recognition in emerging markets.

There are plenty of claims that the euro will fail unless bank shareholders are bailed out, I’ve not seen any explanations but I have seen it repeated very often.

If something comes without explanation or proof but instead is repeated over and over and over and over then I suspect a truism being peddled.

Pretending that an action is done to pretend something liked is a political ploy and as far as I can tell that is what is being done now.

Can someone please explain: Why would a souverign default lead to the end of the euro?

IMO it would not be inevitable that the euro would end, but it would be very very likely.

A sovereign default now, would be a default against the ECB and since the ECB would have to be recapitalized, it would put enormous pressure on euro area governments to either pay up or leave. I don’t know the stats, but I believe germany is on the hook for 27% of any recap and France for 22% (I need to lok up these data).

In the last 3 years, europes private sector banks, which are bust in my opinion, have been using the sovereign debt that they own as collateral to get cash from the ECB. Thats why the ECB comes under so much pressure to loosen the securities rules whenever a country looks as if it will be downgrades. So if a country defaulted, then the ECB will try to pass the collateral back to the private sector banks to recoup the cash provided, but find these banks can’t repay the cash.

Then the real problem begins. The ECB will be bust and will need to be recapitalized by the national central banks. BUT, the Finns say they won’t fund it as do a couple of other countries. Greece, Ireland, Portugal and potentially Spain and Italy, don’t have the capacity to fund. That leave France (a question mark on that one too) and Germany holding the bag.

If Ireland were Germany and our politicians said, hey, we need to accept that these countries are bust, we must recapitalize the ECb and forget about the debt (oh and recap our own banks too), do you think the Irish electorate would be happy about that?

This is why Germany is under so much pressure, if we were faced with the same choices, the option to leave the ECB hanging (effectively ending the euro) would be very tempting.

@ Jesper

Maybe Christine Lagarde has the explanation!

“Second, banks need urgent recapitalization. They must be strong enough to withstand the risks of sovereigns and weak growth. This is key to cutting the chains of contagion. If it is not addressed, we could easily see the further spread of economic weakness to core countries, or even a debilitating liquidity crisis. The most efficient solution would be mandatory substantial recapitalization—seeking private resources first, but using public funds if necessary. One option would be to mobilize EFSF or other European-wide funding to recapitalize banks directly, which would avoid placing even greater burdens on vulnerable sovereigns”.


@ Bklyn_rntr

There are a number of general points which I would like to emphasise and it is that I consider Germany to be a normal democracy with all the advantages and disadvantages associated with it. I just happen to agree with the view of the vast majority of observers that the present German government is putting party electoral interests ahead of everything else and damaging both Germany, the EU and the wider world economy in the process.

There are a number of specific points that are also worth emphasising. The fatal initial error by Merkel was to insist that the EU and the EA act outside the treaties. When one thinks about it, this made, and still makes, no sense as it implies that her government believes that to act within the treaties would be illegal, at least in eyes of the German constitutional court. But acting outside the treaties can hardly remedy this situation, if it exists. It is the job of the ECJ to decide on the conformity of actions under the treaties – including those taken by the ECB – not that of the Bundesbank, the President of the Federal Republic nor, for that matter, the German constitutional court (a fact that has been recognised, practically without reservation, by most, if not all, constitutional courts in the EU).

There is a faint hope that the German court might, on this occasion, finally fall into line but I doubt it. It will simply fail to address the issue, as it did in its Lisbon Treaty judgement, and kick the government instead, which is what is really a source of concern to the political establishment, both government and opposition.

The second fatal misstep is the insistence on unanimity, the problem being that the right to exercise a veto cannot be other than inclusive (as Finland and Slovakia are demonstrating). This is a common simplistic trap into which politicians of all member countries regularly fall (as the waving of the “Irish veto” by assorted politicians over the years will attest).

On those points I agree entirely. Developed world politicians across the world were blindsided by the crisis and Merkel was no exception except in the sense that she “got” the potentially toxic after effects of initial US (Paulson) policies.

I suppose my point is that the rest of Europe is asking a lot from Germany and we are asking in a very rude manner. The narrative is a) the consumer binge was because Germany lent too much, and not necessarily because we borrowed too much and b) if Germany won’t do what’s needed, then the euro will fail and it’s all Germany’s fault.

But the conversation has to be more constructive than that, doesn’t it? Merkel is playing whatever cards she has to protect the German population/ her government from a complete snow job. She is using the bureaucratic processes to slow down a final resolution until she can get some sort of fig leaf to show German voters. We (the UK and the debtor countries in the Euro zone) have decided to ignore this aspect of the problem and instead portray Merkel’s position as short term politicking, or worse, brinksmanship. I suspect the powers that be understand that the day of reckoning is coming and they know that the time is coming when the conversation will be not, how do we fix it? But who do we blame for this disaster?

France and Germany are in a historic, politically motivated, process of union. They are opting for ever closer union, with or without the peripheral economies. I don’t know where Ireland, Spain, or Portugal’s interests lie, but I know that a default and subsequent collapse of the current euro wil be horrendous for them. We need to give Germany a break, understand that their choices are difficult too and find a way to make Germany’s support of the euro more palatable. A bit of a ramble I know, and I appreciate your comments


if the ECB becomes insolvent then it is mandatory for the euro-zone countries to recap. Hence the big resistance against the ECB buying bonds or it accepting dodgy collateral. The participation in the EFSF is optional.

Losses on soverign bonds would first hit bank-equity and possibly (unlikely?) then sub-debt holders of the banks where equity would be hit would lose out and after this the ECB would be hit with losses.

I still do not see a plausible scenario where not bailing out investors will lead to the disappearance of the euro.


her argument is to recap the banks and get equity stakes, not to buy bonds. A bank recap might be needed after a default so it appears she believes the euro will survive a soverign default.

As for the vast majority observers argument…. That argument was used to argue that AAA-rated bonds would never lose more than a few percentages (at worst) in value. Recent past would indicate that the vast majority of observers can be wrong.

I know, mandatory. But it’s mandatory to repay your mortgage and it’s mandatory to respect capital hierarchy (equity destroyed before debt), how are those going? I suppose the point is that mandatory doesn’t carry much weight when you don’t have money, as far as I know, the countries of the Eurozone are sovereign nations and if they decide to NOT honor the recap because they can’t (GIIPS) or won’t (Slovenia, Finland) what wil the rest do?

On the EFSF, I see that as the voluntary, above board mechanism that, it is hoped, will become a conduit for cleaning out the system. The problem is the fund is neither big enough nor flexible enough to prevent disaster. So, the back up, informal mechanism, is to have the ECB pretend that crappy collateral is really good collateral.

You mention that the banks will see equity hit, and maybe sub debt holders hit, what you don’t do is assign a size of losses on that. If the banks lose a trillion but tangible equity is 100bn and debt outstanding is 200bn, where does the rest of the money come from? It has to come from sovereign national governments. There is a formula for that (the 27% from Germany) and those contributions are indeed mandatory…what happens when a country can’t or won’t pay it?

@ Bklyn_rntr

Despite the assumption of the opposite by some, I have a very considerable degree of sympathy for the German position (as can be divined from other comments by me in relation to Ireland paying its debts and ceasing to blame home-grown troubles on others). But all countries must accept that their policies are open to criticism and the acid test is; are they working? It is clear that in Germany’s case, they are not.

The bitter truth is that the only two EU instances that are still functioning after a fashion are the Commission (despite the deadening presence of Barroso) and the ECB. This is because their activities are anchored in the treaties and neither is subject to the rule of unanimity. Indeed, the Commission can decide by simple majority of its members and may finally be getting the gumption to do so.

There is a very interesting story in today’s Sunday Times to which I cannot link because of the pay barrier. However, the opening three paragraphs give the flavour.

“A RADICAL plan to halt a new pan-European credit crunch is being drawn up by officials in Brussels.

Policymakers at the European Central Bank (ECB) and the European Commission are considering offering central guarantees over certain types of debt issued by banks.

The move comes amid concerns that some eurozone banks have been shut out of international money markets”.

There’s that word “guarantees” again.

It appears time is likely to be called on Merkel’s foolish fudges, Spet 7th is increasingly looking like D-Date:

and Italy, Spain, Belgium, Greece and France are in advanced ‘reality avoidance’ mode as they continue their short selling ban:

The German fudges are neither fish nor fowl, and are helping no one. Merkel is floundering in a fatal mix of denial and delayed reaction

Let alone that the cultural and political implications of the present ‘course’ are not being discussed…fact is no one is admitting to the financial stability peril. Europe faces a sovereign and banking crisis, and at the least the toxic uncertainty will bring Europe recession…though frankly this is looking more like a Lehman’s x10 event…

I am probably flogging a dead horse now, but anyway. First off, I enjoy your posts and I agree with most of what you say about how the ball is in Germany’s court now. In no way was I referring to your comments to say they were specifically anti German or that you personally deny Ireland’s responsibility. Good discussion generally avoid ad hominems and I hope I avoided them too.

My disagreement with the narrative is that it has moved a lot in the last three years. It started with… well it’s us but we can handle it (the blanket guarantee), then to…. it’s partly us but with a bit of luck we can kick it forward until our big brothers in Europe find a resolution. Today it’s, well Merkel is an irresponsible loser and anyway none of this would have happened had the Germans not lent us the money.

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