New Idea from Germany

The FT reports that the German economic advisory council advocates a ‘vast euro debt fund‘ (€2.3 trillion) which would be focused on debt redemption.

Update: this expert group has now written a VOX article on the topic.

69 replies on “New Idea from Germany”

@Philip Lane

A very interesting article.

Extraordinary how when the flood waters start lapping at the front door of non interventions, the ‘policy’ shift occurs. Intervention suddenly becomes essential. We even get brand new ideas on how to do it.

All Draghi has to do now is hold his nerve and let Italian bonds goes to 10%.
By then the whole of Germany and Europe will want him to intervene, because the alternative is collapse.
And it is beginning to dawn in Germany just how bad a collapse and 30%-40% currency revaluation would be for them.

Prof Sinn would not have as many sales of tractors to use in his illustrations.

When the citizens of Bavaria are asked: “do you want the deutschemark back or the Italians bailed out?”, what answer do you think they will give?

Italian bond auction Monday…tick tock time

And markets will not trust any fuzzy future potential solution….needs to be concrete and rapid…else catastrophic banks in PIIGS

You asked the wrong question. Inspired by Paddy Hillery , I would pose the following. Do you want the DM back or a job, savings, pension and the ability to go on holidays to anywhere other than Syria?
I suspect all bar the Bild reading Rangers supporters could figure it out.

Here is a link to the website of the German economic advisory council
LINK: /aktuellesjahrsgutachten.html

The first chapter (“Assume responsibility for Europe”) is available in english.

Merkel is against the implementation of a euro debt fund, because it needs the change of to many european treatises.

You think both the question and answer is obvious. If that were so, we would not have arrived at this sorry state. There is a significant body of opinion that still believes we can austere ourselves back to internal balance. You know we cannot. The simple folk who believe that deflation is the answer will not change their minds at this stage of he game. Why should they? They do not share your belief system. They will take the DM and it’s consequences, including the ones they cannot foresee.

This is a satire right? Germany advocating a trillion euro debt fund? This is someone’s idea of a joke?

Or maybe the joke was the EU response to the crisis over the last three years, and this proposal is just the punchline.

The pols in both the core and the periphery have known for some time that the current policy was doomed. However, they fear to tell their eletorates the truth. Now, however, Fritz the car worker is beginning to figure it out for himself that he is toast given the return of the DM.

Au contraire, mein herre. He thinks he is doomed if he bails out Giuseppe. The strong DM never hurt in the past, at least according to conventional wisdom

Handelsblatt reported in a preview of an article to be published tomorrow that a commission within Merkel’s Christian Democratic Union is working on a framework to allow a nation to exit the euro region without losing membership in the European Union if the country doesn’t want, or isn’t able, to comply with membership rules. The newspaper cited unnamed participants in the discussion.

Separately, Reuters reported unnamed sources as saying Germany and France are discussing plans for a “radical overhaul” of the EU that may include a smaller euro zone. A French government official told Bloomberg News there are no plans to shrink the 17-nation euro area. Speculation about such a step is ridiculous, said the official, who spoke on condition of anonymity.

And the UK has a plan…confirmed by Osborne.

Never too late … see Cartoon below: the German Constitutional Court can be overcome – and the real problem is that German Gov did not inform its citizenry of the facts – Sinn and other little deutschlanders jumped on the wagon (and not confined to Gemany) – but from what I’ve been able to gather – realists in Germany have been real for some time – and a Grand Coalition is possible at 24 hrs notice – Treaty change is inevitable and when an Angstrom from the Biggest Black Hole [see Cartoon – Bertrams is more precise than any economic equation I have ever encountered] a declaration of intent to Change Treaty should suffice if backed up by all 17 members (and most of them are already well socialized into doing what they are told to do ….. I have no time for little deutschelanders – I have less for little irelanders. Of course, simpleton might prove to be right again … as german public opinion is as fickle as irish public opinion …

Jurgen Habermas in May 2010

In our day, the German elites are enjoying the return to normality as a nation-state. The morally defeated nation that was once compelled to self-criticism is no longer anxious to speed up the quest for its place in the post-national configuration. In a globalised world, everyone has to learn to incorporate others’ points-of-view into his own. One political symptom of our dwindling willingness to learn that lesson is the German Constitutional Court’s verdicts on the Maastricht and Lisbon treaties, rulings that cling to dogmatic and outmoded legal conceptions of sovereignty. The solipsistic and normatively depleted mindset of this self-absorbed colossus in the middle of Europe can no longer even guarantee that the European Union will be preserved in its wavering status quo.

Accompanying CARTOON by Joep Bertrams highly relevant to TODAY.

Rumour that Kohl is making a come-back …. to save the French from next week …


Have heard similar about a plan to shrink the EZ being discussed in Germany.

Where did this German EAC paper suddenly appear from? It’s not something they knocked up on the back of a fag packet this week. Merkel doesn’t seem to like the idea. Claims it won’t get through court challenges but the authors say she’s talking tosh.

There is no need for Germany or France to intervene in any way shape or form. The most critically wounded members of the Euro Zone will exit of their own accord. It is of the utmost importance that they be treated fairly at the time of departure and afterwards. Continued membership in the EU should not be in question.

I am firmly convinced that the Euro Zone will survive largely intact.


Separately, Reuters reported unnamed sources as saying Germany and France are discussing plans for a “radical overhaul” of the EU that may include a smaller euro zone.

Like Yeats and the swans, we may wake some some day to find that we have been flown away!

The 5 Wise .. er .. 1 wise woman and 4 wise men

The government appoints the members for five years. Traditionally, one comes from the business associations, and one from the trade unions.

Chairman Wolfgang Franz, who is also the head of the Center for European Economic Research in Mannheim, has a reputation for free market economics and reform.

The other members are Lars Feld from the University of Freiburg, Christoph Schmidt from the Rheinisch-Westfälisches Institute of Economic Research, Beatrice Weder di Nauro from the University of Mainz (the council’s first and only woman) and Peter Bofinger from the University of Würzburg.,,15517805,00.html

I suspect you do not think that the future for Hans is as bright as he thinks it might be. After all the reichsmark nua will probably appreciate considerably. German debt GDP would probably reach Italian levels once the banking system was sorted. How long before the hard currency satellites begin to flee.

@ All

This story broke on a number of threads simultaneously. The following is an element of interest.

@ All

In case you missed it on the Roubini thread, following is a hurriedly corrected Google Translate version of the FAZ report of the handing over of the annual report of the German Council of Economic Experts.

“Angela Merkel is sceptical about the Council of Economic Experts proposed European “debt redemption fund” pact to tackle the debt crisis in the euro-zone. The model raises a number of constitutional questions, the Chancellor said on Wednesday at the handing over of the autumn report of the Advisory Council to the Federal Government.

The economists had proposed in its annual report that the euro countries outsource their debt that goes beyond the Maastricht limit of 60 percent of their GDP into a sinking fund with joint liability. Merkel said that a number of changes to the Treaties would be necessary. Moreover, such a concept in the operative management was “not possible under any circumstances.” She maintained her negative attitude towards a common liability for the debt of the euro countries.

The head of the Council of Experts, Wolfgang Franz, said that the proposed sinking fund differs significantly from common euro government bonds (€ bonds). The Fund would be abolished in accordance with strict guidelines to reduce debt in 20 to 25 years itself.

The economist Beatrice Weder the Mauro pointed out that the backing of gold reserves in the sinking fund had nothing to do with the discussion at the G20 summit in Cannes of a proposal to use foreign reserves to strengthen the current euro rescue fund EFSF. The idea of ​​the fund related to something else: “These are individual debt instruments. They are backed by their own security, “said Weder di Mauro. [Comment: In short, joint and not several and joint responsibility for participating countries]

The wise-men contradicted the assessment of the Chancellor that the proposal is legally vulnerable. The debt settlement pact could withstand a review by the Federal Constitutional Court, says the report.

Germany’s Economics Minister Philipp Roesler said the euro zone would be quickly converted into a stable union with stricter rules. Debt should not be collectivised but said the FDP leader. The proposals of the Coalition for an easier immigration of foreign skilled workers and more tax equity would enhance growth. [Comment: A bit late in the day to discover this!]

The wise-men expected 2012 only an economic increase of 0.9 percent to 3 percent this year. In a further tightening of the debt and banking crisis, the experts warn of disastrous consequences for the world economy: “In case of stagnation of world trade, Germany would fall into a recession.”

Interesting times!

@ PR Guy

It has been clear for some time that there is a struggle at the heart of the German establishment about the future course that Germany should take and that the jury is still out. While Merkel may find it easy to dismiss voices from outside Germany, it will be much more difficult to answer the carefully marshaled arguments of here own council of economic advisers, their contribution being couched unmistakeably in terms of countering every blocking thesis that she has hitherto been capable of advancing.

Herewith a direct link to the English version of the pertinent opening chapter of the wisemen’s report. It is destined to become a historical document, whther acted upon or not.

A good short & sweet breakdown of the Euro crisis in these 2 articles from Ed Harrison of credit write downs.…/how-austerity-in-europe-works.html…/11/the-euro-zone-is-one-giant-vendor...

The ECB clearly needs to be a quasi fiscal agency that credits non goverment euros to european goverment fiscal accounts.
If not the euro is toast.

It was my opinion this was the objective from the start given their very original & strange from a central bank perspective free gold on the asset side of their balance sheet.
However – I am puzzled by their lack of action given the graveness of the Italian situation.
They have perhaps chickened out and want the dollar to remain the worlds reserve currency or else they are very very good poker players.

Its either the Dollar or Gold.
There can only be one.

Papandreou is quoted in an article in the Telegraph as saying….Greece would do all it could to stay in the Eurozone.

That sounds ominous. Does he know more than anyone, hence the premature resignation…no replacement and the game of pass the poisoned chalice which nobody wants.

@ Dork

+1 . Impeccable MMT from Harrison.

‘Against this backdrop, national governments are then forced to cut spending, reducing net financial assets in the private sector. Reducing net financial assets means sucking money out of the private sector. And that will reduce consumption demand and harm credit. if private sector debt levels are high and banking systems are leveraged, as they now are in the euro system, this reduction of credit leads to financial distress, bankruptcies, bank failures and potentially systemic failure. That’s what austerity means in an environment of high debt and excessive financial sector leverage’

I guess the ECB is waiting for the OK from the governement side, but things haven’t got bad enough to shift the German mindset.

Where they going to find 1.3 trillion Euro? The Chinese aren’t interested. The G-20 aren’t interested. EFSF is having problems with spread borrowing lot less than that.

@The Dork

An .. er .. understandable and .. er .. illuminating link! I hear they are looking for you at the ECB?

The backchannel stuff to keep the markets calm is the Vox EU article. The front channel stuff on the price is here:

In short Merkel wants all the power in return for bailouts. However it was her who triggered Italy’s debt spiral, the same way the ECB triggered our bank runs.

And the real problem is: that it wasn’t lack of greater European integration which caused this crisis…yet she touts it as the solution.

All that’s happened here is a massive rise in the stakes, with the notion that surely someone will balk at catastrophe…a gigantic game of chicken. Problem is, that Merkozy earnestly belived in their fudge factory…and all the other players are still in place.

IMF+BRICS+USA better have a plan B….because Plan A (Europe fixes its mess), remains a grave risk. If Ms Lagarde has sense, she’ll withdraw to Washington and regain some of the IMF’s (lost/ceded) independence.

Classy European Bank Exposure Graph here – sorry if it’s already been posted. From Reuters via Guardian.

You can see how horribly it might all go wrong: French Banks are most exposed to Greece, Italy and Belgium, number 2 (to Germany) in Spain and number 3 (after Spain and Germany) in Portugal. But UK, US and German Banks are all massively exposed to France.

It’s getting close to place your bets time. I’m going for:

* The above suggestion in post is too complex and will take to long and has the whiff of EFSF mark two, when mark one isn’t even working.
* There is now sufficient recognition that austerity for all is a mistake, and that growth is more important than anything.
* This recognition in the bondholders themselves (and in particular the banks), who not only want ‘their’ money back, but would rather a nice operating market with peace and goodwill for all where they can make a profit (with preferably ‘technocratic’ politicians who don’t have funny ideas).
* Therefore bondholders will continue to pile pressure on the ECB to finally blow the dust off the famous big bazooka – regardless of previous positions, etc.
* However it is done, the ECB will decisively intervene. Entire Board may have to resign.
* Lots of politics to follow.

Simpler version:

* Break up of Euro too horrible to contemplate by various elites and lots of actual people.
* All roads lead to Frankfurt.

So… where are we this morning?

George has gone without naming his replacement and parting with ominous words that suggest Greece simply might not be able to stay in the Euro regardless of wanting to or not. The sticking point would appear to be Evangelos Venizelos, who has his eye on the long run (what happens after the interim government) and his own chances of power.

Silvio is sticking two fingers up at those non-Italians trying to get shot of him and shows all the signs of being more than happy to drag the whole mess down with him. The Italians who are trying to get rid of him are just ending up on his hit list for ‘later’. I wouldn’t be surprised if he has departed from Italy within a few months (to somewhere with no extradition agreement) and left a major dung heap behind him.

The fragrant Christine may have suddenly realised she is compromising the independence of the IMF by being too cosied up to certain European ‘politicians’ (not all elected) and is doing a slow back shuffle.

The Frankfurt Group are wondering if it isn’t all backfiring on them and maybe the ECB is the only viable option left to keep the European project alive. They may not bring it into play though until some of the weaker countries have announced they are leaving the Euro. Today (and the next week?) though will probably be a massive game of chicken to see if they can bluff their way through this.

The Americans are only interested in not triggering a credit event and to all extent and purpose have washed their hands of it all.

The Brits don’t really care who runs Europe as long as she’s good looking enough to stick on page 3 and it doesn’t harm their financial services industry.

In the rest of the world, the self-preservation society is alive and well. I don’t know if anyone has ever done business in China or India but to be on the receiving end (as Europe is) of a joint lecture from them about how they should behave is hypocrisy beyond belief.

Logic says that dead cats really don’t bounce. However, I lose money when I apply logic to the market. I vaguely recall using a ‘short butterfly spread’ in my youth. Let’s go back and have a look at how that works again.

Here’s a fun game to play:

Assuming the Euro 2.0 zone comprises Germany, France, Austria, Holland & Luxembourg, and then is looking for satellite countries, why should they choose Ireland?

A dodgy addition to moderate the value of Euro 2.0? With a built-in craven political class?

If Ireland does get chosen, is there any chance at all that it will be allowed to keep it’s corporate tax haven status?

It would be a ridiculously strong currency. Little advantage in it – can’t even print without consensus.
This is not a solution either. It’s a French ploy to get the Grrmans for “one last bailout” for Italy and then to cut the rest of the PIIGS free.

just hoping our political masters are looking at all options or will Ireland be caught napping again looks like the s**t is about to hit the fan.

@ All

Ok, market initially moved from/past Italy and straight onto France/Belgium/Austria this morning. We’re actually getting closer and closer to this turning up in Lower Sa (+15bps in tyields at the open)xony some morning and forcing the Germans to actually come up with a workable solution.

L-Pap to be sworn in as Greek PM in 90 mins apparently, so everything stabilising a little bit now.

Think they’re on it. Noonans attempts to align Ireland with “Northern European” economies very prescient. They’re doing a good job.


Lots of fault lines opening up now. That is good to see.

Looking at that reuters graph , with €416 billion of Italian debt in the French banks, it seems that the Franco/German fault line is Italy.

My money is on Draghi. He will let yields go up and up.
He is waiting on Germany to decide whether it wants a disordely collapse of the Europe or a no holes barred committment to intervene.

Strange that another critical moment in European history is being decided in Germany. Some of the past decisions taken there have not worked out too well for Europe!

Peter Bofinger, economic adviser to Angela, on Bloomberg a few mins ago – key point:

The Advisory Council Idea or the ECB …. soon.

Love that ‘soooon’…….

Greek unemployment figures show it’s going through the floor.

There’s a bit of a ‘buzz’ in Germany this morning. Not sure what it is. Some imminent announcement perhaps? Seems to be support anywhere near 5840 too which is great for diving in and out of.

Lucas Papademos, the soon-to-be Greek prime minister, is a fluent German speaker with a German wife.

You couldn’t make it up.

Papademos for Greece, Monti for Italy. The technocratic avoidance of democracy would be complete if Mr. McCarthy of this parish were appointed Austerian governor of this periphery.

Aber kann er Deutsch?

McCarthy for dictator? Yes please 🙂 we might get out of this hole faster with the no nonsense realist fact based approach of his

This solution is clearly from the German side.
The key points of this article are sound only if applied in a fiscal union complete with federal aid transfers. If countries like Italy are going to go as far as introducing debt brakes into their constitution and other measures mentioned here they should get a long term federal aid transfer system in return.
What advantage do Italy get in return for all those measures? It’s not clear. They clearly can’t spend the loans for growth as they would have to cut spending much more to achieve a 4.5% surplus according to this plan.

@PR Guy

re Papademos
If you going to install a puppet, then its best that he understands your instructions without the danger of any misunderstandings in translation.

from the Telegraphs

“Germany’s Bundesbank says there are no signs of a credit crunch in country.”

maybe its all that peripherial money flowing in to a euro safe haven such as Germany
i wonder how credit is flowing in Italy ,Spain ,Greece


Good riddance. Assume we start a bile-infused thread to celebrate his moving on??? 😀



United Kingdon-periphery (or the GIM as i like to call it) coming under the spotlight this evening…



This from the Guardian rolling service. Classic.

“4.56pm: What to make of this? Standard & Poor’s has admitted that it accidentally told some clients that it had cut France’s credit rating this afternoon (just before that spike in French bond yields).

“Here’s the official statement:

“As a result of a technical error, a message was automatically disseminated today to some subscribers of S&P’s Global Credit Portal suggesting that France’s credit rating had been changed. This is not the case: the ratings on Republic of France remain ‘AAA/A-1+’ with a stable outlook, and this incident is not related to any ratings surveillance activity. We are investigating the cause of the error.

“Rather embarrassing for S&P. Also makes you wonder why such a message was knocking around the S&P systems in the first place….”

@Bond Eoin Bond

Harvard for dear Lorenzo Bini-Smaghi! Must the The Fiction Faculty with Mairt_een Feld_steen where Capital never seems to Flow and Capital Flows are always to be ignored if they ever do

– the Trappist Monks in Bobbio will be left speechless at such a loss – course the bit of Harvard nous will look well on Dear Lorenzo’s upcoming magnum opus “How I single handedly screwed the EuroZone” sponsored by the Saintly Columbanus Bank AG for services rendered, with a foreword by its head of research, and published by the DinnyOBE Press.

😆 😆 😆

Does it seem to anyone else that Harvard and Yale social sciences departments seem to be used as a prestigious dumping ground for recently ousted controversial characters of less than immense apparent intellect?

A sort of international version of the House of Lords.


these large, rich universities have many centers and programmes that can host non-academic visitors in a flexible way – these are typically quite separate (physically and in terms of activities) from the academic departments.

@ Gavin

There appears to be an at least somewhat genuine answer to that last question/comment on ‘why’ it was knocking about – S&P have admitted they are reviewing/doing some admin work on France’s BICRA rating, which is used to rate the safety of the entire banking sector and is wholly seperate from the sovereign rating, but that this is where the confusion may have come from. Austria, Finland, and Denmark all had their BICRA rating downgraded this week already I think, very large review released from S&P.

@Gavin Kostick/Bond. Eoin Bond

There is another explanation. Newspapers write obituaries long before the individual concerned has departed so that they can be quickly cranked out. In a similar vein, companies that I deal with will draft several different press releases in advance of a known or anticipated event (especially ahead of trouble) and choose the appropriate one to use – as circumstances dictate. Which version of the truth shall we use today?

“The reports of my death are greatly exaggerated,” was the Mark Twain quotation after hearing that his obituary had been published in the New York Journal (though that’s not word for word what he actually said).

Mistaken publications of obituaries aren’t as rare as you might expect. A recent example is of Dave Swarbrick, the British folk/rock violinist, who was killed off mistakenly by the Daily Telegraph in April 1999 when they reported that his visit to hospital in Coventry had resulted in his death. He did at least get the opportunity to read a favourable account of his life, not something we all get to do, and to deliver the gag: “It’s not the first time I have died in Coventry.”

I doubt that Sarko is quite so sanguine about it all though.

Of course, it might just have been some wag of a PR Guy releasing it just after he had taken out a financial spread bet. Stranger things have happened.

All this volatility is great. I made twenty odd forays over the course of the day on the Dax constantly going up and down and got every one of them right 🙂
Happy days

@Gavin Kostick on Fishamble’s Tiny Plays for a country with only a very small amount of sovereignty left

Today’s is from Tom Swift and I hope you enjoy it.

Tom Swifts tiny play is terrific but his entry has also made it clear to me that the standard of entries is too high for me to measure up to, so I’ll stick to posting here.

@ All

‘G-Pap Is Not A Democratic Hero Part XXXVII’

Apparently he leaked ‘fake’ demands that were allegedly coming from L-Pap, all so he could (a) put his own lackey into power instead and (b) so that he could delay the new PM decision until tomorrow, when, as still-PM he would automatically be renewed as PASOK President for another 6 months. As previously noted, his legacy is unlikely to be kind, but where are all his cheerleaders now eh?

@Eoin Bond

I think St Georgious has played a Ciceronian blinder. I don’t really do cheer-leadin … (-;

What does GIM stand for?

I think his desire for popular backing, whether from political calculation or feeling, will be seen as the right move. I don’t believe a technocrat government can run a country in the face of even minority public opposition.


“I don’t believe a technocrat government can run a country in the face of even minority public opposition.”

I think you are correct. A technocrat government will simply carry out the Frankfurt Group instructions to the letter regardless of what any opposition is saying. They might get away with that in a country like Ireland but not in southern European countries. They have not thought through the consequences of this in Greece and Italy and I would not be surprised to eventually see them getting very ruthless and having to resort to extreme violence to quell the unrest. Unfortunately, people get killed in these situations. Once that happens…….. imagine having a couple of Syrias in the EZ 🙁

Spain currently poses a problem to the Frankfurt Group as it has imminent elections. They cannot impose a ‘technocrat’ government there (yet) so need to sweat it out while elections take place and a new government is formed (that can then be coerced). That’s dangerous as Spain is next weeks target (lots of money made out of Italy situation this week and the hits on the FT’s ‘How To Spend It’ went through the roof over the past couple of days!) and is especially vulnerable with no effective leadership in place.

We also have elections in Slovenia coming up after Spain and I see their bond yield went over 7% at one stage yesterday. Small beer maybe but then it only takes a small matchstick to set fire to a forest of trees (old Slovenian saying).

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