Understanding the German Approach to Economic Policy

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27 replies on “Understanding the German Approach to Economic Policy”

Interview with Bundesbank President
Bigger Debt Cut for Greece Would Set Bad Example

In a SPIEGEL interview, Jens Weidmann, president of Germany’s central bank, discusses Greece’s reform efforts and the second EU/IMF bailout for the country. He argues against sweeping debt relief for Athens, saying that other crisis-stricken euro-zone members might see it as an easy way out of their problems.


To be deconstructed in parallel with the above briefing note. Or – The Deluded Illusionists are in control of the EZ Agenda!

Ditto on Dr. Merkel’s ‘Fiscal Corset’ – as Spiegel puts it.


I sense an Op-ed coming on …..

The Objective Reality in The Owl and the Pussycat!

From the brevity and tone of the post it appears that a barge-pole is being used to measure how far away mainstream Irish economists should stay from this.

I read the interesting paper, but noted it was more interesting from what it left out to what it left in. I suspect though that most mainstream economists educated with theory and course material up to 1980 would resonate with the paper’s analysis. But the paper requires me again to return to my pet focus, the elephant in the room, the developments in the global financial markets that have occurred since 1970 on. Thus the authors use classical indices based on fiscal measures such as austerity, budget deficits, supply and demand, surpluses, competitiveness to rest their case. But they neglect to point to the switching of Wall Street, London et al in 1970 through new paper financial models based on derivatives that facilitate speculation in the futures and forex markets; this speculation has made it easy to both create debt and to multiply debt and to trade debt. This has made markets more volatile and vulnerable to events such as those we had in 1987 and in 2008. Unfortunately, within academia there is a dearth of publications describing the negative influence of these new financial services, debt markets on global economies and on currencies, such as the euro. Do not underestimate the effect on the euro on changes in interbank lending practices fed by fears among US banks that large investment banks in the euro are stocked up on CDS derivatives and other financial paper that are worthless. It was derivative scares that brought the crash of 1987; it was derivative scares that brought down AIG in 2008. It is derivative based scares that have dried up interbank lending in the eurozone. Financial paper created the conditions for easy lending in the euro; fears that banks have created bubbles in property in Ireland, Spain are not without foundation. Perhaps the authors need to revise the economic models they use to analyse the German economic model; it has not been uncontaminated or unaffected by financial paper events. There are issues of surpluses, austerity and deficits and competitiveness; but alongside such serious issues, there is the financial paper elephant in the room. Current solution outcomes in Europe have amounted to tacit agreement to feed the elephant of the banks and the financial institutions at the expense of taxpayers austerity. However, this is a mistake, because the elephant of banks and financial paper services after a period of being fed with starving taxpayers, will then run amok , causing untold damage, about which your guess is as good as mine !

Beginning to dislike this deep poltical anylasis of other European countries as if it was our business – we should just deal with them on a inter sovergin level and all of us somehow put this European disaster experiment behind us as politics in ones home country can be hard enough to grasp sometimes.
For example a Irish elite not dependent on the Euro Teat could have told the Germans back in 2008 that if we receive austerity to pay back unrepayable debt then the debt becomes unrepayable – beginning with malinvested credit Bonds with default working its way down to deposits , sovergin debt etc etc.
That would have changed the dynamic.
Its best to keep it simple stupid don’t you think ? – especially in formal chains of command as withen the cracks of confusion fly the Vultures & the Ravens.

Meanwhile the Sunday Indo Rags vaguely Churchillian howls of “We shall fight on the beaches, we shall fight on the landing grounds, we shall fight in the fields and in the streets, we shall fight in the hills – but no just yet” has had its day in the Sun.
This Euro Cretinism needs to be accepted for what it is – a epic disaster for the European commons –
First they came for the small farmers and eventually they will come knocking on all of our doors.
Its time we face this evil – rather then dance with it although I must admit its a fun playground for the Malcontents of this world

It is useful to see the term “ordoliberalism” entering the debate even if it is, in fact, a bit of myth. Ironically, Professor Sinn was one of the parties to its demythologising in a controversial book published in 2005 dealing with Germany as the “Bazaar Economy”. The following is from the IFO site.


Even if he has aspects of the Traget 2 debate wrong, in this instance he is right.

Ordoliberalism can be defined as the strict application of competition law if confined to Germany. Unfortunately, issues of competition within a single market do not stop at national borders.

As to the idea that the state does not intervene, this is as about as true of Germany as any other developed European economcy i.e. not at all! A good example would be the solar energy industry on which Der Spiegel had an enlightening article recently.


Waving the environmental flag can be a smokescreen for all kinds of activities (as countries have learned since the introduction of Article 114.3 and 4 TFEU allowing certain derogations – largely on the inistence of the more environmentally conscious countries – in the context of the establishment of the internal market).

Browsing Der Spiegel, I came across thsi article.


In case anybody missed it cf. the paper by the officials of the Bundesbank on the Target 2 issue.

Of course, Merkel is right about having a few years to solve the problem but wrong about the solution. It is that set out in the letter from the twelve heads of state and government with regard to strengthening the single market. This got short shrift at the recent European Summit. We have instead a strategy based on the shaky ground of a rapprochement of the two major economies in the EA based on an outdated, protectionist social market economy

From your link above….

SPIEGEL: Wouldn’t it be more honest to say that Greece is bankrupt and finally grant it the inevitable debt relief?

Weidmann: There is already a debt haircut …

SPIEGEL: … but only for private, not public, creditors.

Weidmann: With their capital commitments and low interest rates, public creditors play a significant role in the new program. The risks are being nearly entirely transferred to the public sector. It’s totally acceptable that private-sector investors also have to bear the risk for their earlier investment decisions.

If it is entirely acceptable to the Bundesbank that private sector investors have to bear the risk on earlier investment decisions ( in the case of Greece) then why did we pay out that 1+ billion in the case of our defunct bank a few weeks back.
Secondly, how much is left to pay out to risk investors in those failed institutions and can we now take Herr Weidmann at his word.

Funny that the ordoliberalism ‘theory’ of the markets was conveniently silent when the German and French banks were being bailed out.
What we have here is national self interest being suitably dressed up in an untested ‘academic theory’.
In short propaganda to obscure or deflect attention from the devastating effects of German policy on other economies.
Swallow this and you will swallow anything.

On the letter of the Twelve, this is what PM Cameron had to say at his press conference after the European Council.

“Let me start with growth. Yesterday’s unemployment figures for Europe, more than 24 million people out of work, are a stark reminder that we need to recover Europe’s dynamism and create jobs. Before this summit, 11 other EU leaders and myself set out an action plan for growth and many more have backed our plan since then. This is an unprecedented coalition; it brings together countries from all four corners of Europe. It wasn’t just the traditional allies from the northern European countries. It included Spain, it included Italy, it included Poland and many others. I have to say this letter has been the main focus at this Council. Together, the countries that signed this letter represent over half of the EU’s population – a quarter of a billion people. We made it clear that we should agree concrete steps at this meeting. Yesterday I was frustrated that the draft summit communiqué did not do this. But today in Brussels, as you will see when the communiqué is published, we have made our voice heard.

The communiqué has been fundamentally rewritten in line with our demands. There was in the original communiqué no mention of deepening the single market in services; now we have a clear commitment to take action in that area. There was nothing on tackling regulated professions and properly opening up this vital element of the single market; now we have a clear commitment to make progress on that specific area. There was no reference to deregulation; now we have clear references including sectoral targets, a timetable and targeted action for micro-enterprises – those firms that employ less than 10 people. There was no mention of completing the internal energy market. This is a change that can add several percentage points to EU GDP. There is now in the communiqué, a specific deadline to achieve this by June 2014. There was, incredibly, no mention of trade – one of the great drivers of economic growth. Now there will be a special focus on trade, including trade deals at our next meeting in June.

Now let me be clear, this was not just a British initiative. We were joined by a strong group of leading countries, all of whom spoke up very strongly at the Council meeting at dinner last night and again at the meeting we had this morning. I would say that for the first time since we’ve been setting out these ideas, our letter really did become the agenda for this meeting of the European Council. We now have a plan that we must stick to in the months ahead. We have the words, now we need to make sure we get the actions that follow from those words”.

The countries concerned have the necessary majorities to put through the relevant legislation. The Commission has to propose and defend it (a lot is already in the pipeline). Martin Schulz, the new President of the European Parliament, was dismissive of the original letter.

The representatives of organised labour in Europe have a clear choice; do they continue to defend only the interests of their members in the lifeboat or do something to assist those that have fallen out (including those queueing to seek opportunities to leave this country to the eternal shame of those watching and capable of doing something about it).


What about the representatives of .. er .. organised financial capital? Time you explicitly declared your interests …


Political strategy, as distinct from any economic ideology, of the Bundesbank is to protect German Banking/Financial system at all costs; due to inter-linkages with Wall St. this is part of their latently strategic accord with Herr Geithner.

I completely agree with the the content of the Monti-Cameron letter,but it hardly amounts to an alternate policy to the present austerity policy .It might increase the long term growth path of Europe by a few tenth of 1%,but meanwhile this will not calm the markets.Let’s do that, but it will change essentially nothing in the near term.When keynesians like Krugman speak of a growth policy they mean a massive injection of liquidities and large budgets deficits until full employment but ,rightly or wrongly ,nobody in Europe has the stomach for it.

We are in the season of pre election posturing with France going to the polls on April 22nd 2012 and a run off on May 6th if necessary. Germany goes to the polls between Sept. 1st and Oct. 27th 2013 on a Sunday or Public Holiday. Not even elections interfere with work in Germany.

Conditions in both countries are at their best in the run up to national elections. France is likely to move to the left of centre with a heated attack on unfair trading practices that the base will applaud enthusiastically. Germany will continue to stimulate the economy up to Sept. 2013. Merkel will continue to enjoy widespread support (50% presently) and will head up a new Coalition Gov’t. Merkel’s base is the business class that wants free trade, stable currency, less Gov’t debt and cuts to social services.

Ireland should prepare itself immediately for a brazen frontal assault on corporate income tax rates and after Sept 2013 for less largesse from the ECB.

Our referendum is coming at a very sensitive time. A no vote means not another red cent out of the EU, EC, ECB until after Sept 2013. After a period of chaos there will be a second referendum but it will not really matter because our reputation as dilettantes will be cemented.

The brilliance of the Kildare Street intelligentsia continues to underwhelm. The Indo has already embarked on its anybody but SF campaign. Even the Finally Finished could be resurrected.

We are in the midst of social breakdown in Kerry the latest being a woman in her eighties robbed in broad daylight and another also in her eighties robbed around midnight in her home. These events are now routine as the Gov’t props up bondholders and cuts back on Gardai.

@ Overseas commentator

I did not say that it was an alternate policy but it is an essential accompanying one if any form of cautious reflation is to be undertaken. The core problem is that identified in the Bundesbank paper; it is saying implicitly that, unless confidence is restored in the banking system of the economies in difficulties, the euro system will collapse. This confidence can, however, only be restored if the balance of payments problem that is the core source of difficulty is resolved. And this can only happen if the liberalisation sought by Cameron occurs.

It is unfortunate that we do not have anyone in the Commission of the stature of Delors to drive the necessary programme as happened at the time of the creation of the single market for trade in goods. What we have instead is a situation in which several commissioners are responsible and with little confidence in them.

The irony of the situation as far as Ireland is concerned is that the assistance which the country is receiving is delaying and distorting the kind of action that is actually required. An example would be the excessive cuts in capital expenditure relative to current expenditure.

Brendan Keenan has an excellent article today on the infamous Croke Park Agreement which, unless the economic tide starts to come in unexpectedly, will be judged by history with the opprobrium that it deserves.


Apart from Monti, the ball is now firmly in the hands of Rajoy. The countries mentioned by Cameron can make up the numbers. The question is whether they will face down the vested interests in their own countries to do so. They may have to because they are otherwise between the devil and deep blue sea; restore competitivity by this route (internal devaluation) or leave the euro.


“The representatives of organised labour in Europe have a clear choice; do they continue to defend only the interests of their members in the lifeboat or do something to assist those that have fallen out (including those queueing to seek opportunities to leave this country to the eternal shame of those watching and capable of doing something about it).”


The RTE new clip below is a shocking indictment of our country. No amount of political or union bluster will defy the reality of those queues.

@DOCM / Overseas

While commending Cameron for the letter the proposals contained therein, even if implemented 100%, would struggle to make a serious impact on EU unemployment in the short to medium term.
However the knock on effect from an agreed implementation of the such collective measures would loosen up private investment in enterprises that I suspect has seriously reduced in all countries due to uncertainty. It has of virtually collapsed in Ireland. [I recall Seamus Coffey’s presentation at the recent conference demonstrating the extent of the investment collapse in Ireland].

One has to wonder if the German or French unemployment rate was as high as the Spanish or Irish, would we be listening to the same olde, same olde, austerity mantras from Merkel &CO.
On reflection there is no need to wonder. There would be different solutions being implemented.


Re “Croke Park Agreement which, unless the economic tide starts to come in unexpectedly, will be judged by history with the opprobrium that it deserves.”

We are still stuck in this counter cyclical euro love bubble nonsense where we slum the workers and demand more and more austerity.

But we’ve the blinkers and blindfolds on when it comes to the financial services and banks hosing
odious debt interest onto troubled economies.

Croke Park is nothing to the ¢3.1 bn annual debt reparations to IBRC based PN’s. Croke Park is nothing to the troika penal interest rates. Its nothing to the bailout debt this country is saddled with.

The EZ love bubble ‘compact’ ‘esm’ nonsense has to come to an end sooner or later; either through market based enforced default on a capsized economy such as ours, or on demand that the ‘run amok’ debt fracking of the peripherals end.

Collapse is ensured so long as the Troika, ECB and the EMU insist in collaborating with Goldman Sachs and the european investment banks to hoover up debt in Europe.

Instead of hiding bankrupt economies with a bankrupt currency model that is destroying europe’s hard won democratic model, we should be dismantling the corrupt financial system built on the mirage of casino debt debt that will never be paid back.

As long as austerity is directed solely at the consumer, sovereign and individual, and not at the lender curbing excessive reliance on instruments of debt that are corrupt, don’t work, are ponzi scams of the financial service industry, based on paper driven manipulation and distortion
of markets, austerity is just another big scam to extort debt from gullible victims, whose cohort is filled with politicians and euro technocrats owned by the banks.

Some look with 2d glasses at the profligate consumer drunk on lending and argue the consumer needs discipline, frugality and self imposed austerity. That is true, but there is more to be seen here than meets the eye.

Wear 3D glasses and see debt hosed freely by the banks frenzied by the lure of profit and interest uptick on profit. See a financial system distorted and weighted unfairly towards the banks private interest with rules bent and twisted by deregulation to allow for toxic speculation, malpractice and insider corruption.

Instead of reward for success, there is ‘no bank can fail’ reward for failure. See a casino of debt where the casino owners and banking cartels print their own regulation in their own favour.

This is a world where the financial industry has taken over ownership of the political world; the new function of politicians is to administer debt ridden vassal states in such a way as to extract maximum debt retribution by the banks.

So, we got tut tut over Croke Park and bullshit we can’t get someone to run a small bank in Ireland for less that ¢200K.

We get bullshit about competitiveness when in your face lack of competition comes from the abandonment of open market principles of fair capitalism for zombie banks nobody wants apart from vested private interest debt extractors.

The very bullshitters lecturing us about competition come from the most uncompetitive, over protected, distorted, corrupt, badly managed, parts of the economy, the financial sector in league with the political sector, that created the mess and amazingly (not) are the ones most benefiting from this mess.

What bankers really mean by competition is the dismantling of the public service and social welfare system; a system of laisser faire for banks with markets completely controlled by banks, a Latin American model of poverty for the masses and a fascism built on socialism for the banks, a banana republic model already ensnaring many third world countries constricted and asphyxiated by debt….

long past the time to cull the banks and impose new rules on all paper transactions with removal if not super controls required of open market exchanges where investment models based on toxic debt manipulation and improvised explosive debt instruments, IED’s can be safely defused, sanitised and decontaminated.

Sure we need golden rules of 3%, 60% for sovereigns; but show me similar rules rules for banking and financial instruments and capitalism for banks; rather than the new model of socialism for banks leeching democratic and social models across the world to build a new world order banking hegemony around the big five Citigroup, Bank of America, Goldman Sachs, Morgan Stanley and JP Morgan, European investment banks and banks similar the IRish pillar zombies.

@ Joseph Ryan

That Expo picture says it all…so much for turnaround and growth propaganda….hope there were plenty of people with video uploadig to youTube !

@ Colm

“Croke Park is nothing to the troika penal interest rates.”

Eh, what penal rates are these? The EFSF/EFSM is now lending without any margin at all.


“They (Cameron’s Euro Area allies) may have to because they are otherwise between the devil and deep blue sea; restore competitivity by this route (internal devaluation) or leave the euro.”

‘Internal devaluation’ is being resisted forcefully by those riding the ‘gravy-train’ for obvious reasons, but they can point to some legitimate fears that it will focus on cutting the costs of labour inputs alone (and leave other egregious inefficiencies and rent-gouging untouched) and result in deflation that will damage already over-leveraged balance sheets in many sectors.

This is another area where cant, hypocrisy and bluster (aka BS) rule the roost, but most of the economists are silent and refuse to shed light in these issues. I can understand why those with knowledge and competence on macroeconomic, fiscal and monetary matters limit their posts and comments to these areas, but surely we have some with knowledge and competence in microeconomic sectoral and policy matters?

@ Jens Ulbrich & Alexander Lipponer of the Bundesbank

Clarification on Target-2 much appreciated.

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