Some thoughts on crisis resolution

I would usually include this as a comment on my previous post.  Philip has urged us to put more substantive comments as new posts on the grounds that many readers do not read the comments – I hope that is not true.  

Commenters have rightly pointed to the substantial uncertainty surrounding the growth projections in the SPU.   Kevin’s post also puts a question mark over near-term projections.   This uncertainty is a major theme of the IFAC’s recent Fiscal Assessment Report (available here).    Although it is benchmarked on the projections in Budget 2012 rather than recently released SPU, one of the things we do in the report is examine the budgetary implications out to 2015 of alternative nominal growth assumptions.    The Figures on page 34 provide a sensitivity analysis based on a relatively simple simulation model that allows for two-way causality between the deficit and the state of the economy.   Figure 3.3.c shows the implied additional discretionary adjustments that would be required to meet the EDP target of a deficit below 3 percent of GDP in 2015 based on alternative nominal growth assumptions. 

On the question of the need for a less contractionary fiscal stance for the euro zone as a whole that Kevin emphasises, Simon Wren-Lewis had a typically thoughtful piece a couple of weeks back on the constraints on fiscal policy within the monetary union (see here).   Unfortunately, I am sceptical that much will be forthcoming in this direction.   While I am under no illusions about the massive – some might say impossible – political challenge, I think the best route to ease the contractionary forces within the euro zone still remain with the ECB.   A credible commitment to a higher euro zone inflation target (say 4 percent) – or, even better, and price-level target based on underlying 4 percent inflation – offers a real opportunity.  

While there are downsides, this revised target could accomplish a number of things: (i) with a clear mandate to achieve this single target, it is compatible with a reasonable definition of price stability; (ii) it would allow for lower real interest rates, thereby boosting interest-sensitive spending; (iii) given inevitable nominal rigidities, it would allow for a more feasible route to real exchange rate depreciations in the periphery relative to the core; (iv) it should lead to a nominal depreciation of the euro, allowing further  trade-weighted real depreciation for the periphery; (v) it would help ease real debt burdens; and (vi) it would help ease the overall euro zone budget constraint through higher seigniorage revenues.  

I am probably more sympathetic than many readers to the concerns of stronger euro zone countries over the large contingent liabilities and moral hazard problems that come with substantially beefed up mutual fiscal support mechanisms.   But, while recognising the value that countries place on price stability, the extent of the euro-zone crisis means that a higher inflation target appears to score well on any reasonable cost-benefit analysis.   Some (sensible) radicalism is badly needed. 

81 replies on “Some thoughts on crisis resolution”


With a 4% eurozone inflation target there would be light at the end of the tunnel.

In addition to the benefits that John highlights, those who care about the euro for its own sake might also appreciate the much-reduced likelihood that one or more countries will be forced to depart the zone.

If you question the basis of the system I guess its not sensible.

Growth under this NWO system can only express itself through commercial bank credit / debt production.

The absurd China syndrome on the banks of the Shannon is a perfect expression of this.
That Chinese surplus of money came from western banks hyperinflation of credit , some of which they turned into US treasuries.
We wish to tap into this hyperinflation to pay off our hyper inflated debts.

But these are not logical activities as it does not increase wealth.
We need rational domestic organic money production that will rebuild the broken commons around us and relocalise and increase redundencey of this extremely vulnerable and over specialised economic system.

“A credible commitment to a higher euro zone inflation target (say 4 percent)” is just wishful thinking if the ECB is the sort of institution I think it is. I’d really love to be wrong about that. So what I’d like to see is some evidence that the guys with the power (mostly German, with some Italian sidekicks) have ever shown any willingness to compromise on that issue. Anyone?

If no such evidence exists, we might as well be discussing textbook-style optimal policy rules, in the tradition of The Optimum Quantity of Money and suchlike. Here in what Brad DeLong calls the sewer of Romulus the choices are uglier.

I agree a 4% inflation target is the way to go but I’m afraid Kevin in right, the ECB won’t change.

We have to leave the euro.

@ BrianH and BeeCeeTee

Dan O’Brien had an interesting article in the Irish Times today, saying that Germany needs to be isolated within Europe for them to realise the error of their ways, and that Sarko had enabled them to avoid this isolation thus far (as did the Dutch in my view, but again that may be changing). Enter Monsieur Hollande….

Inflation which suits us does not suit Germany*.

How do you square this circle in the end?

* it probably does not suit us either and we would be better off with targeted debt writedown instead of a blanket transfer from all borrowers to all savers but thats a separate argument


I doubt an implosion of the euro zone would suit Germany either. But I think we have to recognise there is a limit to the price they are willing to pay to save it. It may be a case of making the “lesser of two evils” not so evil.


Yes, I read the article this morning. He’s right, but I’m not sure Hollande will be able to shift the Germans.

It appears to me that Merkel hasn’t explained to the German people all the benefits of the euro for Germany and that now it is their turn to be generous. I met two German businessmen a few months ago and they looked and me in shock and disbelief when I suggested it was time for Germany to step up. German society has erased WWII from their collective memory and it appears the Marshall Plan was erased along with it.

Isn’t a negotiation between two parties where there is a possibility or more than a binary outcome – in other words, either one side or the other’s position prevailed – isn’t it usual to meet between the two contending positions.

“A credible commitment to a higher euro zone inflation target (say 4 percent) – or, even better, and price-level target based on underlying 4 percent inflation – offers a real opportunity. ”

So if Germany wants 2% inflation and Greece/Spain/Italy/Portugal/Ireland/Belgium/Hungary/Cyprus and possibly France want 5-10%, then wouldn’t you be astounded if the resultant position for price stability at the ECB was ….. 2%. Where’s the give and take in that?

@John Mch

How do you think Bernanke would get on in the US if he tried to officially target inflation at 4%?

Do you think it would be easier (without the DAX halving first) in Europe?

What would that do to the commodity complex?

I see J-C Trichet was wheeled out today to talk to German TV and said (the same as Cameron?) that Europe is only halfway through this crisis.

He hasn’t gone away you know.

“Philip has urged us to put more substantive comments as new posts on the grounds that many readers do not read the comments – I hope that is not true.”

Every comment thread turns rapidly into a rant about the stupidity of Irish and EU politicians, as well as irrelevant discussions about gold and/or oil. Why bother to find the 1-3 good contributions in that chaff?

@John McH But what if Richard Koo is right? Bit of a moot question I know since we still don’t know the answer to Japan.

@Brian H
Its not up to German society to pay for European society or more accuretly their corporate business interests.
Otherwise there would be no German society.

The Eurozone Frankestein experiment is over – get over it.

In terms of economic declines this is much worse then the post Napoleonic phase as we have declining energy densities now yet they expect us to pay off this stock of debt with metaphysical capital !!

PS I know our masters don’t do GNP forecasts anymore but how are Finance & ESRI (albeit a token .1% in Feb) posting positive GNP forecasts for Y2012 with consumption , investment etc etc tanking ?

PS PS – any funds given over to even road maintenance must be questioned given we will have to deal with a Industrial collapse wether we stay in or out of the Euro.
All available capital must be put into 19th century rather then 20th century Industrial developments as the energy density is simply not there to fund or sustain a American Graffiti type Ireland.

Eventually the capital flows from this latest bubble will burst and then where will that leave us ?
I suspect this new bubble thingy is funded directly from Washington to give a illusion of progress or some such – it will collapse like all other post 1970 cultural illusions pretending to be Industry.

Our sole fiscal goal should be about increasing the domestic redundencey of the place , not increasing out exposure to global capital flows to even more absurd levels.


I think if Mr. Bernanke faced the particular constellation of problems in the euro zone he would act quite pragmatically; I suspect that despite the blood on the floor the US political establishment would act pragmatically too.

I think it is harder in Europe.

You will have to help me with the “commodity complex”.

@Jagdip Singh,
This isn’t a negotiation between equals. As I understand it the German line is somewhat as follows:

You joined the Eurozone because you wanted low inflation and low interest rates. We already had those blessings and we were a bit reluctant because we foresaw trouble if the Mediterranean countries were included. (We weren’t too sure about Ireland either but it wasn’t big enough to make a material difference.) So we made sure everyone understood that you don’t get to have low inflation and low interest rates without discipline; also, we made damn sure the ECB would be set up in accordance with our specifications. Now you’re saying it’s too tough? Nobody promised you a cushy life. If you can’t hack it the alternative is to break it up. Remember though, you won’t find it so easy to establish the credibility of the franc, the lira, the peseta and the punt. We reckon we’ll have no problem establishing the credibility of the D-mark. So make up your minds: stay in a strict, low-inflation Eurozone or leave. It’s up to you. You knew how Germans feel about inflation when you joined.

I’m no apologist for German policy-makers, but I can relate to their point of view. I can’t see Hollande changing it much. He can either knuckle under like Sarkozy did or he can take France out of the Eurozone. I’d prefer the latter but I’m more inclined to bet on the former.

Part of dealing with the crisis from the ECB pov is better communication apparently. Hence, the reason for holding the meeting in Barcelona today (and I quote) to “become better known to the citizens.”

These would be the citizens that are currently being denied access to this location by thousands of armed Spanish police in the surrounding area?


Fair point. Richard Koo provides an important challenge.

I think Paul Krugman gets the response about right — but there are no certainties. Given the particular problems of the euro zone — especially the need in many countries for real depreciation — there is likley to be some premium benefit to additional inflation.

Pauls Krugman’s repsonse to Koo’s argument:


I agree with a lot of your post, but I also have to agree with a lot of the other commentators that the chances of Germany accepting this are slim – unless, that is, there is a clear and imminent threat to the existence of the Euro.

I think the missing piece of the puzzle, between the sensible economic proposal outlined in your post and political reality, was summed up nicely yesterday in KO’R’s post on Ideas and Interest.

At the risk of repeating myself, there is a battle of ideas going on at the moment in Europe, between the Bundesbank’s view of the world and the rest of the EZ. Not only is Germany by far the greatest economic power it is also idealogically wedded to its own political-economic doctrine.

Furthermore, given the boom Germany is currently enjoying because its economy is feeding off the low real exchange rate, it has very little incentive to actually solve the crisis. Can you imagine what would happen to the Euro if uncertainty in the Eurozone could be solved in the short term? The Euro’s value would go through the roof eroding a very large chunk of Germany’s “competitiveness”.

Germany has set the crisis resolution up as a zero-sum game.

A positive outcome for the periphery – and the implementation of ideas such as a 4% inflation target – will only be possible if the prevailing Germanic narrative of the crisis is defeated. A good start to this would be the defeat of the upcoming referendum.

People are talking as if there is only a political elite withen Europe.

This is in fact 3 dimensional chess game with significant collusion between the various actors.
1. The High Elite
2. The Corporate Elite
3. The Political Elite.

Ever since debt could not be monetized (1970s) the Political elite have lost all the games but are simply happy to get paid in the companies chips to keep the illusion of activity alive.
We are dealing with a fundamentally sick system that cannot be saved.
The system can only be sustained by increasing the tempo towards further debt slavery.

The Political elite is not allowed to check (money power) its opponents to the left (credit money) or right (base money)
Again it is there to sustain a fiction and is happy to remain quiet about this obvious flaw in the game once it gets paid in chips.

so after 4 years of laughing at the germans for how they are silly to be seeing the inflation bogeyman in every fix the best ye can come up with is …….

@John I don’t disagree apart from the niggling position we seem to have ensnared ourselves in within the EU/ EZ where the savers are predominantly in one bloc and the borrowers in another.

Some novel approach is clearly required and were it politically possible this is as good as any but with one further caveat.

In Ireland we’ve become wedded to the idea that monetary policy alone drives inflation (our fiscal policy during the boom clearly had nothing to do with it, all down to German interest rates and the evil ECB). If the ECB could be convinced to relax its inflation target, what would the risks be then of Germany using fiscal policy to target inflation?

This can only work if Germany buys in, and that’s not going to happen until the risk of an EZ implosion is imminent. But as you said, in that scenario (if by then it is not too late) it might be preferable to them to a full scale transfer union.

@John I don’t disagree apart from the niggling position we seem to have ensnared ourselves in within the EU/ EZ where the savers are predominantly in one bloc and the borrowers in another.

Some novel approach is clearly required and were it politically possible this is as good as any but with one further caveat.

In Ireland we’ve become wedded to the idea that monetary policy alone drives inflation (our fiscal policy during the boom clearly had nothing to do with it, all down to German interest rates and the evil ECB). If the ECB could be convinced to relax its inflation target, what would the risks be then of Germany using fiscal policy to target inflation?

This can only work if Germany buys in, and that’s not going to happen until the risk of an EZ implosion is imminent. But as you said, in that scenario (if by then it is not too late) it might be preferable to them to a full scale transfer union.

Is it necessary for Germany to agree to a change in the inflation target? Surely the rest of the Eurozone would be enough to outvote them.

@BeeCeeTee, if Germany is outvoted, why should Germany stay in the EZ? Just to be seen as good Europeans? They might put up with it for a while, but not for long.

The domestic elites in each country like this arrangement – they can always blame Germany so therefore you can increase their paper wealth exponentially without too much flak from their base of operations.

The capital of countries including Germany has been completly hollowed out.
There has been a massive wage deflation coming out of the core since 1980ish — for every action there is a equal and opposite reaction and all that.
(Why make Nuclear plants when there is no demand , build cheaper coal fired power stations in China instead increasing your profit margin.)

Credit inflation has sustained demand – this has reached the ends of the Earth and bounced back in 2007.
The BRICs exist in their current form because of wage deflation , capital export in the west.

Its the old slave arbitrage system – the banks did this with the Caribbean sugar plantations back in the day with domestic capital such as , machinery , Mules , skills exported on ships in return for the sugar.

Cork was a major centre for this by the way – it explains the tradional sweet shops near the Butter exchange.

The supply chain is now absurdly tenuous with very little profit from it at these high oil prices.

The entire construct is about to invert.

@ John McHale,

This is your second post in the space of a week that I’ve found agreeable. Welcome to the darkside.

Ignoring the political difficulties, it’s hard to see how you would stoke inflation in some of the periphery given the austerity measures committed to. I think there is room for a well structured QE programme (one targeted at getting member states debt ratios down over a 10-15yr period). And at some point explain to Germany that this isn’t a zero sum game.

Taking an extract from my first posting on the other thread:

“Many international commentators on FX are suggesting a significant devaluation of the euro against other major currencies in a relatively short timeframe (say within the next 18 months). It’s becoming commonplace (again) to hear of 1 euro = 1 $, etc, say 30-35% devaluation. That would be helpful! However, these fx projections have been consistently wrong (and the US just prints money or swaps it for euros in backstop arrangements) to keep its currency down. China is also suspected of being involved in keeping the euro high, in its own economic interest.”

A dollop of increased inflation would be helpful also. A (market) devaluation of the euro in conjunction with that inflation might be one way of compensating the Germans….making their exports even more competitive.

The US and China could do a lot more in this area to assist Europe…but they are not doing so. The EU itself via ECB QE could also do more to assist itself on this.

Relative price adjustment is just as important as maintaining the overall level of aggregate demand, so we certainly agree about the desirability of a higher rate of inflation John.

“@ John McHale,

This is your second post in the space of a week that I’ve found agreeable. Welcome to the darkside.”

I had to resist the temptation earlier to use that exact phrase!

Bernanke would have no problem talking higher inflation targets, just like he did a decade ago. The problem arises when whoever the talker is gets to run the central bank.

I really think that for the ECB ‘price stability’ – by which they mean aping the traditions of the BuBa is an existential problem for them as an institution. However much the periphery representatives on the board would be up for it, it doesn’t matter unless the Germans and the old ECU core change their spots. The Euro is intrinsically brittle in the regard.

Maybe the ECB could eventually follow an O’Neil run BOE and the Fed down that road, but from a practical standpoint it isn’t easy to imagine the leading.

If you look at the S&P, DAX and FTSE100 you will note they are close to highs. I suggested a little while back they might not stay there. If the DAX in particular were to drop say, 35% from its recent high, this sort of argument would get attention. Near the highs, there is almost no prospect of it being given real consideration in my view.

Commodities have acted to dampen demand at QE’d up prices, but they have generally been drifting off. Copper looks particularly interesting. The unhelpful jargon was just a pointer towards the problems of high input prices likely to follow any 4% inflation target – and the anticipation of that as an incentive for people to argue against it.

@John McHale

… (sensible) radicalism … Hmmmmmm

Spose this might refer to Kanter_Inflation of 3% as distinct from Galloperin_Inflation of 4%

… and ECB printing Two Trillion for the Sovereigns as distinct from printing Four Trillion …

And … it might even work ….

That said, I would need to think some more on the concept of ‘(sensible) radicalism’ in an Irish context … I suspect that empirics would be rather sparse …


Something is amiss.

As you say all the indices are close to highs but when you turn to the bond markets they are in risk off mode. Swiss 10 yr down to .62% and German 10 yr at 1.61%. Jap at 0.89%.

Just looked at Unicredit at 2.7. That one third of its value before the reverse split and recap. Total market cap of 4.95b.

Strikes me that all is not well despite the equity markets and that something is about to blow.

The bond pricing says it all.

@Ahura, the point is to stir inflation in the core but not so much in the periphery. That’s where the real exchange rate depreciation comes from. A percent of inflation in the periphery and 5% in the core would be a great outcome.

@ John McHale,

I think a look at the graph at the link below demonstrates how unlikely the current system of money creation is likely to lead to resolution.

It’s a graph of total deposits with, and total debts to, the Irish banking sector over time.

1. It demonstrates the main point of many of my previous posts which is that money is created by banks in parallel with debt and that money is deleted as debts are repaid.

2. It also shows how unique this recession is since we now owe much more than exists in an era when mortgages cannot increase in duration.

3. It shows Ireland’s likely growth prospects since a declining money supply will mean a reduction in GDP or GNP because of our methods of measuring both.

Paul Ferguson
Sensible Money

Raising the inflation target is a non-starter; maybe the Linke Party might support it but what other German party would; Draghi would have to countenace a split GC with more tahn Germany opposing such a move, and what about our friends, the bond investors?

When Blanchard of the IMF proposed such a move a few years ago, he got little support — the attitude was that the expectation would be that the target would be raised again.

The big jump in inflation in the 1970s caught bond investors on the hop and sovereign debt maturities were generally over a long maturity profile.

@ MH Agreed. Would introduce moral hazard into target setting, and that will not happen.

Would also undermine the ECB…..and the currency (so some positive consequences perhaps in that alone?). But any more undermining of same beyond that which has already happened?

@ K O Donoghue

You may well have outlined simplisitically what the german attitude is but that ain’t what we, and more importantly, they, signed up to in the Maastricht treaty.

and you are right – they will have no problem establishing the credibility of the DM….but they’ll do at the price that will inflict serious damage on their export industries.

Perhaps changing the inflation target is a no no. A nominal growth target of 5% would do the trick.


German Finance Minister Wolfgang Schäuble is the leading candidate to become the president of the Euro Group, the common currency’s powerful decision-making body. But if François Hollande wins the upcoming French election, he could scupper the appointment, dealing a major blow to Chancellor Merkel.

Some observers in Brussels haven’t ruled out the idea that Juncker might stay in office in the end despite his repeated statements that he would step down. The 57-year-old, observers say, is just waiting for people to beg for him to stay — and it’s very possible that is exactly what will happen after Sunday’s election in France.


Festina lente! Smoke away … U doin OK.


Getting serious …. baad baad newz … on EU PMI

Euro region manufacturing shrank for a ninth month in April, adding to signs an economic slump in the region is getting worse.

A factory gauge based on a survey of purchasing managers slipped to 45.9 from 47.7 in March, London-based Markit Economics said today.

That’s the lowest in 34 months and compares with an estimate of 46 published on April 23rd. A reading below 50 indicates contraction.

Empirical support for Krugman’s ‘Economic Suicide’ ….

Supposing the inflation target is raised to 4%.
Supposing it is believed.

“ii) it would allow for lower real interest rates, thereby boosting interest-sensitive spending”
Who is going to buy peripheral bonds, even short-term ones, that don’t offer 4%+? Likewise core bonds? I don’t see that it will offer lower real interest rates at all.

“(iii) given inevitable nominal rigidities, it would allow for a more feasible route to real exchange rate depreciations in the periphery relative to the core”
Huh? Only if wages in the periphery fail to rise to match any wage rises in the core.

“(iv) it should lead to a nominal depreciation of the euro, allowing further trade-weighted real depreciation for the periphery”
The US has been trying to cheapen the dollar for some time with limited success. Much of the effect of this has been diminished by increased speculation in commodities with a view to superior returns over bonds and as an inflation hedge.

“(v) it would help ease real debt burdens”
Only if wages rise.

“(vi) it would help ease the overall euro zone budget constraint through higher seigniorage revenues. ”
Er, but I thought you said read interest rates would be lower?

The presupposition in all this is that wages will respond to inflation in the eurozone. While sheltered sectors may be able to winkle out inflation-matching rises and states may mandate rises for their direct hires, where are private sector workers in the internationally traded sectors going to get 4%+ payrises?

How is someone employed by a US company in Ireland going to get a rise that is above inflation in the US and increase their cost without the job moving to a cheaper economy? (There are plenty of cheaper economies).

Yes higher inflation in theory will make the lines on the graph look good. In practical terms, it will be a disaster for many.

Yes easing up on monetary policy, might fuel inflation which would be a disaster.

After all, look at our neighbours in the UK who have printed GBP0.3tn of “quantitative easing” in their economy of GBP1.5tn

Their inflation between 2007 and today is 15%, compared to 5% here.
Their unemployment certainly increased from 4% to 8.3% – ours went from 5% to 14.3%.
Their GDP increased 2% between 2007-2011, compared with minus 9.5% here (GNP here down 14.3%)
Their 10-year bond closed at 2.04% today compared with 6.9% here.
They’re triple-A rated, we’re junk rated by Moody’s
We’ve had to go with the begging bowl to them for a €4bn bailout.

Yes, what a complete disaster 4-5% per annum inflation has been for the UK!


On (i), I have in mind the standard zero lower bound constraint. Assuming the ECB keeps the short-term rate low, the real short-term rate will fall. A credible commitment to keep rates low for an extended period of time should also lower longer term rates.

On (iii), there is evidence that nominal rigidities exist (though I agree that the extent to which the problem is nominal rather than real rigidity can be exaggerated, and this may be especially true for Europe). But it is very hard to cut nominal wages. Though people do seem to be more willing, whether it is money illusion or something else, to have the purchasing power of their wages eroded by inflation. Evidence from the US shows that nominal wage changes are heavily clustered around zero. The existence of nominal rigidity is also what lies behind the belief that nominal devaluations lead to real devaluations and help restore competitiveness and growth.

On (iv), if the ECB was successful at achieving sustained 4 percent inflation — and more importantly a sustained inflation differential vis a vis the US — it is hard to see the euro not depreciating.

On (v), the real burden of debts at fixed nominal interest rates will decline.

On (vi), not quite sure what you are getting at here. My point is that the ECB will generate more seigniorage from faster increases in the money supply, and resulting profits will go to governments.

On your more general point at the end: rather than the proposition being that wages will respond to inflation, part of the mechanism is that real wages will decline with faster inflation. Much of the debate about the restoration of growth in the periphery relates to achieving real devaluation and improved competiveness in the traded sector. Nominal devaluations achieve this in large part by raising the price of imports and lowering real wages. Real internal devaluations based on falls in nominal wages are very hard to achieve — as we are seeing. It should be easier to achieve real internal devaluations with higher inflation. I do not pretend any of this is painless. But it is hard to see periphery economies growing — especially Greece and Portugal — without improvements in the competitivness of their internationally traded sectors.

@Michael and DOCM

I hope I made it clear enough how hard this would be to achieve politically. And maybe you are right — impossible.

But is also possible that something might have to give. If it is a choice between the euro, a substantive transfer union or a higher inflation target, I wouldn’t completely rule it out. Events have a way of turning the impossible into the possible. We should at least be pushing on the right door.

@John McHale
“part of the mechanism is that real wages will decline with faster inflation.”
I am flabbergasted that this is being proposed as a solution. No doubt welfare payments and pensions will decline too.

“(v), the real burden of debts at fixed nominal interest rates will decline. ”
This only applies to governments. The real burden of debts that individuals hold at variable interest rates will rise.

So not only will people be consuming less, they will be spending more of their income on interest.

And this is in their best interest exactly how?

It’s only by saying the political unthinkable that it becomes thinkable. Even if it is never implemented, saying it can shift the boundaries of debate, making previously unachievable change appear more mainstream and acceptable.

@ BEB and BrianH

The Dan O’Brien article is really outstanding and deserves a link.

Unfortunately, the conclusion that France has real leverage is not correct. Sarkozy clung to Merkel’s skirts not because he wanted to but because he had little choice. Hollande, mindful of what happened to Mitterand in 81, will be aware that his margin of manoeuvre is very limited. His biggest asset is the fact that there are leaders in the SDP, notably Steinmeier, who have a wider grasp of the European political imperatives than his former coalition leader Merkel.

The most startling statistic in the article is in the growth in dependence of the German economy on exports;

“Second, and related to the first point, is export dependence. German excellence in manufacturing is rightly lauded. It has driven exports to 50 per cent of GDP. That is double the percentage of France. No other large industrialised economy anywhere in the world even comes close Germany’s exports as a proportion of GDP”.

This puts Germany in a very strong position. There is demand for German products not because the euro is undervalued but because of their excellent quality. Germans can hardly be faulted for that. But more of the profits have to flow to labour rather than capital, much of which ended up in dud American investment products as Dan O’Brien comments, if the European crisis is to be resolved. This may already be happening cf.

Incidentally, I do not think that these exchanges are off topic. However worthy the intent, this thread seems to me to need a dose of some political realism to make it credible.

We can only push on the right door when we have two legs to stand on. One leg is sufficiently well-planted in terms of the compliance of the Government with the Troika-ordained programme of fiscal adjustment and the process of re-structuring the banks. But the second leg is waving in the air. I doubt people here have any appreciation of the bemusement of policy-makers in the capitals of the creditor countries when they look at the structure of the cost base of the Irish economy, the pay levels required to maintain standards of living given this cost base – and the still enviable levels of GDP per capita, the antics of those in the sheltered sectors, the way municipal and infrastructure services are managed and funded and the considerable amount of state equity that is tied up, unproductively and inefficiently, in the semi-states.

I fully agree that the creditor nations will have to re-balance their economies and pursue some structural reforms of their own, but this is a question of sequencing. There will be huge popular and political opposition to any re-balancing or structural reform in these countries while the glorious dysfunction in many of the debtor nations is as plain as a pike-staff – even if it is oh so convenient for most Irish people to turn a blind eye to it (and moan that someone, somewhere else should do something).


I am a bit perplexed by your reaction. Do you not agree that the cost competitiveness of the periphery has to improve? (By the way, I am not saying that this should happen only through wages. Neither am I saying that it all the benefits come via the supply-side through competiveness. A higher inflation target should have positive demand- as well as supply-side effects.)

You are right that it is the burden of debt at fixed rates that will decline. But I don’t see how the burden at flexible rates will increase. (A more valid concern might be that creditors that have loaned funds at fixed rates will lose out; but I think there is reasonable agreement that a rebalancing of burdens from debtors to creditors would be a good thing.)

A major reevaluation of the remaining rump state capital spending ration needs to be urgently looked at.
This is a no brainer.
Instead of concentrating on farming international capital flows and hoping we can get some so that we can waste the stuff on grot like the good old days.

The road programme is now clearly a white elephant wether we get catostrophic deflation or positive money supply dynamics which will help the rail system to grow…..( see the British office of rail regulation website for the spectacular growth in passenger numbers.)

Given the dramatic ageing of the car fleet it is not logical to even maintain the road network – everything we can muster needs to go into Tram & Rail fixed capital creation as the european policey is to drive us into energy surplus regardless so as to feed the financial centres.
Its a crying shame NIRs has scrapped its functional and reliable 450 DMUs this April – we could have bought these for a song.

When this shit really goes down and people won’t be able to afford to drive cars I will say I told you so again , and again and again.
We simply won’t have the capital to buy much new Irish gauge to cater for the explosive demand when the domestic monetary system changes tack.

The lack of strategic planning withen the Irish state so as to save a hypothetical construct is truely frightening.
The IMF & ECB are having a good laugh at our primitive “balance the books” shopkeeping mentality as it serves their evil purposes.

We could put voting machines into storage but not these potentially very valuable vehicles …. this will haunt us , mark my words.

Our economists still think withen a $ bubble mentality – the $ is now eating global capital at a ferocious rate – its new visage is unfamiliar to all.

@ John McHale

I had not seen your reply before I drafted the above. I agree that there should be a push on the right door but I cannot see an increase in the inflation target in that role.

The odd thing, incidentally, about the debate in Ireland is that one would imagine that the country was an amalgam of the countries of the Southern periphery when all the evidence is that we are not. Outside commentators, including German, never make this error.


All the more reason then why Ireland should make the effort to put its house in order. But that would shake Official Ireland to the core. Far better to pretend that there isn’t a whole menu of structural refrom that needs to be addressed, that, insofar as some limited consideration might be given to it, it would all be oh so terribly difficult, most likely ‘slow-burn’ and could even be counter-productive – and sail on serenely. Even if the ship founders, those in the top-side cabins will be well above the water-line. Those in steerage will have to shift for themselves.

@John McHale
“Neither am I saying that it all the benefits come via the supply-side through competiveness. A higher inflation target should have positive demand- as well as supply-side effects.)”
It cannot have demand-side effects if take home wages are squeezed. The same amount of money paying more for the same basket of goods does not mean a greater demand for goods. Indeed, if available money is already 100% allocated to spend, it will mean reduced demand for goods and/or services.

“You are right that it is the burden of debt at fixed rates that will decline. But I don’t see how the burden at flexible rates will increase.”
Because interest rates will rise. Both as a result of inflation and as a result of the declining euro. The ECB can push on the string of short-term interest rates all it wants. It is not, however, either the interbank market, the shadow banking system nor the bond market. It does not control these rates absent massive QE to flatten the yield curve.

In which case, the ECB might as well just do the massive QE which some of us have been arguing for for a long time.

Raising the wages of the centre is a far less painless way to correct imbalances, but it must come at a cheapening of the euro otherwise we are just going to end up with more baskets.

As the Japanese have found out, cheapening your currency is really, really difficult. Even if you blow up part of your island with a nuclear bomb it might not work.

I appreciate you are not just looking in an Irish context, but I mostly am, or rather from the position of someone who is internationally traded, does not have inflation-linked pay or pension, and resents the idea that it is easy for my standard of living to be lowered just because someone else is uncompetitive.

Cheapening the currency is not the goal…. although it may or may not be the outcome in a floating exchange world – its to drive money into the most effiecent activities by changing the ratio of credit to money as bank credit is generally very very wasteful of real resourses as we have seen quite clearly in the post 1987 credit bubble Ireland.

PS – NIR has just scraped the class 450 DMU after they were refurbished around 2005ish.
According to ORR Merseyside rail has the oldest fleet in the UK at 33 years (albeit EMUs)
They were also refurbished around that time and are not going to the scrapheap any time soon.

Its the currency stupid – we cannot afford to pay enough for maintenance or storage staff people as the goverment does not have enough tokens to distribute – we import new capital goods instead effecting the domestic money supply even further……On the mainland UK these units would live for another 5 -10 years at least.

The resourse utilization in the eurozone must be very ineffiecent.

According to the prov. energy balance figures our oil TPES was at 1998 KTOE levels in 2011 but despite some efficiency gains the stock of cars is far higher at 1.8~ million relative to the 1998ish 1+ million and is therefore a grossly non optimal number.

This is the biggest mess in monetary history.
Our energy bill was a record for Y2011 yet we reduced our energy TPES by a truely massive 1 MTOE in one year !!!

The Stock and Flow problem has not been solved yet .

Y2011 oil TPES (inc non energy) (prov) : 7058 KTOE

Y2005 : 9586 KTOE (peak)

Y1998 :7278 KTOE

These are quite remarkable figures to say the least.

The Core did not increase its oil use by much from the 80s onwards – it exported oil to us Fois Gras style so that we could consume its products and thus increase their “savings”.

We served merely as a conduit for capital flows – what we are as a people was of no significance to the mechanism.

How will this country function if it must get by on 1990 like levels of oil consumption ?
Y1990 : 4,422 KTOE……..
We had only 800,000 private cars back then , most people used back boilers rather then oil central heating , the population was much smaller , the habitation pattern was more rational…..

The countries policies should be centred around national survival rather then saving the credit banks which serve no function in a credit / energy starved world as bank credit needs energy to waste.

@ John McHale

My intention was not to imply that it was otherwise but to draw attention to the fact that the economic profile of Ireland is very different to that of the countries of the Southern periphery and that this is more often than not simply ignored in debate.

Not sure about this one. Inflation at 4% with disposable income at -4% leads to a nasty drop in living standards.
Still not the answer.

Credit base money to peoples accounts and intelligently tax waste that grossly effects our balance of payments.
(Paul Ferguson is right – create a new CB account for every Adult that cannot be loaned out)
The Stock & flow problem would be solved withen a few years as the bank credit poison will be drained from the system.

This is a Fisher like debt deflation we are dealing with…..very little of this Keynesian nonsense is needed other then new public works that will be channeled towards rail etc as cars and stuff become unaffordable for many.

It will not happen of course the banks will take this ship down and invest in a lifeboat.

…. but I think there is reasonable agreement that a rebalancing of burdens from debtors to creditors would be a good thing.)

well there is ‘reasonable agreement’ among the debtors anyways…. 🙂

Any chance you could give it a rest on the oil? It’s just one energy source, and there are other more plentiful sources that can substitute for it.

We have already largely got rid of oil out of electricity generation in Ireland.

In case oil prices go unsustainably high, there are obvious solutions to getting rid of it out of transport too, whether based on LPG or wind-powered electricity. It will mean replacing a lot of capital equipment over time, but most of that equipment gets replaced on a cycle of 10 or 15 years anyway.

That leaves heating, where there’s still scope to shave a lot off current Irish oil consumption with building insulation, better heating controls and different fuels. It also would not be the end of the world if high oil prices induced those still burning it for heat to keep their homes a bit cooler than they currently like.

Cutting oil consumption is disruptive, but we are already doing it, and it’s not that big a deal.

@ BeeCeeTee,

“the point is to stir inflation in the core but not so much in the periphery.”

Making the periphery more competitive (while nice) isn’t what I’m thinking. I think the periphery could do with some inflation – their existing mountains of debt are nominal, so the ‘real’ burden could be eased by inflation. This would require price inflation on things that government tax. You could apply a similar logic to Ireland’s mortgage problem.

Cutting oil consumption in the transport sphere is much more difficult as it is very inelastic , especially in Ireland which has a dispersed settlement pattern.
In the 70s & 80s the west shut down its oil electricity plants in a quite effective manner partially because it was simply easier.
The RoI was much higher given the concentrated nature of most power plants be they Gas turbines or more expensive Nuke units.

However the RoI by extending the Luas Green line south is much smaller.
What makes matters worse in Ireland is that our road network is new which means there is a lot of sinked costs which matters if we can’t default.

I agree with you that oil home / commercial heating is the low hanging fruit in the Irish energy universe but transport is a different matter.

The powers that be have a NAMA like attitude to the road network …. IT MUST HOLD ITS VALUE……. we must therefore divert resourses to its upkeep etc etc.
But the $ is still the worlds reserve currency – oils been at $100+ for quite some time now , much longer then the Y2008 spike.
The road network is a drain of resourses at these energy prices and does not add to the countries wealth.

And it is a big deal.
Suburbia is obsolete at these $ reserve prices.

But the $ price will collapse – as Steve says , Europe is the New Saudi Arabia as it is not a federated union.
We will export a Saudi Arabian ration of oil to China & / or the US simply by not consuming much of the precious as our economies collapse

If the real burden is to be eased without debt relief (direct or indirect), it will be by an increase in real income. Inflation in the absence of an increase in real income will not help us. Real exchange rate depreciation will, along with structural reforms, improve competitiveness, thereby allowing us to increase real income.

Re John McHale ” A credible commitment to a higher euro zone inflation target (say 4 percent) – or, even better, and price-level target based on underlying 4 percent inflation – offers a real opportunity. ”

I think we can agree this runs totally counter to ECB policy to date. Inflating away debt is simply not on the table.

@Colm Brazel

“Inflating away debt is simply not on the table.”

This is true but I keep wondering why it isn’t.

It can’t just be Germany and overactive fear or hyperinflation (which anyway was caused by foreign speculators, short selling and banks prepared to loan lots of money to the speculators to do it….. sounds a bit like the sovereign bond market in modern times.

Hot off the (Reuters) press:

“Le ministre allemand des Finances Wolfgang Schäuble a déclaré vendredi que la Grèce devrait en “supporter les conséquences” si elle portait au pouvoir dimanche un nouveau gouvernement qui ne respecte pas les engagements pris par la coalition en place.

Lors d’un discours à Cologne, le ministre a souligné que les futurs gouvernements grecs devront respecter les engagements pris vis-à-vis des créanciers internationaux par la coalition au pouvoir composée du parti de droite Nouvelle démocratie et des socialistes du Pasok.

Wolfgang Schäuble a noté que l’adhésion à l’Union européenne était un acte volontaire, tout en ajoutant qu’il ne pensait pas que les élections prévue dimanche en Grèce et en France aient un impact sur la politique allemande.”

Basically, he doesn’t give a toss who wins what this weekend a) if Greece doesn’t stick to its commitments then it is toast and b) whatever happens in France will not matter a jot to Germany and doing what it wants to do.

The bit about ‘joining the EU is a voluntary act’ kind of suggests that leaving it might not be!! Did Greece fall or was it pushed?

@PRGuy:Draghi at the latest ECB meeting has opened the seal on the fiscal contract in this statement: “But the thirdly and most importantly is that we collectively have to specify a path for the euro. How do we see ourselves in 10 years from now …We want to have a fiscal union? We have to accept the delegation of fiscal sovereignty from national to some form of central [government]”. Over and over elsewhere we are hearing that signing “yes” commits Ireland to the Federal Union of EU. The contract ensures that we will not be able to get out of it either. “That is why the fiscal compact is so important, that is the starting point,[ ” Draghi added


Local elections in Germany – Herr Schäuble is simply indulging in a little Greek bashing which goes down well with the ill-informed CDU voters …. my money is on the Pirates to make another break-through …

My money is on Jean-Claude to make a come- back and not to go away …. should he succeed I’ll strike up a Cuban of the best pragmatic centre right variety ….

Greek political landscape is set to fragment this weekend …. making formation of a new governement practically impossible ….

Blind Biddy has promised to dance a jig on Nikki’s golden butter box that she picked up in Marseilles when A.N. Other Greek spoiled Nikki’s speech on how to save the universe …. if and when we are finally done with one half of the Deauville Disaster …

Ireland holds its MayDay on May 7th … might ring up Seven_of_9 and see if I can get of this planet for a while … “Q” is still trying to figure out the economics of the Fiscal Compact and quite unbelievable as it sounds – he looks confused!

@John McHale


Radicalism pure and simple.

Sensible is getting us no-where except deeper and deeper into odious debt.

FYI Berlin Calling

It could be an uncomfortable weekend for German Chancellor Angela Merkel, with three crunch votes taking place on Sunday. Elections in Greece and France could torpedo her strategy to solve the euro crisis if voters reject pro-austerity candidates, while a state election in Germany may weaken her conservatives domestically.

Angela Merkel’s position as German chancellor is becoming increasingly contradictory. At the federal level, she reigns unchallenged, while her opponents falter. But at the level of Germany’s individual states, her power is crumbling and her center-right Christian Democratic Union (CDU) is bracing itself for further setbacks. At the European level, meanwhile, she has become a figure of hate for many, as her pet project, the fiscal pact, is increasingly called into question.

@German Citizenry

Countries around the world envy Germany’s economic success and look up to it as a role model. But a closer look reveals a much bleaker picture. Only a few are benefiting from the boom, while stagnant wages and precarious employment conditions are making it difficult for millions to make ends meet. By SPIEGEL Staff

What a year it’s been for carmaker Audi and its employees, a year marked by the biggest profits in company history, a bonus in the millions for its chairman and handsome bonuses for many employees — though little to nothing for those at the very bottom of the pay scale.,1518,830972,00.html


I just came here to properly cite Kevin Donoghue describing the German perspective pretty well, in
I think this sums it up pretty well.

The reasons I love to come here are:
1. in this blog you argue very often the real financial mechanics very reasonable, at least as long as I am not showing up active : – (
2. this helps me providing good explanations in good english, and from a credible outside source : -)

In Germany we like to have our rulers to have a PhD, but if (s)he gets caught in bad referencing, even the former heir to the throne,
like Guttenberg, will be tossed into the abyss : – )

As said before, “Spiegel International” is spewing a lot of nonsense as so many times before, that I made it a rule, to not comment on it any longer.

And after David O’Donnell appealed to @German Citizenry,

I think I owe you some comment:

We (Germans with a PhD, MBA, and all the trappings : -) don’t really care about being a role model. We just want to keep our money. We are just a little bit above average in this moment. Absolutely no reason to celebrate. Just 10 years ago we were the “sick man of Europe”. This comes and goes in waves, and I would be happy to live so long to see this happening 2 more times 🙂

National governments being punished in subsequent local elections is a pan-Western eternal favourite. Nothing new under the sun.

The europhile Wolfi Schäuble is your friend. He just told the German unions to demand control over the punch bowl. Heresy : – )
To make him Euro Group Presi. I am not sure what the exact title of the Mayor of Luxembourg, Junckers, is in the moment. It is a way to get him out of the holy sanctuary of German finance ministry.

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