Wyplosz: Germany cannot pay either

Charles Wyplosz was one of many economists who thought the May 2010 deal for Greece was the start of the slippery slope. Here is his latest take on the crisis. 


65 replies on “Wyplosz: Germany cannot pay either”

Amongst other things Wyplosz suggests that Ireland and Spain’s banking crisis was caused by ill-supervised banks.

When you bear in mind that banks create money every time they process a loan and destroy money every time they process a loan repayment it’s hard to see how they can behave prudently.

What’s in circulation is principal, or partial principle, of every loan and what’s owed back is the principal plus interest. A bank can’t possibly behave responsibly under this system. Even if banks lent to only credit worthy people we’d still have people default on loans as soon as the rate of new lending slows.

In resolving the crisis Wyplosz recommends debt restructuring but this is not a good option, particularly if you’re a creditor to a country.

Allowing Governments to carefully create their own debt-free money in order to gradually repay debts is a better option. We could go a step further and control banks from creating and deleting money and thus get to the root cause of future debt problems also.


I think even you would doff your hat at the succinctness and clarity of the final paragraph:
“A basic moral principle is that criminals must be held responsible for the consequences of their acts, even if those acts are unintended. Eurozone taxpayers are the victims of their elected leaders. They now face the choice between breaking up the Eurozone and paying up. Paying up still is the cheaper alternative, but not for long.”

The irony is that not only are taxpayers victims of their elected leaders, but these leaders in turn are victims of their predecessors. Merkel and Hollande are victims of their respective mentors, Kohl and Mitterand. Having just been elected president – and with a comfortable majority in both houses of parliament – Hollande has a huge stock of political capital; but Merkel has very little. She has persistently postponed choosing between attempting to secure re-election and confronting her voters with what is needed to save the Euro project. I think she has finally run out of time. And I think she knows it.

This is an interesting article among a sea of such articles but it fails to get down to cases, like most academic economic commentary. Here is another which does.


A German government spokesman has denied that Merkel is agreeable to having the EFSF/ESM freely buy government bonds, a move by Monti, as Eurointelligence has correctly commented, designed to create one rule for the big boys and another for the small i.e. a bailout but without the economic and political strings and associated odium.

A country can default if it wishes to, countries can’t force other countries to default. The countries that were and are shut out of bondmarkets chose to apply for a program. It was a choice between two bad options but nonetheless it was their choice.

Wyplosz is now saying that the choice that the debtors made is not their responsibility. The moral question revisited? Indeed.

“A basic moral principle is that criminals must be held responsible for the consequences of their acts, even if those acts are unintended.”

That is not a basic moral principle. The moral principle and the general leagal principle is that people should not be convicted where there is no intention. In legal parlance one must prove “mens rea” (mental element) as well as “actus reus” (the act which is criminal).

Pedantic Paddy

It’s still all down to Chancellor Merkel. Will she be prepared to blow her chances of re-election and authorise the ECB and the other funds to provide a wall of money and do some ‘shock and awe’ to blow the shorters, vultures, disaster capitalists, credit players and other chancers out of the water – and will she be able to bring along the Dutch, Finns, Austrians and Luxemburgers and other central Europeans members of the EZ (as well as the Swedes and Danes outside of the Euro and the Poles and other Balts aspiring to join)?

Yes, it might look like one rule for the big players and another rule for the little players, but it would need to be accompanied by the Commission and the ECB replicating the kind of conditionality for Spain, Italy and, possibly, France and Belgium that is formally included in the support programmes for Greece, Ireland and Portugal.

In any event the Irish Government – having been suborned by the various vested interests – is driving a coach and four through the already inadequate strcutural reform programme in Ireland. The Portuguese seem to be making some progress, but the Greeks are even more resistant than the Irish. The Commission and the ECB – with appropriate support from the IMF – might learn from this and get heavier on Spain and Italy (and France and Belgium) in the context of the Single Market programme to which so much lip service is paid.

Will it happen? Who knows. The problem is that most of those who are aching for a bail-out are locked in some version of the Marxist dialectic (as DOCM put it) between capital and labour and are adamantly opposed to any structural reforms. We get plenty of that here. They fail to see that there are two equally important conflicts that need to be resolved with the application of democratic government: that between producers/providers and consumers/users and that between those who perceive they are not getting value for money from their tax payments and those who seek to maximise their receipts from tax proceeds.

Governing politicians – suborned by the forces of capital and labour – have been able to smother and suppress the former conflict (but won’t be able to do this indefinitely). But they are really struggling to manage the latter.

Most economists and commentators have little of use to say about these conflicts; the focus is on high-level technical fixes. But governing politicians and policy-makers are well aware of all these conflicts and how they manage them will determine which high-level technical fixes (so beloved of the economists) they will choose and how they will apply them.

Wyplosz is saying we must grasp the nettle now in order to stop the momentum towards disaster.

He has attacked the moralistic narrative with another moralistic narrative. As such he is fighting fire with fire but of course his moral analysis can be endlessly disected and criticised by his opponents as long as they do not want to do what he wants them to do.

He has addressed this by explaining why his opponents should want to follow the course of action his moral argument leads to. This is clever. It is very difficult to persuade somebody why he is wrong and you are right. It is much easier to persuade him why he should want you to be right.

His short article addresses some major points of dispute as follows:

A. Should there be default or not?
– Wyplosz says there must be default because the wealthy countries do not have enough money to cover the debt.
– Wypolsz ignores the option of deploying quantative easing and/or defaulting through inflation. He also ignores where a choice couls be made between sovereign default and bank default and how this should operate.

B. Should there be fiscal transfers?
– Wyplosz says there should not have been fiscal transfers in the first place, but that the crisis has now morphed to such catastrophic proportions that the cost of fiscal transfers will be less for the core countries than delaying such transfers.
– Wyplosz ignores the fact that bank support conducted at the behest of the G20 was already a fiscal transfer from some peripherary tax-payers to core creditors and other international creditors. Wyplosz does not make the comment that this should not have been allowed (unless he is criticising the ECB support). Nor does he suggest that stability could have been maintained through bank resolution.

3. What must be done to prevent contagion? What are the trade-offs we must suffer?
– Wyplosz suggests that contagion risks are increasing because of inaction (the same point many have been making for years now). Accordingly, one must suffer the contagion consequences now and let countries deal with how the chips fall.
– Again Wyplosz ignores the option of fiscal transfers through QE and default through inflation, both of which carry lesser contagion risks. Wyplosz also fails to address the how action must be co-ordinated to prevent a meltdown. He also fails to address how banking must be treated vis-a-vis how sovereigns must be treated.

All in all it is an excellent article. Obviously there are major issues to be addressed if Wyplosz’s advice is accepted. However, the framework and freedom to address those issues will only exist if the basic prescription of grasping the nettle is accepted.

I think it would be far better if Ireland’s economists, social and political scientists (sic!) and opinion-formers were to focus on the institutional and functional failings of the ESRI – the primary official source of public policy research – and on how they might be remedied than to continuously lament the apparent failure of the powers-that-be in the EU to resolve this crisis in a way that will help poor lil ole Ireland – particularly when there is so much in the policy and regulatory sphere that Ireland can do to help itself.

@Charles Wyplosz

You pragmatism, in the midst of “Nietzsche’s eternally recurring” economic and political lunacy, is most welcome.

@ similar views are now evident, eventually, in the Deutsche Public Sphere

Germany driving up wrong side of the road
19 June 2012 Der Spiegel Hamburg

[… ] no panicking, please: No one seriously wants Germany to pay the debts of Europe. The days of the gold standard ended when the payments between the central banks were cleared in Fort Knox, and the gold bars were shifted from one vault to another. A banking union and euro-bonds should integrate Germany into a system of mutual security. Without such a system, Europe will break down. [,,,]

Merkel the Tentative
It is a historical shame that during this crisis we have a chancellor for whom Europe is not an affair of the heart. In such moments, moments that one can in good conscience call historic, it is important to recognise the political realities – but only in order to change them.

So it’s worth thinking about what might have been under different circumstances. Nietzsche wrote: “The question ‘What would happen if this and not that occurred’ is almost unanimously rejected, and yet it is precisely the cardinal question.” We like to put the march of history down to impersonal forces. But at the turning points of history there always stands an individual. Had the “99-day Emperor” Frederick III not died of throat cancer, and had Bismarck stayed longer by his side, would the Great War perhaps have been prevented?

One can assume that an SPD [German Social Democrat Party] Chancellor would have behaved differently at the start of the crisis than Merkel the Tentative. And one can hope that a new chancellor – or a new woman chancellor – will behave differently after the next election. Small note: Hannelore Kraft has replaced Angela Merkel as the most popular politician in the country. Europe just needs to hold out till then.


… Not sure we have sufficient time to wait for Hannelore? How bout a snap German general election next week?

… time to open good Riesling as it approaches 2.00 … and book those tickets for the OktoberFest …

Wyplosz’s article certainly adds some novel ingredients to the efforts to apply moral suasion to Germany. He argues that Germany should pay for the south because Merkel chose to bail out Greece and that was a crime – against the Maastricht treaty.

“Evangelos Venizelos, the socialist Pasok leader, has said the next two weeks will be critical for the debt stricken country. In a televised address Evangelos Venizelos said the new government’s top priority will be the formation of “a national team” to renegotiate the €130bn bailout agreement Athens has signed with its creditors at the EU and IMF. “Our first test will be the EU summit on June 28 where our battle to revise the terms of the loan agreement with our creditors will begin,” he said”

And Angela Merkel says NEIN!

A lot of retractions on the bailout funds being used to buy Gov. Bonds.

The markets appear to be ahead of themselves with German 10 yr now at 1.61, so do we take it that they believe Germany will pay?

There is no shortage of armchair experts and at least Larry Summers has had two periods in government. He had helped push the ‘Citigroup Authorization Act’ through Congress in 1999 and his boss, Robert Rubin, a former Goldman Sachs executive and soon to be a Citi top dog, left the office of Treasury secretary with quite an accolade when President Clinton described him as the “greatest secretary of the Treasury since Alexander Hamilton.”

There can be pan-European solutions but unless individual countries are prepared to address longterm issues such as corruption, rent seeking and widespread theft from public treasuries, then inequities and slow growth are destined to continue.

Wyplosz, as an armchair expert, has the luxury of pointing to the deficiencies in the Greek program, but a big writedown in 2010 would have also required further funds — to support what George Papandreou effectively admitted was a kleptocratic state. Should it have been, deliver new funds and hope for the best?

In Ireland, it’s 3 years ago since when Bord Snip reported and we still have 88 planning authorities and so on.

The outlook for the EMU is not good and it’s likely that countries which need strong, competent governments determined to lift growth levels will keep getting the opposite.

Germany cannot help France as its trade is already almost in balance within the EMU; Germany’s trade with emerging economies will remain strong.

Ireland plods along hoping for the best, with no appetite for fixing broken systems and clueless as to how could up to 200,000 net sustainable jobs be created in coming years.

On Tuesday, Minister Bruton welcomed the announcement of 75 new jobs at the Dublin office of Maples and Calder, the biggest law firm on the Cayman Islands.

President Obama said in May 2009: “On the campaign, I used to talk about the outrage of a building in the Cayman Islands that had over 12,000 business — businesses claim this building as their headquarters. And I’ve said before, either this is the largest building in the world or the largest tax scam in the world. And I think the American people know which it is. It’s the kind of tax scam that we need to end.”

An estimated $5trn in assets worldwide is held ‘offshore’ in tax havens.

The number of companies housed at Ugland House, Maples and Calder’s Grand Cayman hq is actually about 19,000.

IDA Ireland chief Barry O’Leary said “The strength and depth of industries such as Aircraft Finance and Investment Funds in Ireland is a major attraction for leading corporate and financial services firms such as Maples. As the IFSC has gained critical mass as a global financial hub, international law firms, such as Maples, have been attracted to locate in Dublin both to service existing clients and to win incremental business.”

It all sounds grand and dare anyone mention tax havens and ‘Cayman Islands’ was missing from the official announcement. Dare anyone also mention garlic!

Some have compared Angela Merkel to Heinrich Brüning, German chancellor in 1930-32.

Joseph Joffe, editor of ‘Die Zeit’ writes in the FT today:

He cut government outlays by a third, and borrowing to almost zero. That was the real thing. Yet western governments, including Ms Merkel’s, responded to the crash of 2008 with astronomic stimuli.

Whereas monetary miserliness ruled in the 1930s, the Federal Reserve and the European Central Bank galloped to the rescue. The Fed has injected about $1.3tn-worth of liquidity. The ECB is flooding the markets, buying up shaky sovereign debt and extending cheap loans to banks totalling about €1bn.

Now to deficit spending. In 2011, according to Eurostat, Ireland ran a deficit of 13 per cent (includes bank support – -MH) of gross domestic product, Greece 9 per cent, Spain 8.5, Italy and Portugal 4 per cent each.

OK, these deficits were also driven by recession, but although better off, France and the Netherlands clocked in at about 5 per cent. It is all far beyond the Maastricht limits. A new Mr Brüning would have unleashed a dozen emergency decrees against such horrendous profligacy.

The rather well-crafted Maastricht Treaty had a no-bailout clause that was designed to protect all Eurozone taxpayers from fiscal indiscipline in other countries.
Under Merkel’s leadership, this clause was first violated in May 2010, and then again to bail out Ireland, and again for Portugal and now for Spain.

Like what I keep saying myself. The European monetary union is, by design and by solemn treaty, a monetary union where the safety valve is sovereign default. Whether you’re a political leader or a pundit, deciding after the fact that you wish the Euro was something other than a default union doesn’t make it so. Other parts of Professor Wyplosz’ argument, such as his assumption that the costs of bailing out the banks in the wake of the sovereign defaults will be Manageable™, seem less clearly accurate to me.

1. parliament vote
The Greek government ist overdue for 20 bn of further cuts, not just planned, but executed.

2. parliament vote
Millions have not paid their taxes, thousand of tax agents didnt execute their job. Both groups of enemies of Greece must be punished and made do pretty fast.

I think there is no reason for Greece to come to the Troika before that.

@ anonym

Sure, but overall I thought the approach advocated by Germany up until the end of last year was a reasonable one, i.e. the debts of insolvent nations must be written down as part of any bailout, but a bailout will be provided so that liquidity can be maintained and they can remain in the Eurozone.

Otherwise insolvent nations would be faced with a sudden stop and rather brutal exit from the zone. Seems a tad harsh.

From your post..
“IDA Ireland chief Barry O’Leary said “The strength and depth of industries such as Aircraft Finance and Investment Funds in Ireland is a major attraction for leading corporate and financial services firms such as Maples. As the IFSC has gained critical mass as a global financial hub, international law firms, such as Maples, have been attracted to locate in Dublin both to service existing clients and to win incremental business.”

The aircraft leasing company that reported 675m in profits (a GE sub.)
Paid 375000 in tax here and has no employees.
How many more of those are around?
Bet the law firms get more than the government.

@Colm McCarthy

“The stew is cooking nicely, 10-yr Bund at 1.58 this morning, 40bps ahead from the floor.”

Watch out for any squeeze – it could get painful betting with the crowd.


Why would a Eurogroup member which defaulted heavily enough, and also retained access to the IMF, need to either leave the Euro or receive additional official-sector loans from non-IMF sources (which I assume is what you mean by a “bailout” here)? The decision to have Greece inadequately default and continue to receive EFSF loans wasn’t some act of kindness, it was an attempt to prevent the EFSF and ECB from having to recognise losses on their bad loans to the Greek sovereign.


1. in order to temper the hot business cycle most of the Nordics and Germany have, a nominal interest rate of 4 -5% would be appropriate.

2. German Riester Rente providers (14 Mio contracts with mandatory contributions) are extremely thirsty for 5 – 10 year bunds, which give at least 2.25 % (they have guaranteed) + 0.25% (their costs, rough guess)
In the moment, these and the other life insurances, who must buy at nearly any price, suck about 10 -20 bn €/yr out of circulation, see comments in

It would be actually good for Germans buying more (like tourism) in the southern GIPSIs, if mid term interest rates would be substantially higher, but not too unstable. See comment in

3. But the repeated glee in your words, as in so many others, when something happens, they believe to be negative for Germany, is certainly noted, and attributed to your character.

@ anonym

Well, defaults usually scare off non-official lenders for a while. Historically one default usually leads to another; governments rarely default ‘enough’ the first time round. That scares off private lenders. And the IMF position is that they won’t lend unless the EU does also.

Wyplosz’s logic is,

NOR(dics) /DE gave us a finger, without any obligation,
now we want the full hand of NOR/DE, and accuse NORDE for not handing over the full arm.

Typical CEPR. The same folks who calculate gini coefficients of 0.6 based on “raw” income distributions, for which the income of the lower 40% is negative.
Why isn’t Karl Whelan a member there ?

governments rarely default ‘enough’ the first time round. That scares off private lenders.

The solution to that problem seems evident enough, though.

And the IMF position is that they won’t lend unless the EU does also.

Howso? If the IMF is saying that it won’t be the sole official lender to Greece in future as long as Greece continues repaying its existing official-sector debt to the EU dig-out vehicle(s), then that’s quite fair and very easily remedied. If the IMF is saying that it won’t provide an IMF program for Greece at all without EU loans as well (presumably for as long as Greece remains in the Euro) then

1) It’s a huge problem. The whole design of the Euro is based on the assumption that Euro members continue to have individual access to the IMF as normal, while no similar IMF-like system is permitted at Eurogroup or EU level.

2) It’s a big surprise if a) the IMF turns out to have legitimate reasons to refuse an ordinary IMF program to Euro members and b) that apparently nobody noticed and drew attention to those reasons when Lisbon was drawn up and voted on.

3) It’s pretty damned suspicious: it’s hard to escape the suspicion that there is no legitimate reason for the IMF to refuse Greece a normal program (again, after the European official creditors have been burned nice and proper) and that the IMF’s refusal (or threatened refusal) is the result of influence exerted by EU members (cough Lagarde cough), or maybe others such as the US (our old friend Timmy).


my glee is not at the discomfiture of German savers, who are getting screwed, but at the unravelling of the ‘safe haven’ bond trade, an accidental and unhealthy by-product of the policy mess. Interest rates in Germany (and Denmark, which is not even in the Eurozone) are too low, a mirror image of rates that are too high in Italy, Spain and the programme countries.

German investors in peripheral sovereign bonds have got screwed even more, to save those who bought dodgy bank bonds. It is never obvious to the naked eye who wins and who loses when a financial crisis is being covered up with politically-driven measures. There are losers in Germany too.

@ All

On the moral argument advanced by Wyploz, it has no vailidity whatsoever as states do not act on the basis of morality but of respect for commitments accepted under inyternational law (if one is lucky; otherwise more direct – sometime – military means often come into the frame).

Even the manner in which the argument is formulated is open to criticism as others have remarked.

Given the status of Wyploz as an economist, it is rather strange that he would publish a piece so little in touch with political reality. But in this, he would not be alone.

@Paul H

“It’s still all down to Chancellor Merkel. Will she be prepared to blow her chances of re-election and authorise the ECB and the other funds to provide a wall of money and do some ’shock and awe’ to blow the shorters, vultures, disaster capitalists, credit players and other chancers out of the water”

I don’t understand your apparent disdain for people with the gumption to actually act and put capital at risk to oppose what have frequently been the wedged-up official forces of idiocy in their efforts to rig, distort and manipulate capital markets for base political purposes. It was shorters and hedgies who tried to call the Irish banks and their crap regulator outside and officialdom that conspired to cover up the truth to the eventual at the eventual cost of loss of Irish economic sovereignty. Similarly it was shorters and hedgies that were attempting to persuade people to get real about Greece in 2010 – only to be rebuffed by an official determination to use official dosh to pretend that black was white and white was black.

The problems have been caused by too many ‘long buyers’ not too many ‘short sellers’.

Who are the real “chancers”?


First, based on your last comment, I take back my Glee/character notion against you, but not against most of the “many others”.
And I would like to add, that as I see it, most German politicians and people, exercise a pretty considerable restraint with inflammatory wordings.

So far in Germany, only those folks got screwed, who invested directly in GGB Greek Government Bonds. A tiny group, for which I think nobody feels a need of solidarity. For insurances, and, as always, the Commerzbank, for which the government is still de facto on the hook, their amount was just normal business, sort of.
“losers in Germany”, after 2008, are so far only people holding short/mid term cash like, loosing out of like 1 – 2% real interest, times 3 years, a 40 % of population, 20 % of their wealth, group, which can fret endlessly over that with me in the beergarden, blaming everybody, threatening to vote for the latest “protest party” like the “pirates”. But those people certainly don’t “suffer” and will not riot either. Just order another politically correct, certified bio, hanf beer : – )

Nearly none of these folks are exposed directly to things outside Germany, unlike UK pensioners and their BP dividends, and the very most of those folks would actually cheer substantially higher interest rates.
Background: I am more the globally invested guy, and thought 3 years ago about building a software for their wealth management. Low cost, objective, obviously not biased, or fee driven. I researched the market, who has what, what are historical returns, how does that relate to macro economics. Also thinking a lot about what the lower 80% does, and why. Which, quelle surprise, is a lot more reasonable, from their specific point of view, than I thought before.
But in the end, it does not help these people to have 1 or 2 % more interest, if they don’t sleep well about it. Assperger has its advantages : -)

@Edward 2
It is interesting though…the corporate setup. The one that makes all the money, according to the press, pays virtually no tax. The report said it paid 375000 in tax when they would normally be expected to pay about 90m.
Now that is some tax planning. It is also reported to Bethesda most profitable company in Ireland.

Re your EFSF post…..I see they raised another billion today at 2.4%. That will buy a few Spanish bonds.
The threat seems to be working though.
Maybe Angela will relent but I imagine it would seriously harm her politically. What would the Bild headline say?


re EFSF to buy “distressed” government bonds.

All very well but it is the banks that are distressed! and who have in turn distressed sovereigns (in most cases).
Now when are they going to address the real problem, i,e the banking monkeys that are playing on the backs of the states.


“what would Bild headline say?”

Wir Werden Gefickt (probably)

Interesting conclusion from Jeremy Warner in the telegraph….

“Reassuring, isn’t it? While Europe goes to self-created hell in a handcart, at least someone will be making hay, always assuming hedgies are allowed to exist at all once the revenge of the mob takes hold in the ensuing social and political chaos. Hey ho.”

How could you live in Ireland on two grand a week. The judges cannot even manage on that…and they are not high flying entrepreneurs.

@DOCM, Joseph

it is my understanding that the ESM, being outside the EU because of Camerons tantrum in December 2011, is set up as a hedge fund killer, besides a baseline business stabilizing Spain and Italy.

Giving it a very secret and fast decision power. Every dead hedge fund speculating against some Euro country is a winner and the skalps of Soros and John Paulsons would be the crown jewels.

Dr. Wyploz is correct that debts should be written down, and he also points to who would pay – banks bailed out by their governments.
No politican wants to deal with the “too big to fail issue” of a failed bank, a taxpayer bailout and the subsequent public backlash.

How to solve this?

The banks themselves through the IIF say – “Effective cross border resolution plans, backed up with whole bank resolution techniques and a robust mandate for international cooperation, represent a compelling way to address the ‘too big to fail’ issue.”

The US. have their FDIC and Dodd Frank legislation to address the “too big to fail issue”
What about the Eurozone or the U.K? what have they really done on banking since the crisis on the “too-big to fail issue”?
The Eurozone need to push ahead with common bank supervision and resolution and deposit garantee system funded by banks themselves and design a system in close coperation with the U.S.A and their FDIC. It also should mirror Dodd frank type legislation and go even further. At all stages it should co-operate with The U.S. Japan etc.
Ideally the U.S, U.K and Eurozone banks would have a common bank supervision and resolution/deposit garantee scheme, making competiton fairer in the financial sector. Are Eurozone leaders prepared to think big and be humble and co-operate with the US on this?

yes, a bit of displacement activity is a fantastic idea on the basis that if it weren’t for people like Soros, Greece would be solvent and credit worthy, Anglo Irish Bank would have been solvent, and every team would be winning Euro 2012 at the same time. Buy them all, in size, now. Price doesn’t matter!


I agree that the principal source of the problem is the naked longs – and not the naked shorts. I have absolutely no problem with those who put capital at risk to exploit, profit from – and thereby highlight – policy and regulatory imbecility and idiocy. In normal times (are there ever such times?) they provide a hugely valuable service. But they do not represent the majority of capital market participants or the ‘weight of money’. As I see it, and I could have the wrong end of the stick totally, the majority of participants and those with ‘good money’ to invest simply want some certainty that they will revocer their investments at an appropriate risk-related rate of return.

However, in a time of crisis, when the optical illusions carefully developed and sustained by politicians, policy-makers and regulators, on one side, and most market participants, on the other, have simply evaporated, the market participants destroying the optical illusions are driving many others out of the market or prompting a flight to safety.

Yes, I agree, these players have to keep going when the politicians, policy-makers and regulators are trying to hold on to the shattered remnants of their optical illusions and refuse to face reality, but these politicians, policy-makers and regulators have to bring voters along – voters whom they have systematically misled and gulled.

It would be wonderful if there could be a truce which would involve these players backing off for a limited time and which would be accompanied by the politcians, policy-makers and regulators fessing up and making the necessary policy decisions. But life ain’t like that.

‘Shock and awe’ is very much a second best means of enforcing a truce, but it would need to be accompanied by sensible policy decisions. The electoral cycle and the disingenuousness, dishonesty and hypocrisy of many of those on the left make this almost impossible.

So we are where we are. Muddling through, but leaving a horrible legacy of social and economic devastation.

@ genauer

As another lady leader, notable also mostly for her obstinancy, Margaret Thatcher, remarked; “you can’t buck [defeat] the markets”.

If Merkel thinks that she can, she is in for a disappointment.

European Union
Why German Europe is a non-starter

21 June 2012Gazeta Wyborcza Warsaw

It’s become a commonplace Berlin is to impose its political vision and economic order upon the EU. Not so simple, says a Gazeta Wyborcza columnist, because its social model is in decline and it is no more prepared than its partner political union.

End of symbiosis
The sources of Europe’s German problem – or Germany’s European problem – lie elsewhere and are more fundamental. Firstly, the current crisis has hit Germany hard. Not in economic terms, but in political and moral ones. Far from heralding the onset of a “German Europe”, it actually means its end. The common currency system was based on the German model, with the European Central Bank as a copy of the Bundesbank.

The crash of this “Maastricht Europe” effectively undermines two assumptions crucial for Germany policy – that German solutions are best for Europe and that the German economic model thrives in symbiosis with European integration.


The American economist Raghuran Rajan wrote some time ago that politicians are unable to respond to dangers of unknown scale. This is a good explanation of Ms Merkel’s stance. Until now, German policy has focused on limiting the damage and trying to preserve as much of “German Europe” as possible.

In recent days, Chancellor Merkel mentioned the need for establishing a political union, a prospect the EU leaders will discuss during the summit at the end of this month. It is not Berlin but Paris that may prove the greatest obstacle in the process. The dilemma “the EU’s collapse or a political union” has become very real today. Perhaps Ms Merkel’s greatest fault has been her inability in recent years to prepare the public for either of these scenarios.


Worrying New Data
Euro Crisis Reaches German Industry

German companies believe the euro crisis has damaged their prospects for growth in 2012, according to new figures released on Thursday. Manufacturing activity hit a three-year low and export orders have also seen a sharp drop. The data suggest the crisis is starting to hit the previously robust German economy.

The purchasing managers’ index compiled by the research institute Markit based on a survey of 1,000 firms fell by 0.8 points to 48.5 percent — the lowest figure since June 2009, and below the 50-point mark which is considered to separate growth from contraction. The index for the whole of the euro zone was 46, the same as last month and the lowest level in three years.

Markit’s Tim Moore said in a statement that there seems to be “a deepening consensus among German businesses that the euro area turbulence has already damaged their growth prospects for the latter half of 2012.” Business outlook in the service sector fell sharply from 55.9 in May to 47.0, the biggest drop in the survey’s 15-year history.

The purchasing managers’ index for industry also fell by 0.5 to 44.7 points, the lowest value in three years. “German manufacturers were at the forefront of the downturn as a worsening global economic backdrop and the ongoing euro crisis weighed heavily on export demand,” Moore said.

In June, export orders saw their biggest drop since April 2009. As a result, industry cut the largest number of jobs in two-and-a-half years. Although the sector sector is still taking on workers, the number of new hires was relatively low in June.


I’m surprised anyone should be surprised …. rarely pays to starve one’s customers!


The giant’s weakness

The second, seldom acknowledged, reason for Germany’s European dilemma today has to do with its own socio-economic situation. The benefits of Germany’s economic success of the last decade have been distributed very unevenly. Economic inequality has grown more rapidly than elsewhere in the industrialised world. During the boom, Germany’s export competitiveness stemmed in large part precisely from relatively labour costs, which means low wages.

True, those who were previously unemployed benefited from the creation of new jobs. But the quality of most of those jobs is a far cry from the cushy terms of “Rhine capitalism”. Germany has the highest proportion of “junk” job contracts in Europe.

This is accompanied by very high debts carried by many municipalities, which, forced to introduce drastic austerity measures, are closing down public utilities, swimming pools, culture and welfare centres. Paradoxically, the erosion of the German social model has accelerated since the launch of the euro and the resulting economic boom.


Particulars of Austerity – A Minsky Moment

Policy Note 2012/5
Austerity that Never Was? The Baltic States and the Crisis
Rainer Kattel and Ringa Raudla

The commonly cited example of the successful application of “internal” devaluation as a strategy for economic recovery is that of the Baltic economies. In this Policy Note, we discuss whether the Baltic austerity plan worked, how it was designed to work—and, most important, whether it can be replicated anywhere else. We argue that the Baltic recovery has unique features that do not relate to domestic austerity policies, nor are they replicable elsewhere.

The Baltic economies (Estonia, Latvia, and Lithuania) are occasionally cited as examples of the successful application of austerity and “internal devaluation” as strategies for economic recovery. In this Policy Note, Rainer Kattel and Ringa Raudla discuss whether the Baltic austerity plan worked, how it was designed to work—and, most important, whether it can be replicated throughout the eurozone periphery. They argue that little actual devaluation took place in any of the Baltic countries, and that the Baltic recovery has unique features that do not relate to domestic austerity policies and cannot be replicated elsewhere.

The Baltic recoveries were essentially “outsourced”: they depended on an extensive use of European Union funds and a deep integration of Baltic exporters in economies that weathered the financial crisis relatively well. All three countries also feature flexible labor markets, quiescent civil societies, and dramatic levels of emigration—they do not offer a model that could be imitated eurozone-wide, according to the authors.


At a much earlier stage of the crisis, Kenneth Rogoff wrote an op-ed for the FT, in which he argued that the key problem was excess debt rather than insufficient demand, and that the former could be resolved only by: (i) writing down the debt, (ii) attempting a ‘controlled’ burst of inflation, or (iii) financial repression. I’m recalling from memory but I believe he argued for a debt write down. Charles Wyploz thinks likewise.

Off topic-Euro 2012. Or is it.

Germany still on to beat Greece, Portugal and Spain in that order.
Ireland already out. They beat themselves.

@ All

The German President has said that he will not sign the ESM and the TSCG. one assumes, until the most recent court challenge in Germany is decided. Meanwhile, Ireland has its own case before the Supreme Court.


There is something rather farcical about the contrast between the two; what exactly still eludes me. “Whom the Gods will destroy etc.”

@Cathal Guiomard

Debt writedown. Simple. +1

Even Blind Biddy figured that one out in early 2009 …

Am I the only person who thinks the size of Spanish bank problems ‘revealed’ this afternoon of between €16-62bn is a joke?

@PR Guy

No. I guesstimated half a trillion …. some time ago (inclusive of the regionals etc)

@PR guy

Did you realise that as of 2 comments above, you have started typing to yourself on the interweb?

FYI [barry ritholz

Fear of default and/or the collapse of the Euro is driving current yields. However, a look at long term history reveals that Spain has had numerous other panic driven yield spikes. Their 10yr Bond yield reflected investor fears in 1820, 1831, 1834, 1851,1867, 1872, 1882 and 1936.

The long view graphic ….



Times are slack for PR Guys … or he is practicing for his book on the ‘PR GUY Monologues’


“Did you realise that as of 2 comments above, you have started typing to yourself on the interweb?”

Yes. Work is so boring it is driving me insane (and I was answering my own earlier question). Only 4.5 days to go until I finish the last piece of client work and head off for my retreat – or “PRexit” as I like to call it. It can’t come soon enough. The FS industry is full of the biggest spoofers you can meet and the BS is starting to make me physically ill. I had to have lunch with a right tosser today. Earns a fortune but is an idiot. I don’t get it.

I see Germany have scored a third. Greece need some bailout at this point.

Oh dear. They just scored again. 4-1

Comments are closed.