Tests of German Resilience

This new IMF working paper by Bonhurst and Mody analyses the structural features of the German economy and highlights some key areas for reform – it is here.

22 replies on “Tests of German Resilience”

This is a very interesting paper and a lot of valuable and relevant information has been condensed into 27 tidy pages.

Nevertheless it is deeply flawed in two respects (1) No mention whatsoever the Euro (effectively devaluation for germany) played in Germany’s post-1990s lethargy. it is just ridiculous to ignore in particular when it is clear that intra-euro zone trade remained resilent even in the last few years of the recession – everything is put down to labour reforms/initiatives and current account surpluses that flowed as a result! talk about ignoring the elephant in the room (2) The analysis on target 2 is the old chestnut that is meaningless in the context of a single currency.

In both cases i suspect there are political sensitivities to the IMF stooking any fires (telling the truth) about things that are blatantly obvious to everyone on the outside of these mammoth agencies or political institutions. It is as though the IMF are trying to do 2 things here – very gently reminding germany of its responsibility to global economic health, in particular in light of what it has reaped itself in the past and reminding them, without spelling it out literally of how well they have done out of europe and the euro.

Prob Counterpoint: Also a v. goog link to German Economy ….. and whither it goes

Thursday, September 27, 2012
The German Economy and the European Crisis
Even though most economic commentators focus on the deterioration of the periphery and are nervously taking note of how that is coming to impair the core countries, the strength of the German economy is nevertheless seldom questioned outside the Eurozone.

This Real News Network segment focuses on a generally-overlooked issue: wage suppression and the increasingly precarious conditions that German workers face, and how that plays into Eurozone politics. In July, we provided readers with an important report by Josh Rosner on the state of the German economy. From its executive summary:

Past Eurozone growth, particularly in Germany, did not come from meaningful improvements in productivity, but rather on the back of household wage reductions and industry-friendly reforms to the labor market – the Hartz reforms – which transferred wealth from the people to the banking and export-driven sectors of the economy.

While German and French taxpayers are justifiably angry, their anger is largely misdirected. Rather than embracing the false narrative blaming only peripheral nations for requiring bailouts, the anger should more rightfully be directed at:

• Designers of the European Monetary Union who, at the creation of the EMU, ignored regular and repeated warnings, from noted academics, analysts and policy advisors, that structural weaknesses would lead us to the crisis we now face;

• Banks, in the core, with weak internal controls and excessive leverage, which were profligate lenders in search of yield, to weak private, corporate and sovereign creditors in the peripheral countries;

• Those officials and technocrats who failed to properly regulate the domestic banking industry and allowed bankers to treat all sovereign debt as equal regardless of the differing debt capacity of the issuer;

• Rating agencies that failed to offer meaningful analysis of sovereign credit capacities and also assumed that too-big-to-fail financial institutions ratings should reflect an implied or explicit guarantee by their home country;

• Political leaders who, since the beginning of the crisis, downplayed its ultimate costs and, thus, delayed its resolution and increased the ultimate costs to taxpayers;

With this as a backdrop, it logically follows that the German government and central bank are seeking to protect the markets for German exporters and the German banking sector. Accordingly, the German government will be forced to choose either a large share of the costs of supporting a further integration of the European Monetary Union or, alternately, the larger economic and social costs of its failure, including the massive costs of recapitalizing German banks and financial support for German industry Either approach will lead to German debts rising markedly while its economy contracts. The costs will be astounding.

This report provides a useful perspective from within Germany, particularly on the need to move away from an export oriented economy and the obstacles to achieving that outcome.

Read more at http://www.nakedcapitalism.com/2012/09/the-german-economy-and-the-european-crisis.html#BlYJFR1q4RLmcWfg.99

An interesting piece, in deed, and „authorized“.

1. The very first sentence:
“From its early post-war catch-up phase, Germany’s formidable export engine has been its consistent driver of growth. But Germany has almost equally consistently run current account surpluses“

Why then was the accumulated German Current account NEGATIVE as late as 2004?

Calculate it for yourself for a 38% GDP begin of 2012 (lookup RBS or other “scorecard” , and some 5% GDP CA surplus in the few years before.

2. Page 7 “Not only was plentiful labor available”

Why did Germany then engage since 1955 (http://en.wikipedia.org/wiki/Gastarbeiter) hiring people for a full one million people coming from Turkey, Greece, Italy, Spain, Yugoslavia? Because we all got multi cultural, back in 1955? Why can Germany parachute 150 perfectly Greek speaking tax organization experts any minute? Maybe because they are native Greeks, making their way in Germany?

After WWII 20 % of the working population of Germany was dead or permanently disabled.

3. The plain anti German propaganda seems to be now not only organized, but “authorized”, since Lagarde took over the IMF. Maybe DSK was not good enough at plain lying?

Makes me somehow actually wonder, why David – O –Donnell doesn’t apply at the IMF. Very good salaries, tax free, as far as I heard. He can at least say “Frankfurt School”, although he still can not say what it means : – )

4. Since this February Soffin II is active, which can replace ALL German banks over a weekend completely with 480 b credible fire power. We are not taking any chances. The folks, who think they can push their debt onto the german tax payer should better sober up soon.

So genauer you can dish it but not take it eh :). Gosh, who knew Teutons were so deeply insecure and moody that a cold analysis suggesting some weaknesses might cause such offense. 🙂 🙂

Its a good paper. Seems that it has touched a nerve here anyhow!
Heres what nobody wants to go to : this is going to end with germany paying. Sorry Genauer, but thats the fact. You pay by one or more of
a) by inflation
b) by transfers
c) by the breakup of the euro and the TARGET2 chickens of doom coming home to roost on your spike overvalued DM.

But thats good. It shows that as it should be Germany is the economic core. A peaceful, democratic strong openhanded germany is surely something the continent needs (deserves?)
(in the peripheral core)

@ All

genauer has a point. Germany went from being the sick man of Europe, for which the country drew much criticism, to the healthiest man in Europe, for which the country also draws criticism.

However, this debate is rather beside the point. The core issue is the incompatibility of the major economy in the EA running very large surpluses with the rest within a single currency area.

Another aspect of the phenomenon is the curious European integration effects that this has on German domestic politics. Left and right – as epitomised by the SPD and CDU/FDP – no longer makes much sense as their respective support bases have a common interest i.e. ensuring that the policy of export-led growth continues cf. view of Wolfgang Munchau on the candidature of Steinbrueck.


Im struggling to remember much criticism of germany as the modern day ottoman empire? I do recall concerns about the costs of reunification and the rigidities in the labour market.
Germany, like all large countries, will get criticised whatever it does. Get over it.


“Germany went from being the sick man of Europe, for which the country drew much criticism, to the healthiest man in Europe, for which the country also draws criticism”

That’s not really how I remember it. West Germany was generally the envy of Europe in economic terms and it was always understood that they had superior industrial practices and management. Typically you might get a UK politician and media pals boasting on the basis of a few economic numbers that the UK (as a result of said politician’s policies, naturally) was catching up to or overtaking Germany in terms of measures such as productivity. That was in the late eighties.

Post re-unification, everyone understood that the East German Mark had been overvalued, and there was little surprise that taking over a communist economy caused a slowdown, but the underlying attributes of German industry, it was assumed, would re-assert themselves. Few other countries would have been able to do so. Rather than criticism, you could equally say it drew admiration.

Germany’s label as economically troubled was always assumed to be a temporary one.

Provocative piece of recent German Economic History by Wolfgang Münchau

Eurozone crisis
Why German unification was a mistake
3 October 2012Der Spiegel Hamburg

Thirty years after the inauguration of Helmut Kohl and 22 years after German reunification, the former chancellor is being celebrated as the father of German unity. But the truth is that, by hastily joining the GDR to the Federal Republic, he planted the seeds of the euro crisis, argues Wolfgang Münchau.


Text from Blind Biddy:
“Hi Genauer! Looks like you did not lose your revolver – or are you just happy to meet me again?”

@President Martin Schultz

Welcome! You wear the core Principle of European Solidarity well.


What have the economists ever done for us?

Andrew G Haldane, 1 October 2012

There is a long list of culprits when it comes to assigning blame for the financial crisis. This column argues economists are among the guilty, having succumbed to an intellectual virus of theory-induced blindness. It adds this calls for an intellectual reinvestment in models of heterogeneous, interacting agents, following in the footsteps of other social scientists. This will require a sense of academic adventure sadly absent in the pre-crisis period.


These cliff-edge dynamics in socioeconomic systems are becoming increasingly familiar. Social dynamics around the Arab Spring in many ways closely resembled financial system dynamics following the failure of Lehman Brothers four years ago. Both are complex, adaptive networks. When gripped by fear, such systems are known to behave in a highly non-linear fashion due to cascading actions and reactions among agents. These systems exhibit a robust yet fragile property: swan-like serenity one minute, riot-like calamity the next.

I’m into complex adaptive systems [cas] at times ….


As http://en.wikiquote.org/wiki/Daniel_Patrick_Moynihan , (“From the wild Irish slums of the 19th century Eastern seaboard” ??) said: “Everyone is entitled to his own opinion, but not his own facts.”

I did not challenge the OPINION of this paper, but some evidently completely false claims to fundamental FACTs (accumulated CA surplus and extreme scarcity of labor, hints to any similar scarcity are very welcome!).

The 2 claims I brought were not about some petty things like how many combs Ireland and Germany traded in 1958, or the arrangement of the chairs on the deck of the Titanic : -)

I am somewhat skeptical, that D-O-D or B-E-B, or Eureka here will ever agree with me on how the GDP cake is divided up between various social groups, although I believe now, that there is more common ground to be worked on and expanded. So far we have different OPINIONs, as it was, is, and will be. And that is perfectly fine with me.

But we should get at least the most important FACTs approximately, agreeable ,right.

I think you are dead wrong on “deeply insecure”, more to the contrary, but you are right on that our mood is souring, significantly, more to that later : – )


Until 2004 Germany was perfectly fine with a Current Account (CA) Balance very close to Zero. We exported Mercedes, and went on vacations in the sun rich southern neighbors, trying to learn a little bit about “dolce vita”. In my accounting we had some ACUMULATED CA surplus of 13% GDP end of 1990, and used up all of it and more after reunification. Some tiny thing we all laugh about now.

This notion, that we somehow want to accumulate claims, instead of consuming the fruits of our labor, just sounds so weird from here.

In the moment you realize that this is not a Germany vs the rest, not core vs periphery problem, but more: Scandinavian, and, yes the German welfare state, since Bismarck, getting their act back together, and for all of them, only after 2000 – 2005 the problem looks very different.

Not some mythical mercantilist Germany trying a new trick on its neighbors. Some sinister left/green German government, since 1998, conspiring with the German trade unions (those with half the board seats), “to rule them all”.

Genauer – no idea what that last post is about. Do you disagree with my opinion that somehow germany will pay? if so, on what basis.
Am i the only one that finds a small faint shudder up my spine when someone says “germany mood is souring, significantly, more to that later”. Are we supposed to be scared Genauer? Worried? Chagrined? Mystified?

@ All

As far as Wolfgang Munchau is concerned, it – German re-unification and the history of Europe since – was all one big mistake!


I do not subscribe to such a view. Indeed, it seems to me to be rather silly. But the law of unintended consequences definitely applies.

There are two facts around which it is not possible to get;

(i) it is not possible for all countries to run current account surpluses with one another

(ii) membership of a single currency area removes the safety valve of devaluation to reduce the pressure from resulting payment imbalances.

If one reads the first link in the Press Europa coverage, the seemingly conclusive argument is made that Kohl negotiated creation of the euro in return for German unification. If he did, which I very much doubt, he got the better side of the bargain and demonstrtaed that Mitterand had a poor grasp of economics. The problem now is the same as it was then i.e. disparity in the relative competitiveness of the German and French economies.

Nothing much has changed. The new French government is beginning to look like that of Mitterand in its first few years. The debate in France is till about ratification of the ESM treaty when the negotiations on the next one have already begun!

From the traditional left/right point of view,

I ll guess, you should be very happy with the present conservative German government, with “the last German Europhile” Schäuble, as a German finance minister. The alternatives are social democratic Steinbrück, who will sent the 7th cavalry (cross border military action for financial crime), or the real leftie, the friends of David O Donnell, (“Die Linke”, the only ones who opposed the ESM) Lafontaine, and his deputy Dr. “class war” Flassbeck, wanting to raise your tax levels to 60% via “rapid tax convergence “: – )
Before the clowns got kicked out of the finance ministry. Stocks jumped by 4.5% on that day, this doesn’t happen that often.

From all European nations, Finland is the most peripheral, geographically, having to accommodate Russia for a long time, having gone through a very deep recession since 1992. This caused considerable hardship for a lot of them, but they decided that their stellar AAA rating is more important for them. They had to pledge collateral on their bonds, and I understand them to ask for the same from others now.

They even paid their WWI debt to the US in full, in 1933, unlike the whole rest of us, including UK, France. The Finnish people are wise, they have, by far, the highest PISA scores in Europe http://en.wikipedia.org/wiki/Programme_for_International_Student_Assessment
We sent scores of our teachers there, to learn as much of them as we can.

@ brian lucey
I don’t think that any of your 3 options is available.

There are only 2 real options:

a) Ireland pays her debt in full and on time
This is pretty manageable. The EU / IMF terms are very generous at around 3.5%. The ISIN IE0034074488, I used as a proxy for irish 10-year bonds, trades practically at par. Countries like the UK and US have paid down sovereign debt of 250 % GDP, repeatedly. That’s how AAA ratings are made.

b) Ireland does a sovereign default
Those things happen. But you then have to live with the consequences. We are not living anymore in the times, where British gunboats were sent out to shell the ports, or the Roman empire sold little Greeks “Graeculi” into slavery, to pay off the debt.

In the case of Ireland, it would be clearly a case of “want not”, and not “can not”, as it might be the case of Greece. Nowadays, painful trade sanctions don’t need any more submarine wolfpacks sent to the Atlantic.

What I think most people in GIPSI countries don’t understand:

This would not be some Argentinia defaulting on US banks. They can be a little nasty, don’t forget that easily http://ftalphaville.ft.com/blog/2012/10/04/1191141/some-hedge-fund-managers-walk-onto-an-argentinian-navy-ship/
But they are not “people” and have no standing armies. Still, if the consequences of a sovereign default would be benign, why don’t people do it more often?

If Ireland, or some other country, would default on its debt towards the People of Europe, that would be significantly different.

From my perspective Karl Whelan, still adviser to the Irish government (?), is pretty delusional, when he phantazises about Target 2 debt just written off (“let the Bundesbank write herself a check”). We are not amused. England hat her best times during the rule of the spinster ladies.

Now, Brian Lucey, do I scare you enough, to “not even think about it”, option B?

Genauer what sort of “painful trade sanctions” do you have in mind? Which are legal within the union that is.
You so realise you come across as a ranting bully an
Image Germans should avoid?

@ All



Some very telling points in the contribution by genauer. The proverb used to be “there is nothing certain but death and taxes”. It should now read “there is nothing certain but debt and taxes”.

However, our goose has been well and truly cooked by Time Magazine.


@ All

Tip! To get round the WSJ pay barrier, cut and paste the title of the article to Google and enter search.

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