Wolfgang Munchau is pessimistic

His latest contribution is here, which covers some of the topics addressed on this blog over the last week (with John McHale’s points specifically cited).

18 replies on “Wolfgang Munchau is pessimistic”

So back to the Conflationist Fallacy – and the imperative to separate Financial System Debt from Sovereign Debt; with the ECB as the only institution with the potential to act on same and EU leadership, Germany in particular, adamant that it will never allow such potential as a printing LOLR to be realized.

I’m now pessimistic; empirics support it.

I’m now in favour of UDI on the Promissory Notes; a simple declaration of intent should suffice.

“In the first category, I consider Greece to be unconditionally insolvent; Italy and Portugal to be solvent – but conditional upon a return to sustained growth. I consider the sovereigns of Spain, Ireland and the rest to be fundamentally solvent – minus the banks, of course. In the second category, I consider the private and financial sectors in Spain, Portugal and Ireland to be insolvent.”

Holy god…after all the that money we “invested”.

I particularly liked the bit about the Emperor (Draghi) being naked. Maybe that’s why Weidmann is waiting in the long grass.

Not only are they insolvent they still have not come up with a new business model for making money they are so busy trying to get out of the mortgage market and property business that they have not told us how, if they survive, they are going to make money in the future.

@Germany on the Periphery

Output levels in the manufacturing sector decreased at a solid pace during October and the rate of contraction accelerated since the previous month. This reflected an ongoing downturn in new business intakes, with the current period of falling new orders now stretching to 16 successive months. Survey respondents generally commented on subdued confidence among clients, and particular weakness across the automobiles sector.

Reduced volumes of new export orders persisted in October, with the downturn broad-based across all three market groups. The overall rate of decline in new orders from abroad was the second-sharpest since April 2009. Survey respondents mostly pointed to weak demand from clients in southern Europe and lower levels of investment spending in Asia.

Commenting on the final Markit/BME Germany Manufacturing PMI® survey data, Tim Moore, senior economist at Markit and author of the report said:
“Germany’s manufacturing sector continued to struggle for momentum in October amid weakening demand from its key export markets, according to the latest PMI survey data. Intermediate and capital goods producers led the downturn in output, partly reflecting shrinking sales to southern Europe alongside reports of softer investment spending across Asia.

“The latest data also suggested that manufacturers are gearing up for a difficult final quarter of 2012, as job cuts returned and efforts to reduce warehouse inventories intensified. However, there was some positive news for operating margins, as price discounting stabilised and input cost inflation was unchanged on the previous month.”


I fail to see why the rest of the EZ has to wait for that half a rood of rock in the Rhineland next September 2013 …


BERLIN (AP) — German Chancellor Angela Merkel says Europe’s sovereign debt crisis will last at least five more years.

Merkel says the continent is on the right path to overcome the crisis but “whoever thinks this can be fixed in one or two years is wrong.”


She is roight alrite but what if she is leading us on the wrong path which the analysis by Holland and Portes suggests? A wasteland may beckon ….

I agree 100% with WM.

There is no point in saying that everything will be ok if official policy is tweaked to do x, y or z. Even Colm Mc Carthy’s columns are going a bit in this direction, outlining the faults in the EZ and how policy should change to fix them. Although I agree with his analysis, it is all somewhat a waste of time, because there is absolutely no appetite in Germany for the sort of policy response that will fix the crisis.

From Merkel’s point of view, the German economy is doing reasonably well and she looks likely to win the next election. What’s not to like about the status quo? Where is the incentive for Germany to change the policy mix?

Germany wants to disentangle banks and sovereigns in the same way that we want a CCCTB. We might talk about common corp tax and sign up to CCCTB policy discussions, but there is no way we will change government policy unless we absolutely have to.

And the EZ crisis will not be resolved comprehensively until Germany absolutely has to agree to a change in policy. And that means forcing the issue, by stopping this ridiculous charade of cooperation, by talking loudly and clearly about leaving the Euro, by taking the ECB to court over unguaranteed bank debt, by tearing up the Promissory Notes and defaulting on any remaining senior unguaranteed bank debt.

Wolfgang Münchau being pessimistic is not a man bites dog story and I’m in the same boat myself.

Multi-year low or no growth is the main enemy of a permanent resolution of the crisis.

The US had average annual real GDP growth of 3.4% in the period 1960-2007. A decline of 1% over the next decade would have a bigger impact than it seems.

It looks like the outcome of the elections will be an Obama win and a split Congress. There maybe some compromises in the the near-term but there will be little available for for example infrastructure that is ranked 23rd in the world.

Let’s cheer our own achievements – 50 years to build a motorway from Dublin to Cork!

The supergrowth period of the big emerging economies may be over and Germany follows Japan with the world’s oldest population.

The number of children (up to 14 years old) in the country fell 14% in the period 2000-2010 — 2.1m.

People in Ireland complain about German domination in Europe but it’s foolish to see Germany as the sole power that can reinvent the EMU system.

In the parlance du jour, France is a swing state and to use a related sobriquet, it may in time become a battleground state whether Hollande avoids reforms or not.

In common with Ireland, France needs a big rise in business startups but if risk capital is taxed at the same high level as non-risk earnings, then the civil service will remain the most popular place of employment for young people.

As regards corporate taxes which Bazza has raised, Ireland gains very little from facilitating American services companies to evade paying taxes on their sales in other European countries but because the sums involved are so large, it’s likely that the UK, France and likely Germany will alter existing tax rules or a majority of EU countries would support it.

So yes to reform in each country as long as it impacts other countries!

It’s the same story domestically in Ireland with the elite and their protected cronies in the professional sector, trying to maintain bubble income gains.

Minister Pat Rabbitte is shocked that a bubbletime bank chief is drawing a pension of more than a half million euros annually from a bailedout bank while he and his colleagues have facilitated it.

Even running a charity in Ireland pays more than what the prime minister earns.

Who said charity begins at home?


“Merkel says the continent is on the right path to overcome the crisis but “whoever thinks this can be fixed in one or two years is wrong.”

I think it will run and run.

Policy is designed to buy time and put more lipstick on the banking pig.
I wonder how nihilistic the next risk off phase will be.

Munchau points to the fact everyone imposing austerity at the same time is the probable reason or the fiscal multipliers being underestimated.

I would suggest it’s got more to do the unprecedented nature of the recession. For the economy to run smoothly either businesses or households need to take on more debts to banks than they repay.

To date ever increasing mortgages have facilitated this. However they’ve reached their natural limit in taking two careers to repay. This is a really important point and austerity or no austerity, the problem seems to be that no-one is willing or able get the banks to create money for the economy.

But of course, there’s no reason why banks loans should be the only real source of money for the economy. Indeed, having every Euro created in parallel with an even higher debt is a tough starting point when trying to resolve the debt crisis. Although I suspect even Munchau doesn’t fully appreciate the money comes from bank loans.

@Paul Ferguson

“This is a really important point and austerity or no austerity, the problem seems to be that no-one is willing or able get the banks to create money for the economy. ”

I suspect you are correct in this but the issue goes much further.
European banks are required to deleverage.

‘Shrink their Balance Sheets’ is the phrase used. But what does this mean and what are the consequences of doing this?

Logically the banks reduce lending but they also call in loans, using money that would otherwise be spent via consumption or investment in the various economies. Even when banks deleverage by taking a loss on their loans, the consequence is still the same. They actually incentivize a reduction in aggregate demand, the exact opposite of what is required.

The interesting comparison would be to compare EZ commercial bank balance sheets for the period 2007-2012, with particular emphasis on loans to customers.
I suspect that the reductions throughout the EZ would dwarf government ‘austerity’ cuts over the period.
The imposition of Basle 11 or Basle 111, with the consequent requirement to deleverage as outside capital is not available, is driving the continent into a huge depression.
To a mere onlooker like myself, it is either sheer insanity or deliberate economic sabotage.

@ MH

Your point with regard to France, however often repeated, seems to make little impact on the navel-gazing. It seems to me, however, that political leaders in France are well aware of the bind in which that country now finds itself (even if the importance of the issue has not registered in the debate here). The report commissioned from Louis Gallois underlines this.


N.B. Link to full report.

One wonders what Hollande will do with it. A somewaht similar report by Jacques Attali for Sarkozy is gathering dust in a cupboard somewhere.

Useful addition to views of Robert Keohane noted above ….

Divided States of America
Notes on the Decline of a Great Nation

The United States is frittering away its role as a model for the rest of the world. The political system is plagued by an absurd level of hatred, the economy is stagnating and the infrastructure is falling into a miserable state of disrepair. On this election eve, many Americans are losing faith in their country’s future.


@ Michael Hennigan

“then the civil service will remain the most popular place of employment for young people” It might be attractive in principle. In Practice they have been locked out due to Croke Park for the last 5 years.
One light where employment will have to grow is education. The baby boom is going to result in a rise in children of school age of about 20%. They have ensured their pay will be significantly less than those already in.

300,000 jobs have been lost in the economy since 2007.
There are 227,000 less people in their 20’s working now than then.
Youth unemployment has gone from 5% to over 30% in the same period. Without emigration it would be worse than Spain and Greece’s 50%.

@ Joseph Ryan

Thanks Joseph,

Regarding how deliberate the system of forced deleveraging is, I believe our banking system is very misunderstood. Many economists learn that money comes from being printed by the central bank and then banks indirectly create money from this through the money multiplier. It never seems to be pointed out that only 3% of the money supply exists as cash and the remaining money is created, quite directly, with a matching debt.

While economist do have a better handle on where money comes from It seems to me they don’t fully appreciate that money is deleted through loan repayments. People ‘saving rather than spending’ seems to be the only explanation why there’s less money during a recession.

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