Inside Merkel’s Bet on the Euro’s Future

The WSJ provides an ‘insider’ view here.

28 replies on “Inside Merkel’s Bet on the Euro’s Future”

Interesting detail.

It seems like a long time ago but there were stimulus programs in several countries in 2008/09.

What would be interesting to see are different credible scenarios complete with data on alternative outcomes?

Germany’s gross public debt GDP ratio went from 65% in 2007 to 82% in 2012 despite a growth in the economy.

Angela Merkel listened in Vatican City as Pope Francis, in his inaugural Mass last month, called on the powerful to care for the weak.

A few hours later, in her limousine to the airport, the German chancellor took a phone call from the desperate president of Cyprus, Nicos Anastasiades. “I need more solidarity,” he pleaded, according to officials familiar with the March 19 conversation. His parliament was about to reject a euro-zone bailout deal. His tiny country faced ruin…Cyprus was trying to “test” Europe and refused to see that its banking “business model” was finished, she said, according to people present. Two days later, Cyprus gave in to German and IMF demands to shrink its banks radically, inflicting drastic losses on large depositors.

Ms. Merkel didn’t want such euro-zone dominance. She knew how uneasy it would make Germany and Europe alike.

“Germany is in a difficult position,” Ms. Merkel told The Wall Street Journal in an unusually frank moment in 2009, as Europe’s debt crisis was just beginning. “If we do too much, we dominate. If we do too little, we’re criticized” for not leading, she said. “I will always make sure that one big country isn’t issuing directives.”

Most of us would assume that if we reduced our debts we’d be better off but this reduces the money supply by the same amount.

I’m always curious about where advocates of debt reduction expect the money needed for trading to come from?

I guess the money will come from the savings made on the reduction in debt servicing costs?

@ Paul Ferguson

I’ve been looking through your website and have a question – does your analysis assume a constant velocity of money?

It appears to me that there is a pretty simple answer to your question from above – where will the money come from – in that annual GDP is a function of both the money supply and also the number of times that the money is used within that year (velocity). As the money supply falls because debts are repaid the velocity of money is also likely to increase as people/businesses feel more comfortable spending/investing their excess cash. Net net, there is no reason to assume that a reduction or increase in the money supply will automatically lead to an decrease or increase in NGDP.

John Hussman has an excellent piece on monetary policy and the velocity of money here – wherein there is a chart showing historical US trend in velocity of money since the 1940s – velocity (NGDP/Monetary Base) is currently at 6-7 vs 22-ish in the 1970s, so theoretically the monetary base could fall by 2/3 and the velocity could make up the difference while staying within historical norms.

@ Rich,

I know what you mean. However every euro has a matching debt. If we reduce our debts we reduce the amount of money in the economy by the same amount. Whatever is left, the savings from having less debt to service, will still have a matching debt. Regardless of theories though I think we have enough data on mortgage arrears and SME loan arrears to know that even if we can come up with a theory as to how the economy could function ok with debt reduction we can definitely see that in practise such a theory doesn’t hold.

@ Edward v2.0

We don’t assume a constant velocity for money and in deciding how much money the economy may need the central bank would factor in the velocity of money.

I think the amount of money in the economy is a very big factor in the economy’s performance though. At the moment the central bank has very little control over the money supply and something as important as this is instead decided by the collective confidence of bankers in the system expanding or not.

I think the money supply is far too important a thing to have adjusted effectively by bankers mood swings.

If we could control the money supply we’d be halfway there to controlling price stability according the Fisher’s equation anyway! mv = pt

Most interesting to see a perspective from a different angle.

The article would be funny if it was not true… some interesting quotes struck me…

“Infected Leg Theory”……….amputation required

The math adds up only because of vague footnotes citing future “further measures.”

I wonder is this alluding to The magic growth fairy missing the bus again!!!!!!!!!!!!!

Perhaps with the shortage of young workers in Germany… young unemployed professionals should be migrating to Germany from the european periphery. Already happening to some extent… but perhaps it will accelerate etc?

It is remarkable how the US media succeed in setting the issues broadly in their correct context and, in the process, reveal just how central a player Merkel is.

The following IMHO are the core paragraphs if for no reason other than that they summarise her position.

“The chart divided euro-zone economic policies into two groups: Those made by individual national governments, such as taxes, labor laws and pension systems, and those handled by the EU’s “supranational” central bodies, including trade and antitrust rules. Europe’s troubles, the chart suggested, arose from policy areas controlled by national governments.

Centralizing the national policies was politically unrealistic—akin to creating a United States of Europe. The chart suggested another path: Leave the policies with the national governments, but “coordinate” them via new, and binding, rules and pacts.

The diagnosis showed how German thinking was diverging from the widespread international view of the euro-zone crisis. It put all blame on debtor nations.”

What is missing from this summary, but hopefully not from the actual chart, is any reference to the Single Market. It is understandable that Germany may place no real emphasis on this as the present situation of inadequate and incomplete implementation suit it quite well. Neither is there any need for treaty change to do this. The impediment is not a lack of a legal basis but of political will.

The reference to tax is incorrect. An entire chapter of the Treaty on the Functioning of the European Union is devoted to taxation. The distinction is between direct and indirect taxes, there being provision of harmonisation of the second but not the first. The failure to introduce an EU-wide system of VAT collection, with a sharing of the tax receipts, is one good example. It suits countries to continue with the systems of zero-rating of exports, dividing the market between retail exchange and business to business exchanges, the former being only a very small sector.

The German analysis is otherwise correct. The Lisbon Treaty allows only for the “coordination” of economic and social policies and includes specific language to this effect. This reflects a political reality as what is involved are societal choices which can only be made at the level where the democratic sanction for them exists.

There are currently several examples of such choices making the headlines in Ireland.

@Seafoid. You may be right.

interesting comments from adviser to Merkel as appears in the Telegraph today……..

“15.20 Our Berlin correspondent Jeevan Vasagar reports that Kai Konrad, an adviser to Germany’s finance minister, said the euro “only has a limited chance of survival” and may only endure another five years.
By advocating a eurozone break-up, he runs counter to the official German government line that a failure of the single currency spells failure for the entire European project.
In an interview in German paper Welt am Sonntag, he said:
Europe is important to me. Not the euro. And I would only give the euro a limited chance of survival.
A concrete period is hard to identify as it depends on so many factors. But five years sounds realistic.
No country can pile up debt without running the risk that their investors will pull the plug. It’s in each [country’s] interests to keep their own debts as small as possible. Where the limit lies has to be individually decided. That depends among other things on economic growth and the growth of population.

I wonder how he views our debt pile.
With austerity apparently falling apart (I see that even Enda is postponing)
How long before an implosion?

A fearful insight into just how out of touch with reality Germany remains.

In summer 2011, Ms. Merkel’s key Europe adviser, Nikolaus Meyer-Landrut, distilled the thinking to a chart on a single sheet of paper.

The chart divided euro-zone economic policies into two groups: Those made by individual national governments, such as taxes, labor laws and pension systems, and those handled by the EU’s “supranational” central bodies, including trade and antitrust rules. Europe’s troubles, the chart suggested, arose from policy areas controlled by national governments.

Notably missing from the list of areas with European supervision was the area of economic and monetary policy and monetary union, which, for those not watching the news, have not been going so well.

It is a staggeringly stupid attempt at analysis and our experience with the ECB, Rehn and Buti has to be that the the EU has made a terrifying mess when they have have been been allowed to apply themselves to big economic issues.

It struck me after watching Sinn as well, a charming man but with a head like a block of concrete. The German strain of neoliberalism is as faith based and as allergic to evidence as its Ango-american equivalent.

For light relief here are two Stephen Colbert pieces that Danny Blancflower, ex of the UK’s MPC tweeted about:

Given that reason has failed to changed the mindset of the neoliberal fantasists shaping European economic policy I think it is well past time for just showering them with contempt and barracking them off the stage of public influence.


Good article.

Barnier wants the US to agree that EU bank subsidiaries can have negative capital or can be capitalized on a wing, a prayer and a promise from Old Europe.
Meanwhile the same Barnier and EZ institutions force host EZ peripheral countries like Ireland to make sure that their ‘home’ banks have capital ratios of up to 15%.

I hope Bernanke gives Barnier the response he deserves.

Deutsche bank has a ‘leverage’ ratio of 2.7% per FT. According to the report a fall in asset value of just 2.7% would wipe out the total capital of DB. And we knock ourselves out over about AIB and BOI?

@ seafoid
Nice link.
‘With capital under pressure and markets becoming tougher, many banks across the world have been forced to go back home, where returns are superior thanks to the benefits of scale and stronger distribution, and funding is easier.’

Except for places like Ireland where domestic returns are increasingly bleak, and funding costs are incompatible with growth. Great capital ratios, even if they survive the mortgage/SME crisis, cannot substitute for the magic ingrediient of confidence.

I would guess that Angela can smell something rotten under the floorboards of the big German banks. She might wake up at 4am and wonder if could be rotten enough to threaten the solvency of the mighty German state. S****ze.

Like the losses at Anglo in 2008, no one really knows…..hence the need to keep one’s powder dry and avoid getting drawn into a rescue of the periphery…but what if there is no periphery, and it’s all just one big mess ?

@ All

When we paid off bondholders and agreed a blanket guarantee we convinced ourselves, or so the storey goes, that our banks were not insolvent, they merely had a liquidity problem. I know it is boring repeating the lies we were told but I will never tire of reminding people. When it turned out, surprise , surprise, they were insolvent and only the worst accountants in the world would have failed to spot that, we changed the narrative to, the terrible “threats” we were under, and that we “really” did what we did for the common good. We were taking one for team Europe and now we cannot understand why team Europe has been so cruel to us. When ordinary people demanded to see the “proof” we were “bullied” we were told of secret side letters, emails, telephone conversations we were even told that Tim Geithner got involved to scupper our chances of bailing in bondholders. Even now, the DoF refuse to release all of the 8,000 documents they assembled for the Nyberg inquiry (every inquiry has been doctored and gerrymandered by the DoF setting “the” terms of reference) being released to the Dail’s PAC. In a word, disgraceful. All our great democracy or great republic tells us we can have , are redacted photocopies of photocopies. Former secretary generals and career civil servants forgot that it might be important to preserve an accurate record of what actually happened for posterity. Having been around 30 and 40 years they probably decided that it was better for career and pension considerations if what happened never saw the light of day.

The fact is, team Ireland kept taking and continues to take, within a broken EU and EZ the easy options. Reform is not on the agenda, passing on debt to future generations is THE agenda. A blanket guarantee was an easy option, Croke Park was an easy option, NAMA SPV was an easy option IBRC was an easy option, promo notes were an easy option, converting them was an easy option. Signing the original MOU was an easy option. Not burning bondholders was an easy option, breaking into the NPRF,another easy option. All through this crisis we did not want to upset powerful people in banks. Even today the minister is afraid to use our 15% stake in BoI to vote against one of the architects of the banking crisis getting his 15 times the salary of a TD. We want to talk hard as Cowen did with his expletive regarding Anglo, but then almost simultaneously they (Lenihan and Cowen) buckled as per usual. Advised no doubt by their ‘experts’ in banking at the DoF and department of an Taoiseach.

The lack of leadership has been appalling and future generations are going to see this last decade as one of complete treachery. The country is being bled dry by those who are much more powerful that the politicians, who are much smarter than the politicians viz. the legal, and financial professions aided and abetted by the system apparatchiks populating the top of every government department, the permanent civil servants and before Ernie Ball comes on to defend them, let me say to him that it is not primarily about money (it is for them) it is about the fact that they could not and would not do what was right by the country.

Earlier I was looking at a photo from 2000 when Mr. John Hurley when he was secretary general of the DoF later he went on to play an even worse role in our crisis as governor of the central bank. Ditto Cardiff, whom the government went out of their way to get rid of, in their own Orwellian, inimitable way “promotion”. Herr, Kai Konrad is probably being over optimistic with his 5 year time frame. I am not buying into the notion that he is interested in saving Europe, as someone who has worked in Germany I would say he is far more interested in saving Germany. Meanwhile the Noonan’s, Gilmore’s Kenny’s have made it blatantly obvious that they are only interested in saving their own pensions.

@Paul Quigley
Re funding costs for banks.
I don’t understand or accept that banks funding costs are too high. In an era where deposits are producing negative real returns and when they have access to exceptionally cheap ECB funding this line from the banks appears to be nothing more than rubbish. I see that AIB and it’s satellites are increasing variable mortgage interest rates at a time when they have exceptional mortgage arrears and defaults. Is this bound to tip more over the edge. With the state owning AIB surely the minister should put a halt to this before the others attempt the same.

@ Flatluxjnr

Well, we in Ireland certainly do our best. I cannot make up my mind whether our economic policies are the result of schizophrenia or bi polar disorder but as they tend more towards delusions and grandiose ideas I lean more towards the schizophrenia definition. John Gormley was probably correct when he blurted out (having secured the pension of course) that the Dail was a “madhouse”.

Can anyone explain why a 70 year old minister can get away with piling up debt on the nations children while he is back slapped it’s as if there are no consequences? Our Minister would be 110 years old when the last of the converted PN’s are being redeemed in 2053.

Already, he was infamous for mishandling the Hep-C scandal and his uninspiring stint as leader of FG, his career resurrected on the basis that he supporting Enda in what can only be described as a ridiculous failed heave. One that was launched by innocuous remarks by Richard Bruton on the “Tonight with VB” when asked would he like Enda’s job? he laughed and said, “in his dreams”.

@ flj

Point taken re funding costs isssue. Our banks have not returned to base because the returns are superior, but because they have been forced into asset sales and deleveraging.

@Robert Browne

“we were even told that Tim Geithner got involved to scupper our chances of bailing in bondholders”

You are absolutely, 100% right. He did.

FFS the US were in panic mode about it all at the time when tiny Tim was flying over here to places like Poland once a week to secretly meet with various ‘powerful European figures’ out of the glare of the media. He was meeting people like Merkel, Sarko, Lagarde, Schauble, Trichet, various Eurozone bankers, etc. in private, out of their own countries, making all kinds of threats. I don’t specifially know what the threats were but I know he met them and that he made threats and I’m pretty sure he didn’t bother to meet any of the Irish, he just told the powerful Europeans to ‘cascade the message down’ is the phrase I was given.

@Joseph Ryan

“Deputy Pearse Doherty: To ask the Minister for Finance if he will estimate the additional provision that will need to be made in the accounts of Bank of Ireland; if that Bank has to write down the value of non performing loans to the value of the underlying security; and if he will confirm that such a write-down will result in demands to the State to provide additional capital..

Minister for Finance, Michael Noonan: The Deputy may be aware that the rules relating to the correct level of provisioning are determined by the relevant accounting standards. It is the responsibility of the Bank’s Board of Directors to ensure that these rules, including the correct value of the underlying security for provisioning purposes, have been properly applied and that this is subject to independent external audit review. Nothing has been brought to my attention to suggest the Bank has not applied the rules correctly and accordingly I am not aware of any requirement for the State to provide additional capital.

Deputy Pearse Doherty: To ask the Minister for Finance his position regarding providing additional capital to Bank of Ireland, should that Bank decide to pursue a new rights issue.

Minister for Finance, Michael Noonan: Bank of Ireland has not indicated to the market or my Department that it has any intention to raise more capital from shareholders at this time. I can, however, confirm for the Deputy that, should Bank of Ireland decide to do so at some point in the future, I would naturally consider the options open to the State in this regard at that time. If the mechanism chosen was a rights issue, any decision in relation to exercise of rights attaching to our current holding would be made having assessed the best interests of the State.”

“Meanwhile the same Barnier and EZ institutions force host EZ peripheral countries like Ireland to make sure that their ‘home’ banks have capital ratios of up to 15%.”

Do you seriously think that 15% will be enough?

@Overseas commentator

“Do you seriously think that 15% will be enough?”

Er, no.

Where are you overseas by the way?

@ Edward v2.0

Thanks for the Hussman link. Very interesting piece.

It would be very useful for the central bank when they’re deciding how much money to directly inject in the economy if ever they get there!

@ Paul Ferguson

I applaud what you are trying to do but I don’t believe that an independent committee within a Central Bank controlling the money supply directly is workable, no matter how well intentioned, because for as long as the committee is staffed by humans, they will eventually come under the control/influence of the government and or industry. Even if members were elected by the public or drawn at random, they would still find offers of political or financial reward on retirement if they kept the money flowing – so they would. In the interim the committee would also be infected by whatever personal bugbear or political slant the chairman happened to have.

You should take a look at Chapters 13/14 of David Stockman’s new book (The Great Deformation), he maintains that Milton Friedman and his disciples tried exactly what you are suggesting when they advised Nixon to cancel gold convertiblity and end Bretton Woods. Friedman believed that the Fed would be forever staffed by hawkish academics like himself that would guarantee prosperity by ignoring political will and keep the money supply growing at 3% forever. There’s quite a lot of vitriol in the book, including:

“The very idea that the FOMC would function as faithful monetary eunuchs, keeping their eyes on the M1 gauge and deftly adjusting the dial in either direction upon any deviation from the 3 per cent target was sheer fantasy. And not only because of the political naivete, something Nixon’s brutalization of the hapless Arthur Burns aptly conveyed.

Friedman’s austere, rule-bound version of discretionary central banking also completely ignored the Fed’s susceptibility to capture by the Wall Street bond dealers and the vast network of member banks…

Obviously, given the explosion in credit growth since then, things turned out quite differently and by the time Greenspan headed the Fed he barely even spoke about the money supply. You might argue that the problem of credit growth has been due to the fact that the Fed never had full control of the money supply because of fractional reserve banking, but I would argue that both Greenspan and Bernanke had the tools and the opportunity to reduce the growth in money supply (though not target it exactly), but they simply decided to do nothing about it (or more accurately encourage it) on the misguided belief that they were not causing bubbles and it wasn’t their job to burst them. Why should I expect any different outcome from a committee such as the one you suggest?

While I don’t know enough about the subject to offer a complete solution, the good thing about a gold standard was that you knew there was a limit in the amount of gold mined every year so it prevented humans from interfering with growth in the money supply. I’m not advocating return to the gold standard (or bitcoins) but any long-term solution must account for the reality of human nature and its inevitable corruption.

@ Edward v2.0

You raise a fair point.

I think in terms of designing a system that’s open to as little abuse as possible our proposal is the best we can do.

I’d say bear in mind that money would never be deleted under this system and because the money is issued without a matching interest-bearing debt the money supply does not have to expand for the economy to be stable.

Bear in mind also that the amount of money they would decide to create would be very small relatively speaking. Perhaps they would increase the money supply by 3% over the course of a year.

Equally the central bank would not decide how to spend this money. The Government would see extra money in their account indistinguishable from money collected through taxes and again, because the amount is relatively small the Government would not have a huge amount of spending power.

As well as this if the central bank created far too much money then it would be obvious who to blame and hyperinflation would hurt their wealthy investor buddies too.

No system is perfect though.

I’d also like to note that one way or another the money supply can’t increase as the rate it has since we developed computers. The present system will be unfit for purpose for the foreseeable future so we’ve got to try something!

ah lads, lads – ye keep forgetting the massive pools of wealth hidden ‘offshore’ by the elite 1% who control most governments/media/financial institutions who actively engage in evading their contributions to society and are at the other end is screwing the livin’ daylights out of ordinary folk – ‘the brother says this situation can’t last’……………

All Haughey’s ba\gmen are Sovereign landlords.
In Ireland the interface between private property and the public sector is
where much political corruption occurs.Two examples are the planning process
and state/sovereign commercial leases. The findings of the Mahon Tribunal
were “Corruption in Irish political life was both systemic and endemic”. In
the Moriarty Tribunal the findings were ” What was attempted on the part of
Mr Dunne and Mr Lowry was profoundly corrupt to a degree that was nothing
short of breathtaking”

Ireland has the most draconian anti-tenant commercial property lease law in the world i.e. ratchet upward-only rent reviews tied to long leases,some as
long as 65 years e.g Carrisbrook House, Ballsbridge,but usually 35 years.
This feudal lease law was organised by a cartel.

Former Taoiseach Mr Haughey required a minimum of a million pounds per
year,to finance his lavish lifestyle. Many of Mr Haughey’s bagmen are
sovereign landlords-this was the pay back. Many Irish politicians
families,friends and bagmen are sovereign landlords. This is
institutionalised political corruption. The sovereign should be a lease
maker not a lease taker,because of it’s risk free unbeatable covenant. These
sovereign leases are sovereign bonds with the notorious ratchet upward-only
rent review attached. Sovereign landlords have bled the state dry using this
feudal lease law and have wasted billions of Irish citizens money. We are
alone in the eurozone with this feudal commercial property lease law, where
lease lengths are 5 to 10 years and rents are reviewed annually in line with

The state,by colluding with this cartel and signing these feudal
leases,legitimised them and copper fastened them for all commercial tenants.
Reckless Irish banks lent tens of billions against these feudal leases,not
against the properties themselves,and created the greatest commercial
property bubble in the history of mankind. When this bubble burst it
bankrupted the Irish banks and the sovereign. No other government in the
world would sign these feudal leases.

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