Breugel: assessments of Troika programmes to date

Worth a look, Breugel’s assessment of the programmes in Greece and Ireland in particular, and the differential roles and internal tensions played by the individual members of the Troika, particularly the Commission. The large effects these programmes are having on unemployment is a key feature of the report.

Comments

comments

Author: Stephen Kinsella

Senior Lecturer in Economics at the University of Limerick.

49 thoughts on “Breugel: assessments of Troika programmes to date”

  1. The report concludes that there was improper pressure on Ireland from the ECB leading to excessive payouts to unsecured bank creditors, and that this was done in the interests of the broader European banking system. It is rather remarkable that the authors draw no conclusions from this finding. The failure of the Irish government to sue the ECB at the European Court, allied to the absence of transparency to which the report repeatedly draws attention, permits everyone to peddle their own history of these unprecedented events.

  2. The excuse, offered in this report, for sticking it to the Irish taxpayer is found on page 70.

    “one has to acknowledge that at that time, the EU did not have clear resolution framework, rendering it difficult for the EU institutions to actually act on bank resolution.”

    This is complete nonsense. There was a crystal clear resolution framework in place — hand the Irish taxpayer the bill.

  3. @ colm

    Their conclusions seem clearer than that. They indicate that a bail-in of senior unsecured creditors in the defunct banks would have generated savings of around €2 billion with the possibility of a further €3-8 billion across the viable banks. They conclude these creditors should have been paid but the burden shared with other euro-area taxpayers,

    We therefore do not conclude that it was a mistake to use taxpayers’ resources to pay the relevant creditors, but acknowledge that the burden sharing certainly deserves discussion

    At any rate, since this decision was taken because of euro-area wide financial stability considerations, and because of the reported concerns of the US Treasury Secretary, it would have been appropriate to share the burden with taxpayers in other euro-area countries.

  4. @Colm, @Seamus, another really interesting point from the paper is the conflict the report claims the Commission has, constantly, and which forces a differential application of rules across nations. That is as dangerous as the lack of transparency, in my opinion.

  5. So where do we go from here?

    Can these academic conclusions be translated into real benefits for Ireland?

  6. @ Peter Stapleton

    The “conclusions” have already been recognised and have already brought real benefits to Ireland but for reasons that have nothing to with the academic debate either in Ireland or elsewhere in Europe.

    http://www.irishtimes.com/business/economy/ireland/esri-says-promissory-note-deal-to-save-1bn-1.1394996

    The EU is ultimately a cooperative politial undertaking and the politicians involved ultimately face the choice of accepting this or seeing it collapse (or deciding to leave, which an increasing number of UK Conservatives seem willing to do).

  7. What was/were the explicit objective/s of the Irish consolidation programme? To get back to a ‘normal’ borrow-as-you-go situation? For whose benefit would that be then?

    I recall being told some time back that our borrow-as-you-go situation was ‘unsustainable’ – that aggregate economic growth was not increasing sufficiently enough to keep pace with the increase in repayments. So, by implementing the consolidation programme we depress our existing level of aggregate economic activity – which means we now have an even greater difficulty repaying debts AND we agree to keep borrowing-as-you-go (from the Troika, rather than the markets) as part of the consolidation programme. Hence, our actual debt levels are still increasing? Have I got this correct? If it is correct its bl**dy awful.

    Clearly the decisions about the nature of the programme had some rosy – if not downright dodgy, assumptions about the wider economic contexts (EU, US, etc.). The assumptions about ‘positive growth’ in other countries appear to have been incorrect – and badly so. Perhaps those persons of an economical turn of mind might like to polish off their Crystal Balls and forecast the level of aggregate economic growth that might be required to extinguish our debts (suggest a time-frame) – and our borrow-as-you-go regime. And what are the likely consequences if (or more likely, when) this unicornal level of economic growth fails to turn up.

    Its hardly mentioned in the report – but Irish financial institutions must have been fearfully mismanaged on a significant scale for them to have failed so badly. So why no significant reforms of the ‘on-going’? If they were unfit for purpose by 2008, and are still ‘on going’ – they are even more unfit in 2013: they need to be ‘goned’. And I really love the bit about possible future resolutions of banks requiring the bail-in of creditors. This is a truly, wonderful confidence building decision.

    And bye-the-bye: I need money notes in my wallet in order to go shopping. If I try to pass off confidence notes instead, I might get arrested! So, Troika, please stick your confidence up your a**. Its money we need. Lots of free money.

    @ DOCM: “Benefits”? Which would be?

  8. @ BWS

    If the ESRI is right, one billion on the PN’s; to which has to be added the not inconsiderable sums from the concessional borrowing on the country’s behalf in the markets through the EFSF/ESM; plus the possibility of something on legacy debt.

    Not bad when compared to what Bruegel estimates to be the prejudice suffered by the country (which is far below the sums tossed about in both the academic and popular debate).

  9. Interesting read. So they state the bank Gaurantee was unilateral. I’m surprised there’s no mention of supposed pressure from the ECB.

    And if one accepts it was unilateral, then ‘all’ that was wasted was €19 billion. Though likely €5 to €10 billion, considering 100% haircut would have been ‘unrealistic’. All to keep Timothy Geithner and the ECB happy.

    Though on balance they claim it should have been done but the debt should be shared.

    Which brings us to today. Where
    ‘A nation holds its breath’ though instead of a penalty in a world cup, it’s the potential of selling AIB and or other bank holdings to the ESM.

    We can hope and dream.

  10. Stephen Kinsella has illustrated the ad hoc manner which the EU/Troka has tackled the crisis from country to country. Is this any way to administer a major world economic power. Rehn et al have proved to be incompetent and are now shifting position in the light of prevailing sentiment. God save us from them.

    Btw, Hollande said today that we would have political union within two years.
    What planet is he living on?

  11. At the risk of stoking indignation…we should thank Europe for helping to save us from chaos while giving us an opportunity to put the economy on a sustainable basis for the longterm.

    There were of course mistakes made during this massive crisis when policy makers found themselves in positions where for the first time in their professional lives, they had to make decisions of immense consequence.

    Monday-morning quarterbacking has its place but we should not forget the context.

    It’s no surprise that Greece had the biggest problems given the rule of both right and left post-1974.

    What is clear is that outside monitors can have boxes ticked off on a ‘to do’ list but the destiny of countries is mainly dependent on local choices.

    As to my reference to ‘opportunity’ above, I don’t believe that has been used to address the Irish jobs crisis or implement governance reforms for the longterm.

    The Ancien Régime endures and prospers.

    “The reality is that the Irish economy’s competitiveness and its ability to pay down debt is vastly exaggerated in the official figures,” Philip Lane says in the FT today.

    The main problem is not the official figures but the addiction to spin at government level where foreign and sometimes local misinterpretation of the data, appears to be welcome.

  12. @ DOCM: I am unsure what you actually alluding to. So I’ll leave it there.

    For me, its the human cost that is so great. You can print all the money you want. But you cannot put disrupted human lives back together so easily. Depends on ones personal biases I suppose.

    [ps: I left a brief comment for you on the other thread.]

  13. Whats missing also is a analysis of the possibility for pokitical and social xohesion internally were we to have haircut. Its political economy guys…

  14. @DOCM: “Overgrazing …” That’s a terrific analogy for over-extended credit. Love it!

    Now about this fodder, er credit, shortage … …8-)

  15. @ Seafoid
    Interesting link.
    Exports down, bad loans like this, there’s a little upturn in sentiment at the moment but you gotta ask – how long can this last.

    Bank stress test will be an interesting feat of high grade fudging

  16. This is the bit where it can be argued, the Republic of Ireland unilaterally and without outside pressure, broke the part of mould of capitalism that enclosed banking, effectively rendering it unusable for the rest of the world.

    “Turning first to the issue of senior bond holder involvement, a number of points need to be made. The 2008 state guarantee was given by the government unilaterally and without outside interference. Yet this guarantee meant that for two years (September 2008- September 2010) a large portion of unsecured senior bonds was in effect untouchable.”

    [Still, an open inquiry would be in slightly bad taste – might give those who contributed ‘bragging rights’ down the golf club…or something. Very bad form.]

    A couple of years later on:

    “In the autumn of 2010, a significant debate about the imposition of losses on senior unsecured and unguaranteed bond holders began. According to the Central Bank of Ireland, the total amount of unsecured and unguaranteed senior debt amounted to €16.4 billion in February
    2011.”

    “Several interviewees confirmed the ECB’s firm opposition to the imposition of losses on both going and gone concerns. The ECB was worried that any such move would substantially increase funding costs for the Irish banking system but, even more importantly, for the euro area banking system.”

    Nothing new there at all.

  17. @ Grumpy

    The 2008 state guarantee was given by the government unilaterally and without outside interference.

    Didn’t Morgan Kelly say in the IT in 2009 that the guarantee was so obviously lunatic that it would have been easy to cancel ? I wonder why that didn’t happen.

  18. Bank Guarantee was a foolish mistake.
    The system error that lead to it was:
    The people elected TDs only vaguely qualified in anything.
    A barrister whose expertise was with language and the dichotomies of law was put in charge of finance
    He had to deal with bankers whose expertise lie in figures and the ambiguities of finance
    They lied to him and he could not see that. He judged incorrectly.

    Brian Lenihan would not have been in charge of finance for a medium sized company. There is something wrong when he ends up in charge of finance for a country.

    That is the system error that needs to be addressed.

  19. @ seafoid,

    A government, in an unrequested financial decisions, signed 2 weeks after announcement, to plead “not guilty by reason of insanity”, that is, I think, definitely a first.

    Does anybody have any similar example in the history of the whole mankind ?

  20. @ DOCM
    And they’re probably going to get re-elected in 2 years!

    Maybe we need to have separate elections – one for TDs and the other for ministers.
    Markets are exploiting the weakness of democracy – those who seek power are not up to using ir

  21. @Eureka The one thing you do expect from a lawyer is not sign an open ended contract. Brian Lenihan’s mistake was to guarantee everything. Some guarantee was needed, but some caveats on that guarantee were needed and a lawyer should have known that, notwithstanding any lack of background in finance.

  22. Since I remember, how furious folks in Germany were at that time,

    I looked up, what was said precisely at this time

    http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ayQUgBTLYJEc&refer=germany

    is a good summary.

    This is just like the NATO treaty, you very careful avoid any automatism, which would enable somebody to draw the whole system into the abyss.

    verbatim:

    http://www.t-online.de/wirtschaft/id_16426364/merkel-spareinlagen-sind-sicher.html

    There is no chance in the world, that anybody could ever sue for 1 cent over this text.

    If this Genius Lenihan just would have talked with his Eurozone colleagues, and not have acted nationally alone. But in Ireland nobody stopped him.

    And it was the same thing last summer, when especially France tried to turn the ESM into a vehicle of unlimited liability. It was Germany and our Surpreme Court alone, who stopped that.

    And I was not the only one here around wondering, whether we are the only ones left to really read and think through such texts; there are other AAA countries with a lot at stake as well.

    Do they just have infinite trust in us, or does everybody treat these kind of treaties as some fair weather statements, which will be broken in times of trouble?

    Along the lines of : Ultra posse nemo obligatur

  23. @Michael Hennigan

    Ta for that. Had a serious bout of lorenzobinismaghiitis so Blind Biddy contacted Seven_of_9 who flew in at warp speed and whisked me off to ShangriLa_567 where all traces of this insidious infection were removed. Seven then introduced me to Five_of_15 and … er .. a whale of a time was had by all! Returning to the earthlings I note that nothing has really changed … the ol’ guard upper echelon continues to resiliently spin away, protect themselves, and crucify the rest while the state remains insolvent and the future for the majority of young proles is stagnation or exit. Little signt of Voice and Loyalty .. loyalty to what?

  24. @ francis

    The reason Lenihan did not talk to his colleagues is almost certainly due to the fact that collectively they did not want to know. And they are collectively still at the same game with the odd agreement to do something just as the euro train is about to leave the tracks.

    As to sticking to international agreements, Germany is the last country that can give lessons in this area. There are 27 constitutional courts in the EU and if the German one has the right to interpret the EU treaties, then so do all the others. Pacta sunt servanda! Germany signed up to these treaties and to the articles therein giving the sole right of interpretation to the European Court of Justice.

    But all of this is by the way. The treaties simply forbid any country taking on the liability for another country’s debts. They do not block common action to run a common currency successfully.

    Two links that you may find of interest.

    http://www.economist.com/blogs/freeexchange/2013/05/european-central-bank-2

    http://www.faz.net/aktuell/wirtschaft/raus-aus-dem-euro-afd-will-nicht-zurueck-zur-d-mark-12187441.html

    Germany is stuck with the euro and the pesky Club Med whether it likes it or not. The question is whether the general political situation in Europe will permit a continued “time out” until the federal elections which will, in my opinion, demonstrate for the third time that one Angela Merkel is incapable of translating a very high level of personal popularity into a clear majority electoral mandate. When was the last time the CDU won a land election?

  25. @DOCM

    Herr Professor Sinn? You gotta be kidden us! Sinn_u_citus after a bad dose of lorenzobinismaghiitis? Who u spinnin for?

  26. @ DOCM

    You are just speculating about Lenihan’s reasons, and I don’t share your opinion.

    I and Germany have the exact same right to ponder the legal ramifications of other peoples acs as anybody else, equal, not last.

    The German Supreme court (BVG) has the supreme right to rule over the constitutionality of German laws, and he had made it abundantly clear, that this includes all laws involving financial obligations. The ruling was that no other body but the sovereign, the Bundestag can decide about this, not a German government, not any European body or court, and that not even the sovereign has the right to sign this right and duty away with unlimited waivers, without changing the German constitution first.

    Good luck with that. I actually have a photo of one of the laywers /politicians in September 2009, together with me and his communist challenger, smiling at the Harras : -)

    I have not looked into the details of the verdict from last September 2012, but that is how I understood it. The Sovereign voted even on the details of the Cyprus loan peanuts, what I found somewhat excessive.

    We will see, what the BVG verdict on OMT and the other stuff on 13./14th of June is. We are not in a hurry. It has been our clear interpretation, that the no bail out clause prohibits any significant government bond buying, and we have noticed, that others want to interpret this somewhat differently. And they tried to force their way with the emergency argument. From our perspective, for now, this and all other holes is plugged with the ESM and strict conditionality.

    And from the perspective of AAA countries, to “run a common currency successfully” certainkly does not include the power of running up substantial liabilities on them, which would be in violation of the “no bail out clause”, also not indirectly.

    Quite frankly I do not see what will change this before or after the German elections. Some folks seem to prefer Steinbrück and his 7th cavalry.

    I think that most of the German people are just as short sighted and selfish as all our neighbors. Schroeder lost 2005 with just 1%. If he would have won, he would be now the Iron Chancellor II.

    I think, I have said it here before, that all the hard decisions were done by social democrat Schroeder before and therefore Merkel didn’t really have to hurt anybody. Merkel is today extremely popular, not only in Germany, but all over Europe, despite all the nationalist and personal hate mongering, hugely more popular than the local national leaders, see e.g. the Pew Research from this week http://www.pewglobal.org/files/2013/05/Pew-Research-Center-Global-Attitudes-Project-European-Union-Report-FINAL-FOR-PRINT-May-13-2013.pdf
    Page 27, Table Q32a-d, Merkel beating every local national leader by 11 to 46 points, except Greece, of course.

    This is not because she gave any great speeches, people heard, or making any promises (the only one promise of her, I remember, was to raise VAT in 2005 by 3%, and not only by the 2%, the SPD wanted : – )

    But because all the other Gnomes, like Cameron, Sarkozy, Hollande, Berlusconi , Papandreou, Samaras, and the Germans Stoiber, Gutenberg, Röttgen, and the sozis Steinbrück, Steinmeier, and the travesty Gabriel , etc., etc. look so utterly bad in comparison.

    All those Testerstorone driven empty suits with a big mouth.

    For many folks like me, it is love at second or third glance. I valued, how she finished off Kohl, but assumed she wouldn’t survive her regicide.

    Coming back to your links:

    I saw that lecturer of the Little School of Evil, with his phantasies of “must be” of things, he at least understands to be “right now completely off the table”. And they ever will be, like the rest. S&P has killed his phantasies of ESBies 2 years ago, stating that the resulting credit rating would be even worth than the arithmetic mean, because it would create illusions which would increase the default risk of the bad risks. All trivial thinking , just not arriving in the academic sandbox arena.

    It reminded me somewhat of http://www.youtube.com/watch?v=WdQmwe_SX7Y

    The Cour-Thimann you mentioned is over a year old. We now have ESM, Cyprus had 4 days before it would be switched off the target system and returning to do financial transaction in gold buillion. Is there something special in this paper, you want to point to?

  27. @ francis

    The most pertinent extract is probably this (pages 22 and 23). (The paper is from April 2013!)

    “Fundamentally, large imbalances in the various accounts (or any sub-account) of the balance of payments reflect the interconnection, and thereby also the dependence, of a country vis-à-vis the outside world.
    Therefore, they are vulnerable to spill-over effects from adverse developments in other countries, such as in the case of the sovereign debt crisis in the euro area with its potential for reversals in payment flows.
    At the same time, while current account balances have been markedly reduced since the onset of the crisis, for several countries under strain they remain in deficit (or in the case of Ireland, the surplus is not sufficient
    to cover for net financial outflows) and similarly, they remain in large surplus in other euro area countries. Thus, the correction of past imbalances in the current and financial accounts does not appear as strong as may be expected outside a monetary union where the countries’ exchange rate and external accounts could adjust rapidly. Eurosystem liquidity support as reflected in the associated Target balances – and this is one of the hypotheses of this paper – has helped to smooth the balance
    of payments adjustments in EMU. Target balances are not a separate mechanism. The Eurosystem liquidity support was given to the normal counterparties in central bank operations, namely banks, to support
    their liquidity position. In no way was there any aim to provide funds to finance current account imbalances – these are all indirect effects of a monetary policy aimed at maintaining price stability in the euro area.
    The ‘shock absorption’ by the central bank is inherent in the construction of a monetary union where, firstly, the payment system ensures the smooth flow of capital in a currency whose value is the same everywhere in
    the monetary union; and secondly, the central bank takes decisions, within its policy mandate, that contribute to the preservation of the monetary union. To ensure the outreach of monetary policy throughout the area when cross-border financial markets become fragmented, the monetary authority can itself replace private intermediation to some extent and augment liquidity provision.

    Without the Eurosystem accommodating the liquidity needs of solvent banks in countries under strain – and in absence of the possibility for exchange rate realignments within a monetary union – disorderly adjustments may have arisen, with adverse implications for the economies, as well as for price stability in the euro area as a whole.

    This is also the case for countries with current account surpluses. Their residents could have incurred disruptive losses on the claims they had previously contracted on debtors in countries now under strain (or may
    not have been able to smoothly repatriate the funds initially invested there). Surely, they could not have been able to sustain those current account surpluses. The possibility of Target balances emerging thus allowed creditors in surplus countries to continue recovering their claims on foreign debtors, and firms to continue exporting goods and services. Reciprocally, residents in countries under strain could continue to service
    the domestic and external debts previously contracted, while solvent customers could continue to import goods and services, including those that are vital for production chains.

    At the same time, while the resulting stabilisation via Target balances offset the sudden lack of private financial flows, the Eurosystem intermediation did not foster a rebalancing in the balance of payments alone. This stabilising action gave time for policymakers to address the underlying causes of the imbalances – the question is whether this time is being used effectively.”

    It helps explain why even the AfD sees that Germany simply cannot leave the euro.

    That Merkel shines only by way of comparison with the other leaders in Europe is a point that I have often made myself.

    As to the role of the BfG, I have absolutely no problem with it protecting the Basic Law. That is its job. If it thinks that any treaty commitment that Germany has entered into is incompatible with it, that is a problem for Germany, not the other countries of the EU, to resolve. Merkel put the onus on these countries instead by insisting on (i) an amendment to Article 136 of the TFEU to cover for any possible legal challenge and (ii) the “bail-out” arrangements being dealt with by way of international treaty – the ESM – rather under the EU treaties. The end result is a legal imbroglio for Germany. The statesmanlike thing to do from the start would have been to act under the existing treaties. They covered, and continue to cover, the situation that has arisen. There has simply been a failure to utilise the provisions that they contain for giving supervisory powers to the ECB, a situation being belatedly and reluctantly corrected, and for the other steps required on which Schaeuble continues to stall.

    There are currently no statesmen in Europe.

  28. @ francis

    After ESM, please insert “and TSCG (Treaty on Stabilisation, Coordination and Governance)”.

    The failure of the major governments to get to grip with fundamental issues, including that in relation to competitiveness (where I think the broad thrust of German policy is undoubtedly correct) has resulted in German car manufacturers setting up their own banking arrangements.

    As pointed out by the ECB expert;

    “The possibility of Target balances emerging thus allowed creditors in surplus countries to continue recovering their claims on foreign debtors, and firms to continue exporting goods and services. Reciprocally, residents in countries under strain could continue to service the domestic and external debts previously contracted, while solvent customers could continue to import goods and services, including those that are vital for production chains.”

    As Gavyn Davies of the FT succinctly put it; “No Target 2 balances, no euro”.

  29. @ DOCM

    just a very short, first reply.

    Sinn was sloppy signing the preface of the paper in 2012 : – )
    I am gonna read it. There was also a Karl Whelan piece in forbes with regard to Target 2.

    My understanding was, that the ESM and many other things, like the Schengen treaty, are based on bilateral treaties, are that way, because the UK used their veto.

    While it is astounding how far patchwork can work for long times, I ll hope the English finally make up their mind in the next few years.

    What I think the AfD folks represent, is primarily the increasing doubt, here around, whether the different cultures are close enough and strong enough, to actually obtain synergy in diversity, some strength in larger numbers, and do not lead to endless infights.

    A relevant article: “Greek vs Irish unions, 20-0”
    http://www.ekathimerini.com/4dcgi/_w_articles_wsite3_1_16/05/2013_499299

    More, most likely, after lunch and reading your links : – )

  30. @ francis

    No hurry!

    On the UK “veto” of the ESM, the BBC had good coverage at the time.

    http://www.bbc.co.uk/news/uk-16104275

    Merkel simply rang rings around both Sarkozy and Cameron. The two treaties will contribute little or nothing to solving the core problem of differences of competitiveness, especially between Germany and France. However, they avoided domestic legal difficulties for Merkel and left the blame with the UK. In short, both Sarkozy and Cameron did Merkel a favour and neither was astute enough, on the evidence, to be aware of doing it. That is why she is best in class.

    Some data on France from the Telegraph.

    http://www.telegraph.co.uk/finance/comment/rogerbootle/10067698/France-has-been-ignoring-its-problems-now-the-chickens-are-coming-home-to-roost.html

    Hollande could think of noting better in his recent press conference than to resurrect the moribund idea of Sarkozy (and Chirac) of an “economic government”, whatever that means. Anything but tackling the real problems confronting the country!

  31. @ DOCM

    LOL, this is now going a lot bullet point like over many points, but I think it is better that way, because that is exactly the problem, that everything is connected with everything, and can not in most cases be solved separately.

    1. Cour Thimann 2013 Target 2 paper

    As far as I have read it so far, my sense is, that the way this worked out was not really fully contemplated before starting the Euro, making me afraid, that people also might not have thought through the ESM and many other multi-page stuff.

    My sense is, that in the long run we have to find ways to reduce the Target 2 balances, with new regulations / mechanisms requiring treaty changes, but how those should look like, depends a lot on other decisions we have to make first, or events we could be facing. So I stop the discussion here, at least for the moment.

    2. Czech

    When I look at my good Czech neighbors, they are coming up pretty nicely, without much EU help so far, with their own currency, with what I would call a loose peg at 25 (+/-1, 3 sigma) krona to the Euro. The Danish krona at 7.45 +/- 0.1, the Swedish coming down from 10.5 to 8.5 in the last 4 years.

    When I cross the border with my bike, there are no flags, no guards, just some small signs. Each others police, medical first responder, sewers (!) can cross the border. This is better than Canada / US, where they do now hold up formerly agreed fire brigades. The polish police has become pretty good at catching folks stealing cars in Germany at the Ukranian border.
    Czech car and other manufacturing is now pretty tightly integrated in this central European supply chain / production network, much tighter than Ireland.
    What we see often as British obstruction, can also have advantages, we can make separate collaborations with Czech, NL, Poland, which we might not be willing to do with Bulgaria, Romania.

    Bottomline of this excursion: for the very most good neighbor stuff we do not really need a currency union.

    3. UK

    (your bbc link) In December 2011 the UK was alone, not even the Swedish understood them, but saw that as a pretty plain demand for special privileges.
    With a 500 year old proud currency history, I would also clinge to that, I understand this very well.

    (your telegraph link) Quite frankly, if I look at economic data, I would be more afraid for the UK, with 8% budget deficit (vs 1% equilibrium), at 8% unemployment (vs some 6% long term expectation), after some “blood bath budget” in name only, therefore all the difficult decisions (8%- 1%) – (8%-6%) /2 = 6% consumption cut necessary) still in front of them.

    France with a budget deficit of 4% and 11% unemployment (vs 7% long term expectations ) looks to me like 4% -1% – (11% – 7%) / 2 = 1% real consumption cut necessary, easily to be done, just get the retirement age in line, and take the labor laws (and 35 hours/w :- ) just half way towards more international standards.

    Their high government fraction is not so different from Sweden, Denmark, this is not deadly. But of course I do prefer lower.

    France ETF EWQ vs Germany EWG is ok, compare to british EWU as well, FDI situation looks good,
    Compare FDI in and Outflows http://www.oecd.org/daf/inv/FDI%20in%20figures.pdf
    Now does this look like investors are really scared of France?

    Quite frankly, if somebody can explain to me, why I should see the UK in a more positive light, relative to France, I am all ear!

    We have all our own ways to address various problems, and we also do certain things our way (Sparkassen, apprenticeships, …. )

    4. Merkel

    I don’t think she run circles around them. She did nothing new. If somebody blocks with some unfair, as in not really infringing on national holy cows, but more trying for horsetrading, there are ways to get around, ESM just like Schengen : – )
    And then the handywork doesn’t look statesmenship, but it works : – )
    I think the handywork was a lot more by the europhile old lizard Schäuble with his social democrat Asmusssen, and Jens : – )

  32. @ francis

    In summary reply;

    1. The answer to the Target 2 “problem” is, as implicit in the ECB paper, a correction of the current account imbalances giving rise to it i.e. across the board efforts – including by Germany – to equalise competitive conditions.

    2. The point about the euro is not whether it was wise or not to introduce it but that there is no means of reversing it short of an economic disaster for Europe as a whole.

    3. I agree with your point with regard to the health of the UK economy. (I should add a warning with regard to all links to the Telegraph as it takes a particular line in all matters relating to the EU).

    4. As to Merkel, the relationship between her and Schaeuble is, at this stage, the stuff of legend. In my view, it is no longer of any great significance. Opinions may vary but facts are stubborn; refer to point 2. Once the dust has settled after the elections, I expect some real negotiation with regard to the core issues; refer to point 1.

  33. @ DOCM

    1. CA surpluses
    The substantial numbers many northern countries, not only germans run since a few years, typically since around 2005, are mostly with outside the EU. Destroying this export business of special machines, mercedes benz, etc, would not help an unemployed construction worker in spain.

    I am nearly finished with Carolus recommendation of Röpke “civitatas humana” and it is faschinated how close the same arguments 70 years ago between the Keynes view and the others are to today.

    2. The point is still, that if, in the long term, cultures too different do not work, than the short term actions would have to lead to doing long term the right thing. I have not finished my thinking yet, but tend to the periphery being better off on the inside, despite continous adaption pressures.

    3./4. no further comments of value from myside

    Do you read “The Economist”? Did you see the epic Macedonia comment wars there? Hundreds of comments flying in many entries.

    At some point an author was pretty open, that he just writes 3 or 4 sentences to set the protagonists of to the next rampage.

    some parts of the comments at
    http://www.economist.com/news/europe/21578105-europe-waits-angela-merkel-faces-new-anti-establishment-party-what-alternative/

    look like this could develop there as well.

    My perspective is, that Merkel will stay chancellor no matter what, either with the FDP or the Social democrats, and that now everybody thinks he can throw a tantrum, including Seehofer and his PKW Maut.

    interesting story: “breaking bad” on RTL Nitro, meth = pervitin

    And Gideon Rachman is now pro Europe, as of today.

  34. @’ francis

    I have debated the first point repeatedly with MH. The idea that Germany has to “destroy its export business” is so embedded in the defence mounted by defenders of the status quo that it seems impossible to shift. This not what critics of German policy are seeking. What they want is a re-balancing of the economy to spread growth across all sectors.

    On the irreversibility of German euro membership, even the most – indeed the first formal – eurosceptic party in the country recognises this.

  35. @ francis

    Sorry! Above sent before being checked.

    It is remarkable how little imagination campaigning politicians demonstrate e.g. Seehofer and his idea for a motorway vignette. His effort to turn Germany into a maxi-Switzerland is, however, not entirely a surprise in the present European context.

    I agree that Merkel will be back, a fact which demonstrates an unusual political fact which is seldom remarked upon i.e. there is a consensus between industry and organised labour which bridges the other differences between the parties. The use of various colour (traffic light) designations as a shorthand for the possible coalitions further demonstrates this point.

    I think Rachman has always been pro-Europe and he is spot on in his most recent analysis.

    http://www.ft.com/intl/cms/s/0/528b21aa-c138-11e2-b93b-00144feab7de.html

  36. @ DOCM

    1. the local facts.

    The vignette, or electronic maut is actually not unpopular. People in Bavaria are fed up with paying vignettes and special routes like the Brenner, and the same people driving without fees through Bavaria. Switzerland is popular, we are just too large, but Seehofer went on a learning trip for direct democracy, the “Helvetisierung Deutschlands” : – )
    http://www.sueddeutsche.de/bayern/csu-chef-seehofer-mehr-direkte-demokratie-wagen-1.1283245

    What got on my nerves, was formulating Ultimatums, but this is on the other hand a time honed CSU strategy preventing the political splintering on the right side.

    The metal workers agreed on a wage increase of 3% per year for 2 years last week. It was noted from both sides, that the negotiation was the fastest in 50 years. It didn’t take them even to midnight on the first day. What that also shows:

    You are right, we have here a lot of consensus over the whole society, from AfD to the communists, over a lot of things. “Soziale Marktwirtschaft”, Universal health care, tariff autonomy as the general concept, but even the FDP agrees now, reluctantly, on that there might have to be some minimum wages in certain areas

    The HICP inflation target for the EuroArea is <= 2.0%, and with public pensions and wages frozen in places like yours, it will even out.
    3 years ago I took a closer look, why these substantial CA surpluses started, and stagnant wages in the early 2000s in Germany are only a smaller part of it. And reducing marginal tax rates and bringing corporate taxes more in line with the European environment, the larger part. I had actually tried to put this into some graph, but without a lot of details and sub calculations, forget it.

    2. Keynes / Multiplier

    This argument, if only the German wages would rise more or the German government would run high deficits, the structural problems in the GIPSI countries would be somehow solved this I come across about twice a week in various versions.
    Most the times it comes from American academic economists, thinking everything in their own American sandbox.

    America is a large, unified, relatively closed economy, as is Japan. In contrast to what most people believe. Closed as in trade / GDP about 10%, and that mostly in goods which are not really elastic.
    That means, if you give 1 Dollar more to an US unemployed, the most of this, 80 – 95%, will be spent the same year in the US.

    But if you pay 1 dollar higher pension in Germany, only a small trickle of this would end anywhere in GIPSI countries.

    What I wrote here, is extremely short, but this whole argument is very important, and I would be willing to spend some time to discuss it through, open minded, with you, because this is one of the things endlessly coming back, and trying to better understand each other and trying to get this into a more robust and hopefully agreed form, is worth the effort.

  37. @ francis

    We are probably alone in these exchanges as the focus of blogger attention has moved to the hearings of a US Senate committee on the tax avoidance by US companies facilitated by their presence in Ireland (see other thread).

    There is a real difficulty with the lack of knowledge of German in the Anglo-Saxon world (for want of a better expression). Mine is not that great but I can read German and follow the press closely.

    I disagree fundamentally with the argument to which you refer. That is the point that I have the greatest difficulty in getting across. I would compare the reasoning to a view of the world that likens it to a billiard table with the balls (countries) caroming off one another in a precisely predictable fashion; modern macro-economics in other words.

    Germany should not abandon hard won competitive gains in an increasingly difficult international trading environment. But the country needs to get into a better balance with its neighbours, especially in terms of labour market conditions. It is probably the most important area where some agreement has to be found with France. There are innumerable other areas where the single market is effectively blocked. If Europe is to become a “closed economy” on the pattern of the US and Japan, this has to happen. It cannot succeed with a single currency if it does not. It will break apart.

    The AfD have understood this. Its solution of dumping the least useful members of the crew over the side is not, however, politically feasible.

  38. I know that we are alone here, I watch the corporate tax thread too.

    Otherwise the proposal for some long , drawn out discussion of what I see essentially (90%) the same discussion as 70 years ago, between the Röpke and other Ordnungpolitik folks with the Keynes. I am just finishing the book, and mostly it reflects what I came to independently, recently.

    And I realize, that there is this fundamental disconnect, which basically rules all other discussions.

    Like labor market, …..

    You are since a long time the first I could imagine to discuss this with, but it surely would take some time for each of us, and it maybe better to not do this in this blog. Exchange of more complex data sets, diagrams, time needed ….

    Interested? Suggestions how / where to do it ?

    The AfD folks I see more as tellling folks: if you want to play all or nothing, lets do that, at first theoretically; what would end for Greece or Cyprus or some others as a true long lasting catastrophe, like > 50 % permanent GDP loss, would be not nice for us, but by far not deadly, like < 5% permanent GDP loss.

    Pure gut feeling numbers, but trying to put things into perspective.

    Basically they are calling the bluff.

  39. Maybe we start this by you stating a little more specific, what you would expect from whom in Germany now.

  40. @ francis

    I doubt that we can take this dialogue that much further as what we might discuss has probably little relevance to what will happen.

    By way of example, two elements of the SPD programme, the introduction of a national statutory minimum wage and the scrapping of the “stay-at-home” childrens’ allowance (betreuungsgeld), would be a starting point. But will either happen?

    In my opinion, France will continue being France and Germany Germany, with some degree of movement towards a more integrated single market. If the euro is to continue, these leaves only one other solution; acceptance in some form of debt-raising mutual liability (which has happened already some extent).

  41. DOCM

    your are right about this one “has probably little relevance to what will happen”.

    There are NO plans for any monetization or mutual liability. And it will not happen.

    The prime reason for the 120% debt/gdp target is, to ensure that nobody gets any wrong ideas about a default to be beneficial.

    This “Betreuungsgeld” is a classic example of some kind of 3rd order trade off of various social measures.

    From a purely theoretical point, (conservative, upper income) families should have the freedom to provide better family based child care.

    From a practical point, those (with a typical net income north of 3000 – 5000) can do this with or without this 150 Euro.

    What matters much more, that those at the lower end, with multiple kids, would get with this a (for them) massive incentive, to keep them at home, and use that money for all kinds of purposes, and not send their kids to kindergarten, to learn to socialize and the proper use of the german language.

    The Betreuungsgeld is for me a good example, why something we took from the scandinavian examples, with low and highly educated immigrants, and a very different settlement structure (e.g. size of schools) is probably a reasonable thing to do there, but definitely not in most parts of Germany.

    But the CSU in the rich parts of Bavaria is playing a game for election votes, I do not like. And I do expect this to be scrapped after the elections.

    I could detail that with numbers, distributions, personal examples, in quite some length. We have problems in this area in Germany, which need more actions, no doubt. But not this CSU way.

    Again an example, why something good in one place is not beneficial in many others. And from my perspective not that difficult to understand, but it needs 5 pages, and not just 5 lines.

Comments are closed.