Categories Uncategorized Don’t blame German banks for the Irish economic crisis Post author By Philip Lane Post date August 18, 2015 54 Comments on Don’t blame German banks for the Irish economic crisis Derek Scally writes here. Related ← Brexit and Ireland → China: Growth and Debt (Geneva Report on Deleveraging) 54 replies on “Don’t blame German banks for the Irish economic crisis” Truthiness is the truth we want to exist. … But truthiness can also apply to Ireland’s obsession over Berlin’s weapons of financial destruction: German banks. The only Truthiness in this article is Derek Scally’s belief that Irish people have been blaming German banks for the crisis. In reality we’ve been blaming Irish banks for causing the crisis for quite some time. The ongoing crisis however. Ah, a somewhat different story. The main semantic bait and switch in this article is the argument that the “German Banks” did not lend so much during the boom, and are hence blameless. That Irish people complain about “German banks” is of course, mistaken, ignorent, wrong, and just a little bit racist my dear readers. But Irish people aren’t complaining about Deutchebank, or Commerzbank or the like are they? When was the last time you read “vehemence” from “‘German banks’ theorists” about the poor old Landesbanken, or complains of rapine by KfW Bankengruppe? You haven’t, because no-one is complaining about “German banks”. People are complaining about Germany and its Teutonic enforcer the ECB. People are complaining about the the Troika and European institutions, clearly aligned now with a German financial and economic hegemony on the continent. People are complaining about the policies and politics of these supergroups, principally their enforcement of austerity, which have been a disaster and have turned a sudden financial shock in 2008 into a decade long continental recession. That is what people are complaining about. How happy for Mr. Scally and other Brussels Block journalists that they meet such Wurzel Gummidges at continental dinner parties. How easy it is to put over these strawmen arguments, while conveniently ignoring all the arguments most sensible commentators are actually making. No, anyone who mentions the work “German” during a euro discussion is probably just ignorant “kind-of-” racist. Well at least this article has put us all on notice that henceforth Eurocrat positions are to be shored up by comparing we doubters and naysayers to troglodyte US republicans and I presume “backward” nationalists. Next they’ll be telling us to go away and commit suicide. The Bundesbank announced in Nov 2010, the month of the bailout, that the net German exposure to Ireland was €25bn (IFSC & domestic). In 2013 economists at the Irish Central Bank reported that German banks’ exposure to Irish domestic banks was below €1bn or 1% of foreign funding by end-2007. https://www.centralbank.ie/publications/Documents/Economic_Letter_2013_V4.pdf Mark Twain once said: “A lie can travel half way around the world while the truth is putting on its shoes.” These days Google can always reaffirm the ‘truth’ to anyone who wants to find ‘evidence’ to support a position no matter how wacky. Joe Keohane, editor of Esquire magazine, wrote in 2010: “Recently, a few political scientists have begun to discover a human tendency deeply discouraging to anyone with faith in the power of information. It’s this: Facts don’t necessarily have the power to change our minds. In fact, quite the opposite. In a series of studies in 2005 and 2006, researchers at the University of Michigan found that when misinformed people, particularly political partisans, were exposed to corrected facts in news stories, they rarely changed their minds. In fact, they often became even more strongly set in their beliefs. Facts, they found, were not curing misinformation. Like an underpowered antibiotic, facts could actually make misinformation even stronger.” This rubbishy strawman is not worthy of a junior cert essay. I have never heard anyone blame the “German banks” for the Irish crisis and anyone who did make them was clearly uninformed. Perhaps Mr. Scally could provide us with some references to reasonable sources where such allegations are documented? No, instead he relies on a mythical dinner party guest – absolutely laughable! The first Greek bailout was constructed to avoid losses being imposed on German and French banks – so says Karl Otto Pohl, formerly of the Bundesbank. Furthermore, the Germany government has actively prevented recovery in the EZ by foolishly focusing its own tiny deficit when it should have been expanding its spending to pick up the slack in the rest of the EZ. Many people have rightly criticised the German government for acting cynically and foolishly and using a 19th century moralistic approach to macroeconomics. However, Mr. Scally’s dinner guest is the first one I’ve heard who has blamed the German banks for the Irish crisis. Truthiness is not confined to anyone country or utterance. If people make statements that are unsupported by facts, they, and their statements may be qualified as simply wrong. Whether they change their minds or not in the matter is neither here nor there (unless they can muster a majority to act on the basis of them). The following statements that can all be tested for truthiness in this way. (i) the euro is a collective undertaking voluntarily entered into by all governments and, it must be assumed, their electorates, as all EA countries are functioning democracies, although there are strong dissenting voices in all countries (ii) it has not worked very well (iii) it is currently being retrofitted to make it work better, again, in the same manner as (i) above (with the possible exception of Greece until very recently) (iv) there is dispute about whether the burden of this retrofitting is being borne fairly (v) Germany, as the anchor of the euro, the biggest economy and with the greatest voting weight where such matters, has the most decisive voice (vi) the German electorate, and expert economic opinion, is itself divided as to what this voice should be. These links are relevant in relation to the last point. http://www.frankfurt-school.de/clicnetclm/fileDownload.do?goid=000000575799AB4 http://www.sachverstaendigenrat-wirtschaft.de/fileadmin/dateiablage/download/sondergutachten/sg2015_en.pdf The fundamental difference of political appreciation relates to the issue of burden-sharing (iv above). By and large, my own view is that it has been reasonable but, in essence, is not open to measurement being rather the outcome of difficult negotiations and ultimate compromise. If the agreed medicine works, the problem will go away. The jury is still out. @ MH I wonder will Bernanke change his view on German imbalances? http://www.forbes.com/sites/raoulruparel/2015/04/09/bernanke-gets-it-wrong-on-germanys-trade-surplus/ The author, however, also gets it wrong by taking for granted what is a myth i.e. that the German government does not intervene in the German labour market or, at least, not when it comes to wage-fixing. The political saga with regard to the introduction – finally – of an inadequate minimum wage would indicate otherwise. The fact that he bases his argument, as you seem to do, on the fact that the German surplus is with non-EU countries also misses a point that I have made many times i.e. that Germany is competing against other EU countries in these markets and, with the low euro, stealing their lunch. High manufacturing wages do not compensate for a low wage regime in other sectors of the German economy. What drives these policies is the balance between the domestic interests involved. This is not now even confined to industrial products. French farmers are up in arms with regard to competition in the agricultural sector, notably in relation to pork where the sector – located mainly in Brittany, a disadvantaged region – is in crisis. Not to mention the milk sector! Some advantages can be pushed too far! @BWT “I have never heard anyone blame the “German banks” for the Irish crisis” You mustn’t listen to the popular discourse much. I hear that trope every other day. And it’s repeated in the media ad nauseam. Some examples (and there are many more): Fintan O’Toole, Irish Times , 1 July 2015 Ireland was forced to bear the cost of a bank bailout put last week by Patrick Honohan…..at €100 billion and rising. ….. One of those stories is that the crisis had nothing to do with reckless lending (by, for example, German state banks) Fintan O’Toole, Irish Times , 21 July 2015 …It is forgotten that prudent Germany had its own versions of Anglo Irish Bank and its own reckless lenders, pumping money into Ireland and Greece, Spain and Portugal in search of a fast buck. John Drennan, Irish Independent, 10 April 2011 Last week The Wall Street Journal noted wisely that “pain in German banks ought to be Germany’s responsibility . . . not Ireland’s”. Sadly, we, and Enda, are finding out the hard way that when it comes to international diplomacy and finance, the decisions are made on the basis of who is carrying the biggest stick. It would, of course, be far too uncouth for our European ‘partners’ to admit Ireland has been forced to accept a fiscally illogical deal because the EU elites are too weak to stand up to rogue German banks and anonymous bondholders. This article misses all of the reasons that some are, perhaps erroneously, inclined to believe that German banks were highly exposed in Ireland. The ECB, in the person of Trichet, appeared to be protecting something when it refused any bail-in of bondholders. If not German banks, what was it that was being protected? American banks? Meanwhile, maybe somebody can explain why they think this graphic is “truthy”: http://static.guim.co.uk/sys-images/Guardian/Pix/maps_and_graphs/2010/11/22/1290456271078/IRELAND_bail_out-002.jpg And while you’re at it, explain the truthiness of the chart on p. 17 of this quarterly review from the BIS, which puts overall exposure of German banks to Ireland at the end of Q2 2010 at US$186.4 billion, exceeded only by the UK at $187 billion. http://www.bis.org/publ/qtrpdf/r_qt1012.pdf Maybe Herr Scally was influenced by the German media. When the German president visited Ireland, the radio station Deutschlandfunk played a snippet of Paul Murphy blaming German banks. There was a documentary on Arte (a German/French cultural TV station) about saving the banks some years ago. A lady from the Ballyhale group said that the bailout saved German banks and not Ireland. The intrepid reporter, Harald Schumann of the Berliner Tagesspiegel, found some evidence of the debts of German banks to Anglo-Irish Bank courtesy of Guido Fawkes: http://www.arte.tv/de/staatsgeheimnis-bankenrettung/7291880.html For me the main problem with truth and truthiness in this case is the intransparency of the evidence from all sides. Which brings us back to the core issue. the dispute about sharing the burden of retrofitting the euro. Looking at only one element of the jigsaw will not enlighten anyone on the big picture, least of all trying to unscramble who won and who lost from the financial flows that have occurred during the period of the crisis. The assessment can only be a political one. An increasing number of Merkel’s party have their minds made up already. This Handelsblatt recent story will have helped them to do so. http://www.handelsblatt.com/politik/international/tricks-bei-den-griechenland-hilfen-der-versteckte-schuldenschnitt/12189374.html See section on Ireland and the now almost forgotten promissory notes. http://www.irishtimes.com/business/economy/central-bank-accelerates-sell-off-of-bonds-issued-after-ibrc-liquidation-1.2320957 In the debate in Germany, Professors Winkler and Bofinger have largely demolished the general thesis prevailing, it seems, in Germany and defended most recently by the majority of the Council of Economic Advisers (which could be summed up as “back to the future” and a Maastricht 2). In his paper Winkler, anticipating what the arguments supporting this thesis would be, comments on the fact that Merkel and Schaeuble had to issue not one but two blanket guarantees. Luckily for German banks, these guarantees were credible; which was not true in Ireland’s case. Daily Telegraph’s Ficenec: ‘Only Matter of Time Before Stock Markets Collapse’—NEWSMAXFINANCE http://wp.me/pKzXa-ua Global central bank easing has run amuck, and the results won’t be pretty, says London Daily Telegraph columnist John Ficenec. “From China to Brazil, the central banks have lost control, and at the same time the global economy is grinding to a halt,” -he writes. “It is only a matter of time before stock markets collapse under the weight of their lofty expectations and record valuations,” he warns. “Time is now rapidly running out.” He claims that the central banks are rapidly losing control. Ficenec is “Questor Editor” of the Telegraph Group and specialises in the London Stock Market and other City of London issues. He has a regular column in the Telegraph which gives advice to investors. View This Link http://www.telegraph.co.uk/finance/markets/questor/ Financial Times today says Malaysian and Indonesian currencies are in free-fall as money “gushes” out of “emerging countries” what about the list of Anglo bond holders that was leaked – lots of German banks on there ? http://order-order.com/2010/10/15/anglo-irish-bondholders-should-take-the-lossesis-the-ecb-forcing-ireland-to-protect-german-investments/#:RLKCC1qeVKsRRA Bob Schiller in his Nobel Prize Lecture defined a bubble as: “A situation in which news of price increases spurs investor enthusiasm, which spreads by psychological contagion from person to person, in the process amplifying stories that might justify the price increases and bringing in a larger and larger class of investors, who, despite doubts about the real value of an investment, are drawn to it partly through envy of others’ successes and partly through a gambler’s excitement”. I would say that a speculative bubble is a peculiar kind of fad or social epidemic that is regularly seen in speculative markets; not a wild orgy of delusions but a natural consequence of the principles of social psychology coupled with imperfect news media and information channels. At the center of this definition are the epidemic spread, the emotions of investors, and the nature of the news and information media. Bubbles are not, to my mind, about the craziness of investors. They are rather about how investors are buffeted en mass from one superficially plausible theory about conventional valuation to another. http://www.irishexaminer.com/viewpoints/yourview/a-question-of-valuation-220487.html One thinks of how a good debater can take either side of many disputes and, if the debater on the other side has weak skills, can substantially convince the audience of either side. College debate teams demonstrate this phenomenon regularly, and they do it by supresing certain facts and amplifying and embellishing others. In the case of bubbles, the sides are changed from time to time by the feedback of price changes, with the proliferation, caused by price increases, of reminders of basic facts that a debater might use to defend the bubble. The newspapers are even better at presenting cases than are typical college debaters. Germany is competing against other EU countries in these markets and, with the low euro, stealing their lunch. The writer of the Forbes piece got the story on the surplus wrong – it’s easy as Destatis does not adjust monthly data for transhipments via Rotterdam that appear as imports from the Netherlands. The Euro Area accounted for about 30% of the trade surplus in 2014. Whether Bernanke or for example his former Princeton colleague Paul Krugman are right or wrong on particular issues does not concern me. It would be good to have more balance between the top 3 members of the Euro Area in particular but that is dependent on what France and Italy can do — mainly themselves. “Stealing their lunch” makes a soundbite that feeds into the received wisdom, but this avoids dealing with some pertinent facts. I didn’t realise how bad the economic situation in Italy is until I collected some data on Italy’s Mezzogiorno, which accounts for 36% of the population. Italy’s Mezzogiorno is Achilles’ heel of Euro Area – lowest birth rate since 1862 We could for example argue about average hourly French pay in 2014 being lower than Germany’s or why every country in Europe gives industry lower energy prices etc. and get nowhere. Why does the euro give Germany an advantage but not France? This issue here can be understood by mainly focusing on the micro level: 1) The most important sectors of German industry are automotive manufacture, mechanical engineering, electrical engineering and chemicals. 2) Leadership in capital goods production requires a history of innovation and building the equipment that is used in manufacturing plants across the world, which cannot be easily copied elsewhere — compare the apprenticeship systems in Germany and France. 3) Most of the growth in car/car parts production since 2000 has occurred outside Germany in other European countries. France and Italy are competing mainly with Japanese and Korean firms not the German giants. 4) Germany leads the world in chemicals/pharma exports €160 billion in 2013 followed by US at €146, Belgium at €102, China €86, Netherlands €77, France €75, Switzerland €64, UK €63, Japan €58 and Ireland in tenth place at €57 billion — Germany’s BASF founded in 1865 is the world’s biggest in the sector and 2 US firms are its main rivals. 5) Germany has about 40% more small firm exporters than France and Italy combined — like the Chinese, they are good at business. 6) Global business sectors are increasingly dominated by a small number of giant firms and in the US key sectors have a concentration of a small number of such firms — in Europe, there is diversity across 28 markets and a giant like Siemens is mainly competing against General Electric, not a European firm. 7) Italy has not only few big firms but it also has a poor FDI record like Greece — they can only do something about it. Sace, the Italian export finance agency, says it can compete better against France than Germany: http://bit.ly/1JieWRE http://sace.it/en – click Export Market tab Developing export markets is a hard slog and excluding FDI firms, Ireland also has a poor exporting record despite low corporate and social security taxes, combined 60 years of State supports. Above post in response to DOCM @ Paddy Healy The yen is down 33% since the Bank of Japan opened the floodgates in early 2013 and in the 30 months to June 2015 with Shinzo Abe back as prime minister, GDP has only risen by 2%. Couple of observations about the article – and while I read yesterday I cannot now access behind firewall – so my response is based on what I remember: 1. Scalley reference dodgy or patchy data in a lot of cases – yet while he is happy to cite this as not being evidence of ‘German Bank theorists’….he appears to be perfectly happy to reference said data as evidence in defence. 2. He refers to less than 5% deposits being on hold in Irish banks being of German origin – so what? I don’t recall anyone ever talking about German bank exposure being in respect of deposits – and if these were deposits held by Germans independent of the banks why is it even referenced in the article….is it because “less than 5%” of anything sends a powerful message. 3. Agree with Fedup Pleb and others – the primary target of disdain was Germany and not German Banks – although the latter certainly entered the dialogue….and rightly so…because ultimately that brings us to 4 4. Germany’s position on the socialising of private creditor debt in Ireland cannot be looked at in the context of exposure to Ireland alone but more accurately to the the PIIGS and possible contagion effects of bowing ot the Irish. German bank exposure in Spain and Itally was significantly higher than Ireland….and there was no Depfa bank excuse there http://www.levyinstitute.org/pubs/wp_767.pdf (see figs 26/27) The political motivation for Germany bailing out its own Hypo Real Estate should not go unnoticed by those looking to get to the bottom of Germany MOTIVATION – and motivation is the key issue the Scalley article avoids addressing….their POSITION on tying the sovereign to private creditor debt is crystal clear and while the link I attach suggest their (motivation) banks exposure was also clear across the PIIGS in particular, if you do NOT believe German banks were exposed then why on earth would one try and not understand the Germany’s motivation if you discount the exposure factor!?? Don’t tell the Irish people not to blame the Germany banks and leave it at that…based on your ‘patchy’ data that does not look at the whole EZ exposure. tuh tuh! 5. Most people talked about ‘German and French’ banks and paper attached would appear to justify that position. @ DOCM The US is in cost terms far more competitive than Germany but the US trade deficit in manufactured products increased to $524.2 billion in 2014, a rise of $76.8 billion (17.2%) from 2013. Despite euro dip China & US remain most competitive manufacturing nations @ MH In the avalanche of data that you advance, you fail to deal with the issue of manufacturing for the countries in question. http://www.theguardian.com/business/economics-blog/2014/apr/24/uk-economy-seven-things-need-to-know-ons-g7 “The changing makeup of the UK economy is roughly in line with other major economies (but manufacturing has declined most rapidly in the UK). All G7 economies (UK, US, Canada, Germany, France, Italy and Japan) have seen roughly the same change in composition as the UK, with a gradual decline in production and manufacturing as a proportion of GDP. The UK and France are at the bottom of the pack, with just 10% of their economies attributable to manufacturing. Germany comes out on top at 22%, followed by Japan at 19%.” “Stealing their lunch” is more than a soundbite. It is a fact. @ DOCM OK “stealing their lunch” could be compared with Apple and Nokia where the latter only woke up to the changing market when it was too late. France and Italy are mainly in different product markets to German giants. The claim that German firms are taking business that they could get, is not credible. Even on an issue like labour costs, in an area like chemicals the ratio would be low. Foreign firms now own much of UK mfg which explains the low R&D spend while US mfg outsourced lots of jobs to China because high tech (assembly) + pharma (capital intensive) shop floor functions can be easily moved elsewhere. Machinery mfg in Germany, Austria, Switzerland and Sweden still require specialist shop floor skills. When the received wisdom becomes a mantra, facts often don’t matter! The brutal reality is that Irish banks created money out of thin air (like banks everywhere) but used it primarily to finance property speculation – whereas, almost by accident, a share of it is used in many economies to finance productive investment even if still boosed speculative activities excessively. No effective restraint was exercised by the relevant supervisory or regulatory authorities on the way they expanded the asset side of their balance sheets and they were able to plug the liabilities side as they went with bonds and deposits. When the asset side of their balance sheets went pop there was no proper legal mechanism in place to bail-in the speculative bondholders and depositors. And governments everywhere panicked at the prospect of a total seizure of the banking and payments systems. They simply threw taxpayers’ money at the problem. In time-honoured manner capitalism (in this instance a pretty ugly neoconservative variant) needed the state to bail it out of the mess it had made. There’s little point moaning about German banks or bondholders – or those of any other nationality. It makes far more sense to consider the long overdue economic policy shift to put some manners on capitalism being advanced by Jeremy Corbyn: http://www.project-syndicate.org/commentary/jeremy-corbyn-uk-economy-by-robert-skidelsky-2015-08 @MH “When the received wisdom becomes a mantra, facts often don’t matter” I fear you are a victim, (not unlike Scalley and Dan O’Brien), of the very predilection you caution others to avoid. It is not the case that there is not merit in many of the arguments you present about German competitiveness but the problem is that you worship at the altar of the margins as opposed to looking at the primary drivers. There is no doubt getting into the devil of the detail can provide valuable insights but when the marginal arguments trump all else they present as distorted a picture as could be derived from pure fiction. I will refer readers again to the study attached at the link at the bottom of this thread. I appreciate it’s a long report and people simply don’t have the time to review but I will do my best to summarise the analysis in terms of Germany’s status in relation to European and global competitiveness. At the relevant section the author notes: “The euro started appreciating strongly in 2002 in real effective terms and especially vis-à-vis the U.S. dollar. Euro strength cut Germany off from benefitting even more from the global boom in the mid-2000s. The euro crisis then had the convenient side-effect of prompting a sharp euro depreciation, which has helped Germany to recharge its export engine by re-coupling to global growth; ever more strongly shaped by China and other emerging market economies that are well-disposed towards German capital goods exports anyway. For instance, while Germany had a sizeable bilateral deficit vis-à-vis China prior to the global crisis, the bilateral position reached a near balance in 2012” I don’t think there is anything controversial in that summary. Germany’s contribution to global current account imbalances can easily be addressed through an appropriate euro exchange rate regime – provided the euro currency union IS internally balanced. “As at the global level, current account imbalances within a regional currency union also require a financial counterpart. Prior to the euro crisis private capital flows were very forthcoming, pushing regional financial integration to new heights. But for euro crisis countries that source dried up as private capital flows suddenly stopped or even reversed…. ….One challenge concerns the path towards a full rebalancing of the currency union and the required official financing flows that this process has come to depend on – the flow issue. Another challenge concerns the debt legacies which the buildup of current account imbalances has left in its trail – the stock issue.” Now we are getting slightly more controversial only insofar as mantra’s take over from facts in denying a need for rebalancing. Anytime the issue arises on this site we get the emotive response about ‘why should German taxpayers pay for x,y and z?’. MH you yourself refer to this sort of notion as a ‘transfer union’. Unfortunately, the FACT is that this is what is required within a monetary union if stability in the union is to be maintained. If stability is not the aim of the union then what purpose does it serve? As the author notes – and again I would hope this fact is not in dispute: “Essentially, a currency union is a commitment to a common inflation rate. And the ECB’s definition of price stability as “below but close to 2 percent” attaches a number to that commitment, which provides a stability norm for wage trends. The “golden rule of currency union” says that national wage trends corrected for productivity (i.e. unit labor costs) cannot stray from this stability norm for long without causing imbalances. With nominal exchange rates gone, unit labor cost trends determine whether intra-area real exchange rates stay in balance” As the author notes conventional wisdom (aka “mantra”) has it that “crisis countries” lost competitiveness due to excessive wage-inflation. In fact (see figure 4 of the attached link) Germany was the outlier in the union since it began being the only country consistently remaining divergent from the common 2% goal….indeed the picture is alarmingly out of kilter with the “norm”… “One consequence was that competitiveness positions inside the 9 currency union ran seriously out of kilter and imbalances built up. Another consequence was that diverging wage trends also undermined the “one-size-fits-all” monetary policy, setting off an asymmetric shock. As wage restraint together with mindless austerity and structural labor market reform persistently depressed the “sick man of the euro’s” domestic demand, the ECB’s uniform nominal interest rate also meant relatively tighter financial conditions in Germany, magnifying divergence further, as the opposite would be the case in countries with aboveaverage inflation, such as booming and bubbling Spain and Ireland” “The outcome for the currency union, as far as internal competitiveness positions are concerned, was quite equivalent to a 20 PERCENT PLUS deutschmark devaluation. The euro has of course ruled out that kind of “beggar-thy-neighbor” strategy – and its ultimate purpose was just that. But with exchange rates no longer available as a tool for swift rebalancing, intra-area imbalances will have to be resolved in the same way they built up: by reverse movements in relative unit-labor costs.” ….and guess who the onus falls on to bring balance back into the equation….that’s right – not the outlier but rather everyone else? And in doing so you think the 2% remit of the ECB can be met? Of course not, but at least German taxpayers will be protected and the broken union can persist to exist. Now, to paraphrase Denis Hopper said to Christopher Walken in true romance as he chewed on what he knew would be his final cigar…. ‘if that ain’t a fact….tell me I’m lyin’ ‘ http://www.levyinstitute.org/pubs/wp_767.pdf ps….can anyone tell me how one can make bold or italics when posting in the comment box. @MH You said it! I do not often agree with AEP of the Telegraph but I do in this instance. http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/11584031/Germanys-record-trade-surplus-is-a-bigger-threat-to-euro-than-Greece.html Incidentally, the major German export is motor vehicles. Have France, Italy and Spain stopped manufacturing them? @ DOCM You provide an interesting illustration of the common template of policy debates where the disagreement is not about facts but the relative significance of them. It is seen to help where there is a defunct or live economist, journalist or other guru of standing to link to relevant material in support of the argument. You refer to motor vehicles – in 2014 Spain produced more than 4 times the production of Italy; Spain was Europe’s biggest producer of commercial vehicles and second biggest producer of motor cars in Europe. FDI explains Spain’s biggest manufacturing export as it does in the UK. VW accounts for 1 in every 3 cars produced in Spain. Renault of France has only 9% of the commercial market compared with 40% for Mercedes + Man; 16% for Netherlands-based Daf and the Swedish companies Volvo and Scania (both under new ownership in recent years) have 22%. Two thirds of the production of German firm cars is outside Germany – what level would you desire? What would you like to be done to see more production from Renault, Fiat and other sectors?? People don’t buy German products because they’re cheap – the euro and labour costs are not important here. There’s lot of hand wringing but credible solutions are scarce because they require attention to in particular France and Italy . C’est la vie and that is all I have to say! @ MH You have, in fact, put your finger on what is saving the situation IMHO from descending into a real crisis of confidence i.e. the level of integration of manufacturing that has occurred within Europe. However, the problem is not who made what where but the balance of financial claims which result in terms of nation states which is what the EU continues to be made up of. Deutsche Welle had this comment recently. http://www.dw.com/en/is-germanys-big-export-surplus-a-problem/a-18365722 If the concerns being widely expressed constitute a mantra not based on fact, then a lot of people, apart from your good self, and the sectors in Germany benefiting from from what you consider the correct assessment, are very deluded indeed. Germany’s willingness to produce more than it consumes ( i.e. run a large and persistent BOP current account surplus) does not seem to make much economic sense. Yes, the country is acquiring foreign assets but one would think an ageing population would prefer to consume more and run down assets. Cultural and societal attitudes regarding thrift versus spending perhaps. @ DMcL Cultural and societal attitudes are undoubtedly part of the explanation. However, the most pertinent reason IMHO is that it suits the dominant elements in German society in terms of a fundamental understanding between government, industrial employers and organised labour in the export industries. This explains how there can be repeat grand coalitions. Merkel may be extraordinarily popular but she has been unable to get a governing majority for the CDU/CSU. The question these interests pose is; why change a system which is making a lot of people well off and some extremely rich, especially when the health and social welfare systems are organised on such an equitable basis? It is a fair question. We are hardly best placed to be critical as our current account surplus is, if I am not mistaken, on a par with that of Germany. Unfortunately, that is where the comparison ends. Seamus Coffey on the topic – in the Irish Times – of where our exports are coming from and his – very sound – recommendation about what should be done to ensure that some, at least, of the benefits accrue to the population in general. https://www.irishtimes.com/business/economy/multinationals-bring-many-benefits-1.2315003 It drew one comment! “Don’t blame German banks for the Irish economic crisis!” No, definitely not. It was actually the Heroic Bank of Antartica and those pesky penguins. But lets move on. Financial regulation anyone? Naw, been there and it works. Hubris is better. “Germany’s willingness to produce more than it consumes ( i.e. run a large and persistent BOP current account surplus) does not seem to make much economic sense.” Never made (economic) sense, nor will it – but Political Realism is what makes sense. Uberalles and all that! Wins out every time. All you have then is an increasing bunch of sour (and sore) losers. This hardly matters to the mittlellanders. Keep up the exports – until no one needs or wants as much. Then things will start to go interesting. When, not if. @ DMcL I forgot to mention the German banks. http://www.ft.com/intl/cms/s/0/75a8cf06-39f5-11e5-bbd1-b37bc06f590c.html#axzz3jZDkzHsj Overall, the policy does not, indeed, make much economic sense. To quote Deutsche Welle. “Germans have invested a lot of their surplus earnings over the years in buying foreign assets,” according to Heike Jöbges, an economist at the Berlin School of Economics and Law, who has studied the country’s trade imbalances and investment flows. “On the whole, those investments have lost money.” Because of exchange rate depreciations as well as losses on paper assets like US sub-prime mortgage bundles in the wake of the 2008 financial crisis, the portfolio value of Germans’ assets is only two-thirds what the buyers originally paid for it. @Ernie Ball The debate on the BIS statistics was done ad nauseum around here and in the media in 2010/2011. Basically, the majority of that will be IFSC as mentioned in the Scally article. @DOCM, John FitzGerald discusses the impact of recent CSO revisions: http://www.irishtimes.com/business/economy/john-fitzgerald-revised-cso-figures-are-a-dose-of-reality-on-deficit-1.2327121 Apparently our trade surpluses weren’t as surplussy as we thought. Of course, the injunction is to keep exporting as much as we can. And don’t worry about glaring inefficiencies and rent capture in the sheltered private, public and semi-state sectors. Sure ’twill all be grand while it lasts. @Rob, Your effort to educate Ernie is much appreciated, but I fear it’s a ‘saothar in aisce’. It seems the data that led me, and no doubt others, to believe that Ireland was running a substantial surplus, were not reliable. John Fitzgerald on the subject today. https://www.irishtimes.com/business/economy/john-fitzgerald-revised-cso-figures-are-a-dose-of-reality-on-deficit-1.2327121 I think we should distinguish the extent to which surpluses are induced by the government or not. Take the following two BOP surplus countries as a comparison: Norway: BOP 12.2% (GDP); Government surplus 12.5% Germany: BOP 7.7%; Government 0.4% Thus we see that in Norway’s case the Government is forcing its populace to save for a rainy day. In Germany’s case it appears to be the populace themselves who initiate the saving. It’s one thing to criticise a government for excessive fiscal rectitude but can we really blame a whole people for not spending as fast as they can produce? Germany has shown enormous forbearance. Ireland in 2008 decided we were going to try and exploit the rest of the Eurozone by offering an unlimited guarantee to attract deposits from across the EZ banking system. Brian Lenihan is on record as saying that he took pleasure from the upset this unilateral me-fein approach created among other countries. 2 years later he had to go back to these countries looking for help to honour the crazy commitments we had made. The EZ countries, despite our beggar thy neighbor antics of 2008, agreed to help us honour those commitments. They understandably asked us to implement a realistic austerity plan to get our deficit down and get back on our own feet ASAP, so they wouldn’t have to pay for our deficits longer than necessary. The ECB likewise understandably, did not want to lend any more money to insolvent banks whose only preservation was a sovereign that was locked out of capital markets. Yet somehow, Germany/EZ/ECB are consistently cast as the villains of the piece. Our stupidity was epic throughout this period before, during and after the crisis. Their concerns were completely normal, moderate and ultimately mirrored our own. Yet somehow we insist on contorting facts anyway we can to conjure up evil outside forces as having played a part in our downfall. It’s more Macbeth than realism. @Gav Roche “Germany has shown enormous forbearance” It is extraordinary how people can throw out this sort of rhetoric backed purely by rhetoric. I have attached an economic paper that highlights the internal devauluation that occured in Germany through the ‘boom’ years. The paper promotes the notion that the purpose of a monetary union is stable pricing (do we agree with that?) i.e. inflation at circa 2%….yet no danger of reading the paper and commenting on what you do or do not agree with in it. No – “Germany has shown enormous forbearance”… The reality is that it is everyone else that has shown the forbearance and Germany bears the main responsibility for failure to recognise the shortcomings in the euro project vis-a-vis its own domestic policies. That is not to say Germany shares the majority of the blame for the euro coming into existence in the first place but they are the ones refusing to recognise their very CENTRAL role in the current crisis….and it ain’t that of the saviour! @ PH Our national problem appears to be the opposite of that of Germany i.e. an ingrained tendency to consume more than we produce, paying the difference through excessive borrowing coupled with compelling people – especially our youth – to seek a life abroad. Who gets to to do the consuming is the main bone of political contention with little regard to the need to first produce something. Germany’s problem is not the cause of the crisis in the euro but correcting it would go a long way towards helping to resolve it. The difficulty is that the others side, so to speak, and especially France, have to make most of the adjustment required to restore their competitiveness. Germany cannot be held responsible, for instance, for the wrong direction that France under the last socialist administration took with the introduction of the 35 hour week which has been a millstone around the neck of the French economy ever since. Attributing the role of victims and villains is a political not an economic exercise. By and large, all governments, with the exception of the new Greek government until recently, have negotiated within respectable democratic limits. Germany has played the essential stabilising role. http://www.politico.eu/article/esm-imf-regling-klaus-regling-lagarde-draghi-greek-crisis-euro-grexit/ It would have been better had the stabilising elements been constructed within the EU’s existing institutional structure. Cameron landed himself with the blame for this wrong turn but there can be little doubt about the fact that both Germany and France were happy to go in that direction in any case. I think that both under-estimated the likely negative political fallout in terms of further European integration. @ PH A Guardian report of what happened at the time. http://www.theguardian.com/world/2011/dec/09/david-cameron-blocks-eu-treaty @Rob, Paul Hunt Look, whether Germany’s exposure to Irish banks was $186 billion or a fraction of that is irrelevant to the reasons that many people–justifiably–think that Ireland was crucified to protect German and British and US banks. It doesn’t matter what the exposure was. What matters is what Trichet and the ECB thought the exposure was. And the evidence is that they thought it was so significant that burning Anglo bondholders could have important contagion effects. The actual level of exposure is of no consequence. But Derek Scally didn’t write an article about how the ECB forced us into a bailout based on false information about the exposure of foreign banks to Ireland, now, did he? @DOCM, I’ve always tried to highlight that German policy is torn between doing what is necessary to keep the Euro show on the road and trying to ensure the EU (or, at least, itself and other economically functioning and rasonably well-governed member-states) is pursuing a sensible global economic strategy. And this has to be achieved while trying to reconcile the demands of competing powerful domestic special interest groups. Couple this with the fact that, for years, Germany was the principal net contributor to EU funds that helped to lift the PIIGS out of backwardness, ignorance, superstition, poverty and the baleful residues of dictatorship and then had to spend on re-unification. I would much prefer, and it would be far, far better, if Germany did not have to, or believe it has to, shoulder these burdens. The centre-right hegemony that has been created to manage the inevitable policy conflicts is unsustainable, is based on flawed economic assumptions and relies on the abuse of political and economic power. It has emasculated the centre-left politically and suppresses viable policy options that are much more in the broad public interest. It is provoking popular resistance and will provoke even more. Perhaps this centre-right hegemony centred around Germany believes it can manage the populist, nationalist, xenophobic opposition on the right and the re-assertion and re-imagination of long-standing policies on the left. But I have my doubts. It may continue for a little longer on the continent where the newer left-wing factions are supplanting the hollowed out dessicated hulks of the traditional centre-left parties (e.g., Syriza totally eclipsing PASOK). Ironically, it is in the UK, where the Corbyn phenomenon is seeking to rejuvenate the dessicated hulk of the Labour party from within, that the centre-right hegemony is most vulnerable. And it even more ironic that the Tory party’s isolation from its natural centre-right fellow travellers on the continent is increasing its vulnerability. @Ernie, The core of this problem is that banks are allowed to create money out of thin air by advancing loans. They then pad out the liabilities side of their balance sheets as best they can to match the increase in assets after this. People elect governments to control banks ability to create money out of thin air – or to appoint Very Serious People (VSPs) to police the banks. So, in the first instance, if the governments people elect or the VSPs they appoint don’t do their job on the banks and the banks advertise themselves as being fully complaint with the obligations of their banking licenses issued by a sovereign state that in turn asserts it is fully compliant with its international obligations and if, in addition, there are no legally binding bank resolution arrangements then, yes, citizens as taxpayers are ultimately on the hook. And a majority of voters gave FF and the Greens the political kicking they fully deserved for putting them on the hook. And it is very likely that FG and, in particular, Labour will also get a deserved political kicking for selling themselves as being able to secure some reimbursement of the bail-out taxpayers financed, but then proved unable. It’s in this context that the gloriously misnamed People’s Quantitative Easing being advanced by Jeremy Corbyn is of relevance. This doesn’t strip the banks of the ability to create money out of thin air and vest it totally with the state (as Irving Fisher and his colleagues proposed with the Chicago Plan in the ’30s), but it increases the role of the state to create money to finance productive investment and bypasses the ineffectual, but greedy, banks. @ PH I think that your analysis is correct except, paradoxically, in the case of Germany. In short, the representatives of the centre-left and the centre-right are united in their belief with regard to the benefits of a policy where demand for German production must always, in the first instance, be found abroad. This may be creating some difficulties for the SPD especially as the latest opinion polls suggest that Merkel and the CDU/CSU willl get an absolute majority at the next election. But they said the same thing prior to the last election. The AfD has split and the Liberals may be on the way back to the Bundestag. Die Linke have no effective voice. The Greens seem to have lost whatever footing they had, despite a recognition of environmental concerns right across the political spectrum. The key explanation is, of course, the fact that the dominant German trade union representation is in the manufacturing sector. This is not true of other EU countries, and notably in the case of Ireland because of the huge role of foreign firms (as Seamus Coffey set out in his blog on 8 July), a situation which is greatly to their detriment. “If it ain’t broke, don’t fix it” is the consensual order of the day in German politics. That this may be a mistake is another issue. There are plenty of equally egregious errors of policy taking place in the other countries of the EU. @DOCM, I don’t think we’re in disagreement about Germany. There appears to be a broad internal consensus that the current ‘grand coalition’s’ policies are satisfactory. However, the EU’s institutions were designed and developed to mediate and moderate the inevitable dominance of the major member-states and to prevent national policies emerging, in this instance from Germany as the pre-eminent member-state, that are applied thoughout the EU. For example, if Germany’s obsession with the fiscal ‘schwarze Null’ (black zero) were not so anally retentive and economically damaging it would be funny. And as another example, its enthusiasm for imposing “structural reforms” on member-states its deems errant and recalcitrant that it would never consider undergoing itself (despite a crying need for such reforms) exhibits a dishonesty and hypocrisy that will provoke widespread and effective political opposition eventually. In the meantime the Irish Government will keep its head down with fingers crossed that the MNC enclave will continue to prosper, that the phasing out of the most egregious tax dodges used by some MNCs will shift the spotlight and that the gouging of the public by the powerful internal special interest groups won’t provoke any more public disgust and anger than has been provoked by the Irish Water fiasco. @ PH There is the rub! If you have a high performing specialised export sector, with 100% global dominance of something like 20 niche sectors, you can tolerate a lot of domestic inefficiency. Indeed, the author who is the genesis of this thread covered this other aspect of German “truthiness” some time ago i.e. that of the myth of German “efficiency” as all embracing. http://www.irishtimes.com/news/world/europe/berlin-letter-myth-of-efficiency-tarnished-by-spiralling-costs-1.2307833 @ PH For total twaddle, it would be hard to beat this contribution by the French economy minister and supposed white hope of a failing Hollande administration. http://www.bloomberg.com/news/articles/2015-08-25/europe-s-religious-war-on-debt-must-be-overcome-macron-says What do we conclude from this discussion. Irish taxpayers are saddled with the bad debts of Irish banks that will take decades to pay off. And nobody can identify the beneficiaries. What a load of %&*$#. @Geronimo, And if it proved possible to identify the beneficiaries, what do you think the relevant Irish authorities should do? @ PH The beneficiaries are largely Irish citizens who were the last to sell their property or get a CPO when the music stopped. There is €60bn swilling about in the hands of a lucky few farmers and others who made windfall property and land gains. This could be tackled by a retrospective solidarity tax on net property gains made between, say, 2003 and 2007. Dan McLaughlin ‘Germany’s willingness to produce more than it consumes… does not seem to make much economic sense.’ Crotty might have argued that they are remaining truest to the habits of capitalism built up over the millenia since the first pastoral peoples trying to eke out a livelihood in western/central Europe were forced to delay gratification and invest in draught stock, hay and equipment to stay alive over the cold winters. After an unpromising start this way of doing things was becoming very succesful by the Middle Ages. Ireland, with its cool summers and mild winters, did not fit this pattern and formed other priorities. Caesar noted the Germans’ unwillingness to import in book 4 (the best known one) of his Gallic Wars. Mercatoribus est aditus magis eo ut quae bello ceperint quibus vendant habeant, quam quo ullam rem ad se importari desiderent. Quin etiam iumentis, quibus maxime Galli delectantur quaeque impenso parant pretio, Germani importatis non utuntur, sed quae sunt apud eos nata, parva atque deformia, haec cotidiana exercitatione summi ut sint laboris efficiunt. They let in traders to offload the spoils of war rather than because they want to import anything. And horses, which the Gauls are very fond of and pay big money for, the Germans won’t import but stick with their own horses, small and deformed, and work them to death. Substitute Irish for Galli and mercs for iumentis and you will see that little has really changed. He also says a few lines later that the Gauls would surround and stop any passing merchant and milk him for news about what was happening elsewhere, often holding them against their will. They would tell them what they wanted to hear (et pleri at voluntatem eorum ficta respondeant) and on the basis of this, and vague rumours, the Gauls would make plans, often about matters of the greatest importance – and then regret it afterwards (quorum eos in vestigio paenitere necesse est). @PH Reveal them to the banking inquiry. Relevant wouldn’t you think? @ Paul Hunt Write it down in a little black book for future reference. Never know when such information will come in handy. So, in response to my question, I’ve got: 1. a proposal to extract some economic rents retroactively; 2. an expectation that a group of parliamentarians might do something useful with the information – despite the fact that successive parliaments created the mess; and 3. A vague suggestion that appropriate retribution might be exacted sometime in the future. This is actually quite worrying. @PH I think your own attitude is quite worrying in the manner in which you have spun the proposals put to you. Your summary of number 2 is a cynical assault on democracy and democratic processes generally. I know democracy is not in vogue with the troika – its been found to be a bit of a nuisance but some of us still believe that despite that its the best model of governance available to us. You clearly do not. So the question in return now, is to you – why do you propose the beneficiaries should not be revealed….what exactly is the value in that? Secondly, what alternative to democracy do you propose? Tell me that and i will get back to you on whether I think your answers are worrying or not. @Nocense, You’re relatively new to the board and I’ll let your allegations about my stance on democratic governance pass. (In any event, anyone familiar with my comments over an extended period here would consider them laughable.) You seem to be under the illusion that we have a fully functioning parliamentary democracy here. We don’t. It is generally accepted, and the academic research is unambiguous, that, among EU member states with governments being elected by parliament, an elected Irish government exercises executive dominance over parliament that is more excessive than that exercised by any other elected goverment in the EU. Until there is some re-balancing of the powers exercised by the Oireachtas and the executive – which can only be achieved by the members of the Oireachtas collectively – allocating tasks to sub-groups of Oireachtas members has the potential to provide some entertainment, but little else. @PH I don’t disagree with your analysis to functioning of democracy either in Ireland or in the EU. But it is like the people that scoff at those that order a “diet coke” with their super meal at mcdonalds – just because there is a lot wrong the mix already there is no need to make it worse or simply give up and abandon any semblance of trying to do the right thing. You posited that it was pointless to follow the money trail as part of the banking inquiry because your problem is with a dysfunctional parliament – I am still not clear however that if the parliament was functioning to your satisfaction that you think it would be relevant to the inquiry. My view is following the money will always give you insight into why things are the way the are. btw, I’m not that new to the board but I will let the (apparently) inherent condescension in your intro pass. @Nocense, The terms of reference of this inquiry and its timing and the composition of this sub-group of Oireachtas members are all determined by party politics. The objective is to demonise previous FF led governments. If the inquiry highlights things that might need further remedy the Government will most likely respond by asserting all necessary changes in structure and procedures have been made to prevent a repetition. I just think identifying the original bondholders won’t achieve anything useful. Lets agree to disagree. The key point is that nothing really has been learned from the catalogue of greed and stupidity that led to the triple fiscal, banking and porperty blow-outs in 2008. The same mixture of greed and stupidity is prevalent in other sectors – and rapidly returning to the financial and property sectors. I would much prefer our parliamentarians were focused on the current and future detriments to the public interest, rather than examining the entrails of past detriments. Comments are closed.