The New Republic

Cutting off your nose to spite your face. Works wonders.

- ClumsyMohel

June 26, 2012 at 3:30pm

well, isn't this just cheery news. I hate to say it but if the Euro falls apart I hope Romney is elected and the real shit storm happens after he takes office, then watching him flounder about will be about the only amusement left.

- blackton

June 26, 2012 at 3:44pm

If you're going to call yourself 'clumsymohel', then perhaps a different metaphor is in order.

- timteeter

June 26, 2012 at 3:56pm

I'm with Blackton. If we get definete proof that the EU is about to hit the fan in the weeks before the election, all liberals should just sit back, let Romney get the job, put up with 4 years of crap, and then enjoy the ride afterward. I'm half joking of course.

- ARealHero

June 26, 2012 at 5:20pm

Why the assumption that the Germans want to save the Euro in it's current form? Since they've been unable to extract even just commitments for reforms that everyone agrees on the need for, perhaps the plan is to let a country or two (cough, Greece) go up in flames to incentivize others to get with the (German) reform program. It's worth remembering that despite all of the obvious benefits of the single currency for an exporter Germany, while not being coerced, wasn't the main driver behind it.

- Nari224

June 26, 2012 at 6:39pm

Point taken, Tim. Nari224, it is very far from certain that there is such thing as the Euro w/o Greece, or any current member. Once the precedent is set for a country to exit the currency, then the financial markets will assume the euros in say, Italy, are not really worth as much as euros in Germany. And once you have "German Euros" versus "Spanish Euros", then you really just have DEM v. ESP (the end of the EUR). Is this certain to happen? Well, anyone who tells you they know it will or won't is lying, but I've at least never read a good explanation as to why this won't occur if someone leaves the currency (the only question to me is how long the breakup process happens, which again is hard to say). My guess is that it happens quickly, and that the consequences (also very hard to know exactly) are at least as bad as Lehman, if likely not worse. If the Germans were only thinking about their economic self interest, they would want to save the Euro in it's current form. But they are running up against an inherent resentment of helping out the "lazy" PIGS (just learned this acronym today) even though their borrowing enabled Germany to grow at the rate that it did. This is an inevitable outcome of creating a currency union without the other things that usually come with it. Can you imagine the shit Mississippi or Alaska would be in if the other 49 states were somehow able to withhold transfer payments unless MS or AK slashed their budgets to oblivion? At core, most Americans feel a sense of national unity, and so even the idea of this sounds crazy (let alone working out a direct mechanism by which this bargaining between state re: transfers through the federal government would come to be). At this point, the Germans have nothing but contempt for the Greeks, and they seem to be willing to risk hurting themselves quite badly to prove it. Now if someone can tell me why I'm wrong, and everything will be just dandy when Greece returns to the Drachma, I'd be more than pleased.

- ClumsyMohel

June 26, 2012 at 7:15pm

And just to clarify, I am aware of the existence of the legislative branch, but there is currently no equivalent bargaining between say New York and Alabama to anywhere near the degree of Germany and Greece.

- ClumsyMohel

June 26, 2012 at 7:28pm

ClumsyMohel - I don't necessarily disagree with anything you've said. However this (and basically most US media outlets) keep asking the (sometimes rhetorical) question "Why does Germany do this if they want to save the Euro?". My answer is "maybe they don't (in its current form)". There is also the small problem that (aside from the union issues you mentioned) the existing disparities in economies is utterly untenable. To "solve" the problems of the lazy PIGS (no real need for quotes there), Germany has to undergo some form of inflation (likely wage inflation) to make itself less competitive wrt to the other countries. The other countries wages are far too high compared to their productivity, and they can't really cut their wages and hope to grow in any meaningful sense. So the Germans effectively need to make their economy less competitive so that others can continue to enjoy the low rates the German's have earned through hard work and non-trivial sacrifices (see the stagnant German wage growth over the last decade). Good luck in selling that to das Volk. In my highly speculative view, once Greece leaves the Euro in a "disorderly" fashion, the hope in Berlin is that everyone else gets with the (reform) program in a hurry. At which point Euro bonds and other instruments that will assuage your concern about Italian and Spanish (even French) Euros vs German Euros will suddenly appear on the table (the quote from this article notwithstanding). And yes, this is playing chicken with economic Armageddon, no quibbles about it. And while it clearly benefits them, there is little evidence that the Germans need the Euro as you posit. German growth since the introduction of the Euro has not been notably higher than previous periods, and some of that growth is attributable to being able to put more of the former East German population (well, their children) to work. The drag on the German economy of re-unification was non-trivial and hasn't gone away even today. And I can relate that many a former Western German resents the "Ossies" in private. They have no time whatsoever for the PIGS.

- Nari224

June 26, 2012 at 10:28pm

It's worth reminding everyone, however, that the I in PIGS (Ireland) had none of the budgetary problems, tax chaos, or administrative corruption that one identifies with Greece. It was in some ways a model of EU good behavior. Ireland's crucial problem was not financial in the national economic sense, but rather that it chose in a momeny of insanity to take on the banks' crisis, essentially a huge exposure based on private loans and investment, as a national treasury responsibility. Suddenly the Irish taxpayer was on the hook for the banks' f***-ups.

- ironyroad

June 27, 2012 at 12:28pm

As has been discussed in detail by Krugman and others, the only hope for PIIGS (Pryugal, Ireland, Italy, Greece, Spain) and probably other EU countries to remain in the Euro (and for the EU to survive) is for Germany (and others) to agree to modest inflaion (4-5%) and large transfer payments. Anything else (including Euro bonds) just kicks the economic problem down the road to re-appear in probably yet-more virulent forms. Else each PIIGS is better off with its own currency-- and debt renunciation. That works pretty well (Google:Argentina). Germany's current demands will lead to economic disaster-- not only for PIIGS, but are in due time for Germany. And vquite possibly (probably?) the US. The US has relatively little trade with the EU, but world-wide depression can be triggered by individual events when the world-wide economy is already in serious trouble (Google: Austria. 1931). @Hero:Exactly my point for some time. Not half joking before the election. And if the EU collapses after the election?? You think BHO can handle that and the Dems will benefit?? That's the real joke. Dems are kidding (themselves) if their answer is yes. There are times in complicated card or board games, war, and politics when a tactical retreat is the wisest strategy (Google: G. Washington).

- drofnats1

June 27, 2012 at 12:49pm

Nari. Be carefull of modern myths. Germany benefitted from EU inflation AND being able to sell to other EU countries. German banks speculated in Spanish, Greek, and other properties-- leading to bubbles that popped.. Germany doesn't want it's bankers to take a well-deserved haircut. Spain's problems are NOT due to government overspending or non-competetive or lazy workers. Nor are Ireland's. Ireland is in the trouble it's in largely by following German advice. How's that working out?

- drofnats1

June 27, 2012 at 12:58pm

It depends what you mean by "relatively little," drof. The EU takes about 22% of American exports, which is not overwhelming but certainly not a minor slice.

- ironyroad

June 27, 2012 at 1:14pm

Irony.. Exports to EU make up about 2% of US GNP... (we sell much more to ourselves than to others).. A 50% drop in exports to EU will affect GNP by about 1%. Admittedly, some states would be affected more than others. Nevertheless, the much larger danger of an EU depression/collapse almost-certainly is the triggering problem exemplified by the Lehman collapse or the 1931 Austrian collapse -- rather than an immediate precipitous drop in US GNP.

- drofnats1

June 27, 2012 at 2:32pm

dro - no argument with anything that you're saying, but they're all far from making Germany "dependent" on the Euro and largely tangential (at best) to the immediate issue at hand. It has certainly done better than without it, but it's not like it had the Euro for a large chunk of its post war history where it posted (by European) standards stellar growth. Of course the Germans don't want to subject their banks to a haircut. The Germans were also quite stubborn about bailouts until their own banks hit the wall in 2008. So what? They're only acting in their own self interest. However since they hold all their cards, their self interest is considerably more important than anyone else. The Irish were certainly stupid. And it was German, French and British advice FWIW. I'd have advised them to take the Icelandic approach myself, much as you recommend Argentina as a model (although its not like the Argentinian experience was without pain). However it is fair to observe that not all of the PIGS are lazy. The Irish are actually (by some measures) more productive than the Germans. However the Spanish are most definitely not and thus they don't have the capacity to cope with the collapse of a booming real estate market or allowing their banking sector to speculate away. Doesn't matter that everyone else was doing it, if you can't bail it out (see Switzerland) you're going to end up with the short straw. Their situation is obviously different from Greece's, but to my original point, it's not like the Spanish appear any more receptive to the changes to Maastricht that the Germans want than the Greeks or French. At that point the German's have the option to stiff someone in a serious way or just continue to limp along. That or they really just as incompetent as some posit, although I find it difficult to attribute that to the Germans.

- Nari224

June 27, 2012 at 3:01pm

Thank you Irony and drofnats for providing some much needed realism to this board. Irony - Lenihan didn't do it in a drunken fit. He was made aware in no uncertain terms by the ECB that HE HAD NO CHOICE. This is borne out by recent revelations and the fact that the ECB is insisting we pay UNSECURED Bondholders in full, 100%. The only country in the history of the universe being asked to pervert common law like this. To confirm - A lot of the excessive leverage both soverign, corporate and personal in the PIIGS relate back to the low interest rate demanded by Germany to smooth their reunion. This is conveniently overlooked by the Germans and caused huge housing bubbles, notably in Spain and Ireland. Germany has been playing a cute game, knowing full well the DMark would overnight become the hard currency of choice for the world if it was ever floated again. Irish taxpayers are BAILING OUT GERMAN/FRENCH AND UK BANKS, not the other way around. People have always thought Germany = Europe. Now it seems with reunification out of the way and a dramatic increase in competitiveness as well as a healthy balance of payments, Germany has always = Germany.

- IggyPop

June 27, 2012 at 3:53pm

Intriguing how everybody has become a slave to Germany. We have the makings of a new (W?)Holy German Empire. It is an injustice to impute laziness to the average Irish and southern Europeans. Many work harder and longer than the average German, but they are operate in inefficient economies historically beset with entrenched guilds, excessive bureaucracy, corruption, poor social and physical infrastructure, and weak states. Fancy how American conservatives are trying to give us a weak state that can't administer and tax, too. One problem is that Germany doesn't want badly enough to change this situation. A NYTimes op-ed in the past two days (I can't remember the two writers' names) propose that Germany start moving out of the Euro by issuing government bonds, then corporate bonds, in new Deutsch Marks. The Mark would rise in value as the Euro declines in value, thus affording the European periphery a chance to improve their trade accounts and revive and reform their economies.

- amidut

June 27, 2012 at 5:46pm

I should recant calling the PIGS lazy as a whole; I had Greece in mind and lazily conflated them in my writing. Iggy - I agree that what is being foisted upon the Irish taxpayer is a travesty. It is however a problem that when you take someone else's money, you are rather dependent on their good graces. And it turns out those good graces are in short supply here. Perhaps the Irish should precipitate a Greek default and just say no to the unsecured bondholders. But I am curious about one of your statements - how did Germany "demand" low interest rates?

- Nari224

June 27, 2012 at 6:45pm

For years the Eurozone based monetary policy on Germany's economic growth needs. Low interest rates helped drag Germany out of its post-reunification slump. But interest rates were held far too low for the peripheral countries. It created a credit boom, excess spending by households and governments – and it certainly didn't provide the incentives required to increase competitiveness. While Germany was getting its house in order with monetary assistance, southern Europe was in party mode. Now, Germany has no intention of returning the favor. It won't accept inflation domestically as a method to correct the imbalances within the Eurozone. Instead, it wants to impose deflation on the periphery. It's fine for Merkel to say No to every useful solution but at some point the rest of Europe are going to ask what are they getting out of it and what is Germany getting out of it. The answer to that question is cut and dry. Germany can't have it both ways forever.

- IggyPop

June 27, 2012 at 7:04pm

Nari - beware the propaganda. The Greeks work the longest hours in Europe. http://www.happensingreece.com/greeks-work-the-longest-hours-in-the-eu-according-to-british-statistics/

- IggyPop

June 27, 2012 at 7:06pm

Thank you, IggyPop. These tropes about "laziness" somehow being endemic to an entire nationality are absurd. Greece's problem has much more to do with broken institutions than with some imagined lack of work ethic genetically or culturally embedded in its populace.

- ClumsyMohel

June 27, 2012 at 8:38pm

OK, you are talking monetary policy, I was thinking Bond market rates. The latter being low for everyone because the markets ultimately felt that governmen bonds within the Eurozone were implicitly backed by Germany. I'm not sure what hours worked represents other than hours at work. The Greek economy is colossally unproducitive. I can "work" long hours and still not be as productive as someone else if I spend a lot of that time goofing off. And both the objective measures that exist, as well as countless both personal experience and anecdotes from Greeks I know who have returned to Greece (largely from Australia, to whence their parents immigrated in search of a better future in the 60s) stingily indicte that the latter is probably what's happening. I spend a lot of time working with Germans, and there are some very interesting union arrangements in terms of how many hours some of them work. But they all show up to work, pay their taxes and treat people (at least in the South) that are on welfare as social pariahs. And thus they (along with some strong protectionist government policies) manage to be quite productive despite lots of holidays, short work weeks and maddeningly strong rules against overtime or working weekends. This isn't to say that I necessarily agree with what or why the Germans are doing. I'm only positing an alternate theory for what and why.

- Nari224

June 27, 2012 at 8:50pm

Clumsymohel - I utterly fail to see why that is. Have you been to Greece? Talked to Greeks? It's not like those that have immigrated back after their parents left are reticent about that move being motovated by there just being a whole lot fewer demands on you than in Australia/New Zealand/the US. And it's not like this is the first time their economy has teetered on the brink if you're not interested in anecdotes. The hard facts support the same conclusion. This is a county where tax avoidance is a national pastime. If you think Germans would joke to each other about how much they avoided paying the government, or that it would be even vaguely acceptable, you are confused. It's all well and good to blame their "institutions", but the instutions are the county. This is not to say that the impact on ordinary people won't be catastrophic. It probably will. And there's precious little the average person can do about the situation (although, they are a democracy, so...) but that doesn't change the actual situation.

- Nari224

June 27, 2012 at 9:03pm

It's also worth mentioning that the concept of a common currency is substantially undermined by the fact that a German "Drop Dead" is an acceptable or at least politically viable proposition in Europe, but in contrast New York and California can't tell Missouri or Alabama the same. Neither will the feds stop paying out social security checks just because any given state is having serious financial problems. The deeper problem in Europe is a failure of political union, which did not just appear with monetary union, despite some dewy-eyed fantasizing. And it's a serious question -- that the Germans have dangerously opened up in exactly the arena that guaranteed their survival and flourishing after WW2 -- whether or not that is now even more of a non-starter than it was 10-15 years ago.

- ironyroad

June 28, 2012 at 3:35am

No arguments there irony. The Germans want the rest of Europe to run like Germany and they appear unwilling to budge. Iggy - sorry, shouldnt't post late at night; I didn't complete my reply to you re low ECB interest rates. My recollection (and I'm more than happy to be corrected) was that the plan was for the periphery countries to use the growth the low interest rates would bring to start making some petty serious reforms. Read: take an axe to their public sectors which would obviously have a strongly negative impact on demand. However as you said, they had a party. I understand that the Greeks continued their time honored tradition of addressing unemployment, even during one of the largest and sustained booms on history, by simply employing more people into the civil service. Compare this to what the Germans did, eg the Hartz reforms which were unpopular at the time but extremely useful in 2008-9.

- Nari224

June 28, 2012 at 8:10am

Irony - apparently can't post in the morning either, forgetting my main argument here. Is Germany not asking for just those very rules that bid New York and Alabama and make the transfer tenable (ie Alabama has to balance it's budget)? And everyone else is saying "no thanks"? I don't disagree that this is dangerous ground for Germany, but it's not like they're in this alone. It's more like Alabama decides to start running a huge deficit to pay people to live there, and make up the difference with a blank check drawn on New York. And plan to do this indefinitely.

- Nari224

June 28, 2012 at 8:26am

You make a good argument Nari, but to that I'd reply with two comments: Ireland (Oregon) did balance its budget; and Is Germany willing to have representative parity? Two senators from Greece (Alabama), two from Germany (New York).

- ironyroad

June 28, 2012 at 4:18pm

No need to apologise Nari. I enjoy reading your posts. Unfortunately our public sector took an axe to everything on the Island and we're now burning the furniture they missed to keep warm.

- IggyPop

June 28, 2012 at 5:14pm

Not to mention that pile of TNRs in the corner of the living room, Iggy (or did you decide to forego the tree-eradicating version and now are regretting it?).

- ironyroad

June 28, 2012 at 9:47pm

Yea, just on the digital Irony. Was getting them too late over here and had already read most of the articles by the time the mag arrived. Do miss the glossy mag though.

- IggyPop

June 29, 2012 at 6:09am

Damn, sorry I missed the replies yesterday (wouldn't think it would be too difficult for the website to make that a wee bit easier). Irony - Ireland is getting screwed, there's no question about that. And if I could string a coherent argument across a few days, I'd not have conflated the I in with the GS :) However it's somewhat tangential to the issue - Germany got what it wanted in Ireland's case, and it's not in the other cases and that may explains why the Germans are acting the way they are. Major powers have the ability to act in their own perceived self interest, and banking on appeals to the unfairness (or otherwise) of the situation don't have a historically strong record. And it's not like the Spanish or Greeks were, shall we say, completely honest on their application. Also, thanks to Der Spiegel we know that the Italians should never have been allowed to join and were accepted on purely political grounds, largely to show Germany's support for an integrated Europe. I would guess they are regretting that right about now. It is an interesting question whether the Germans would accept representative parity ala the US senate (although I can guess!). However I'm not sure its necessarily the correct comparison - the "purse strings" are controlled by Congress which obviously proportional, and the US houses perform considerably more functions than manage the single currency. And that's where the Euro becomes a more "interesting" experiment in limited federalisation when compared to the say the US, Canada, Australia etc. where it's basically a shared currency without devolving the other powers from the various member states that usually tends to occur with a single currency. (Yes I know this ignores the open borders and numerous other improvements legion nameless EU officials have toiled away at to standardize)

- Nari224

June 29, 2012 at 3:13pm