As a German I must say that in my opinion this article captures the German sentiment very well. On the one hand it is short sided, it will likely lead to more economic problems than necessary and the stance of the Euro members (and Germany especially) on Greece is hurting the economy there much more than necessary.
On the other hand I do feel that some of this sentiment is justified. After all the example of Italy (Bond markets demand high risk premiums, Italy announces much needed reforms, ECB buys Italian bonds, Italy removes reforms) is quite telling. The same (much worse, actually) applies to the financial institutions. What precedent have we set by bailing almost all of the out. Without a lot of reform investors will no doubt assume that financial institutions are state-guaranteed, allowing them to continue the tails I win, heads you (the state, taxpayers) loose game. Clearly more decisive action is required to deal with the current problems but I think we are deluding ourselves if we believe that we can make it out of this debt crisis only by clever policies.
It only makes sense, right? Personally i am quite pleased that the Germans lead this psychological warfare against the faceless 'markets', that are pushing more and more to funnel taxpayer's money in their ill-gone investments. As a greek, i find it ridiculous that the world's markets are turbulent over a tiny small country like Greece (the only PIGS country that is actually bankrupt), and exaggerate the risks so much. I do agree that markets have changed and it's time for a reform [What lessons have we learned from the 2008 crisis: None].
Have you ever thought twice about what exactly "faceless markets" are? Markets are composed of many agents, people, institutions, and mostly your pension money! It's true. Pension funds and other institutional investors are the single-largest segment, esp. of sovereign bond markets! Now ask yourself, with the Greek government in its current position, if it came to you today and asked you to lend it money, not to invest it in some thing or other but merely to pay back previous creditors, would you do it?! Yeah, me neither...
It's a copout by politicians and the bozos they represent to ascribe individual actions such as "pushing" or "punishing" etc. to aggregates like markets. But just as the laws on the molecular level do not simply reflect those on the subnuclear level of matter, the construct of "representative agents" is a fiction. Aggregation in the social sciences is just as hard and unintuitive as in the natural sciences, maybe even harder.
So why do they do it? Because to anthropomorphize "the market" allows them do demonize it, making things simple for the bozos in describing current developments as some kind of "struggle" between supposedly good central banks and politicians and evil, "faceless markets". Unfortunately, this type of rhetoric completely misframes the issues and leads invariably to wrong decisions by building political pressure at the wrong points in the system.
Markets are indeed composed of many agents, people and institutions squandering your pension money, all of whom hide behind the faceless market, arguing that if "the market" is doing it, it has to be right. Which is exactly what got us into this mess in the first place - everyone shirking off responsibility for their actions.
Does that mean that you should be forced to sell things for a price lower than you're willing to accept, or that you should be forced to buy things for a price higher than you're willing to pay?
Ah yes, the poor and irresponsible financiers have to take a haircut. Better that the Greek people should pay the price for a generation for little more than believing the lies their politicians told them to get elected, as they piled on the debt? If there were a way to wring a solution to this crisis out of those most responsible (Greek politicians) I would have us do it, but there isn't. So irresponsible lenders and irresponsible voters, and nations who perhaps irresponsibly guided Greece into the Euro in the first place, will have to share the burden. Sorry this doesn't jive with your Randian neo-libertarian bullshit ideas about how things actually work.
I fail to believe that markets serve the common good when the price of gold (a barely useful metal that on its own can't feed a single child) soares and also that the economic output of europe relies on greece. That's what the market would suggest. I'm not saying kill the markets, i just like rational markets. PSI invested in greek bonds (for 10 years now), for their own reasons, let them take the hit.
> Now ask yourself, with the Greek government in its current position, if it came to you today and asked you to lend it money, not to invest it in some thing or other but merely to pay back previous creditors, would you do it?! Yeah, me neither...
Absolutely not. Nobody rational would. That's the point.
>> [...] this psychological warfare against the faceless 'markets', that are pushing more and more to funnel taxpayer's money in their ill-gone investments.
> Have you ever thought twice about what exactly "faceless markets" are? Markets are composed of many agents, people, institutions, and mostly your pension money! It's true.
Yeah, so? They don't have to step up and ask for a loan. They just sit back in their masses and demand institutionalized theft to bail out their investments.
And why does it suddenly make things right that it's just regular people doing it?
Greece is simply the tip of the iceberg, the bit above the sea which you can see, whatever solution is eventually found for Greece will likely be taken as precedent for the rest of southern europe.
The sentiment is justified, but the position is untenable. With every passing day, Greek debt compounds massively, and the hole gets bigger. Meanwhile, the uncertainty in the markets causes further volatility and pain for all concerned, and you risk the setting in of total panic. You end up with the worst of both worlds: all the market pain of a Greek default, without the default itself...but with the default still quite likely.
The Greek economy is dysfunctional to its core (even a passing skim-through of Michael Lewis's new book will give you a sense for just how dysfunctional it is). But that isn't the root of the problem. The root of the problem is that Greece was brought into the Euro monetary collective in the first place, and given the credit ratings and borrowing rates of a country like Germany. Banks had a large part in helping put lipstick on the Greek pig, covering up its systemic flaws and getting it ready for EU primetime.
So imagine that Greek dysfunction was like a caged and abused pitbull, and Greece's EU inclusion was like walking into that cage waving a bloody hunk of meat in either arm. Who do you blame when you lose a few limbs: the pitbull, or yourself?
There's an interesting extension of this line of thought. My sister-in-law works in Istanbul for a Greek company. She says that most of the actual profit-generating work done for this company is done in Romania or Turkey. The Greek offices, from what she describes, are more or less completely dysfunctional.
Now, take that insight of conditions on the ground along with a chart of the growth of the Greek vs Turkish economies over the last decade, and then ask yourself: why is Greece a full EU member and included in the Eurozone, while Turkey's membership negotiations have completely stalled (and will probably conclude with Turkey not joining the EU)?
Can you imagine a world where Greece is allowed to leave the Euro, massively devalue its debt (and take the decade or more of restructuring/rebuilding its economy that would come with that), and Turkey with its strong manufacturing sector and youthful, growing middle class is brought in in Greece's place? The EU and the Euro would be in a far stronger position...but it will never happen. Unfortunately, European cultural prejudices are still to ever-present and will result in Greece continuing to be dragged along while Turkey gets shunned.
Human rights are a factor, plus there's the fact that Turkey is a Muslim country, though many in the EU won't admit that. But even that could probably be overlooked if not for the fact that Turkey is a huge country. With a population of 73 million people (and a growing population, whereas many European states are stagnant in this regard), Turkey would immediately become the second-largest EU state, which means more members of the EU parliament than France or the UK and more voting power in those institutions where countries vote by weighted population.
If Turkey were a Muslim country with a European toehold and a history of dodgy human rights abuses but a general trendline towards democracy and it had a population of about 10 million, the EU would be falling all over itself to admit it and show how enlightened it was.
Some Turks joke that the Turkish army has the largest gay porn collection in the world.
According to a Turkish friend of mine, yours is not an accurate characterization of Turkey. There are still huge problems with democracy, power of the army, corruption, media controlled by people in power, torture, Cyprus, and more. According to him many of these things are worsening -- he is afraid that Turkey is going to go further in the direction of Syria instead of the EU. Telling is the 6 month compulsory military service for all men, except gay men, who are barred from military service and are considered to have a disease in need of treatment by the minister of family affairs. Those who follow the rules (and choose safety over the risk of rape and violence) and disclose that they're gay are asked to supply photographic evidence of enjoyment of being penetrated as proof (being exclusively the active sexual partner is not considered gay). The less lucky have to undergo a rectal medical exam. Additionally on the point of censorship: gay organisations' web sites are being blocked by the government.
Despite improvements in the economy Turkey is not yet fit for joining the EU. Sadly "stuff like the acceptance of evolution" (see below) is one of the least of the concerns.
I am not at all trying to minimize Turkey's real problems. But many of the Eastern European EU states also have some of the same or similar problems (particularly Romania and Bulgaria). In their cases much of the reason given for admitting them to the EU was that membership would bring them closer to European norms. (Indeed, this is an incentive held out by those in Europe who favor Turkish EU membership.)
My point is that all these problems would be easier to ignore or fix if Turkey had 10 million people. At 70 million, they'd have such a strong voice in EU institutions that they'd be as likely to change the EU as vice versa.
I agree the population size is a huge part of the problem, though I think it has more to do with immigration worries than voting-in-EU-institutions worries. There was already a bunch of nationalist ire over the proverbial "Polish plumbers" flooding western Europe and undercutting local labor, once they were fully admitted to the EU with free movement of labor. The prospect of 70 million Turks having the right to move to any city in Europe is much more unpopular than that (and good fodder for anti-immigrant populist parties), because there's more of them, they're poorer, and they're perceived as more foreign. If it were 10 million Turks, there might be more of a chance of getting people to agree.
yep, what GP called "European cultural prejudices" is just a thousand year of direct experience and knowledge that the gradient of how wild and barbaric things become grows when one moves from inside the Europe through East/South Europe toward Russia/Turkey (i need to hand it to Turkey though - "photographic evidence of enjoyment of being penetrated as proof (being exclusively the active sexual partner is not considered gay)" beats a lot of what i could say about my old country :)
IMHO the answer is to show Turkey what they're missing. Open our borders (Canadian specifically, but all ideally) to their mistreated (and those from everywhere else) and let them live happy productive lives.
Accelerate the brain-drain until nothing but the dictator is left, then go back and take over.
The cynic in me sometimes wonders if this argument is used as a red herring, and that there are other issues that need sorting out (involving money and control).
Of course there are control issues as well, turkey has 73 million population and so would instantly be the 2nd largest voting bloc, very likely to become the biggest due to demographics in the future.
It would make sense to have a much stricter standard for accepting large than tiny countries as new members.
Turkey has grown strongly lately, but GDP/Capita is still 1/3 of Greece and 1/5 of Germany. I wish them all the best, but they are still a quite poor country. (and if you look at stuff like the acceptance of evolution (extremely low), an argument could be made that they are quite backwards too)
It was mentioned today that the Greek government employs TWENTY PERCENT of the population - and there was a 100-year old constitutional law that prevented the effective firing of anyone working in the government.
This is institutionalized graft and is surely a main contributing factor in the corruption.
Meh. Our governments (USA, Canada, EU) waste more, they just give it to lobbyists. At least this is a bottom-up instead of our top-down theft.
Given that the lower income you have the more of your income you spend, giving stimulus packages exclusively to the poorest members of society and letting it trickle up seems the only reasonable way to do it.
I see only one way out : find responsibles and punish them. Through fines and prison terms. Some people have hidden the true state of Greece by fraudulent accounting with the help of experts from Goldman Sachs.
Politician who participated in that should be judged for treason. Financial experts for fraud. Goldman Sachs must be fined heavily for this.
Right now, Dexia is falling despite 6 billions of aid in 2008 and a successful "stress test". Obviously some fraud happened there too. There are many places where inquiries should be made.
Heads must roll, then austerity will become a possibility. Many people see this as just an economical problem but it is a very political one. There is a crisis of legitimacy amongst the people who are organizing the austerity : in most place it is the same people who caused the crisis.
I'm not sure the falsification of records is really at the root of this, in the sense that it was a deception that did not really deceive anyone. There was a bit of consensual hallucination going on: nobody really believed Greece's numbers, but it was convenient for everyone to pretend to believe them. Lenders who bought Greek bonds should certainly have conducted their own analyses and had a decent idea that the headline figures were not accurate (I would guess they did, actually, but assumed that Greece wouldn't be allowed to default, so bought the bonds anyway).
Yes, everyone knew the Greeks were cooking the books. Hell, even the press knew - it was in the papers. But the expectation was that once they joined the Euro they would act more like Germans.
That seems to have been a bit of a miscalculation.
I do think there have been significant improvements in Greek public administration since joining the Euro, but miracles would've been needed to get the turnaround that would've been necessary in such a short time. If Greece had had 20 years to gradually get its economy in line with western Europe, I think it was on pace to do so, or at least come close, but the 7 years between it joining the Euro in 2001 and the financial crisis of 2008 weren't really enough, especially since some of the positive structural changes it had made (like the beginnings of pension reform) don't really pay dividends until some time into the future. Joining the Euro did help somewhat in improvements also, because Greek politicians were able to use the "it's not us, Brussels is making us" excuse to push through some of the less popular measures.
The changes, at least from the perspective of some of my Greek relatives, were pretty encouraging up 'til 2008. The notoriously inefficient public administration was still not good, but seemed to be getting better; some things that used to require you running across town to get physical stamps from 10 different offices were being consolidated in common service centers, the number of separate approvals needed for any given document was being reduced, etc. Outright corruption was greatly reduced from the pre-Euro government, and book-cooking seems to have been reduced as well (the vast majority of the dodgy statistics are pre-2001 data). The telecom sector got much better than the old OTE-or-nothing monopoly, leading to many Greeks finally having home internet. The Athens metro finally finished construction (partly spurred by the Olympics). The national sport of tax evasion was slowly being tackled, starting with "soft" shaming measures like publishing maps showing purported average incomes of various wealthy suburbs of Athens, if you took their official tax returns as accurate (all the wealthy suburbs somehow look like low-income ghettoes!), and moving to more hardball measures like doing inventories of yachts in yacht harbors and inquiring with owners who appear not to have ever reported sufficient income to explain owning one. Pensions went through at least the first round of rationalization to remove the most egregious loopholes that allowed some people to retire exceptionally early. Etc.
But basically the scope of changes needed was quite large, and the amount of cushion Greece had, with an already very-large debt, was quite small. Probably someone should've noticed the looming problem earlier and worked out a sensible restructuring and feasible N-year plan before it became a crisis.
You're being far too generous. It's not just that the public administration was bad before the Euro - it got worse after 2001 when politicians used borrowed money to buy votes. Pay for Greek civil servants has doubled since 2001 in real terms.
The really sad part of all this is it represents a horribly squandered opportunity. If expenditures had been kept steady and the government just rolled over existing debt in 2001 into bonds with the new far lower interest rates it would have been a win for everyone.
The german government seems really wise in this regard. The notion that there are any easy "fixes" to something as complex and intricate as an economy is very suspect to me. Things like quantitative easing seem way more dangerous than simply making sure your financial fundamentals are sound.
While morally entirely correct (IMHO, I'm Dutch, we also use the same word for guilt as we do for debt) I doubt the Germans can hold on to this position for very long. Apparently the German "Landesbanken" are heavily invested in Greek and other crappy debt, which is a problem because these banks also fund a large part of the "real" German economy. So Germany probably has no choice but to prop up the lousy debt.
That's the main quandary that the politicians/economists appreciate but the general public doesn't, I think: either way Germany is stuck bailing out this debt, because in large part it's not really bailing out Greece, but bailing out German banks. The main choice is whether to pay the banks directly (let Greece default on the bonds, then cover the losses to keep banks solvent), or to pay them indirectly (send Greece enough money for it to keep servicing the bonds).
I've said this over and over again to Germans that I know and they simply don't believe what you say. They really think that they are bailing out profligate Greeks and that there is no benefit to them. Politically, it isn't feasible for Merkel to come out and say that German banks need to be bailed out. It's much easier to talk about European unity and solidarity as the reason for "bailing" out Greece.
Germans pride themselves on their fiscal restraint. They save and abhor debt in their personal lives. I think it would shock them to know that their banks are close to insolvency because they took German savings and lent the money to Greeks and Portuguese. If the German government were honest about the poor state of their banks then the government would not survive.
I agree. The simplest way to make this clear is to simply let the Greek banks default (and any other banks for that matter). This will expose the German banks and the German Government will be forced to bail them out. This bailout will be a much easier sell than the current one as it will be clear to the German taxpayer that they are bailing out their own banks who made bad bets out of greed, lack of diligence and just plain ineptitude(just like all the other bankers around the world).
There is this constant argument about "confidence" going around. We must maintain investor confidence etc. There is a limit to that and its much shorter than its usually stretched to. I've seen the same thing in software where management will cover up a systems flaws and press on with new features. In the end it all falls apart and a post mortem always reveals that they should have faced up to the problems sooner. So fk confidence, the whole thing is going to fall apart anyway and the longer we leave it the harder it will be to fix. Let the Greeks default and let the bankers take the hit, replace them with some talented young people (there are plenty) and lets get fixing things now that they are no longer covered up.
German banks are - by a large margin - not the most exposed to Greece. French banks for example are much more exposed to Greek dept. If Greece fails, this will hit German banks, but other banks much more, it might be especially hard for countries with a smaller GDP and a higher bailout/GDP ratio.
As a German taxpayer I don't care whom I bail out.
Funny thing: People talk about Germany, instead of Greece. Sure, bailing out German banks will cost some money, a state breakdown in Greece will cost Greek people much more.
Bailing out the Greeks made some sense when it was seen to be cheaper than bailing out German banks. But as the situation stands it looks like bailing out Greece is throwing good money after bad, and the German banks will have to be bailed out anyway. So from the German perspective the right thing to do would be to let the Greeks go bankrupt.
The total exposure of French banks to Greek debt is larger than the total exposure of German banks to Greek debt, true, but the problem for Germany as a whole is that a specific group of German banks, namely the Landesbanken that fund a large part of German industry, have comparatively large proportions of their holdings in Greek debt.
So the Germans don't have to worry about bailing out Commerzbank or Deutsche bank the way the French are worried about BNP or Credit Agricole, but they do have to worry about what happens if the Bayerische Landesbank can no longer fund Bavarian factories.
One thing I'm somewhat confused about is why a bailout is better than default. In both cases the banks cannot pay back loans so their credit is worthless right? In a bailout the government becomes the bank (through a proxy) but its still the governments credit, not the banks'. So keeping the banks alive, instead of allowing them to default would keep jobs, but wouldn't it be keeping the jobs of people who, for lack of a better term, didn't actually do their job?
That happens pretty commonly even in a traditional view of debt, though the dividing line for whether the lender or lendee is more to blame varies. At one extreme, if you lend money to an alcoholic who's well known for not paying back his loans, and he spends it on alcohol and doesn't pay you back, not too many people will be sympathetic to you for making an obviously-stupid loan. In fact they might blame you for enabling bad behavior in an entirely predictable way. And if you lend so much money that his failure to repay puts you in risk of going bankrupt yourself, then people will really think you're irresponsible...
This is a fundamental tenet of what lending is all about. It's why a bank won't just give money to anyone for any reason at all. It's something everyone has considered in their personal life on a micro level, at some point. Yet in certain contexts the very idea of a difference between responsible and irresponsible lending, and accountability for same, goes right out the window. Conveniently when it does it always seems to be in support of funneling huge amounts of taxpayer money to large banks, or foisting indentured servitude on the bankrupt.
> investors will no doubt assume that financial institutions are state-guaranteed
They are state-guaranteed. Too big to fail. Every piece of financial machinery for the debt circus is required and they can't get rid of it or let it fail without exposing the same functionality elsewhere.
As long as we use a debt-based state currency the banks can't be allowed to fail. At some point they'll just print new money and start fresh hoping it doesn't happen again.
Until we declare the debt-currency game to be unwinnable and stop playing, we'll keep losing.
As the article makes a point of mentioning Angela Merkel...
> All this is true. Yet Mrs Merkel seems to lack a sense of urgency. Despite the world’s calls for action, she does not believe in bold strokes—be it letting Greece default, or issuing Eurobonds to mutualise governments’ debt. Only a slow, step-by-step approach will work. In other words, the pain, austerity and market turmoil will go on for the foreseeable future.
...it's worth pointing out, by comparison to other world leaders, Angela Merkel has a PhD in Physics (Quantum Chemistry in fact). In other words she's more than capable to grasping the complexities of financial markets.
Much as it annoys Anglo-Saxons, Mrs Merkel might be right.
I have no doubt she is intelligent, experienced, and has good intentions. But to make the simple connection from physics background, decades away, to today's financial markets and economies strikes me as rather bold.
You need to have thought about things, and you can't (unfortunately) just read a couple of books or articles to "learn" this subject. You are aware how the economics profession as a whole performed over the last few decades?
EDIT: Just recently, I was complaining to a friend that I am thinking about markets and economics now for almost ten years, one way or another, and I am still just speechless sometimes, asking myself wtf is going on or what does this mean etc. I feel there are many things that I still don't seem to get on a deeper, fundamental level. And I like to think I'm not so stupid either. So, I can fully imagine how tough it must be to get into a situation where you actually need to make a call with real consequences for millions of people, for many years to come, on the basis of very, very limited information. Frankly, I feel a sense of history might be of more help to someone in this position than a physics background.
Economics and Quantum Chemistry accually have a lot in common. They are both looking for mathematical shortcuts / models for highly complex systems and use similar tools. So sure reading a few book is not going to give you an in depth understanding of economics, but being able to look at the math and call Bull !@#$ is invaluable.
EX: It is generally accepted that money is created when a bank creates a loan, however, you can make also make a similar argument that it's only when banks fail that new money is created. Both are in some ways true, but the second is actually a more useful when looking at what happens when the economy takes a real dip, because the banks created IOU's not money, but the FED get's to create money to replace those IOU's.
That's not to say Economics is easy, lacks depth, or had no concrete progress. However, there is a wide range of models out there and evaluating there relative merits in the short and long term during such complex times takes deep analytic insight.
There are other alternatives as well, like the one MMT'ers do where money is created when a government spend (and destroyed by taxes). This while bank lending is a zero sum game since it creates a corresponding net negative on the other side of the transaction.
Agreed. But to me she doesn't need to be a subject expect on financial markets. My point was her education has trained to be able to understand models of complex environments. I'd argue that gives her better chance of actually understanding what her financial experts are telling her.
I don't know if this was the above posters intent, but from what I gather lots of qaunts and other statistically minded finance workers have a background in physics because the math education they've received is highly applicable.
it's worth pointing out, by comparison to other world leaders, Angela Merkel has a PhD in Physics (Quantum Chemistry in fact). In other words she's more than capable to grasping the complexities of financial markets.
I also have a PhD in quantum chemistry, and I don't think this in itself qualifies me to understand economics any better than anyone else.
Actually there was an interesting article on the subject of why smart people so often make really bad politicians.
The tldr: "So why do intelligent people consistently make such a hash of things? Because they are smart enough to talk themselves into anything. Ordinary mortals don’t engage in fancy mental gymnastics to reach conclusions that defy common sense. But intellectuals are particularly prone to this."
Because they are smart enough to talk themselves into anything. Ordinary mortals don’t engage in fancy mental gymnastics to reach conclusions that defy common sense. But intellectuals are particularly prone to this.
Huh? Citation needed. For both of those claims. Actually, three claims: 1) Intelligent people talk themselves into anything. 2) That is why they make a hash of things. 3) Ordinary people do not engage in mental gymnastics to reach conclusions that defy common sense. Also, which is it, intellectuals or intelligent people?
Nobody grasps the complexities of financial markets. Everyone is just along for the ride. If anyone grasped the complexities, they would either be able to solve the current mess or be able to tell it is unsolvable. Instead, everyone is handwaving, guessing and trying whatever ridiculous thing they can to keep the system from collapsing.
There are a few that have found how to profit from what's going on: not because they understand how the system in general works, but because they understand some minor parts a bit better than others.
Others will jump in to say that markets are not predictable like chemical bonds, but i would counter-argue that they should be more predictable and less fear-and-rumour-driven
A great quote from Galbraith is appropriate here. "The markets can stay irrational a lot longer than you can stay solvent."
I don't know exactly what you mean by should but whether or not fear and rumor should drive markets the fact remains that they do sometimes drive markets.
> and jealous institutions such as the constitutional court.
The Bundesverfassungsgericht (federal constitutional court) is the only organ that reliably keeps doing its job, ensuring that the newly passed laws are in fact constitutional -- a test that was failed so many times in the recent past. Calling that jealous behavior is a very strange position to take.
This article spotlights two of the root causes of the crises in Europe - namely, (i) broken governments that spend beyond their means and the (ii) moral hazard that exacerbates such overspending.
Greece Example:
Greece spent too much money raised through issuing debt (which increasingly looks like an imminent default) and creditors continued to lend Greece money under the belief that Greece wouldn't be allowed to default by the rest of the Euro countries.
There's no painless way to fix this mess, but I don't think giving Greece a massive one-time bailout sends the right message to the rest of the Euro countries (and countries' creditors) regarding moral hazard. The citizens of bailing-out countries (e.g. Germany) will be incredibly angry, rightfully so, and who knows how that will play out. On the other hand, small delaying actions like the ones that have been taken since the Euro crises began only worsen the situation and undermine global confidence in European leadership.
Personally, I think the creation of a common currency (Euro), without a corresponding enforceable common fiscal policy, is the root cause of the global impact of this crises. One member of the common currency can bring down many of the rest of the members by contagion so essentially, the coalition is only as strong as its weakest link. The weakest link can be strengthened by enforcement of a common fiscal policy, but there was clearly no such common fiscal policy being effectively enforced in Greece.
Another problem with the common currency is that Greece cannot devalue its currency to (i) make its exports more competitive (thereby improving its economy) and (ii) lessen its debt load through inflation. Before the Euro, the Greek Drachma could have been devalued in order to accomplish (i) and (ii). Now, Greece has no way out other than default or waiting for a bailout which may or may not come.
No easy answers here, but my guess is that Europe will continue to incrementally increase its "help" to Greece and other struggling countries until a major comprehensive bailout is required. Similar to as in the US with its banks a couple of years ago, such comprehensive bailout will occur, global taxpayers will lose, and the cycle will continue until we see an even bigger problem next time. Happy thoughts to start off my morning...
Most smaller countries with their own currency can not do (ii), because they can only get dollar or euro denominated debt from international markets/institutions.
Depends on whether they are running a current account deficit too, in which case there will be net borrowing from abroad. Many countries borrow quite substantially abroad.
> Think of nuclear fission: it generates useful energy but if it runs out of control you get a cataclysmic explosion. After Fukushima, Germany announced that it would phase out nuclear power. And yet, when it comes to the sovereign-debt crisis, Germany is prepared to live with the risk of economic meltdown.
This bullshit analogy nearly made me stop reading the article.
It is simply not clear that the economic meltdown will be prevented by throwing more money at the problem. It will make some people rich, but the root causes are not addressed.
"The vast majority of financial transactions, he told fellow finance ministers in a closed meeting earlier this month, “do not serve the real economy”. When markets go astray the answer is not to make the taxpayer step in once more, but to introduce better regulation."
> When markets go astray the answer is not to make the taxpayer step in once more, but to introduce better regulation."
And this better regulation is going to come from the folks who wrote Dodd-Frank, who think that the CRA is a good idea, who keep defending Fannie Mae and Freddie Mac.....
With this caveat that financial markets fund a lot of the real economy as well. So you really don't want banks going bust left and right, as morally righteuous as that would be.
When banks start failing left and right, people start getting scared, taking their money out of banks, causing banks to become insolvent, causing more banks to fail, etc. When a bank fails, you lose money (absent depositor's insurance), potentially lots of it. This is not a good thing. It caused a lot of pain in 1929/1930s in the U.S., and led to the creation of the FDIC. Even 80 years later, we sort of have a cultural memory of bank failures as being a large part of causing the Great Depression in the U.S.
The FDIC is backed by the full faith and credit of the United States and just like no politician will vote to reinstitute the draft, no politician will do anything but prioritize those payments very, very high.
One of the many reasons we got that far the global crisis is probably the reactive attitude "jump when the markets tell you so". As a German I find it comforting that our chancellor is not of that kind. One can criticize many points, but one has to agree that she does not fear head wind. Would be nice to have more politicians of her kind in Germany.
"German politicians are constrained by a complex federal system, a sceptical public, messy coalition politics and jealous institutions such as the constitutional court."
You mean German politicians are constrained by Democracy. This article portays it as if it was a bad thing.
Democracy I think is the least evil of the types of government that a society can have, but is still inherently terribly flawed (but less than other types of government) because of basic human failings (e.g. moral corruption, greed, "sheeple" mentality).
Perhaps only a benevolent dictator could actually make decisions in an unbiased "best for everyone" manner...but then again how long would any dictator remain benevolent once he/she's had a taste of absolute power?
I have no idea why Keynesian ideas are assumed as the proper way to solve economic problems when, in fact, they never work. Germany is unusual, especially in comparison to the United States, in that they make a point of only spending the money they have. They have been watching the "wonderful" results of Keynesian intervention in the US recently and around the world and likely noticed that the results are always greater economic disasters. What sense is there in pouring gasoline on a fire?
...they make a point of only spending the money they have.
Germany has the third-highest public debt in the world with only the fifteenth-highest population. Their debt is much higher as a percentage of GDP than the U.S. (83% vs. 62% according to the CIA world Factbook. [1]) They've spent plenty of money they don't have.
But Germany was/is in a very different situation. We are absorbing since twenty years a formerly communist econom - the GDR. Germany had little choice than invest a lot of money to do so. If you look at current policies, they are much about getting the debt problem under control.
Germany uses Keynesian ideas as well for example it launched a Konjukturpaket[1] in 2009. Germany was just not hit as hard and recovered faster, there is nothing particularly unusual about that.
The US has been doing extremely half-assed Keynes. It's not working because the bills haven't been large enough to have a measurable effect. Fundamentally I think the problem is the US has been too risk-averse. We've been hamstrung by our inability to accept that we have to take big risks to solve big problems, instead we're neutering any sort of solution to the point here it doesn't present a risk, and consequently can't present a true solution.
I think there's a similar issue with this economist article. The assumption that there is a "correct choice" I think is wrong. There are a variety of bad choices, and it's probable that extremely risky choices are the only ones that have a chance of solving the crisis.
You're making economics sound like a religion rather than a science, there. If Keynesian economics hasn't worked in the US, then there's two possibilities:
It's also worth separating the descriptive and prescriptive aspects of Keynesian economic theory. On the descriptive aspects, it seems to be doing fairly well so far. In particular, Keynesian models predicted that we wouldn't suffer significant inflation from the stimulus program + QE/QE2, due to a liquidity trap, whereas some monetarist models predicted that high inflation would result (and the Austrians were even predicting hyperinflation). Since high inflation hasn't materialized, that seems like at least some evidence in favor of the Keynesian macroeconomic models.
For actual Economic theories with a causal basis, the Austrian School wins with Von Mises the clear leader. Keynes simply can't work and never will - more Keynes means an even worse economic disaster.
So, if the US has a net positive year where tax revenue exceeds costs, all the trillions of dollars in debt we are in will suddenly become investments? Fantastic!
The real problem is the uncertainty of the solution. It is not clear whether strong action will have the slightest effect so Germany, given it's calamitous history with financial crises, is probably holding back just in case.
The picture of a group of penguins standing on the ice at the edge of the water waiting to see who jumps first (or gets pushed) seems to sum up the situation nicely.
The EU has and always will be a forced construct that Germany will essentially have to shoulder. Other countries were going to tolerate Germany's reunion only when they support the EU.
Now that they realize how the construct attempts to level the standards of live across the union, Germany realizes in what kind of downward spiral they tapped.
Going to be even more "fun" to watch, when certain rules such as "penalty" for countries that export more than they import are enforced. Germany makes an excellent Hamster-in-the-wheel.
Also interesting that the Economist continues to come up with the same kind of story every week. Just check the last Economist links that were posted on HN over tha last weeks and you will see that they all have the same message. To be honest, I would expect them to be more diverse.
While I generally abhor taxes, I really like the idea of a financial transaction tax. It would effectively eliminate the profit margin for high frequency trading and remove a LOT of volatility from the markets. IMHO the market volatility is causing the average person to doubt the stability of the economy and hurting the entire ecosystem.
Even a small transaction tax... Say, $1/EUR per trade would remove the incentive for High frequency trading and encourage some more productive market dynamics. I mean, really, who wants to IPO in a market like this? And that removes a pretty significant source of funding for new businesses...
By drastically reducing volume it would also reduce liquidity and increase spreads. Sweden tested this in the eighties and abandoned after seeing the market substantially dry up (and the resulting taxes as well).
I can see that happening with a large tax, but surely it's not a step function, where no transaction taxes results in huge liquidity, while any non-zero tax causes a catastrophic drying up of liquidity. How about, say, a penny-per-trade fee? That would discourage trading at the sub-penny level of liquidity, which is not particularly useful anyway, while still making it profitable to provide liquidity if arbitrage opportunities of >$0.01 were involved.
It would certainly reduce liquidity and increase spreads, but I think that's the point. Stocks are not supposed to be a terribly liquid instrument, yet volume continues to outpace growth in the market. It's true that trading in Sweden basically moved to London when they tried this, which is part of why now you're seeing a push against this unless the entire EU hops on board, or even the entire world (however it will not happen in New York in a million years).
There are lessons to be learned from Sweden's experience, but I'm not sure you can necessarily point to as a definitive case study and say "See? It won't work."
Even the title of this article doesn't make a large amount of sense. Of course the Germans want to take part in "fixing" the Euro crisis. But this is the problem with people in the finance world today. All they want is a "quick" fix. "Patch" the hole and the boat will stop leaking. I completely agree, something must be done to avert a double dip however a "quick fix" will not get us there. Most importantly, people need to increase their savings, lower spending.
If people save more and spend less, the prices go down, the companies make less money and unemployment figures go up. I don't quite see how this would solve the problem.
Precisely. That is why Germany does not have a great domestic economy, all of their wealth is generated from exports, i.e. first we lend you the money, then you buy our expensive cars with the money, then we ask for the money back ;-)
Eh, who exactly is getting bailed out? I think you mean loans, which are expected to be paid back in full (and up until very recently, interest was also paid on these "bail outs" making it a profitable venture for the country doing the lending).
On the other hand I do feel that some of this sentiment is justified. After all the example of Italy (Bond markets demand high risk premiums, Italy announces much needed reforms, ECB buys Italian bonds, Italy removes reforms) is quite telling. The same (much worse, actually) applies to the financial institutions. What precedent have we set by bailing almost all of the out. Without a lot of reform investors will no doubt assume that financial institutions are state-guaranteed, allowing them to continue the tails I win, heads you (the state, taxpayers) loose game. Clearly more decisive action is required to deal with the current problems but I think we are deluding ourselves if we believe that we can make it out of this debt crisis only by clever policies.