There was some positive sounding signals coming from Merkel’s government recently: Berlin was open to more “pro-growth” policies for the eurozone, yielding to the growing calls for a duel policy of “structural reform” (i.e. austerity madness) and some form of stimulus. Unfortunately, that seems to come with the constraint of no additional spending. Hmmmmmmmm:
German opposition leader says Merkel embraces idea of EU growth pact alongside fiscal treaty
By Associated Press, Published: May 24
BERLIN – Germany’s opposition leader said Thursday that Chancellor Angela Merkel has accepted the need to add a separate set of measures promoting growth to the European Union’s treaty enshrining fiscal discipline.
Sigmar Gabriel told reporters after a two-hour closed-door meeting between Merkel and top lawmakers that the government has “significantly moved toward accepting a pact for growth and investment.”
Hollande’s election this month shifted the political tide in Europe away from talk about austerity measures toward ways of fostering growth as Europe is on the brink of a recession, with southern European nations such as Greece, Portugal or Spain particularly hard hit.
Merkel recently also started talking about spurring growth, although she strictly opposes the idea of fostering growth through more spending, saying it would only make Europe’s debt woes worse. Instead, she maintains that growth can be fostered through a more effective use of existing EU funds and implementation of structural reforms.
Previously, the conservative chancellor also refused to link the ratification of the fiscal pact to growth-promoting measures.
“The government has realized today that it can only win France’s approval and a two-thirds majority in Parliament through changing its position,” said parliamentary caucus leader Juergen Trittin of the opposition Greens.
However, it remained unclear Thursday what exactly a growth pact would entail, and whether Merkel has accepted that more spending might be necessary.
So did Merkel “accept that more spending might be necessary”? Ummmmmmmmmmmm…no. At least, not if Berlin is co-signing and it lacks a ‘relinquishment of national sovereingty’ clause:
As Euro Bond Wins Supporters, Details Remain Vague
By JACK EWING and PAUL GEITNER
Published: May 27, 2012
FRANKFURT – To euro zone countries in need, euro bonds would be a noble expression of European solidarity and a crucial instrument for preserving the common currency.
To Germans and quite a few others, though, euro bonds would be a lot like co-signing a loan for a deadbeat brother-in-law.
Those caricatures have dominated a debate that has left Europeans deeply divided on a central question: Should euro zone countries create common bonds to reduce borrowing costs for members that cannot get affordable credit on their own?
But despite the intensity of the debate, even as political upheaval in Greece and bad bank loans in Spain mushroom into existential threats to the currency union, the euro bond remains only the vaguest of concepts.
About the only thing clear is that Germany and some other creditworthy northern countries oppose adopting such bonds anytime soon. Meanwhile, François Hollande, the new French president, seems keen on speeding things up – even if he has not quite articulated how his idea would work.
“You don’t know what François Hollande is talking about when he talks about euro bonds,” said Jacques Delpla, a member of the French Council of Economic Analysis, a panel that advises the government. “An open bar with German money for Greece and Spain? That doesn’t work.”
At their meeting in Brussels last week, European Union leaders agreed only that euro bonds deserved further study.
Mr. Delpla is the co-author, along with a German economist, Jakob von Weizsäcker, of one of the few detailed proposals so far. They outlined how euro bonds might be used to ease financial pressure on countries like Greece, Spain or Italy while addressing German concerns by encouraging more prudent government spending.
The basic idea of euro bonds does enjoy wide support among economists. Proponents also include Christine Lagarde, managing director of the International Monetary Fund. And last week the Organization for Economic Cooperation and Development in Paris called for some variation of euro bonds.
The various models share a basic idea: In addition to each country’s raising money by issuing its own bonds, as is now the practice, they would put at least some of the debt into a common pool. These pooled bonds would be issued by some kind of joint European debt agency, with all members assuming shared responsibility for repayment.
The problem is that talk of euro bonds inevitably raises fundamental questions about the nature of the European Union. Such bonds would require European countries to watch one another’s spending much more closely, and each country would have to cede some control over its own budget.
For euro bonds to work the way U.S. Treasury securities do, investors would need assurances that they are backed by a central treasury, or at least an agency with direct access to tax revenue from each member state.
“This needs a very strong institutional setup,” said Guntram B. Wolff, deputy director at Bruegel, a research organization in Brussels. “If you are going to sell them to a Singaporean investor, the Singaporean investor needs to know who is going to pay that bond.”
Once European governments began financing one another on a large scale, they would certainly also want more say over one another’s budgets and big-ticket items like military spending or pension systems. For those who advocate a more powerful “United States of Europe,” these changes would be good. But they would represent a huge transformation of the decentralized Europe that exists today.
“Immediately behind the euro bond proposal lurks political union,” said Uri Dadush, a director at the International Economics Program at the Carnegie Endowment for International Peace in Washington.
“The moment you start saying, ‘Give me half your tax receipts,’ we are talking serious stuff,” Mr. Dadush said. “We are talking about giving up major sovereignty.”
The European Central Bank probably has the credibility to play the role of a euro bond debt-issuing agency. But the bank would almost certainly refuse to do so, seeing it as a threat to its political independence – and a violation of the prohibition on using the bank to finance governments.
But even if the E.C.B. did not issue the debt itself, euro bonds would need at least the central bank’s tacit support, Mr. Dadush said.
A big reason U.S. Treasury securities have retained credibility with investors, for example, is that despite official denials of complicity, there is an assumption that the Federal Reserve would not let the U.S. government go bankrupt. The E.C.B. would probably be much less likely to accede to such an implicit guarantee.
The German chancellor, Angela Merkel, made an argument similar to Mr. Dadush’s at last week’s meeting in Brussels, saying Europe must become more economically and politically integrated before it could issue common debt. But the federal Europe she seems to have in mind could take years to build, by which time the euro could lay in ruins.
Germany also fears that lower interest rates would simply reinforce irresponsible spending habits by countries like Italy. To German eyes, Italy, Greece and others did not take advantage of the low interest rates available in past years to make their economies function better.
In a short statement to the news media after the Brussels meeting, Ms. Merkel said “several participants noted that the common interest rates with the introduction of the euro really didn’t lead to improvements in the economic competitiveness of all the euro countries.”
One European diplomat, speaking on condition of anonymity, said even a step toward euro bonds could reassure investors who have been watching Greece teeter and fear a bank run in Spain – and wondering what happens next. “The fundamental issue,” he said, “is who or what stands behind the euro.”
Ok, so Merkel seems to acknowledge that the growing call for eurobonds is fueled by a desire to quell the self-reinforcing crisis dynamic where concerns over a country’s credit leads to a spike in borrowing costs and an even greater crisis. That self-reinforcing death spiral is happening right now and Merkel appears to agree that eurobonds would be an effective solution for preventing this. And that’s why she opposes it. The debt crises are apparently an unpleasant necessity needed to “avoid reinforcing irresponsible behavior”. And this eurobond opposition in Berlin exists even when the “pro-growth” sides are apparently open to the idea of a “United States of Europe” model where budget-making authority is handed over in exchange for pooled eurobonds. That’s pretty much a sovereingty fire-sale and it’s still not acceptable.
Now why on earth would Berlin be unwilling to accept having their neighbors basically hand themselves over for cash? That’s pretty much the dream, right? Wrong. Get ready for mini euro-Chinas:
Six-Point Growth Plan Merkel Prepares to Strike Back Against Hollande
BY FIONA EHLERS, JULIA AMALIA HEYER, CHRISTOPH PAULY, CHRISTIAN REIERMANN, MATHIEU VON ROHR, MICHAEL SAUGA, CHRISTOPH SCHULT, HELENE ZUBER
Translated from the German by Christopher Sultan
The more European leaders talked at a dinner last Wednesday, the grimmer Angela Merkel looked. One after another, they spoke out in favor of the joint assumption of debt and against the strict austerity course Berlin is calling for. The chancellor stared silently at the man who was responsible for this change of mood — France’s new president, François Hollande, who noted with satisfaction that there was “an outlook for euro bonds in Europe.”
Merkel disagreed, saying that euro bonds are not the right tool, but to no avail. Only a minority stood behind the German leader. Even European Council President Herman Van Rompuy said, at the end of the dinner, that there should be “no taboos,” and that he would examine the idea of euro bonds. “Herman,” Merkel blurted out, “you should at least say that some at this table are of a different opinion.”
Merkel’s world had been turned upside down. For the first time in years, the chancellor did not set the tone at an EU summit, nor did she and the French president agree on joint positions in a backroom before the meeting.
A Judo Attack
But Merkel is an experienced opponent. She knows that she is now on the defensive in Europe, and she is planning her counter-attack. She believes that euro bonds would enable the crisis-ridden countries to lower their borrowing costs, and that the necessary structural reforms would be postponed. This is why she now wants to counter Hollande’s proposals with a principle familiar to judo fighters: using your opponent’s momentum for your own attack.
When it comes to energy projects, the European Commission places special emphasis on projects such as connecting the wind farms in the North Sea and the cross-border power and gas lines among the Baltic countries, between Northern and Southern Europe and to North Africa. It also wants to promote international natural gas pipelines like Nabucco and expanding efficient internet connections. While Germany and France agree on the importance of these projects, their differences lie elsewhere. To stimulate growth throughout Europe, Merkel’s advisors don’t just want to implement measures that cost money. The Germans are convinced that growth can also be generated less expensively, using structural reforms that require nothing more than living with hardships.
According to an internal document making the rounds at the Chancellery, German government experts have developed a six-point plan that is reminiscent of former Chancellor Gerhard Schröder’s Agenda 2010 economic reforms, and seeks to harmonize austerity and growth in Europe once again. The document defines the position with which Merkel intends to enter into negotiations with Hollande and the other EU partners.
In the plan, the Germans focus primarily on measures that have been successful in Germany in the past, and that placed the country in the role of Europe’s engine for growth. Accordingly, Merkel wants to launch Europe-wide programs to promote start-ups and small and mid-sized business, like the programs offered by the KfW development bank in Germany. Under the German programs, government agencies have to approve investments within a fixed time period, and the applications are considered automatically approved if they are not denied within that time period.
Merkel also wants EU countries with high unemployment to use Germany as a model in reforming their labor markets. This would mean relaxing protections against wrongful dismissal and introducing more limited employment circumstances, called “mini-jobs” in Germany, with lower tax and contribution burdens. And like Germany, these countries would also be expected to develop a dual education system, which combines a standardized practical education at a vocational school with an apprenticeship in the same field at a company in order to combat high youth unemployment.
Merkel’s advisors have also noticed that southern EU countries still own many companies that enjoy special protections. Under their plan, privatization agencies or special funds would be established in these countries to privatize the state-owned businesses. Foreign investors could be attracted with tax benefits and less stringent regulations.
The advisors also recommend the establishment of so-called special economic zones, like the ones that once ushered in China’s economic ascent. Finally, the Germans want Europe’s southern countries to invest more in renewable energy, reduce tax barriers and promote worker mobility. All of this, they reason, strengthens Europe’s competitiveness.
So the new six-point plan that’s supposed to counter the growing calls for more pro-growth economic policies is going to include creating mini-Chinas. Well, at least that might explain the apparent desire of Berlin’s policy-makers to permanently impoverish its neighbors…you can’t mimic China without a seemingly inexhaustible supply of poor migrant workers. And the best part of the whole plan? It’s cheap! Not only is there going to be a bunch of state-asset fire-sales but the main cost for these types of “structural reforms” is apparently just “living with hardships”. And since you can’t monetize hardship that means it’s free! Sweet! Isn’t it awesome how money = karma. It really simplifies things.
So how did Berlin’s policy-makers arrive at these wise and merciful policy (and cost effective!) solutions for their ailing neighbors? By learning a few lessons from their own experience with reunification. It was long, painful, and expensive:
Germany Looks to Its Own Costly Reunification in Resisting Stimulus for Greece
By NICHOLAS KULISH
Published: May 25, 2012
MUNICH – When Germany wants to understand Greece and the crisis afflicting Europe it not only looks south to the Continent’s periphery but also turns inward, to the former East Germany, still struggling more than two decades after German reunification.
To an extent not often appreciated by outsiders, the lessons provided by that experience – with the nation pouring $2 trillion or more into the east, by some estimates, to little immediate benefit – color the outlook and decisions of policy makers and the attitudes of voters, a majority of whom would like to see Greece leave the euro zone, polls show.
Most economists agree that Germany could do more to help revive growth throughout the euro zone, and there are reports that Chancellor Angela Merkel is preparing to propose a major European Union plan to accomplish that. But the German reluctance to underwrite the economies of Greece and other struggling countries is not just a matter of the parsimonious Germans hoarding their funds, as it is so often portrayed, but a sense that subsidies do not breed successful economies.
“Money alone doesn’t help,” said Simon Huber, 44, out for a stroll recently near Sendlinger Gate here. “You’re only saved when you save yourself.”
Though regularly lectured by their colleagues across the Atlantic about the need for stimulus measures to reverse the sagging fortunes of countries like Greece and Portugal, German experts believe they have a lot more experience trying to revive uncompetitive economies locked in currency regimes after nearly 23 years of dealing with the former East Germany.
“We performed a real-life experiment,” said Hans-Werner Sinn, president of the Ifo Institute for Economic Research here.
While unemployment in the former West Germany is 6 percent, it remains stubbornly higher, at 11.2 percent, in the east. In 2010 gross domestic product per capita was more than $40,000 in the former West and just under $30,000 in the former East, compared with 1991 figures of $27,500 in the West and about $12,000 in the East. But much of the narrowing in the gaps between east and west, experts say, is attributed to the migration of job seekers westward as much as to any significant improvement in the east.
There have been success stories in the revival of cities like Dresden and Leipzig, and some regions, especially on the southern edge of the former East Germany, are doing better. But the eastern part of the country today is known for perfectly rebuilt town squares that sit empty for much of the day and new stretches of autobahn with few drivers on them.
“Germany made huge investments in infrastructure in East Germany,” said Klaus Adam, a professor of economics at the University of Mannheim. “The hope that the rest would follow has not been fulfilled. You need to get the productivity figures up.”
The magazine Der Spiegel reported that a six-point plan is in the works that includes incentives for midsize companies, a loosening of protections against firing for workers, special economic zones and even a version of Germany’s system of dual training divided between vocational school and hands-on work at companies. State-owned enterprises would be sold in a process similar to that of the Treuhand, the agency that helped privatize East Germany.
“The Mediterranean area should become like the Federal Republic, only with better weather,” the magazine said.
Yet the one-dimensional portrayal of Germans as heartless austerity taskmasters is only part of the story. A basic sense of thriftiness is also coupled with a strong belief in social safety nets; this is not unchecked capitalism, but a model known here as the social market economy.
“The limit of German brotherhood extended to East Germany, and they saw what happened with two trillion euros over the past 20 years,” said Michael C. Burda, an economics professor at Humboldt University in Berlin. “And these are people they love. They don’t consider the Greeks their brothers.”
Great, so the lessons from Germany’s decades of dealing with the challenges of reunification appear to be:
1. Privatization, declining wages, deregulation, and mini-Chinas = good.
2. Investments in infrastructure and social well-being = bad.
So I guess the article below is what we get to look forward to, but without all that awful wasteful social welfare spending. International ‘tough love‘, interestingly, sometimes resembles an intranational transregional shakedown:
East Germany Counts the Cost Of Privatization
By Brandon Mitchener
Published: July 12, 1993
DRESDEN – One of the lasting lessons of East Germany’s costly conversion from a command to a social market economy is that privatization seldom means automatic salvation.
First, an ill-conceived currency union with West Germany, combined with notoriously low productivity, rendered most of the region’s manufactured goods vastly overpriced. Then its traditional customers in Eastern Europe vanished as old trade ties were severed.
Now, with Western Germany and much of Europe languishing in recession, even privatized East German companies that have slashed costs and produce competitive products suddenly find their survival at stake again.
“We’re getting more and more companies that weren’t ready for the free economy when they were privatized by the Treuhand,” said Michael Sagurna, chief spokesman for the southeastern state of Saxony. He was speaking of the government agency charged with selling off East Germany’s state-owned assets.
More and more companies want to have a new crack at the process, said Alexander von Klaudy, head of acquisitions for Deutsche Industrie-Holding GmbH, part of Deutsche Bank. “We think we’ll get a lot of business from companies that aren’t entirely happy with their privatization,” he said.
The recession, and a series of serious mistakes, are also rendering sale of the Treuhand’s remaining 700 privatization candidates more difficult and expensive and increasing the likelihood that the agency will be around for years rather than close at the end of 1993 as originally planned.
One of the agency’s most complicated and controversial tasks in coming years will be policing the fulfillment of investors’ contractual promises. As a rule, the Treuhand refuses to take back companies that it has already privatized, although in a few cases it has made exceptions. Eighty percent of investors meet their obligations, in fact, but with evidence of abuses accumulating, the Treuhand recently announced an expansion of its audit staff to 550 from 350 by the end of the year.
In recent weeks, at least three cases have come to light involving unscrupulous investors who plundered their Eastern purchases for personal profit.
Many entrepreneurs in the East, including those no longer directly involved with the Treuhand, describe an almost conspiratorial alliance of regional bureaucracies, banks and competitors making it impossible for them to stay afloat. The IWH economics research institute in Halle, in a June report, said there was reason to fear a “deindustrialization of the East German landscape.”
“The construction mafia in West Berlin barely lets us breathe,” said Dieter Hasler, director of Eletro-Anlagen-Bau Kleinmachnow GmbH, an electrical equipment maker based in Brandenburg.
Peter Dittrich, a consultant to Atlas, a mini-Treuhand set up by the state of Saxony to salvage 140 unsold Treuhand companies, defended government intervention as a growing political necessity. “There are some areas that would have 70 percent unemployment if these companies died,” he said.
Mr. Sagurna cited MuZ as an example of state support with a purpose. “If you compared a Trabi with a Golf,” he said, referring to East Germany’s failed attempt to copy the Volkswagen people’s car, “it was safe to say the Trabi wouldn’t survive competition. But if you compare an MuZ with a western motorcycle, you would probably conclude that it’s a good motorcycle that’s worth building.”
But Mr. Späth, of Jenoptik, ridiculed the government’s plans to salvage “industrial cores” in the East. He said it was a sop to East Germans “to call everything that’s left an industrial core.”
Rather than nurture unprivatized East German industries back to competitive health, which is no guarantee of market success, the Treuhand should stick to its original mission of selling off companies at any cost, critics say.
Yes, international ‘tough love’ does sometimes resembles an intranational transregional shakedown, but it doesn’t have to be so expensive. Lesson learned.
Ok, so the six-point plan for ailing economy’s appears to be:
1. De-industrialization at any cost
2. Re-industrialization at any cost (China-style!)
3. Rinse and repeat at any cost
4. Rinse and repeat at any cost
5. Rinse and repeat at any cost
6. Eutopia (China-style!)
Oh wait! But what is this new news I see? Is the Frankfurt Group having a change of heart? Perhaps it’s been recognized that the eurobonds-for-sovereingty swap was one of the most amazingly cheap forms victorious economic conquest ever achieved? Naaahh…think ‘eurobonds turned into an austerity straight-jacket’…or something like that:
Germany Seeks Financial ‘Redemption’ for Europe
By Peter Coy on May 28, 2012
Germans hate the idea of covering the debts of the big spenders of Southern Europe, but the hottest new idea for sharing Europe’s debt burden comes from … Germany.
Surprising but true: Germany’s opposition parties have gotten Chancellor Angela Merkel to reconsider an idea floated last winter that involves joint European liability for nations’ sovereign debt.
The idea comes from the German Council of Economic Experts, also known as the “wise men.” It’s called the European Redemption Pact (PDF), which sounds a bit religious to the American ear but isn’t intended to be.
Since fresh thinking on the European debt crisis is badly needed, it’s worth taking a look at what the wise men advise. Here’s the plan in a nutshell:
The debt of the 17 countries belonging to the single-currency euro zone is split into two parts. The portion up to 60 percent of each nation’s gross domestic product stays on the books, unchanged.
The portion of nations’ debt exceeding 60 percent of GDP is transferred into something called the European Redemption Fund.
The 17 countries are still liable for the portion of their debt that’s transferred in the fund. They have 20 or 25 years to pay it off.
Legally, however, all 17 nations are jointly liable for the debt placed in the fund. This is a way for low-debt nations such as Germany to backstop high-debt nations like Greece, giving peace of mind to their creditors and lowering interest rates.
To make sure countries pay off their debt in the European Redemption Fund, some of their national tax revenue would be earmarked for repayments. They would also have to commit to fixing national finances to free up money for debt service.
Having gotten the rest of their debt down to 60 percent of GDP, countries wouldn’t be allowed to run it back up. There would be automatic “debt brakes,” as Germany and Switzerland already have.
The responsibility of Germany and other creditor nations is strictly limited to the amount of money that’s put into the redemption fund. That makes this plan different from “euro bonds,” which some countries are pushing. Euro bonds would be new bonds for which all the euro zone countries would be jointly liable. There would be no cap on the size of borrowing via euro bonds.
Befitting a plan originating in Germany, the proposal is not exactly generous. It’s hard to imagine how a country like Greece could immediately begin repaying the European Redemption Fund while keeping the debt remaining on its books at a mere 60 percent of GDP.
But at least it’s something. Establishing the principle of joint liability for debt could open the door to a more forgiving (read: realistic) plan in the future.
Is anyone else feeling like they’ve seen this movie before?