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“Too Big to Fail” (Uber Alles): The EMU and German Economic Imperialism

Dave Emory’s entire life­time of work is avail­able on a flash drive that can be obtained here. (The flash drive includes the anti-fascist books avail­able on this site.)

Joseph Goebbels, Hitler’s pro­pa­ganda chief, once said: ‘In 50 years’ time nobody will think of nation states.’

NB: Updated on 5/1/2013

COMMENT: Before we return [some­what reluc­tantly] to the Boston Marathon bomb­ing and the remark­able [and pre­dictable] con­nec­tions emerg­ing in con­nec­tion with this milieu, some impor­tant points and obser­va­tions should be recorded about the stun­ning events unfold­ing in Europe.

(These have been largely eclipsed by dis­cus­sion of the Boston bomb­ing, which MAY have been part of the idea.)

Build­ing on past obser­va­tions and bear­ing in mind points made in other posts:

  • As high­lighted in the linked arti­cle excerpted below, Ger­many is fill­ing a vital eco­nomic need by tak­ing advan­tage of an influx of skilled work­ers from South­ern Europe, whose plight is the direct result of the German-driven (and thor­oughly dis­cred­ited) “troika” pol­icy of aus­ter­ity. Ger­man pop­u­la­tion decline man­dates that at least 400,0000 such immi­grants be admit­ted each year to com­pen­sate for the aging of the workforce!
  • The same aus­ter­ity pol­icy is also open­ing up Greece, Spain and the other vic­tims of “aus­ter­ity” to takeover of trou­bled busi­ness assets by Ger­man firms, as high­lighted in another linked story.
  • Another linked and excerpted story  notes that the Ger­man gov­ern­ment is assist­ing in this effort.
  • That self-same aus­ter­ity doc­trine is also caus­ing anx­i­ety in the invest­ment com­mu­nity over the integrity of invest­ment in banks and other threat­ened insti­tu­tions in the afflicted coun­tries, as high­lighted in another linked post.
  • As we have seen in the past, the weak­ness in the South­ern Euro­pean economies is strength­en­ing investor con­fi­dence in both Ger­man gov­ern­ment and cor­po­rate debt, shoring up the econ­omy of the Fed­eral Republic.
  • The con­tin­ued weak­ness of the Euro also ben­e­fits Ger­many, assur­ing good mar­ket prices for the exports that are the fun­da­men­tal ele­ment of Ger­man economy.
  • It should be noted that the Cypriot econ­omy was obliged to finan­cial­ize its econ­omy due to the loss of key agri­cul­tural and indus­trial infra­struc­ture as a result of the Turk­ish inva­sion of that Island in 1974.
  • In what may appear incred­i­ble to newer lis­ten­ers, the poli­cies we see unfold­ing are delib­er­ate and pre-conceived, many decades ago. Ger­man banks “poured the drinks” for the intox­i­ca­tion cur­rently bedev­il­ing South­ern Europe.
  • The German-driven aus­ter­ity has drawn sup­port by virtue of the fact that the EMU is the ulti­mate exam­ple of “Too Big to Fail.” Many observers have–rightly or wrongly–predicted utter finan­cial chaos and eco­nomic col­lapse if the euro were to fail. This anx­i­ety has pre­served Germany’s abil­ity to impose eco­nomic hege­mony on Europe, result­ing in an increas­ing degree of polit­i­cal hegemony.
  • To an ever-greater extent, under­stand­ing what is tak­ing place in Europe requires an under­stand­ing of the the­o­ries of Pruss­ian mil­i­tary the­o­reti­cian Carl von Clause­witz, whose con­cepts of “total war” and “post-war” have dri­ven Ger­man power struc­ture for the bet­ter part of two centuries.
  • In con­sid­er­a­tion of the pre­ced­ing point: The Third Reich’s mur­der­ous poli­cies had a point. The idea was to leave their neigh­bors weaker for the dura­tion, by killing impor­tant peo­ple (within 6 months of the Ger­man inva­sion in 1939, there few peo­ple left left alive with a col­lege edu­ca­tion. Imag­ine try­ing to rebuild a war-torn soci­ety with vir­tu­ally no engi­neers, doc­tors etc.) The sur­vivors suf­fered from PTSD, mal­nu­tri­tion and other afflic­tions con­tribut­ing to low birth-rates and fer­til­ity. Of course, those soci­eties also had their wealth stolen and were with­out invest­ment cap­i­tal. Their cor­po­ra­tions had been sub­sumed to the con­stel­la­tion of “cor­po­rate Ger­many,” main­tain­ing their eco­nomic depen­dence on, and sub­servience to, Ger­many. See the 3 pas­sages from Mar­tin Bor­mann: Nazi in Exile excerpted below.
  • In the United States, the GOP is treat­ing the Obama admin­is­tra­tion and the Amer­i­can econ­omy in the  same  man­ner that Ger­many approaches South­ern Europe. Inex­tri­ca­bly linked with the Under­ground Reich,  the GOP is walk­ing hand-in-hand with Germany.

“Ger­many Soaks up Tal­ent from South” by Marie de Verges; The Guardian Weekly; 4/12/2013.

EXCERPT: Unem­ploy­ment rates con­tinue to break records in the euro­zone, and there is lit­tle chance of an improve­ment this year. The cri­sis in the jobs mar­ket across Europe is hit­ting young peo­ple hard­est, set­ting in motion new migra­tory pat­terns between Mediter­ranean coun­tries and the north.

Ger­many stands out as an excep­tion. Despite slug­gish growth in the EU’s largest econ­omy, unem­ploy­ment is steady: good news that won’t fall on deaf ears. In the past two year the net num­ber of peo­ple enter­ing Ger­many rose from 128.000 to 340,000. Ger­man busi­nesses are draw­ing on a fresh source of cheap, qual­i­fied labor from Greece and Spain. . . .

. . . . Unem­ploy­ment is soar­ing in Greece and Spain, with more than one in four out of work. Youth is bear­ing the brunt of the down­turn, with more than half the active pop­u­la­tion under 25 job­less. Mean­while, the Ger­man labour mar­ket is buoy­ant. Accord­ing to fig­ures pub­lished by the fed­eral employ­ment agency in Feb­ru­ary unem­ploy­ment is steady at 6.9%. . . .

. . . In the first nine months of 2012,27,000 Spaniards, 26,300 Greeks and almost 10,000 Por­tugese moved to Ger­many. The Ger­mans already have a name for them, neue Gas­tar­beiter (new guest work­ers), a throw­back to the immi­grants who flocked to West Ger­many in the 1960’s. . .

. . . .How­ever the new gen­er­a­tion dif­fers from its pre­de­ces­sors. Today’s migrants are younger and bet­ter qualified. . . .

. . . Ger­man busi­ness is thriv­ing but the pop­u­la­tion is grow­ing old, result­ing in an increas­ingly acute short­age of labour. The coun­try is des­per­ately look­ing for qual­i­fied per­son­nel to staff its fac­to­ries, research lab­o­ra­to­ries, hos­pi­tals and kinder­gartens. Accord­ing to experts, at least 400,000 new­com­ers (in the net migra­tion bal­ance) will be needed every year to com­pen­sate for age­ing and to main­tain cur­rent eco­nomic trends.

South­ern Europe has a mas­sive reserve of young tal­ent with poor prospects. . . .

“Ger­man Firms Eye Invest­ment in Crisis-Battered Euro States” by Annika Brein­hardt; Reuters; 4/25/2013.

EXCERPT: Ger­man com­pa­nies are set­ting their sights on south­ern Europe as fears of a euro zone breakup fade and eco­nomic reforms trans­form the crisis-battered region into an attrac­tive place to invest once again.

Coun­tries like Por­tu­gal, Italy, Greece and Spain are still strug­gling with deep reces­sions and high unem­ploy­ment but have also attracted atten­tion for the oppor­tu­ni­ties they present, not just the risks.

Strong com­pa­nies are attract­ing inter­est among the “Mit­tel­stand”, medium-sized and often family-owned man­u­fac­tur­ing firms to which Ger­many owes much of its export­ing prowess.

That is in large part due to the eco­nomic and labour mar­ket reforms bailout coun­tries have been forced to imple­ment — mak­ing it eas­ier to hire and fire and reduc­ing wage costs — which less stricken coun­tries such as France have been slower to embrace.

“For finan­cially strong Ger­man Mit­tel­stand firms, the cri­sis is turn­ing out to be an oppor­tu­nity. They are increas­ingly active with acqui­si­tions in Spain,” said Christoph Him­mel­skamp, a con­sul­tant at Roedl & Part­ner who advises smaller Ger­man firms on deals with Span­ish coun­ter­parts.
Him­mel­skamp says he has seen a 30 to 40 per­cent increase in Ger­man acqui­si­tions of Span­ish firms since 2009, when the euro zone debt cri­sis first flared in Greece.

“The mood was sub­dued when there was spec­u­la­tion Spain could leave the euro. Some of our clients started putting the brakes on trans­ac­tions ... Once that dis­cus­sion ended, invest­ment returned.”

erman firms are buy­ing up strong com­peti­tors, clients or sup­pli­ers at a time when those com­pa­nies are strug­gling to stay afloat through years of reces­sion in their home mar­kets and as shaky banks restrict access to credit. . . .

“Schaeu­ble Touts Plan to Boost Ger­man Invest­ment in Span­ish Firms” by Ben Sills; bloomberg.com; 4/29/2013.

EXCERPT: Ger­man Finance Min­is­ter Wolf­gang Schaeu­ble agreed on a plan to boost invest­ment in smaller com­pa­nies in Spain at a meet­ing today with his Span­ish coun­ter­part, Econ­omy Min­is­ter Luis de Guindos.

“There is a lot of money in the banks and at the Euro­pean Cen­tral Bank but not enough invest­ment,” Schaeu­ble said at a joint press con­fer­ence at a coun­try hotel near Granada in south­ern Spain. “That is where we want to take measures.”

The two coun­tries backed a pro­gram that will seek “spon­sors” who will encour­age investors in Ger­many, Spain and other coun­tries to pro­vide equity financ­ing for com­pet­i­tive com­pa­nies, said de Guin­dos. Increas­ing the cap­i­tal of smaller com­pa­nies will help them tap bank financ­ing, he added. . . .

“Cyprus Res­cue Hurts Bloc’s Bank Plan” by Matthew Dal­ton; The Wall Street Jour­nal; 4/5/2013.

EXCERPT: Euro­pean offi­cials have been deter­mined to mend the region’s finan­cial mar­ket after see­ing it torn apart along national lines dur­ing the eco­nomic cri­sis. That effort suf­fered a blow with the rad­i­cal surgery pre­scribed for Cyprus’s banks as part of March’s bailout deal.

The agree­ment will see large depos­i­tors in Cyprus’s two big, inter­na­tion­ally active banks absorb steep losses. Money trans­fers to and from the island are now sharply restricted. All told, the deal deliv­ered a wake-up call to reg­u­la­tors, investors and depos­i­tors alike about the risk of banks based in Euro­pean coun­tries with finan­cially stressed governments.

This mes­sage could rever­ber­ate, ana­lysts say, threat­en­ing the economies of Europe’s depressed south­ern rim. Europe’s finan­cial plumb­ing remains clogged, with depos­i­tors in North­ern Europe wary of send­ing their money down south, where busi­nesses and con­sumers are suf­fo­cat­ing in an envi­ron­ment of high inter­est rates.

If depos­i­tors and investors grow even-more ner­vous about the safety of South­ern Euro­pean banks, the cost of their fund­ing will rise from already high lev­els and so will their lend­ing rates.

Cor­po­ra­tions have taken notice, said John Grout, pol­icy and tech­ni­cal direc­tor at the Asso­ci­a­tion of Cor­po­rate Treasurers. . . .

“Cyprus Finds not All Nations Are Equal” By Christo­pher Pis­sarides; Finan­cial Times; 3/28/2013.

EXCERPT: . . . Many peo­ple think of Cyprus as fac­ing sim­i­lar prob­lems to Greece, because of the close con­nec­tions between the two coun­tries. But Cyprus has a man­age­able fis­cal deficit, effi­cient account­ing and legal ser­vices, inher­ited from British colo­nial rule. The large major­ity of the peo­ple run­ning those ser­vices are trained in British uni­ver­si­ties and speak flu­ent English.

After the Turk­ish inva­sion of 1974, when most of the agri­cul­tural and indus­trial base was lost, Cyprus decided to add busi­ness ser­vices to tourism as its prin­ci­pal export. Dual tax­a­tion agree­ments, lax immi­gra­tion poli­cies and low cor­po­rate taxes attracted busi­ness from the Mid­dle East, the EU and Russia.

The trou­ble, accord­ing to the troika of the Inter­na­tional Mon­e­tary Fund, Euro­pean Com­mis­sion and Euro­pean Cen­tral Bank, is that this also brought large amounts of bank deposits to Cyprus, blow­ing up the bank­ing sec­tor to “unsus­tain­able” dimen­sions. Deposits are about eight times gross national prod­uct. This fig­ure, how­ever, is still smaller than Luxembourg’s and not too dif­fer­ent from that of Malta and Ireland.

The troika, with out­spo­ken sup­port from the Ger­man finance min­is­ter, is telling Cypri­ots that their “busi­ness model” is unsus­tain­able. Its rec­om­men­da­tion is, in effect, that Cyprus’s banks should shrink 50–60 per cent in the next five years – and the oppor­tu­nity for shrink­age was offered on a plate. The biggest Cypriot banks – Laiki Bank and the Bank of Cyprus – had invested heav­ily in Greek sov­er­eign bonds. The banks would need cap­i­tal to con­tinue operating. . . .

Mar­tin Bor­mann: Nazi in Exile by Paul Man­ning; Lyle Stu­art [HC]; Copy­right 1981 by Paul Man­ning; ISBN 0–8184-0309–8; pp. 55–56.)

EXCERPT: . . . This huge orga­ni­za­tion I.G. Far­ben] func­tioned as a man­u­fac­tur­ing and research arm of the Ger­man gov­ern­ment, with the respon­si­bil­ity of dis­cov­er­ing all pos­si­ble means of increas­ing the mil­i­tary power of Ger­many. More than RM 4.25 bil­lion was invested in new plants, mines, and power instal­la­tions, with other mil­lions going into new research facil­i­ties. . . . So close had Far­ben become to the gov­ern­ment that I.G. always knew in advance all inva­sions planned by Hitler. It was to sup­ply the mate­ri­als nec­es­sary to each con­quest, and when a land had been over­run and sub­ju­gated, the Far­ben experts would han­dle the con­sol­i­da­tion and orga­ni­za­tion of the indus­trial facil­i­ties as addi­tional sup­ply sources for the Ger­man armed forces. As Ger­man troops swept across Europe and Hitler pro­claimed his vision of a thousand-year Third Reich, I.G. Far­ben also dreamed of world empire. This was out­lined with clar­ity in a doc­u­ment called Neuord­nung, or ‘New Order,’ that was accom­pa­nied by a let­ter of trans­mit­tal to the Min­istry of Eco­nom­ics. It declared that a new order for the chem­i­cal indus­try of the world should sup­ple­ment Hitler’s New Order. There­fore, the doc­u­ment stated, Far­ben was fit­ting future indus­trial plans into such a frame­work. . . . I.G. Far­ben was the major chem­i­cal firm on the Con­ti­nent, and as each coun­try fell to Ger­many its acqui­si­tions of chem­i­cal and dyestuff com­pa­nies were enor­mous. I.G. also increased its invest­ments in these by RM 7 bil­lion. [Empha­sis added.] . . .

Mar­tin Bor­mann: Nazi in Exile by Paul Man­ning; Copy­right 1981 by Paul Man­ning;  [HC]; Lyle Stu­art Inc.; ISBN 0–8184–0309–8; p. 28.

EXCERPT: . . . I.G. Far­ben was a for­mi­da­ble ally for Reich­sleiter Bor­mann in his plans for the post­war eco­nomic rebirth of Ger­many. In a tele­phone con­ver­sa­tion with Dr. von Schnit­zler, Bor­mann asked what would the loss of fac­to­ries in France and the other occu­pied coun­tries mean to Ger­man indus­try in gen­eral and to I.G. in par­tic­u­lar. Dr. von Schnit­zler said he believed the tech­ni­cal depen­dence of these coun­tries on I.G. would be so great that despite Ger­man defeat I.G., in one way or another, could regain its posi­tion of con­trol of the Euro­pean chem­i­cal busi­ness. ‘They will need the con­stant tech­ni­cal help of I.G.’s sci­en­tific lab­o­ra­to­ries as they do not own appro­pri­ate instal­la­tions within themselves.’ . . .

Mar­tin Bor­mann: Nazi in Exile by Paul Man­ning; Copy­right 1981 by Paul Man­ning;  [HC]; Lyle Stu­art Inc.; ISBN 0–8184–0309–8; p. 145.

EXCERPT: . . . . The Reich­sleiter asked Schmitz his views of the future. Schmitz replied, ‘The occu­pa­tion armies will be under­stand­ing in the West, but cer­tainly not in the East. I have instructed all Far­ben admin­is­tra­tors and tech­ni­cians to come to the West, where they can be of use in resum­ing our oper­a­tions once the dis­tur­bances of 1945 come to a halt.’ Schmitz added that, while gen­eral bomb dam­age to the I.G. plants was about 25 per­cent of capac­ity, some were untouched. He men­tioned speak­ing with Field Mar­shal Model, who was com­mand­ing the defenses of the Ruhr. ‘Model had planned to turn our Bayer-Leberkusen phar­ma­ceu­ti­cal fac­tory into an artillery base, but he agreed to make it an open, unde­fended fac­tory. Hope­fully, we will get it back untouched.’ ‘What about your board of direc­tors and the essen­tial exec­u­tives? If they are held by the occu­pa­tion author­i­ties, can I.G. con­tinue?’ Bor­mann asked. ‘We can con­tinue. We have an oper­a­tional plan for such a con­tin­gency, which every­one under­stands. How­ever, I don’t believe our board mem­bers will be detained too long. Nor will I. But we must go through a pro­ce­dure of inves­ti­ga­tion before release, so I have been told by our N.W. 7 peo­ple who have excel­lent con­tacts in Washington.’ . . . .

 

 

 

 

Discussion

5 comments for ““Too Big to Fail” (Uber Alles): The EMU and German Economic Imperialism”

  1. And now the Euro­pean unem­ploy­ment rate is at a record high and the dreaded inflation-monster is the weak­est it’s been in three years. The obvi­ous ques­tion policy-makers are ask­ing: does this awful data mean the euro­zone has turned a cor­ner? The policy-makers that made the poli­cies that brought us this awful data seem to think so:

    Mon­day, April 29, 2013 by
    John O’Donnell, Reuters
    Could the euro­zone have turned a corner?

    There are no calls for cel­e­bra­tion, no desire to relax in the cor­ri­dors of Brus­sels, but some offi­cials believe the euro­zone has turned a cor­ner, sharp­en­ing the focus on longer-term reforms and structures.

    Despite a messy bailout of Cyprus, mar­kets are calm, Ireland’s res­cue pro­gramme is on track and Greece and Por­tu­gal, while still in reces­sion, hope for a slow recov­ery next year.

    Slovenia’s banks are a con­cern, but one that pol­i­cy­mak­ers are con­fi­dent they can deal with. And although Malta’s bank­ing sys­tem is vast com­pared with its econ­omy, it is not struc­tured in the same way as in Cyprus. The same goes for Luxembourg.

    Spain’s bank restruc­tur­ing appears to be working.

    “All the skele­tons are out of the closet,” said one senior offi­cial who has spent much of the past three years work­ing on the cri­sis. “There are no more major issues in the pipeline.”

    It is a line of think­ing shared by Euro­pean Cen­tral Bank pol­i­cy­maker Yves Mer­sch, who said last week he did not expect another coun­try to “slump further”.

    The rel­a­tive calm has given offi­cials in Brus­sels breath­ing space, and the signs are that sev­eral coun­tries, includ­ing France and Spain, could be given an extra year or two to meet their bud­get deficit goals. The pol­icy of aus­ter­ity remains, but the pace of fis­cal con­sol­i­da­tion will ease.

    Yet none of that means the big­ger issues under­pin­ning the cri­sis are resolved. While the exis­ten­tial threat may have passed, the need to imple­ment tough and unpop­u­lar struc­tural reforms remains, and plans for tighter over­sight and con­trol of banks via a ‘bank­ing union’ are not even halfway there.

    “With Cyprus, we have hit the low­est trough of the cri­sis,” said Peterson’s Jacob Kirkegaard of the Peter­son Insti­tute for Inter­na­tional Eco­nom­ics, a think-tank in Washington.

    ...

    Many dan­gers lie ahead. First off, most mem­ber states still have to fully imple­ment tough reforms to reha­bil­i­tate their economies by rais­ing pro­duc­tiv­ity, cut­ting labour costs and over­haul­ing their pen­sion sys­tems, even as they are drop­ping deeper into recession.

    That painful process of reform is going to take years to com­plete, with the risk that it will be rejected by voters.

    Sec­ondly, the botched ini­tial attempt to impose losses on small savers in Cyprus could grad­u­ally erode con­fi­dence, prompt­ing depos­i­tors to with­draw money if they fear a sim­i­lar “bail-in” elsewhere.

    “There is clearly a risk that when you make a pro­posal that insured deposits can be bailed in, you have let the genie out of the bot­tle,” said Stringer. “It is then dif­fi­cult to con­vince peo­ple that this option will never be considered.”

    Thirdly, the con­trols on cap­i­tal move­ment in Cyprus have cast a cloud of uncer­tainty over Europe.

    “If you can­not access or trans­fer euros in Cyprus, it will call into ques­tion whether there is a frag­men­ta­tion of the cur­rency,” said Stringer. “It’s dif­fi­cult to argue that a euro in Cyprus is the same as a euro in Germany.”

    But per­haps the biggest risk, as in the past, is that Europe‘s polit­i­cal will to change could fal­ter. That is espe­cially true when it comes to estab­lish a bank­ing union, includ­ing ECB super­vi­sion as well as an agency and fund to close bad banks. It is a con­cern at the fore­front of offi­cials’ minds.

    As the sense of cri­sis has eased, Berlin has cooled to the idea for fear that it could be left on the hook for reck­less lend­ing in other coun­tries. With­out Ger­man sup­port, the whole scheme will falter.

    Finance Min­is­ter Wolf­gang Schaeu­ble put a brake on plans in mid-April when he said bank­ing union needed a change to the EU Treaty, a cum­ber­some process most mem­ber states want to avoid.

    ...

    Over the longer term, as Europe wal­lows in reces­sion and voter resent­ment hard­ens, the mood could darken.

    “Fore­casts for eco­nomic recov­ery, includ­ing our own, keep on get­ting pushed back,” said Fitch’s Stringer. “First it was 2011, now 2012 and then 2013. The big worry is that Europe will suf­fer a lost decade, as Japan has done.”

    Francesco Papa­dia, the for­mer head of the Euro­pean Cen­tral Bank’s finan­cial mar­ket oper­a­tions and one of the inner cir­cle around for­mer ECB Pres­i­dent Jean-Claude Trichet, under­stands the risks in the del­i­cate bal­anc­ing act to sus­tain confidence.

    “The mess in Cyprus was hor­ri­ble,” he said. “I’m sur­prised that the mar­ket has taken ... events so much in its stride. But if Italy says we’ll run our own finances not Brus­sels, or Merkel says for­get about bank­ing union, for exam­ple, then ten­sions could come back with a vengeance.

    Huh, so Europe risks fac­ing a lost decade if the economies don’t recover, but policy-makers are still feel­ing opti­mistic while main­tain­ing their com­mit­ment to “struc­tural reforms”. The opti­mism appears to be rooted in:
    1. An eas­ing of the imme­di­ate cri­sis sen­ti­ment fol­low­ing the Cyprus bail-in deba­cle.
    2. The Cyprus bailout appeared to but­tress sup­port for the planned “bank­ing union“
    3. Grow­ing agree­ment amongst policy-makers to extend the by a year or two the time allowed to coun­tries like Spain and Italy to meet var­i­ous “struc­tural reforms”.

    In other words, they’re feel­ing opti­mistic over an agree­ment to leave “eased up” aus­ter­ity poli­cies in place for years longer than ini­tially planned. They’re also feel­ing con­fi­dent due to the fact that the Cyprus-related eurozone-implosion threat appears to have lit a fire under everyone’s ass regard­ing the imple­men­ta­tion of the “bank­ing union” by high­light­ing how ten­u­ous the cur­rent sit­u­a­tion remains. Feel­ing opti­mistic yet?

    As for­mer ECB-official Francesco Papa­dia warned at the end, though, if the mar­kets get spooked again and/or Merkel say “for­get about the bank­ing union” (which she’s sort of doing by demand­ing a treaty change). Papa­dia also warned of the risk of coun­tries like Italy get­ting the strange idea that run­ning their own finances instead of let­ting Brus­sels han­dle it would be a good idea. And for the bank­ing union to work Papadia’s warn­ing about Italy decid­ing to run its own finances will have to be avoided. The planned bank­ing union adds a new layer of over­sight to EU-wide (and not just eurozone-wide) national fis­cal pol­icy (i.e. poten­tially ALL national expen­di­tures depend­ing on how things evolve). In addi­tion, there is also the fis­cal com­pact com­ing into force that man­dates EU-wide deficit ceil­ings of 0.5%. Those two pol­icy regimes that are posi­tioned to be the enforcers of per­ma­nent aus­ter­ity have yet to come into exis­tence. So the notion that the bank­ing union will some­how solve Europe’s con­ti­nen­tal identity/sovereignty crises is sort of a sick joke. But it’s a joke for the future.

    In the mean time, let the beat­ings must con­tinue!

    The New York Times
    The Beat­ings Must Con­tinue
    Paul Krug­man
    April 30, 2013, 6:25 am

    Some­times econ­o­mists in offi­cial posi­tions give bad advice; some­times they give very, very bad advice; and some­times they work at the OECD.

    It’s almost exactly three years since the Paris-based OECD gave what may have been the worst advice of any major inter­na­tional orga­ni­za­tion — worse than the Euro­pean Com­mis­sion, worse than the ECB. Not only did it join in the demand for fis­cal aus­ter­ity, it also demanded that the US start rais­ing inter­est rates rapidly, so as to head off the threat of infla­tion — even though its own mod­els showed no such threat.

    So here we are three years later. No infla­tion take­off in Amer­ica (and the Fed try­ing to find ways to boost demand at a zero rate); aus­ter­ity eco­nom­ics has crashed and burned; the lat­est num­bers from Euro­stat look like this:
    [see img]

    And what is the OECD’s chief econ­o­mist (still the same per­son) say­ing?

    The euro zone is at risk of snatch­ing defeat from the jaws of vic­tory by aban­don­ing efforts to cut bud­get deficits and fix long-standing eco­nomic prob­lems, the Orga­ni­za­tion for Eco­nomic Coop­er­a­tion and Development‘s chief econ­o­mist warned Monday.

    Mr. Padoan said the grow­ing per­cep­tion that aus­ter­ity has been futile is incorrect.

    “Fis­cal con­sol­i­da­tion is pro­duc­ing results, the pain is pro­duc­ing results,” he said.

    He added that euro-zone pol­icy mak­ers need to do a bet­ter job of com­mu­ni­cat­ing their suc­cesses to a weary population.

    I believe that’s eurospeak for “the beat­ings will con­tinue until morale improves.”

    Yes, the pain is pro­duc­ing results.

    Posted by Pterrafractyl | April 30, 2013, 8:42 am
  2. For folks fear­ing a US gov­ern­ment shut­down, fear not! Europe has been engaged in the wide­spread slash­ing gov­ern­ment spend­ing for years and just look how awe­some it’s going:

    The Tele­graph
    My grov­el­ling apol­ogy to Herr Schäuble

    By Ambrose Evans-Pritchard Eco­nom­ics Last updated: Sep­tem­ber 17th, 2013

    Ger­man Finance Min­is­ter Wolf­gang Schäu­ble has been vindicated.

    For my part, I have been wrong about every­thing. Ger­man dis­ci­pline poli­cies for the euro­zone have been a tremen­dous suc­cess. I am ashamed for sug­gest­ing otherwise.

    As the wise, patient, and always self-effacing Mr Schäu­ble writes today in The Finan­cial Times, the Euro-sceptics talk and write relent­less drivel.

    Ignore the doom­say­ers: Europe is being fixed” is the headline:

    The euro­zone is clearly on the mend both struc­turally and cyclically.

    What is hap­pen­ing turns out to be pretty much what the pro­po­nents of Europe’s cool-headed cri­sis man­age­ment pre­dicted. The fis­cal and struc­tural repair work is pay­ing off, lay­ing the foun­da­tions for sus­tain­able growth. This has taken crit­i­cal observers aback. It should not have, because, in truth, we have seen it all before, many times and in many places.

    Despite what the crit­ics of the Euro­pean cri­sis man­age­ment would have us believe, we live in the real world, not in a par­al­lel uni­verse where well-established eco­nomic prin­ci­ples no longer apply.

    Mr Schäu­ble says Ger­many pulled it off the old-fashioned way ear­lier this decade, with root-and-branch reform. The UK did it in the 1980s, Swe­den and Fin­land in the early 1990s, Asia in the late 1990s:

    The recipe worked then and it is work­ing now, some­what to the cha­grin and bemuse­ment of its numer­ous crit­ics in the media, acad­e­mia, inter­na­tional organ­i­sa­tions and politics.

    In just three years, pub­lic deficits in Europe have halved, unit labour costs and com­pet­i­tive­ness are rapidly adjust­ing, bank bal­ance sheets are on the mend and cur­rent account deficits are dis­ap­pear­ing. In the sec­ond quar­ter the reces­sion in the euro­zone came to an end.

    Sys­tems adapt, down­turns bot­tom out, trends turn. In other words, what is bro­ken can be repaired. Europe today is the proof.

    So there we have it. The prob­lem is solved. How can I not have seen it? How can any of us on this blog thread have missed it?

    I apol­o­gise for men­tion­ing that unem­ploy­ment is 27.8pc in Greece, 26.3pc in Spain, 17.3pc in Cyprus, and 16.5pc in Por­tu­gal, or for point­ing that it would be far worse had it not been for a mass exo­dus of EMU refugees. Nor was is proper to men­tion that Greek youth unem­ploy­ment in 62.9pc. These are triv­ial details.

    I apol­o­gise for point­ing out that the EU-IMF Troika orig­i­nally said the Greek econ­omy would con­tract by 2.6pc in 2010 and then recover briskly, when in fact it con­tracted by roughly 23pc from peak-to-trough, and will shrink another 5pc this year accord­ing to the think-tank IOBE. This slip­page is well within the nor­mal mar­gin of error.

    I apol­o­gise for men­tion­ing that the debt tra­jec­to­ries of Spain, Greece, Italy, and Ire­land have accel­er­ated upwards under the aus­ter­ity plans, and there­fore that the pol­icy has been self-defeating.

    It was quite uncalled for to point out that Italy’s debt ratio has jumped to 130pc of GDP, or to so sug­gest that debt can­not keep ris­ing on a con­tract­ing nom­i­nal GDP bas, and I will wash my mouth soap if I ever utter the words “denom­i­na­tor effect” again. It is shabby to use such cheap language.

    I apol­o­gise for men­tion­ing IMF stud­ies show­ing that the fis­cal mul­ti­plier is three times higher than first thought by EU offi­cials in EMU cri­sis states, and there­fore that the con­trac­tionary effects of belt-tightening are far greater than first calculated.

    As for using that pious and pre­ten­tious Greek word “hys­tere­sis” to sug­gest that mass unem­ploy­ment and the col­lapse of invest­ment in south­ern Europe has low­ered the eco­nomic growth tra­jec­tory of these coun­tries for years to come, out­weigh­ing any of the alleged gains from the EU-imposed reforms: this is just try­ing to blind good folk with posh talk.

    I apol­o­gise for sug­gest­ing that Ger­man reforms under Schröder have been vastly overblown, and that Ger­man com­pet­i­tive­ness gains have been chiefly the result of a beggar-thy-neighbour wage squeeze at the cost of EMU trade part­ners. Nor should I have said that a small open econ­omy like Swe­den in the 1990s may well be able to tighten its way back to vital­ity in a the mid­dle of a global boom, but if half Europe does so in uni­son in a slump, it will inflict carnage.

    It was uncon­scionable of me to say that Ger­many has locked in a semi-permanent trade advan­tage over Club Med, or for say­ing that the try­ing to close this gap by impos­ing defla­tion on the South is impos­si­ble because this will play havoc with debt dynamics.

    How could any of in the euroscep­tic camp have stooped to the his­tor­i­cal pornog­ra­phy of the 1930s, sug­gest­ing for one moment that EMU repli­cates the worst errors of the inter­war Gold Stan­dard, or that the German-led cred­i­tor bloc is doing to Spain exactly what the US-led cred­i­tor bloc did to Ger­many from 1928–1933? Just sheer smut.

    I apol­o­gise per­son­ally to Mr Schäu­ble for call­ing him a dan­ger­ous medi­oc­rity: arro­gant, shal­low, narrow-minded, provin­cial, and unsci­en­tific in equal degree. This was shock­ingly rude. It brings shame to Fleet Street.

    I should not have ques­tioned his wis­dom in think­ing it is pos­si­ble to harm­lessly enforce con­trac­tionary poli­cies on the South of a sin­gle cur­rency zone with­out off­set­ting expan­sion in the North. Events have shown that he has the finest mind in Europe, and a superb grasp of Euro­pean pol­i­tics. More­over, peo­ple have seen the light even in Greece, where he is now adored.

    I apol­o­gise for scream­ing for two years that the EMU would blow apart unless Ger­many allowed the ECB to step up to its respon­si­bil­i­ties as a lender of last resort for sov­er­eign states, as it finally did at one minute to mid­night in July 2012. It was the Fis­cal Com­pact that saved EMU, and the Six Pack, and the Two Pack, and all those rule books from Berlin.

    It was carp­ing for me to sug­gest that recent charts show­ing a dra­matic nar­row­ing of unit labour costs in Spain et al are largely bogus, the mir­ror of mass unem­ploy­ment that causes an auto­matic rise in appar­ent pro­duc­tiv­ity; and nor should I have quib­bled about the low trade gear­ing of Spain, Italy, Por­tu­gal, and Greece, or sug­gested that exports are too small a share of GDP to lift these coun­tries out of the morass quickly. This is just pointy-headed, clever-clever, anorak stuff, and frankly laughable.

    So no, Mr Schäu­ble has pulled it off. The Ger­man Con­sti­tu­tional Court is in the pocket of the Ger­man finance min­istry and will thank­fully run a coach and horses through the Grundge­setz when it rules next month, or soon after. The court will not stop the ECB keep­ing Italy and Spain afloat. The law has been stitched up, so no prob­lems there.

    ...

    Posted by Pterrafractyl | September 30, 2013, 1:04 pm
  3. Ger­many got another reminder last week from Bun­des­bank Chief Jens Wei­d­mann that it would be fool­ish to assume that the aus­ter­ity treat­ment won’t be return­ing to Germany’s work force sooner or later. The vir­tu­ous cycle of greater tech­nol­ogy lead­ing to greater pros­per­ity can be turned into a vicious cycle of fis­cal aus­ter­ity and scarcity pretty eas­ily. It just requires that a soci­ety mind­lessly ele­vates profit-maximization and eco­nomic “com­pet­i­tive­ness” (which is also basi­cally a mea­sure­ment of prof­itabil­ity) over ALL of the society’s other inter­ests. Do that long enough and ANY econ­omy will break. Send­ing one’s trade part­ners into an eco­nomic death-spiral while posi­tion­ing one’s own soci­ety to com­pete in the same “com­pet­i­tive­ness” race with these neigh­bors also helps the vir­tu­ous cycle of greater tech­nol­ogy and and net pros­per­ity turn vicious:

    Sep­tem­ber 25, 2013, 12:15 PM
    The Wall Street Jour­nal
    ECB’s Wei­d­mann Warns Ger­many on Need to Reform
    By Christo­pher Lawton

    Germany’s top cen­tral banker issued a stark warn­ing to Germany’s gov­ern­ment Wednes­day: either reform or risk falling behind.

    Speak­ing at a Deutsche Bun­des­bank event in Dues­sel­dorf just days after national elec­tions in Europe’s largest econ­omy, Jens Wei­d­mann, pres­i­dent of the Ger­man cen­tral bank, painted a sober­ing pic­ture of the chal­lenges Ger­many faces.

    No one sees Ger­many as “the sick man of Europe” any­more, Mr. Wei­d­mann said, ref­er­enc­ing a com­mon phrased used to describe Ger­many in the late 1990s when its econ­omy was weak.

    “But an eco­nomic head start can quickly be lost,” he added.

    ...

    As a result, Ms. Merkel may now need to spend months nego­ti­at­ing with par­ties with con­flict­ing views on taxes and social issues in order to form a gov­ern­ment. The Social Democ­rats, one likely part­ner, wants to raise taxes on the wealthy to pay for more invest­ment and social pro­grams, and imple­ment a nation­wide min­i­mum wage.

    In a wide rang­ing speech, Mr. Wei­d­mann said Ger­many would be chal­lenged by glob­al­iza­tion, energy pol­icy shifts, and an aging soci­ety. In par­tic­u­lar, Mr. Wei­d­mann, who also sits on the Euro­pean Cen­tral Bank‘s Gov­ern­ing Coun­cil, sin­gled out Germany’s debt, which at 80% of nom­i­nal gross domes­tic prod­uct, is “very high.”

    He also called for tar­geted invest­ments in infra­struc­ture and edu­ca­tion to help boost eco­nomic growth, but warned that any new invest­ment shouldn’t boost Germany’s national debt. He also warned that imple­ment­ing a min­i­mum wage could have neg­a­tive con­se­quences for employment.

    Ulti­mately as other economies imple­ment reforms and slash pub­lic bud­gets to bet­ter com­pete on the global stage, Ger­many can­not afford to sit still, espe­cially as its soci­ety ages. But he added that these chal­lenges can be over­come through reforms. In par­tic­u­lar, he urged Ger­many to make more use of its older and female work­ers, and called for a sys­tem­atic approach for attract­ing skilled work­ers to Germany.

    ...

    Oh well, increas­ing global trade will no doubt turn around all these euro­zone economies once they’ve suf­fi­ciently increased their “com­pet­i­tive­ness”. Or maybe not.

    Posted by Pterrafractyl | October 1, 2013, 1:53 pm
  4. Ger­many got another reminder last week from Bun­des­bank Chief Jens Wei­d­mann that it would be fool­ish to assume that the aus­ter­ity treat­ment won’t be return­ing to Germany’s work force sooner or later. The vir­tu­ous cycle of greater tech­nol­ogy lead­ing to greater pros­per­ity can be turned into a vicious cycle of fis­cal aus­ter­ity and scarcity pretty eas­ily. It just requires that a soci­ety mind­lessly ele­vates profit-maximization and eco­nomic “com­pet­i­tive­ness” (which is also basi­cally a mea­sure­ment of prof­itabil­ity) over ALL of the society’s other inter­ests. Do that long enough and ANY econ­omy will break. Send­ing one’s trade part­ners into an eco­nomic death-spiral while posi­tion­ing one’s own soci­ety to com­pete in the same “com­pet­i­tive­ness” race with these neigh­bors also helps the vir­tu­ous cycle of greater tech­nol­ogy and net pros­per­ity turn vicious:

    Sep­tem­ber 25, 2013, 12:15 PM
    The Wall Street Jour­nal
    ECB’s Wei­d­mann Warns Ger­many on Need to Reform
    By Christo­pher Lawton

    Germany’s top cen­tral banker issued a stark warn­ing to Germany’s gov­ern­ment Wednes­day: either reform or risk falling behind.

    Speak­ing at a Deutsche Bun­des­bank event in Dues­sel­dorf just days after national elec­tions in Europe’s largest econ­omy, Jens Wei­d­mann, pres­i­dent of the Ger­man cen­tral bank, painted a sober­ing pic­ture of the chal­lenges Ger­many faces.

    No one sees Ger­many as “the sick man of Europe” any­more, Mr. Wei­d­mann said, ref­er­enc­ing a com­mon phrased used to describe Ger­many in the late 1990s when its econ­omy was weak.

    “But an eco­nomic head start can quickly be lost,” he added.

    ...

    As a result, Ms. Merkel may now need to spend months nego­ti­at­ing with par­ties with con­flict­ing views on taxes and social issues in order to form a gov­ern­ment. The Social Democ­rats, one likely part­ner, wants to raise taxes on the wealthy to pay for more invest­ment and social pro­grams, and imple­ment a nation­wide min­i­mum wage.

    In a wide rang­ing speech, Mr. Wei­d­mann said Ger­many would be chal­lenged by glob­al­iza­tion, energy pol­icy shifts, and an aging soci­ety. In par­tic­u­lar, Mr. Wei­d­mann, who also sits on the Euro­pean Cen­tral Bank‘s Gov­ern­ing Coun­cil, sin­gled out Germany’s debt, which at 80% of nom­i­nal gross domes­tic prod­uct, is “very high.”

    He also called for tar­geted invest­ments in infra­struc­ture and edu­ca­tion to help boost eco­nomic growth, but warned that any new invest­ment shouldn’t boost Germany’s national debt. He also warned that imple­ment­ing a min­i­mum wage could have neg­a­tive con­se­quences for employment.

    Ulti­mately as other economies imple­ment reforms and slash pub­lic bud­gets to bet­ter com­pete on the global stage, Ger­many can­not afford to sit still, espe­cially as its soci­ety ages. But he added that these chal­lenges can be over­come through reforms. In par­tic­u­lar, he urged Ger­many to make more use of its older and female work­ers, and called for a sys­tem­atic approach for attract­ing skilled work­ers to Germany.

    ...

    Oh well, increas­ing global trade will no doubt turn around all these euro­zone economies once they’ve suf­fi­ciently increased their “com­pet­i­tive­ness”. Or maybe not.

    Posted by Pterrafractyl | October 1, 2013, 1:54 pm
  5. Krug­man has a nice post on some of the moti­va­tions behind the Ger­man oppo­si­tion to last week’s sur­prise inter­est rate cut by the ECB designed to ward off Europe’s grow­ing prob­lem with defla­tion. It appears
    that intense fears over the pos­si­bil­ity that some lazy South­ern Euro­peans might be get­ting a ‘free-ride’ by low inter­est rates super­sedes fears of defla­tion. And it appears that those fears of lazy South­ern­ers are par­tially based on an appar­ent inabil­ity to recall that higher lev­els of infla­tion in South­ern Europe was exactly what Ger­many used to achieve its own aus­ter­ity suc­cess:

    The Con­science of a Liberal

    Germany’s Lack of Reci­procity
    Paul Krug­man
    Novem­ber 12, 2013, 1:26 am

    Huge ten­sions over the ECB rate cut, with a split on the board and many Ger­man econ­o­mists protest­ing. As usual, a lot of it is about the per­cep­tion that those lazy south­ern Euro­peans are get­ting a free ride:

    A com­men­tary by the chief econ­o­mist of the finan­cial weekly Wirtschaftswoche called the deci­sion a “dik­tat from a new Banca d’Italia, based in Frankfurt”.

    Why can’t those Ital­ians etc. pull up their socks the way we did?

    What Ger­mans — econ­o­mists as well as the gen­eral pub­lic — still don’t seem to get is how much Germany’s suc­cess at emerg­ing from its late-90s dol­drums depended on a some­what infla­tion­ary boom in south­ern Europe. And they there­fore also don’t real­ize how much dam­age Ger­many is impos­ing by refus­ing to allow higher euro­zone inflation.

    ...

    Ger­many was able to achieve large gains in com­pet­i­tive­ness with­out defla­tion, because Spain and oth­ers were will­ing to accept infla­tion well above 2 per­cent. But now the euro­zone has over­all core infla­tion below 1 per­cent, which means that Spain can only achieve inter­nal deval­u­a­tion through crip­pling deflation:

    ...

    The Ger­mans, in other words, aren’t ask­ing the south­ern Euro­peans to emu­late them; they’re demand­ing that they accom­plish a feat Ger­many never had to man­age, and which hardly any­one has ever man­aged.

    One of the inter­est­ing long-term impli­ca­tions about struc­tur­ing an econ­omy based around the moral par­a­digm of “if you (or your nation) didn’t earn it, you (or your nation) don’t deserve it!” is that we’re rapidly tran­si­tion to an econ­omy were a grow­ing amount of what’s pro­duced is pro­duced using sci­ence and tech­nol­ogy that none of us earned because we will have inher­ited enor­mous tech­ni­cal exper­tise from past gen­er­a­tions. So are the engi­neers that man­age the robot-run fac­to­ries of the future really going to look at all that robot-created pro­duc­tion (using sci­en­tific knowl­edge and tech­nol­ogy that took cen­turies to develop) and say “Yes We Did Build That! All of that! And all you lazy moochers had bet­ter not even think about shar­ing in the spoils of our grand socioe­co­nomic con­quest that we achieved all on our own!” Is this really going to be our future? Prob­a­bly, since it’s already our present.

    Posted by Pterrafractyl | November 12, 2013, 8:46 pm

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