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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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