Wednesday, February 22, 2012

Germany and the Euro Problems

I think that there is one interesting aspect to the turmoil in Europe. Well, okay, two. The one I am not referring to here is the revenge of reality. Borrowing to consume, especially as a national policy is stupid. It can only be done as a direct result of determined evasion of the fact that you are still going to be alive, or be a country, in the next minute. We should be very familiar with this trend. It is what is happening in Washington today.

What I want to discuss here is what is happening within and toward Germany: what the Germans are thinking and doing, and how people are acting toward Germany as Europe grapples with Greece’s very high government debt.

In more than one news article Germany has been called the paymaster, that is, ultimately, it is Germany who will provide the funds for bailing out every stupid government, that includes not just the Greeks, the Irish, the Spanish, and the Portugese, but also, when their time comes, the Italians and the French, although even German isn’t wealthy enough to save them all. In fact, the French have pushed policies recently that would have required the ECB, the European Central Bank, to fund recapitalizing the banks in France and elsewhere. That really means that Germany would be the source of the capital. The Germans said no, do it yourself.

There are other European governments besides Germany that have been more responsible in their fiscal habits that would have money to offer, but they are all small. Combined, the other governments would be dwarfed by problems in Greece. No, only Germany is large enough and wealthy enough to have the capacity to bail out a small country like Greece.

This recognition also includes the understanding that it isn’t just money that is required. This understanding comes from Germany. Others, many others, both within and outside of government, are calling for the ECB to just inflate their way out of the current mess. On some level Germany understands that doing so would destroy their wealth, and they aren’t willing to do that. So far, the ECB has been controlled by the Germans.

Then we have the people who explain the entire problem in terms of Germany’s scheme when the euro zone was established to construct it for their own benefit. The most consistent and clear statement of this view that I have seen comes from Stratfor, a private “intelligence” firm in the U.S. In a report, “Germany's Role in Europe and the European Debt Crisis”, published January 31, 2012, Stratfor argues that Germany engineered the agreements setting up the bloc and the common currency to make them wealthy.

[a cause] relates to Germany's status as the world's second-largest exporter. About 40 percent of German gross domestic product comes from exports, much of them to the European Union. For all their discussion of fiscal prudence and care, the Germans have an interest in facilitating consumption and demand for their exports across Europe. Without these exports, Germany would plunge into depression.
Therefore, the Germans have used the institutions and practices of the European Union to maintain demand for their products. Through the currency union, Germany has enabled other eurozone states to access credit at rates their economies didn't merit in their own right. In this sense, Germany encouraged demand for its exports by facilitating irresponsible lending practices across Europe. The degree to which German actions encouraged such imprudent practices -- since German industrial production vastly outstrips its domestic market, making sustained consumption in markets outside Germany critical to German economic prosperity -- is not fully realized.
True austerity within the European Union would have been disastrous for the German economy, since declines in consumption would have come at the expense of German exports. While demand from Greece is only a small portion of these exports, Greece is part of the larger system -- and the proper functioning of that system is very much in Germany's strategic interests. The Germans claim the Greeks deceived their creditors and the European Union. A more comprehensive explanation would include the fact that the Germans willingly turned a blind eye. Though Greece is an extreme case, Germany's overall interest has been to maintain European demand -- and thus avoid prudent austerity -- as long as possible.

This explanation is pure Maciovellan real politics and Marxist economics thinking that have been standard for a couple centuries. Supposedly, Germany could only become wealthy by sucking the wealth from others. Never mind that its best trading partners are other wealthy countries (or countries that are developing, like China). Never mind that the Greeks (and Spain and Italy, etc.) choose to borrow based on their own social welfare goals (that was the first cause that Stratfor mentions, but then ignores completely in its focus on Germany).

Also, in the same report, Stratfor states clearly that Greece and any of the others must stop this spending binge, without any hint of the supposed consequence to Germany. If they were consistent, they would be selling Germany short.

The Germans are well aware that they are going to be the paymaster. Even the man in the street understands the situation well enough to consider the wisdom of going ahead with the bailouts. The Greek bailout is especially irksome because the Greeks have pushed their wage rates above those in Germany (the monthly, legal, minimum wage in Greece is much higher than Germany’s, and all the other European countries), the Greeks have failed to follow through on the promises they made for the first round of the bailout, and the protestors in Greece have called the Germans names that no German can tolerate.

Which brings us to the attitude of the Greeks, themselves. A few have shown that they understand the situation. That seems to include a few politicians. To begin to move the government toward policies that Germany would accept, the Greeks had to make a man prime minister who was not a politician. When Germany demanded a lot more than promises, the politicians dithered for days. And when the vote was actually taken, many politicians in the largest parties voted against the bailout.

The Greek technocrat government does recognize that the country is bankrupt. The bailout offered by the other European countries is not to actually make them whole, but to give them the time to put themselves right. This isn’t a free lunch, just a little support. The support gives them the cash necessary to redeem debt falling due in March and the money to meet payrolls and continue operating without resorting to adding more debt to their total (and nationalize the banks). The Greek government must still find ways to spend less and income sources to pay off more debt. By 2020 it is suppose to reduce its debt from 160% GDP to 120%. For a country that does not produce much, in which the government accounts for about 40% of the economy, which has a culture of avoiding work and accepting corruption, and sees no connection between receiving money and production, getting the government to change its budget from a big annual deficit to a surplus is an overwhelming task. I don’t think that it can be done in a few months or a few years.

Then we have the Greek people. This is a democracy in the finest sense of the word. The population seems to think that it is fine for others to sacrifice and pay for the Greek life style. We have the government workers, who tend to not work, but spend their days shopping and sitting in cafes. We have the workers at government owned companies, who expect to be taken care of regardless of their lack of productivity and their willingness to cause disruption within the company and within the country. You have the employees of private companies who see government controls as the way to keep their job and income without regard to their productivity or the company’s financial health. You have the retired or the soon to be retired who were promised certain pensions and are angry that there is no money to meet those promises. These groups may not add up to the majority but they (and their relatives) are still a large enough portion of the population to be the deciding factor in elections. All of these groups have indicated they are angry about the changes required by the Euro Zone counties, led by Germany. What these elements of the Greek population think should be done hasn’t been reported that I know of. But, when interviewed, they all seem to think that their benefits should remain in place. How? Somehow!

So Germany is singled out for abuse. Memories (by people who weren’t there, for the most part) of past German sins are recalled. Ignoring the difference between sending troops to kill and providing money to maintain irrational finances, Germans are damned as dictators and Nazis. Some of the Greeks proclaim that the answer is communism, ignoring that it also failed the same way Greece is failing and that it has killed more people than the Nazis did.

One would expect that the Germans are angry about their treatment from the Greeks. I am sure that many Germans would prefer to just let the Greeks sink and be done with them. The more responsible of the Germans are not willing to do so. They do recognize that doing so would have very negative consequences for Germany for some time. I could argue that the long-run, self-interest of the Germans would be better served by unentangling themselves from their self-destructive neighbors, that their neighbors are going to continue to be problems and will require more and ever larger amounts of money. But that would be too selfish, and too painful in the short run, I suppose.

What Germany is looking at is that if Greece goes then Spain, Ireland, Portugal, and then Italy and probably France, too. They are thinking that solving the Greek problem will tend to prop up the others and they all can begin healing together. It is a pipe dream, but it is also the consequences of the premises with which Germany began. I do expect that Germany did expect the other governments to behave and control their fiscal budgets. That was a delusion and the Germans kept that delusion and tended to ignore what the other countries were actually doing. Germany is kind of an anomaly in that it is a social welfare state with a post WW2 tradition of some fiscal responsibility. It has even demonstrated how to absorb a backward country, East Germany, and grow. One has to have a certain respect for how Germany functions. Yet, they are still pretending that their own demographics problem doesn’t exist and they won’t have the same major debt problem as the rest of us. They still only pay attention to the next moment in time. They are still only a democracy that will tear itself apart under pressure. But they are holding themselves together much better than Italy or France.

So, to avoid the very nasty problems that letting Greece go to pieces, the Germans are willing to take on the obligations of bailing them out. The just completed bailout package includes sections intended to keep the Greeks on course, which the Greeks find insulting. Interesting isn’t it that the Greeks failed to follow through on their previous promises when they received money, and they are now insulted because their saviors don’t trust them.

The entire package is intended to assist the Greeks to lower their debt level from 160% of GDP today to 120.5% by 2020 (isn’t it interesting that they think that they can be so precise?). Usually, projections like this tend to have growth levels that can’t be maintained and the whole thing is fantasy. I expect that the projected growth levels in the bailout projections aren’t high at all, but I bet that the Europeans expect the Greek economy to begin growing sometime within the next couple years. I don’t know why. All of the capital within the country is either being soaked up by taxes or bonds, or has left the country. Who wants to invest in Greece? Is a Greek worker worth the effort? Has the Greek government actually made it easier or even possible for an investor to safely put his money there, let alone expect profits? According to online sources, manufacturing is only 18% of the economy. Production has been leaving Greece because of the business climate and the Greek worker. Why go back? As far as I can see, what has happened so far will not lead Greece to a growing economy and that means that it is going to continue to shrink, the government budget will not generate a surplus, debt will not decline (and will probably increase), the percentage of debt to GDP will not get anywhere near to 120%, and Greece will default with very messy consequences. Germany will have poured real money down a deep hole.

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