Forget Greece: Europe's real problem is Germany | Hacker News Reader

Forget Greece: Europe's real problem is Germany

washingtonpost.com

41 pointscwan28 comments

While I don't disagree with some of the author's analysis, and the thought behind some of his solutions, one premise of this article is flawed.

He promotes the notion that: 1) Germany creates wealth better than other countries, and 2) by saving and investing that wealth rather than consuming it, Germany does a disservice to the world and impoverishes its neighbors. [1]

By the same logic, we should applaud billionaires for building mansions and enormous yachts rather than living modest lives and investing in startups and other businesses. And what of all the arguments about the US and other first world countries consuming such a disproportionate share of the world's resources? If we were to consume less, and by necessity save and invest instead, we'd be impoverishing the rest of the world!

Germany is perhaps culpable here -- culpable for making bad investments which enabled wealth destruction. And they're further culpable for bailing out Greece, which perpetuates the problem and supports our world's already out of control situation with respect to moral hazard.

[1] I'm ignoring his point about currencies here, because I don't really disagree with the notion that Germany engaged in a counter-productive vendor-financing scheme on consumer goods. That's the same boat that China's in with the US. What I'm trying to emphasize is that the problem is who they loaned money to and for what purpose, whereas the author seems to imply that any increased German consumption would have been better than increased savings.

[2] The author also seems to think it is misguided to blame the spendthrift politicians in Greece. Whatever you think of the economy of Germany, I can't see what's mistaken about blaming spendthrift politicians.

> 1) Germany creates wealth better than other countries

No, his basic argument is that Germany creates wealth better than others in large part because EMU has allowed it to benefit from unnaturally low exchange rates. If it still had the deutschmark, it would be trading at a much higher level, reducing its competitiveness.

I think he's pretty much spot on with his analysis, but who knows what the solution is.

Wait, with the strong Deutsche Mark West Germany had trade surpluses all the time.

German's core competitiveness is not based on price. Price has an influence, but countries buying a German (Siemens) gas turbine for a power station don't do it because it is especially price competitive. They do it because of its technical qualities mostly. Same for the High Voltage DC lines that Siemens sells to China. Same for the high-speed trains that Siemens sells to China, Russia, Spain, ...

Siemens HVDC systems in China: http://www.innovations-report.de/html/berichte/energie_elekt...

That is indeed a valid counter-argument. I guess you'd have to quantify the proportion of its exports that are price-insensitive to be sure. I'd be interested to know if anyone has a rough idea?

I think there's a lot wrong with what you just wrote. But just two things: consumption of resources and economic consumption are two different concepts; and the paradox of thrift.

Most of the kind of wealth that can be consumed by consumers is stuff that takes real energy and resources to produce, transport, and dispose of.

As for thrift, I subscribe to the notion that it's a virtue, and I reject the supposed paradox. We're not going to settle that in this thread, though. That argument has been going on for a hundred years. The Wikipedia page covers the history.

But the energy (as measured in joules) and resources (as measured in mass of raw materials) are not normally a large part of the costs of a good. They are substantial for some goods, but many goods increase in value the less resources they require, as more efficiency requires more technology, etc. I also think you'll have a harder time arguing your case with consumption of services, which is the growing part of our spending these days.

Re thrift, I'll only add that it's plain that if everyone saved all their money, the economy would collapse; there must be a continuum along that line; and that there seems to be a plausible story about increased savings resulting in a build-up of underemployed capital, which in turn starts getting used for less and less productive investments.

Saving simply means that time preferences are shifted toward the long term. Someday you're going to use that saving in one form or another.

In other words, saving rates is the tradeoff of future goods over present goods.

Beside, capital goods needs to be maintained, replaced, or improved over time. That will cost some money. If you don't have any saving, you can't proceed to invest in capitals.

Think about it. Saving 10 arrowheads and wooden shaft every weeks mean you will have an ample supply of arrowheads for hunting if you broke one of your arrows. It also allow you to focus on investing in new technology, such as steel arrowheads because you don't have to worry about constantly running out of arrows for hunting while trying to figure out how to make steels.

No, saving isn't that simple. Saving normally means you put it in a bank or similar entity; the bank then tries to invest that - i.e. loan it to someone who will spend it, and make payments based on profit from that spending. So saving should "simply" mean switching from one kind of spending today for another today. My point about everyone saving is that it includes even the people that the bank would try to lend to, leading to the bank having a bunch of money and struggling to find a profitable place to put it.

Unwinding savings is a different issue, because things change over time, and it's hard to predict the future. There may have been inflation, and that money is worth less, or vice versa. If everyone has been saving, and they all try to spend those savings at the same time, they'll find that their savings are worth much less than they expected, owing to the excess supply of money, which will decrease its value.

Money really isn't like arrowheads or wooden shafts. If you think of the economy as a series of interconnected flows, such as an intricate water machine with pumps, pipes and reservoirs, money is like the water in the pipes flowing from one place to another. It's just an agreed medium by which we can transmit wealth from one place to another. But it's dangerous to think that you can hoard it, and rely on it holding its value in the long term. Nothing is guaranteed about value in the long term.

Indeed, mass hoarding of money would likely depress the economy, owing to deflation from the reduced supply of money, and hence leave everyone worse off down the road. Mercantilism really isn't a good policy, as the Spanish found out a few hundred years ago:

http://www.economictheories.org/2008/08/mercantilism-in-spai...

If you consider the Euro bloc economy en masse, it's a bit like it's using old-fashioned specie money. Looked at from this angle, the article is more or less arguing that Germany ran into the mercantile trap, where running a surplus and encouraging exports was considered a good thing, but turned out otherwise. But mercantilism is long out of fashion for good reasons.

"Nor will they accept that German industry was able to thrive over the past decade because of a common currency and a common monetary policy that, over time, rendered industry in some neighboring countries uncompetitive while generating huge real estate bubbles in others."

I don't really buy it. Germany was strong even before the Euro was invented, and other Eurocountries were already struggling before that. And we see big companies moving out of Germany into cheaper Eurocountries on a regular basis.

I am also not sure I entirely buy that there is a right or wrong way to handle a strong export industry. I think ultimately what causes problems is just wasting money (ie on bureaucracy and "bribes" a ka subventions for shoddy businesses).

I've heard the exact opposite point being made about the US: they have a large-ish trade deficit, and quickly increasing debt, but everyone who sells what the US people buy buys US state debt, so everything works out in the end.

As an entertaining thought, try to picture what would happen if Greece, or even the US, would go bankrupt (i.e., default on state bonds).

I like the idea of "restructuring" bonds by asking people to give up a part of the face value against being insured from the default. (This sounds a lot like the scare game, though... if Greece defaults, the non-insured bonds are nothing, and if enough people exchange their bonds, everything works out and the folks who stuck to their non-insured bonds have the higher face value and get their money).

> As an entertaining thought, try to picture what would happen if Greece, or even the US, would go bankrupt (i.e., default on state bonds).

Argentina has done so at least once.

I prefer default to inflation.

With default, either folks stop lending to govt or their lending becomes a donation. Since govts can't be trusted to borrow, either one is an improvement over inflation.

> As an entertaining thought, try to picture what would happen if Greece, or even the US, would go bankrupt (i.e., default on state bonds).

That's not the slightest bit entertaining to me :)

Re: public investment in banks: "That strategy worked in the United States, and there's no reason it can't work in Europe."

Isn't it a bit early to say that the strategy worked in the US?

I am german and that viewpoint is entirely new to me. Thank you for the link.

That it is novel somewhat surprises me. I thought it was commonly known and accepted that it was in large part German banks that were being bailed out when bailing out Greece. Similarly, as I understand it - and have long understood it, since perhaps 2005 or so (I'm Irish) - the property bubble in Ireland was driven by historically low interest rates - only easily possible with an influx of foreign capital denominated in Euro. Inflation in house pricing was so extreme that relying on it became an accepted way of becoming wealthy. Now, in Ireland, lots of people are pointing fingers, blaming politicians, banks, property developers, etc., but the real theft was by the property owning middle class themselves. When people wonder where the money of the boom went, they need only look to people who owned houses.

And another problem with house ownership - especially in English-speaking countries - is that it is seen as politically damaging to enact policies that cause house prices to fall, because it reduces the perceived wealth of the middle class. But this very same dynamic is what causes people to be upset, screaming that teachers and policepeople can no longer afford houses on their wages, ergo wages must rise, first time buyer tax rebates / etc. and other stupid policies that just serve to push up house prices even further.

It's all pretty depressing, and makes one despair somewhat of democracy.

"I thought it was commonly known and accepted that it was in large part German banks that were being bailed out when bailing out Greece."

That's how I - I'm German - understand it, but I think it's pretty much the minority report around here these days. The vox populi still argues that we shouldn't have done it, as if there were an option out of it even now. The majority doesn't grasp what's happening and why it happens, and it seems to be very easy to keep them in the dark right now.

>It's all pretty depressing, and makes one despair somewhat of democracy.

The more things change the more they stay the same.

"A democracy cannot exist as a permanent form of government. It can only exist until the majority discovers it can vote itself largess out of the public treasury. After that, the majority always votes for the candidate promising the most benefits with the result the democracy collapses because of the loose fiscal policy ensuing, always to be followed by a dictatorship, then a monarchy."

http://en.wikiquote.org/wiki/Alexis_de_Tocqueville

The number one lender, by far, to Greece is France, not Germany.

Germany is distant third.

Indeed, the numbers I know about indicate that France is owed 66% more than Germany, but that's not very distant. It's also somewhat hard to find a breakdown of debt numbers private and public, owed to entities in other countries.

For example, I understand the lump of debt owed to Switzerland was because of a Greek bank being HQ'd there:

http://www.read-news.info/financial/switzerland%E2%80%99s-no...

The bank's deposits are backed by Greece; it's now HQ'd in Luxembourg.

Was Switzerland the one you had in mind for second?

France is then lending 66% twice as much as Germany to Greece. '66% more' than Germany is significant IMO. So much for the theory that this was largely for bailing out German banks.

Basically France' banks are being bailed out (plus a lot of other countries incl. UK and US).

Germany is not especially exposed to Greece's problem. Germany also provides only 11% of Greece imports (though Germany has 20% of the EU GDP). Greece's problems are home made (lots of weapons imports, large military, corruption, country run by a few families, ...). The decision to spend billions on military ships, submarines, military aircrafts, tanks, etc. is entirely political.

Another problem is that tax receipts in Greece are way below what they should be. The Greeks' view is that their government is useless at spending public money, so they view it as their duty to dodge as much tax as possible. One law, for example, allows Greek property owners to avoid paying tax on a building until it is completed - so a lot of property owners don't build the top floor on block of apartments, so it isn't "finished" and therefore nontaxable.

We had a similar problem in Ireland up until the 1980s/90s where dodging tax was practically a national pastime - if you rang up your bank, they would advise you on how to dodge tax! They would encourage customers to set up accounts in the Cayman Islands. Even the former Irish Prime Minister was in on the act:

http://www.breakingnews.ie/ireland/ojidojsnmh/

The key to solving the tax receipts problem is a strong body for collecting tax and heavy penalties for non-compliance.

Yeah, there is an economy which is competitive on the world market and that's a problem.

Sure.

Yes but one of the main reasons it is so competitive is that it benefits from an unnaturally low exchange rate. If germany still had the deutschmark it would trade at a much higher level, making the economy less competitive. The european central bank has kept the interest rate low for a long time, benefiting mainly the german economy. Other smaller european economies were left with interest rates that were much to low. This resulted in a flood of cheap credit, leading for exmaple to a housing boom and subsequent bust in Spain/Ireland.

West Germany was competitive with the Deutsche Mark before. It ran trade surpluses then, too.

Many German goods are not competing based on price. A luxury car like BMW, Mercedes, Porsche and others doesn't compete (much) on price. Many smaller companies also are market leader not on price, but on service and product quality. China buys German machines and tools not because they are cheap. The US bought offshore wind turbines from Siemens for the Cape Cod wind farm not because they are competitive on price, but because they are the best available turbines for offshore wind farms.

For much of the German export industry it makes no difference where they export. If the Euro makes it easy, then many exports go to Eurozone countries. If not then more exports go to other countries outside the Euro zone. The Euro was overvalued in the last year - with the Euro going down, exports to other countries will strengthen.

Proof? In its years of existence the German Mark never reached parity with the US dollar.

On the contrary, switching to the stronger Euro made Germany's exports less competitive, not more, outside of the EU.

Not quite a fair comparison, as the DEM was exchanged to be ~0.5 EUR when the Euro was first introduced. Thus the DEM reaching US parity would have been equivalent to 1EUR being 2USD, which has yet to happen.

Oh, no! Not again!

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