Why Germany seems not to want a quick fix for the euro crisis
economist.com
economist.com
On the other hand I do feel that some of this sentiment is justified. After all the example of Italy (Bond markets demand high risk premiums, Italy announces much needed reforms, ECB buys Italian bonds, Italy removes reforms) is quite telling. The same (much worse, actually) applies to the financial institutions. What precedent have we set by bailing almost all of the out. Without a lot of reform investors will no doubt assume that financial institutions are state-guaranteed, allowing them to continue the tails I win, heads you (the state, taxpayers) loose game. Clearly more decisive action is required to deal with the current problems but I think we are deluding ourselves if we believe that we can make it out of this debt crisis only by clever policies.
It's a copout by politicians and the bozos they represent to ascribe individual actions such as "pushing" or "punishing" etc. to aggregates like markets. But just as the laws on the molecular level do not simply reflect those on the subnuclear level of matter, the construct of "representative agents" is a fiction. Aggregation in the social sciences is just as hard and unintuitive as in the natural sciences, maybe even harder.
So why do they do it? Because to anthropomorphize "the market" allows them do demonize it, making things simple for the bozos in describing current developments as some kind of "struggle" between supposedly good central banks and politicians and evil, "faceless markets". Unfortunately, this type of rhetoric completely misframes the issues and leads invariably to wrong decisions by building political pressure at the wrong points in the system.
Does that mean that you should be forced to sell things for a price lower than you're willing to accept, or that you should be forced to buy things for a price higher than you're willing to pay?
You are right that the price of gold is far higher than it would be if people weren't using it for investing, though.
If the value of gold was determined by industrial demand only, it would be a fraction of what it is now.
Absolutely not. Nobody rational would. That's the point.
>> [...] this psychological warfare against the faceless 'markets', that are pushing more and more to funnel taxpayer's money in their ill-gone investments. > Have you ever thought twice about what exactly "faceless markets" are? Markets are composed of many agents, people, institutions, and mostly your pension money! It's true.
Yeah, so? They don't have to step up and ask for a loan. They just sit back in their masses and demand institutionalized theft to bail out their investments.
And why does it suddenly make things right that it's just regular people doing it?
The Greek economy is dysfunctional to its core (even a passing skim-through of Michael Lewis's new book will give you a sense for just how dysfunctional it is). But that isn't the root of the problem. The root of the problem is that Greece was brought into the Euro monetary collective in the first place, and given the credit ratings and borrowing rates of a country like Germany. Banks had a large part in helping put lipstick on the Greek pig, covering up its systemic flaws and getting it ready for EU primetime.
So imagine that Greek dysfunction was like a caged and abused pitbull, and Greece's EU inclusion was like walking into that cage waving a bloody hunk of meat in either arm. Who do you blame when you lose a few limbs: the pitbull, or yourself?
Now, take that insight of conditions on the ground along with a chart of the growth of the Greek vs Turkish economies over the last decade, and then ask yourself: why is Greece a full EU member and included in the Eurozone, while Turkey's membership negotiations have completely stalled (and will probably conclude with Turkey not joining the EU)?
Can you imagine a world where Greece is allowed to leave the Euro, massively devalue its debt (and take the decade or more of restructuring/rebuilding its economy that would come with that), and Turkey with its strong manufacturing sector and youthful, growing middle class is brought in in Greece's place? The EU and the Euro would be in a far stronger position...but it will never happen. Unfortunately, European cultural prejudices are still to ever-present and will result in Greece continuing to be dragged along while Turkey gets shunned.
If Turkey were a Muslim country with a European toehold and a history of dodgy human rights abuses but a general trendline towards democracy and it had a population of about 10 million, the EU would be falling all over itself to admit it and show how enlightened it was.
According to a Turkish friend of mine, yours is not an accurate characterization of Turkey. There are still huge problems with democracy, power of the army, corruption, media controlled by people in power, torture, Cyprus, and more. According to him many of these things are worsening -- he is afraid that Turkey is going to go further in the direction of Syria instead of the EU. Telling is the 6 month compulsory military service for all men, except gay men, who are barred from military service and are considered to have a disease in need of treatment by the minister of family affairs. Those who follow the rules (and choose safety over the risk of rape and violence) and disclose that they're gay are asked to supply photographic evidence of enjoyment of being penetrated as proof (being exclusively the active sexual partner is not considered gay). The less lucky have to undergo a rectal medical exam. Additionally on the point of censorship: gay organisations' web sites are being blocked by the government.
Despite improvements in the economy Turkey is not yet fit for joining the EU. Sadly "stuff like the acceptance of evolution" (see below) is one of the least of the concerns.
My point is that all these problems would be easier to ignore or fix if Turkey had 10 million people. At 70 million, they'd have such a strong voice in EU institutions that they'd be as likely to change the EU as vice versa.
Accelerate the brain-drain until nothing but the dictator is left, then go back and take over.
Human rights issues ( http://en.wikipedia.org/wiki/Human_rights_in_Turkey ), Cyprus, death penalty.
This is institutionalized graft and is surely a main contributing factor in the corruption.
Given that the lower income you have the more of your income you spend, giving stimulus packages exclusively to the poorest members of society and letting it trickle up seems the only reasonable way to do it.
Politician who participated in that should be judged for treason. Financial experts for fraud. Goldman Sachs must be fined heavily for this.
Right now, Dexia is falling despite 6 billions of aid in 2008 and a successful "stress test". Obviously some fraud happened there too. There are many places where inquiries should be made.
Heads must roll, then austerity will become a possibility. Many people see this as just an economical problem but it is a very political one. There is a crisis of legitimacy amongst the people who are organizing the austerity : in most place it is the same people who caused the crisis.
That seems to have been a bit of a miscalculation.
The changes, at least from the perspective of some of my Greek relatives, were pretty encouraging up 'til 2008. The notoriously inefficient public administration was still not good, but seemed to be getting better; some things that used to require you running across town to get physical stamps from 10 different offices were being consolidated in common service centers, the number of separate approvals needed for any given document was being reduced, etc. Outright corruption was greatly reduced from the pre-Euro government, and book-cooking seems to have been reduced as well (the vast majority of the dodgy statistics are pre-2001 data). The telecom sector got much better than the old OTE-or-nothing monopoly, leading to many Greeks finally having home internet. The Athens metro finally finished construction (partly spurred by the Olympics). The national sport of tax evasion was slowly being tackled, starting with "soft" shaming measures like publishing maps showing purported average incomes of various wealthy suburbs of Athens, if you took their official tax returns as accurate (all the wealthy suburbs somehow look like low-income ghettoes!), and moving to more hardball measures like doing inventories of yachts in yacht harbors and inquiring with owners who appear not to have ever reported sufficient income to explain owning one. Pensions went through at least the first round of rationalization to remove the most egregious loopholes that allowed some people to retire exceptionally early. Etc.
But basically the scope of changes needed was quite large, and the amount of cushion Greece had, with an already very-large debt, was quite small. Probably someone should've noticed the looming problem earlier and worked out a sensible restructuring and feasible N-year plan before it became a crisis.
The really sad part of all this is it represents a horribly squandered opportunity. If expenditures had been kept steady and the government just rolled over existing debt in 2001 into bonds with the new far lower interest rates it would have been a win for everyone.
Germans pride themselves on their fiscal restraint. They save and abhor debt in their personal lives. I think it would shock them to know that their banks are close to insolvency because they took German savings and lent the money to Greeks and Portuguese. If the German government were honest about the poor state of their banks then the government would not survive.
There is this constant argument about "confidence" going around. We must maintain investor confidence etc. There is a limit to that and its much shorter than its usually stretched to. I've seen the same thing in software where management will cover up a systems flaws and press on with new features. In the end it all falls apart and a post mortem always reveals that they should have faced up to the problems sooner. So fk confidence, the whole thing is going to fall apart anyway and the longer we leave it the harder it will be to fix. Let the Greeks default and let the bankers take the hit, replace them with some talented young people (there are plenty) and lets get fixing things now that they are no longer covered up.
As a German taxpayer I don't care whom I bail out.
Funny thing: People talk about Germany, instead of Greece. Sure, bailing out German banks will cost some money, a state breakdown in Greece will cost Greek people much more.
So the Germans don't have to worry about bailing out Commerzbank or Deutsche bank the way the French are worried about BNP or Credit Agricole, but they do have to worry about what happens if the Bayerische Landesbank can no longer fund Bavarian factories.
Well, a little bit but – someone had to lend them the money in the first place. The liquidity crisis of 2008 hit everyone…
"You fucked up! You trusted us."
They are state-guaranteed. Too big to fail. Every piece of financial machinery for the debt circus is required and they can't get rid of it or let it fail without exposing the same functionality elsewhere.
As long as we use a debt-based state currency the banks can't be allowed to fail. At some point they'll just print new money and start fresh hoping it doesn't happen again.
Until we declare the debt-currency game to be unwinnable and stop playing, we'll keep losing.
> All this is true. Yet Mrs Merkel seems to lack a sense of urgency. Despite the world’s calls for action, she does not believe in bold strokes—be it letting Greece default, or issuing Eurobonds to mutualise governments’ debt. Only a slow, step-by-step approach will work. In other words, the pain, austerity and market turmoil will go on for the foreseeable future.
...it's worth pointing out, by comparison to other world leaders, Angela Merkel has a PhD in Physics (Quantum Chemistry in fact). In other words she's more than capable to grasping the complexities of financial markets.
Much as it annoys Anglo-Saxons, Mrs Merkel might be right.
You need to have thought about things, and you can't (unfortunately) just read a couple of books or articles to "learn" this subject. You are aware how the economics profession as a whole performed over the last few decades?
EDIT: Just recently, I was complaining to a friend that I am thinking about markets and economics now for almost ten years, one way or another, and I am still just speechless sometimes, asking myself wtf is going on or what does this mean etc. I feel there are many things that I still don't seem to get on a deeper, fundamental level. And I like to think I'm not so stupid either. So, I can fully imagine how tough it must be to get into a situation where you actually need to make a call with real consequences for millions of people, for many years to come, on the basis of very, very limited information. Frankly, I feel a sense of history might be of more help to someone in this position than a physics background.
EX: It is generally accepted that money is created when a bank creates a loan, however, you can make also make a similar argument that it's only when banks fail that new money is created. Both are in some ways true, but the second is actually a more useful when looking at what happens when the economy takes a real dip, because the banks created IOU's not money, but the FED get's to create money to replace those IOU's.
That's not to say Economics is easy, lacks depth, or had no concrete progress. However, there is a wide range of models out there and evaluating there relative merits in the short and long term during such complex times takes deep analytic insight.
I also have a PhD in quantum chemistry, and I don't think this in itself qualifies me to understand economics any better than anyone else.
Actually there was an interesting article on the subject of why smart people so often make really bad politicians.
The tldr: "So why do intelligent people consistently make such a hash of things? Because they are smart enough to talk themselves into anything. Ordinary mortals don’t engage in fancy mental gymnastics to reach conclusions that defy common sense. But intellectuals are particularly prone to this."
http://reason.com/archives/2011/10/04/why-smart-presidents-d...
Huh? Citation needed. For both of those claims. Actually, three claims: 1) Intelligent people talk themselves into anything. 2) That is why they make a hash of things. 3) Ordinary people do not engage in mental gymnastics to reach conclusions that defy common sense. Also, which is it, intellectuals or intelligent people?
There are a few that have found how to profit from what's going on: not because they understand how the system in general works, but because they understand some minor parts a bit better than others.
I don't know exactly what you mean by should but whether or not fear and rumor should drive markets the fact remains that they do sometimes drive markets.
I'm not saying it's directly applicable but the anyone who has grasped it, should be capable of understanding market effects as well.
Either the cat is dead or it isn't. Or was it Greece?
The Bundesverfassungsgericht (federal constitutional court) is the only organ that reliably keeps doing its job, ensuring that the newly passed laws are in fact constitutional -- a test that was failed so many times in the recent past. Calling that jealous behavior is a very strange position to take.
Greece Example: Greece spent too much money raised through issuing debt (which increasingly looks like an imminent default) and creditors continued to lend Greece money under the belief that Greece wouldn't be allowed to default by the rest of the Euro countries.
There's no painless way to fix this mess, but I don't think giving Greece a massive one-time bailout sends the right message to the rest of the Euro countries (and countries' creditors) regarding moral hazard. The citizens of bailing-out countries (e.g. Germany) will be incredibly angry, rightfully so, and who knows how that will play out. On the other hand, small delaying actions like the ones that have been taken since the Euro crises began only worsen the situation and undermine global confidence in European leadership.
Personally, I think the creation of a common currency (Euro), without a corresponding enforceable common fiscal policy, is the root cause of the global impact of this crises. One member of the common currency can bring down many of the rest of the members by contagion so essentially, the coalition is only as strong as its weakest link. The weakest link can be strengthened by enforcement of a common fiscal policy, but there was clearly no such common fiscal policy being effectively enforced in Greece.
Another problem with the common currency is that Greece cannot devalue its currency to (i) make its exports more competitive (thereby improving its economy) and (ii) lessen its debt load through inflation. Before the Euro, the Greek Drachma could have been devalued in order to accomplish (i) and (ii). Now, Greece has no way out other than default or waiting for a bailout which may or may not come.
No easy answers here, but my guess is that Europe will continue to incrementally increase its "help" to Greece and other struggling countries until a major comprehensive bailout is required. Similar to as in the US with its banks a couple of years ago, such comprehensive bailout will occur, global taxpayers will lose, and the cycle will continue until we see an even bigger problem next time. Happy thoughts to start off my morning...
I thought that most countries didn't need to borrow money internationally, they just sell bonds primarily to their own citizens.
This bullshit analogy nearly made me stop reading the article.
Spot on!
And this better regulation is going to come from the folks who wrote Dodd-Frank, who think that the CRA is a good idea, who keep defending Fannie Mae and Freddie Mac.....
Remember, nobody is too big or has been around too long to be allowed to fail. Assyria fell, so can Goldman Sax.
You mean German politicians are constrained by Democracy. This article portays it as if it was a bad thing.
Perhaps only a benevolent dictator could actually make decisions in an unbiased "best for everyone" manner...but then again how long would any dictator remain benevolent once he/she's had a taste of absolute power?
Germany has the third-highest public debt in the world with only the fifteenth-highest population. Their debt is much higher as a percentage of GDP than the U.S. (83% vs. 62% according to the CIA world Factbook. [1]) They've spent plenty of money they don't have.
[1] https://www.cia.gov/library/publications/the-world-factbook/...
I think there's a similar issue with this economist article. The assumption that there is a "correct choice" I think is wrong. There are a variety of bad choices, and it's probable that extremely risky choices are the only ones that have a chance of solving the crisis.
1. It was too small or wrongly applied, or
2. Keynesian economics doesn't really work
The picture of a group of penguins standing on the ice at the edge of the water waiting to see who jumps first (or gets pushed) seems to sum up the situation nicely.
If nothing fails, nothing succeeds.
This is all a result of the myopic human opinion of perma-growth.
In the end private industry(the IMF) winds up bailed out, THEN using their ill-gotten gains to scoop up public assets for pennies on the dollar.
Going to be even more "fun" to watch, when certain rules such as "penalty" for countries that export more than they import are enforced. Germany makes an excellent Hamster-in-the-wheel.
Those of us who live in Europe see no point in antagonizing somebody who isn't a pain in the ass.
Even a small transaction tax... Say, $1/EUR per trade would remove the incentive for High frequency trading and encourage some more productive market dynamics. I mean, really, who wants to IPO in a market like this? And that removes a pretty significant source of funding for new businesses...
There are lessons to be learned from Sweden's experience, but I'm not sure you can necessarily point to as a definitive case study and say "See? It won't work."
Why do you think that?
These trades net far more than $1 (or one euro).
Yes, they're looking for pennies, or less, on each share, but they're not trading single shares.
You have the car. The carmaker has it's money. The bank has it's money. I don't have a car. I've paid for all this ;-)
There is nothing particular protestant about Germany and there is nothing particular catholic about Greece.