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Most countries, including Spain ran surpluses. Their public finances were in order. However governments couldn't stop the flow of liquidity from 'the Centre' - because of the whole 'free flow of capital thing'.

At the same time Germany and France recovered from euro-sclerosis not only because they reformed, but because demand for its products expanded a lot from the increased trade and growth in the periphery.

Germans should be mad at their bankers who financed the whole bubble and now demand to be bailed out with their money.

Germany being mad at Spain for bank bailouts is like New York mad at Florida for the same. We are all in this together.

> Most countries, including Spain ran surpluses.

Why did the spending expand (or the tax go down)? I dont think there is one clear answer to this quiestion but it does not matter. Eitherway the government shuld have reacted and cut spending (or collecting more taxes).

> Germans should be mad at their bankers who financed the whole bubble and now demand to be bailed out with their money.

The EU made that difficult to default (imposible? we will se) and the EU created the insentiv to lend so much money to these countrys (bail out garantee).

Additionally the ECB broke there rules of not exepting junk as collateral. The just keeped exepting greek bonds.

The ECB made the hole thing worst (kicking the can down the road) and now it backfires.

Just blaming out the banks is simplistic, the just reacted to instentiv like anybody else.

> Germany being mad at Spain for bank bailouts is like New York mad at Florida for the same. We are all in this together.

Sorry that is not the case.

> the government shuld have reacted and cut spending (or collecting more taxes).

Any economist will tell you that the worst time to do that is in the midst of a horrible economic slump.

1. Not every economicst will tell you that

2. Like we can see in spain or greek, not cutting it right away can have very bad consequences

3. The slump has been much worse by the thread of defaulting countrys. This would not have happpend if they had cut when they started to get a bad deficit.

Spain actually had better fiscal discipline than Germany during the boom, with lower government deficits and lower public debt, so "discpline/indiscipline" is definitely not the whole story.

What I meant with discipline is the general attitude towards spending. Germany has spent a lot of money, but they spent it smartly, building up to becoming one of the most powerful industrial nations in the world, whilst the southern countries built houses that now stand empty in the spanish ghost towns.

That still made more sense than Ireland.

For the last 40 years if you built property in Spain people from Germany/UK would buy it.

How did Irish banks expect to sell more new houses than they had people?

But Spain had an absolutely massive private debt, that's now crashing down. Moreover this building bubble has been extremely obvious to anyone who's ever been to Spain in the last few years. A responsible government should have been stepped in a few years ago.

What matters in terms of financial responsibility is not public debt alone, or private debt, but both.

It did try to regulate building, but there was too much money coming in from abroad as loans. It couldn't stopped its inflow because it is against EU treaties.

The central government was. But historically as now the relatively weak central government wasn't the problem - the regional governments ran up (and some continue to run up) exorbitant deficits. This is in exclusion of private Spanish debts, which are very large.

I believe it's still true even if you add in regional debts. From what I can find, before the current crisis, outstanding central government debt hovered around 30-35% of GDP, while regional debt added up to around 10% of GDP, for a total of 40-45% of GDP, one of the lower debt totals among large economies in Europe. Lately it's been ballooning due to a mixture of: 1) interest-rate rises producing a self-fulfilling prophecy; 2) recession reducing tax revenue and increasing safety-net expenses; and 3) recession causing the GDP denominator to get smaller.

The main difference I can see is just that the German economy is much stronger than the Spanish economy, not any difference in fiscal discipline. Germany can afford to carry bigger deficits and bigger debts because it has a comparatively strong economy; same reason the U.S. can maintain much higher deficits than Spain without borrowing costs increasing.

Actually, Germany did cause quite a bit of the problem. Without Germany, the Euro would have devalued much faster, much earlier, which would have easied some problems.

A Germany going it alone would also have a much more expensive currency. This is one reason Germany doesn't want the Euro to collapse I suspect (along with the massive disorganisation)

Germany has no problems with a more expensive currency.

You don't think a 1 NeueDM = $10 would have an effect on BMW sales abroad?

This makes any imports (energy, goods, materials, services, ...) totally cheap.

Thank you.

BMW has factories world wide. With that exchange rate they would go on a big big shopping tour and buy any market they can.

This would be the big expansion of the German industry.

Do you have other good ideas?

Yes it could move all it's manufacturing to China and then use it's strong currency to let all it's citizens buy cheap Chinese TVs in Walmart

How's that working out for you guys?

We have already factories in China. China is already cheaper than Germany. Much. Still we have the factories in Germany.

Check out VW some time.

http://en.wikipedia.org/wiki/Volkswagen_Group_China

@lispm: imports would be cheap, and German labor would be very expensive. Germany (like most of Europe) imports raw materials, adds value with labor, and exports finished goods. BMW could not export made in Germany cars with a profit anymore; this could still be good for BMW (just like Apple, they could build everything in China), but it would be bad for the Germans.

German labor is already VERY expensive.

We still have factories in Germany and outside of Germany.

Each BMW uses a lot of materials and energy for production. That would get a lot cheaper. Plus BMW imports lots of parts from other countries.

We really had that discussion years ago. When the West German Deutsche Mark was getting stronger all the time. BMW expanded in Europe and outside of Europe. Still it kept its factories in Germany. The quality of its workforce is extremely high.

@lispm: "the raw materials would get cheaper" doesn't mean anything for export. Raw materials for export get in, and they get out inside the finished goods - at the same exchange rate. The exchange rate is neutral for raw materials that get reexported.

Instead, relative labor cost would change. That labor is high quality? Yes, it is. But importers wouldn't buy it "at any cost". Higher price, same value -> less demand.

As for the DM getting stronger all the time: It did so in time, while German relative productivity was rising. On the contrary, this would create an incredible shock. I wish you not to see your dream come true. You could find out it's a nightmare.

The German manufacturing industry does not export raw materials. It exports cars, machines, tools, power plants, .... For building these things it needs all kinds of materials. Much of that is imported.

> relative labor cost would change

German has already a much higher labor cost than most comparable countries. Still we have industry here and Germany is the second largest exporter in the world.

> while German relative productivity was rising

Productivity is high and still rising.

lispm, I see that your very proud of Germany. Just be careful not to be too proud. Nobody is perfect, and nobody can prosper alone.

Changes in currency only have short time effets. The prices tend to new equillibirum. Your imports get cheaper and after a while it reaches a new equillibirum (balance) between the two.

Deflation(Inflation can only grant a short term benefits and that is without calculating in the distortionary effects.

Ask German exporters...

We did in West Germany decades ago.

The answer: the exporters adapt to every exchange rate. What they really prefer is a STABLE exchange rate - high or low. What they prefer even more: no exchange rate. Trade in a large market with a single currency is even easier.

Yes, and I recall perfectly well what the German industry said whenever the Italian currency (lira) was devalued. They weren't happy.

You don't understand the Germany economy.

Most of Germany's trading partners are within the Eurozone. If Germany left the euro, then their currency would skyrocket relative to the rest of the Eurozone, making their exports much more expensive, and it would absolutely devastate the German economy.

Germany needs the Euro as much as the Euro needs them.

The entire situation is a disaster, because the only solution really is for Germany to support the rest of the EU through the issuance of Eurobonds. This will never happen. So the entire Eurozone is locked in this death grip.

If Germany left the euro, then their currency would skyrocket relative to the rest of the Eurozone, making their exports much more expensive, and it would absolutely devastate the German economy.

Huh? According to you, Germans currently work hard building products that will be enjoyed by others in the Eurozone.

Why would it be bad for them if that situation reversed, and suddenly they were able to purchase the fruits of other's labor? That's like saying it would be bad for me if my stock portfolio suddenly increased in value, and I were able to hire a cook rather than cooking for myself.

> You don't understand the Germany economy

How do you know? I'm German and I follow the German economic development for several decades now.

> If Germany left the euro, then their currency would skyrocket relative to the rest of the Eurozone

You mean to the level we had before in West Germany?

Check out the economic 'failure' of West Germany some time.

> The entire situation is a disaster because the only solution really is for Germany to support the rest of the EU through the issuance of Eurobonds. This will never happen. So the entire Eurozone is locked in this death grip.

Now it seems that you don't understand European economy.

I exept your point but:

Changes in currency only have short time effets. The prices tend to new equillibirum. Your imports get cheaper and after a while it reaches a new equillibirum (balance) between the two. Deflation(Inflation can only grant a short term benefits and that is without calculating in the distortionary effects

Switzerland has the same problem now, Germany would have after the Euro. In the Switzerland case it has been a much strong effect then it normal would have been, since people used the CHF as saving.

How do you figure? German banks very much fueled the housing and lending bubbles in the rest of Europe. This is one of the reasons Germany is so against debt holders taking haircuts on their loans.

Germany is very much a part of the neighborhood going south (so to speak) in that they were at the very least enabling all the loose lending, if not actively complicit in fostering such an environment (e.g. why weren't they vetting their loans better).

One could argue that they were in a way complicit, but not responsible. Is it Germany's fault that the representatives of a country made it seem that they were able to make good on their debts?

Representatives of a country aren't exactly magicians that can hide the anemic growth and money pissing (particularly in Public-Private "partnerships") that countries like mine - Portugal - had.

They were either fully aware or extremely incompetent, and the latter isn't plausible.

Exception: Greece. It defrauded investors by producing false accounts.

I agree with you that the German banks facilitated the spending, but the fault still lies with the countries that abused that money. You cannot blame the bank for your debt after requesting your 12th credit card!

Aside: I believe that the German banks have to live with their mistakes regarding due diligence, although even that isn't so clear as it seems that the greek authorities weren't entirely honest when it came to their financials.

You cannot blame the bank for your debt after requesting your 12th credit card!

Why not? I can and do blame banks for lending money to people who they know are submerged in debt. That does NOT mean those people aren't to blame too. Blame can be attributed to more than one party.

So, US banks have no responsibility for the sub-prime crisis?

Arguing about faults here doesn't help. It appears that Greece has the bigger faults (but they're already paying a lot for them). But I would gladly save them to save us all.

German banks? They did? Do you have a source for that?

According to Michael Lewis (in both The Big Short and Boomerang) Germans banks were famous worldwide as being an excellent source of "stupid money".

http://www.pbs.org/newshour/bb/business/july-dec11/makingsen...

"The Germans made just about every bad investment you could have made in the last 10 years. They invested in Icelandic banks. They invested in Greek government bonds. They were heavy into Irish banks, big into Irish banks, and they bought U.S. subprime mortgage bonds."

Who gave Spain how much money?

I want numbers, not stories.

Here you go - exposures of banks of the relevant countries to Spanish banks:

http://www.haver.com/comment/comment.html?c=120604b.html

[NB Germany doesn't have the largest exposure to Spanish banks - US banks do]

Right.

In Portugal its the US banks, too. In Ireland its the UK banks. In Greece its the French and US banks.

That the German banks were largely responsible now is falsified with the numbers you linked to.

I didn't interpret knowtheory's comment as implying that German bank's were solely responsible, but I can see how you could make that interpretation.

However, I can't provide direct quantitative information on the quality of the loans summarised by those numbers. Lewis (who seems credible to me) gives accounts of how German banks appear basically to have been taken advantage of (hence the "stupid money" comment) as customers for particularly ill-advised investments.

> Lewis (who seems credible to me) gives accounts of how German banks appear basically to have been taken advantage of (hence the "stupid money" comment) as customers for particularly ill-advised investments.

That part of the story is correct, IMHO. There are a lot of stories around it.

Germany has been exporting its inflation to other European nations since the inception of the Euro, and will continue to do so as long as it can.

You act like they degined it that way. In reality german was more or less forced into the Euro.

How'd that happen? Why didn't it happen to the UK? Or Denmark?

It would be long story. Basiclly the DM stopped other contrys from devaluating (they had agreed to that). So most of all france wanted to get ride of it and have contoll over the euro. The would only vote for reunigicatin if germany agrees. This stuff is not well documented but it not a conspirecy theory either. I will update the post with some soures latter.

German politics is paid for by the manufacturing industry. They needed a weaker DM and a stronger Franc/Lira/Peseta to sell stuff.

UK politics is paid for by the financial industry - they need more currencies to trade. A stable predictable and universal currency would kill the city.

Denmark stayed out because it was forced to have a referendum and sensible people always vote against anything that politicians are all in favour of.

Sorry not correct. Germany didn't want it. Im not sure about UK, I think they still have the pride of a I think they still have the pride of an empire.

I know nothing about Denmark.

"Lack of discipline is what caused the crisis."

Don't say this kind of stuff. It's verboten. Always, always blame lack of government spending. ;)