European Debt Crisis: How Germany can “Lead”

If in the future, Germany were asked to guarantee amounts beyond the current 211 billion Euros for the EFSF,  nothing would happen without the Bundestag’s (lower house of German parliament) approval, federal finance minister Wolfgang Schäuble told the Bundestag today. The members of parliament endorsed Germany’s current contribution to the EFSF, with most of the votes both from the governing coalition parties, and the opposition.

Many anglo-saxonian papers, such as the Economist, have told Germany’s government to “lead”, to restore creditors’ and investors’ trust in the Euro. The truth is that Germany can’t simply “lead” Europe. Our country is trusted to a surprising and encouraging degree, given the past century’s history, but the two world wars aren’t forgotten. Many comments, especially from Greek commenters on this thread on a Die Welt blog, may serve as indicators.

But what can the German government do?

Even if the governments of Greece, Italy, and Spain did everything it takes to restore trust in their Euroland share, politicians there could hardly resist to point out that it was “Germany” (as if there were no other European  states taking positions similar to Germany’s) which “imposed” the hardships. But without such commitment from the countries in crisis, contributions to the EFSF will not only be meaningless, but will become Finland’s, Germany’s, or the Netherlands’ burden, and wreck their public finances, too. Besides, Greece, Italy, and Spain will not only need to restore their financial status, but they will also need to rebuild their economies, i. e. their competitiveness. That, in fact, is a prerequisite for sound public finances.

It is obvious that not only the “southerners”, but Germans, too, will need to prepare for tougher times. Germany hasn’t yet balanced its own budget (let alone its pension systems). That’s an immediate task, and be it only to put  certain amounts of the saved money aside –  for a transfer union (because the countries in crisis won’t be able to rebuild their economies all alone), and to put aside further amounts should the countries in crisis – and many of their creditors – go bust.

To believe that there will be a European watchdog that will make sure that the southern states will live up to their commitments (if there should be commitments at all) is an illusion. Germany, along with other contributing countries, should provide funding for a transfer union for a limited period, just as the Taiwanese state provided its fledgling industries with a limited period of protectionism, decades ago. After a given period, the funding should stop – mercilessly – just as Taiwan removed protective barriers around its industries after a given period. Meantime, the southern countries should take the steps they – not a European agency or a contributing European country – believe to be useful.

If they succeed or not: time would be bought, the contributing countries could prepare for a time after a break-up of Euroland (if the Eurozone should prove to be unsustainable), so could the creditors, and noone could seriously accuse the contributing countries (especially Germany, the whipping kid of many southerners’ choice) of accroaching a hegemonic role over other sovereign states.

For many reasons, we should see ourselves in the same boat as Greece, Italy, or Spain. As long as our trade with the three, and many other trade-deficit countries didn’t appear to pose obvious problems, people here in Germany didn’t ask too many questions, either. If we want to be true Europeans, we can be just that, and leave it to our fellow Europeans if they want to be “EU-Europeans”, too, and do their share of the work.

These steps wouldn’t only help to restore trust within the financial markets. They would also provide some peace of mind among those EU member states which aren’t yet members of the Eurozone. They could stay on the sidelines and wait if the day to join will ever come.

19 Comments to “European Debt Crisis: How Germany can “Lead””

  1. “But what can the German government do?”

    Allow, or even encourage, the governments of the southern countries to embrace default.

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  2. In 1998 William Hague described the Euro as “a burning building with no exits”. Even if the current situation were entirely solved, there are simply no guarantees without a unified system of fiscal governance that it would not recur. I see no good solutions to this problem.

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  3. Mike: can you add a short breakdown to what the consequences of a default of the southern countries – Greece, Spain, possibly Italy – would be, and why these should be a more attractive approach than the outline above?

    Foarp: I see no good solution to this problem either, not yet, anyway. However, the only situation in life which can be described as a burning building with no exits is a burning building with no exits. It will probably pay to look for the best possible approach.

    I dislike much of what seems to be prepared as a recue plan, because it’s too centralist, in my view – it doesn’t look as practical as more local approaches, and it isn’t one that would encourage accountability. No matter if it should turn out to work reasonably well, or fail, there would be a lot of fingerpointing, and most of that along national rupture lines. Building a unified system of fiscal governance should also be easier if cooperation, rather than coercion or whatever kind of “blackmail”, prevails.

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  4. Default would be disastrous. But it would be better than the alternative, in that it would allow people to start dealing with the reality that those governments were, and are, basically insolvent. The immediate consequence would be that banks which lent to those governments will have to take a hit – perhaps leading some of them to collapse. Yes, a lot of people in northern Europe are going to be hurt by this. The other immediate consequence of default would be the need for massive political reform with the cutting back of government spending to what it can take in in taxes (and it’s quite likely that taxation will have to be extremely low to avoid “social unrest” – assuming it can be avoided).

    The alternative to default and the path the Merkel government is treading now – that of endless bailouts – will eventually ruin not only the public finances of the German State (not that they were anything like “healthy” to begin with), but it would almost certainly lead to the collapse of the Euro since the ECB would have to turn to printing money to fund the bailouts.

    Needless to say, a collapse of the Euro would be catastrophic.

    Yet what is happening in Europe now is not merely confined to Europe – even here in Taiwan, we are similarly exposed to the danger of long term recession or even worse (interest rates have been very low for a long, long time, most of the island’s economy is export oriented and government debt is something like 165% of nominal GDP) – but this danger is not the subject of public debate yet.

    In the U.S. meanwhile, the Republican debates are despiriting. Those guys are talking about tax reform, tort reform and cutting regulation and the questions being put to them are about “how to create jobs”. Yet the problem is one of monetary and fiscal reform, and that means deep, long term spending cuts – which will be an extremely difficult thing in practice. They’re not even talking about that.

    And then there’s the Democrats… (facepalm).

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  5. See the recent talk by Professor Kevin Dowd here for a more general, and much more sophisticated presentation than I could give.

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  6. Mike: up to the 27th minute, Prof Dowd doesn’t seem to address the issue I’m addressing in my post here. To make this a more-to-the-point discussion, I suggest that you point out the passages where he does – if the link is meant to be in this context. Or maybe you can find a transcript of it, and link there?

    It is legitimate to point out that giving the EFSF all the firepower it may need can result in the default of even Europe’s financially and economically (comparatively) sound countries. But that isn’t directly related to bailing out banks. In fact, giving up on Greece, Italy, and Spain combined, is likely to lead to troubled banks which are – old theme – too big to fail. That we should have had rules in place long since similar experiences in 2008 is a topic I don’t address here, because that would be conditional type three, which doesn’t work here and now.

    Dowd gave his talk on Sep 12, and he may or may not have been aware of the amounts of debt bought by the German Bundesbank in the European banks’ interbanking system – amounting to 18 bn euros in 2006, and to 338 bn now – that’s way more than what Germany contributes to the EFSF guarantees (just to leave an impression of what letting the southerners default may involve). To encourage general default (an orderly haircut for Greece would be a different story amounts to jumping off a high-speed train, rather than trying to stop it.

    If one tends to choose the braking option (which I do, for one), one needs to ask how centralized, or how diverse, approaches to halting the train of disaster should be. That’s what I’m discussing in this post, and its based on the belief that most of the jitters in the markets stem from a lack of political decisions, rather than from the absence of a laisser-faire policy. This post also addresses the likelihood that the south would lean back and do nothing to reindustrialise – by putting a transfer union into place for a limited period. This union would need to service both German accruals (if the approach fails, and the same situation returns, after that period), and policies in the south.

    And as I’ve just mentioned the lack of action in reforming the “too-big-to-fail” financial sector after 2008: yes, building accruals (or combining accruals and write-offs) should be mandatory for commercial banks, too, during that period.

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  7. “…up to the 27th minute, Prof Dowd doesn’t seem to address the issue I’m addressing in my post here.”

    Dowd’s talk is more general – as I said. Although he talks mostly about the U.S. and the UK, the relevance of these countries’ problems to the European debt crisis is clear as the problems are very similar: mismanagement of the currency, faulty accounting standards, negative real interest rates, lack of savings, over-leveraged banks, public finance mess, bloated government, high taxes…

    Essentially, everything is broken.

    “It is legitimate to point out that giving the EFSF all the firepower it may need can result in the default of even Europe’s financially and economically (comparatively) sound countries. But that isn’t directly related to bailing out banks.”

    It isn’t? Who lent the money to the southern governments, then? And the greater risk of printing money to give to the EFSF isn’t simply the default of Germany and France, but the collapse of the Euro under inflation. And “firepower”… that’s an unfortunate choice of metaphor, isn’t it?

    “In fact, giving up on Greece, Italy, and Spain combined, is likely to lead to troubled banks which are – old theme – too big to fail.”

    Those troubled banks (and they aren’t only German banks either) are already “troubled” (i.e. broke) – they are going to have to be restructured, there’s no way around it.

    “That we should have had rules in place long since similar experiences in 2008…”

    There were rules in place – both for the commercial banks and the ECB, but they either gamed the rules (the commercial banks) or just broke them with impudence (the ECB). Now of course, you might well say they were the wrong sort of rules and I would agree: I think the best way to get the right rules is with a free banking system and honest accounting procedures within a sound monetary framework (e.g. a gold standard, or some other commodities-anchored currency). That and less government and lower taxes – all of the things anathema to the political Left (and parts of the Right too).

    “To encourage general default… amounts to jumping off a high-speed train, rather than trying to stop it.”

    No I think it’s more like jumping out of a three-story building that’s on fire. Yes, you’re probably going to break your legs if you’re lucky enough to survive the fall, but if you stay in the burning building you are certainly going to die. Default is the one option which would allow people to face reality and then start to deal with it, instead of pretending the EFSF bailout money will put out the fire.

    “…one needs to ask how centralized, or how diverse, approaches to halting the train of disaster should be…”

    Diverse. Let them embrace default and leave the Euro – the southern countries (actually, all of the big European countries except places like Switzerland and Norway) must engage in serious monetary-fiscal reform.

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  8. Essentially, everything is broken.

    – That’s what every Government-is-the-problem advocate likes to say, Mike. In fact, only government can solve these problems (accounting standards and their faithful practice included), and as I pointed out before, banks and states can be restructured without having to go bust. Bubbles created by borrowing at nearly nothing and investing at three per cent (Dowd) helped to create bubbles such as the construction spree in Spain – but that’s an issue to address by changing banking policies – and that can be done with or without letting big banks or countries go bust. My suggestions in this posts are about enabling and financing the restructuring of the southern states – financially and economically.

    Those troubled banks (and they aren’t only German banks either) are already “troubled” (i.e. broke) – they are going to have to be restructured, there’s no way around it.

    Sure – if the bailouts go wrong right away, there will be inflation. If. Every option comes with a price to pay. The good thing is that the EFSF guarantees aren’t money that has yet been spent, and that there may be no need for it to be spent (and to quite a degree “printed”) if things go wrong. Letting banks and states go bust, on the other hand, will definitely lead to disastrous consequences, as you have said yourself earlier. The EFSF may lead to disastrous consequences – but at a time where both banks and contributing states will be in a better position to deal with them – see post, and the last para of this comment.

    My suggestion: stop bitching, Mike. Stuff like and “firepower”… that’s an unfortunate choice of metaphor, isn’t it? doesn’t contribute to understanding the problem and discussing it, unless you explain as to why it is “unfortunate”. And if it’s only on a marginal note, just leave it out.
    Obviously, you are free to write what you want, as long as you stick to these rules, but I’m only open for a discussion if it is problem-oriented, and leaves narcissism (“another blogger banned me from his commenting thread because I’m so right and he can’t handle it”) aside.

    I’m most interested in comments which put this post’s concept into question, so that I can sit down again, think again, and rewrite it. That everything is broke is a statement that most likely results from a weltanschauung or a current mood.

    So Mike: write as you like – but don’t think of JR as a blogger who is available for any topic you may want to discuss.

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  9. Hey Mike, your suggestions from the Thatcherist junk room remind me of politics textbooks of the 1980s. I can understand that some British people have hurt feelings, but remember that Germany is still a country with a good manufacturing industrial base, and that we would like to continue to do business with Italy, Portugal and Spain in the future, too.

    There was a time before Margaret Thatcher when there were manufactured products made in Britain worth to be talked about. Made under the terror of the shop stewards, but nade anyway. When it’s about Britain, I’m nostalgic. I’ll buy a Landrover, imported from the Malaysian second-hand market, as a christmas gift to myself. If the Rhine Army no longer exists, at least I can act as if.

    It’s nice that neoliberalism hasn’t struck in Germany the way it did in Britain, and that a public servant like myself – along with many skilled workers – can still afford products of genuine value?

    Long live the Queen. No iriony meant.

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  10. “That’s what every Government-is-the-problem advocate likes to say…”

    Well, that’s because government is the problem.

    “In fact, only government can solve these problems (accounting standards and their faithful practice included)…”

    That is a presumption, not a fact. It is only governance that can solve those problems, not government. The distinction is one of form and function.

    “Bubbles created by borrowing at nearly nothing and investing at three per cent (Dowd) helped to create bubbles such as the construction spree in Spain – but that’s an issue to address by changing banking policies – and that can be done with or without letting big banks or countries go bust.”

    That’s an issue to address by changing banking policies before the bubbles grows too large. But it isn’t just the market bubbles is it? It is the sheer size to which government, and what might be called “the political sector” of the economy, has grown. Raising interest rates now will not magic away the need for … extremely large… market corrections. Sovereign default of the southern countries is the only way to finally stop banks and investors putting their money in government bonds rather than in enterprise.

    “Sure – if the bailouts go wrong right away, there will be inflation. If.”

    And just what, in your view, could possibly cause the bailouts to go wrong? I mean, they’ve worked well so far right?

    “I’m only open for a discussion if it is problem-oriented, and leaves narcissism… aside.”

    I’m not narcissistic, I just have a different weltanschaung than you and, whilst I do have doubts on certain things, I am not in doubt in areas with which you and other social democrats are likely to disagree with me. I do not pander to other people’s need to maintain their self-esteem, but that doesn’t mean I have an inflated sense of my own self importance. If I did, I wouldn’t talk to any of you people.

    “That everything is broke is a statement that most likely results from…”

    It results from the preceding litany of things that are broken.

    taide…

    Hey Mike, your suggestions from the Thatcherist junk room remind me of politics textbooks of the 1980s.

    Perhaps that’s because you’re as ignorant as your insult is crude.

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  11. Hey Mike, I can’t make much of your criticism (“insult”). But you don’t like to pin yourself down to statements (other than credos) anyway.

    “PUSSY” would be an insult. But I would never say such things. : twisted :

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  12. With an avatar like that, I don’t blame you.

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  13. Well, that’s because government is the problem.

    When saying “government”, are you referring to central banks and legislators as government, or would it only include the bureaucracy/the executive branch, Mike? Or anything other?

    And just what, in your view, could possibly cause the bailouts to go wrong? I mean, they’ve worked well so far right?

    They have worked so far, but at costs no public finances can sustain in the long run. At least here in Germany, no conclusions have been drawn yet, to avoid further situations like the one in 2008 (when subprime was a big issue) until now (as eurozone states are the big issue). We certainly agree that they are likely to recur, as it is a very nice solution for the banking sector itself. As for the coming years, even if political decisionmakers share my ideas about a transfer union and build that kind of system, in addition to the EFSF, the bailouts could still go wrong if a southern state chooses to default anyway, for a dislike of the time limit on the transfer union, or because the financial industry panics again, or because it becomes foreseeable that a southern government won’t achieve its goals within that arrangement, or for any other reason that may turn up along the way. It’s by no means a risk-free approach. Hence the need for the creditors to make accruals.

    I’m not narcissistic, I just have a different weltanschaung than you and, whilst I do have doubts on certain things, I am not in doubt in areas with which you and other social democrats are likely to disagree with me. I do not pander to other people’s need to maintain their self-esteem, but that doesn’t mean I have an inflated sense of my own self importance. If I did, I wouldn’t talk to any of you people.

    A commenter of some time ago described your approach this way:

    Sometimes, Mike Fagan’s exchanges result in a little bit of…I think…incivility. It appears he likes to dig his readers/commenters into as much of an arcane discourse as possible, and then wiggle out (even if both people agree) and proclaim, “I win!. […] but I wish he wouldn’t trip over himself and his semantics so much that it results in such weird, mine-ridden, kamikaze-bravado that gets everybody so uncertain and touchy (himself too, it seems!).

    I think it’s a good description. Your suggestion that you do talk to people like “us” anyway doesn’t cut it. That may just as well be because there are no other people available for you to talk to. I’m certainly thinking of you as a narcissist- not in the sense of a reasonable degree of self-esteem, but as one who keeps indulging himself in a cycle of challenging “others”, interpreting rejection by “others” – being banned from a blog – as the crown of achievements, and complaining about “other” peoples’ ignorance.

    Just for my personal benefit, and to avoid expressions that may leave an unfortunate impression: why do you think that “firepower”, in connection with the EFSF, would be an unfortunate expression?

    “everything is broke” […] results from the preceding litany of things that are broken.

    Whose litany, Mike?

    Tai De: the German self-interest is an important aspect. I tried to point that out with the remarks in the second-last para of the post. Either way – if a transfer union of the kind I’m speculating about would work, it would lead to more competitive industries further south – there will be no sustainable exports to those countries otherwise, but without substantial and sustainable growth, German exports to the countries in question would have to go down to quite an extent. I see no way around that.

    Btw, I’m not sure what anyone could possibly have against that fat cat in your avatar, but then, Mike and it have never met personally. Anyway, I’m saddened that Mike feels insulted here, but I can’t see the insult, either.

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  14. JR, why do you keep emboldening my name? Are you trying to suggest I should capitalize it? (If so, the lower case “m” is just from long habit of convenience to distinguish myself from another “Mike” elsewhere).

    “When saying “government”, are you referring to central banks and legislators…”

    Government by the State – the apparatus of coercion. The nominal independence of the central banks does not make them any less an aspect of government , so yes. I would prefer to see legal tender laws repealed and the central banks replaced with competitive, currency-issuing institutions as they would be under strict market pressure not to over-issue their currency by lending to profligate governments. Ask me if you want to know more.

    “At least here in Germany, no conclusions have been drawn yet…”

    By whom? I think I read somewhere that as many as 60+% of Germans disagree with what the Merkel government is doing.

    “We certainly agree that they are likely to recur, as it is a very nice solution for the banking sector itself.”

    Yes. They are likely to recur, until they can’t recur anymore: currency collapse.

    “…the bailouts could still go wrong if…”

    So many ifs. My opinion is that they most likely will go wrong, because basically they rely on governments not acting like governments. It’s better to embrace default now, liquify all the crap in the banks and then restructure them with a better capital base. Same goes for the governments – a lot of programs will have to be flushed now in order to save future generations from having to work all their lives to pay off the entitlements of their forebears, and for nothing in return.

    “I think it’s a good description.”

    I don’t. The charge of “semantics” is interesting. Words are the necessary keys to concepts, without which we cannot think and therefore function as human beings. To dismiss an argument thus because it hinges on a subtle conceptual distinction is – quite literally, retarded.

    “…one who keeps indulging himself in a cycle of challenging “others”, interpreting rejection by “others” – being banned from a blog – as the crown of achievements, and complaining about “other” peoples’ ignorance.”

    I don’t regard being banned as “the crown of achievements”, and have never said so. It doesn’t count as anything to my credit, but only to the discredit of the people who banned me (and doubly so when they lie about it afterwards). As for other people being ignorant – your pet pussy above might pick up a thread or two from watching the Kevin Dowd talk I linked to earlier. He might dismiss it – after all, it’s the Adam Smith Institute and he’s a public servant – but then I’d still be the one who’s “narcissistic” right? Give me a break…

    Oh, and his insult was the remark on “Thatcher’s junk room”… but I wouldn’t expect Lefties to recognize such a remark for the crass slur that it is.

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  15. JR, why do you keep emboldening my name?

    It’s a habit of mine, Mike. I started emboldening names in threads where a larger number of people were taking part in a discussion, and now it has become a standard. To do it works faster, than to think about the need to do it.

    [no conclusions ] by whom? I think I read somewhere that as many as 60+% of Germans disagree with what the Merkel government is doing.

    They disagree – so do I -, but not everyone can think of a better concept, and while most Germans may be uneasy with the situation, they wouldn’t necessarily vote the ruling parties out for the EFSF.

    Yes. They are likely to recur, until they can’t recur anymore: currency collapse.

    That is a presumption, not a fact – unless you can prove that the collapse of the euro is the only way to put an end their recurrance.

    So many ifs.

    Sure. So many ifs, and probably some more of which I haven’t thought when writing my previous comment. And still, the number of ifs says nothing about the likelihood that it would go wrong.

    I don’t regard being banned as “the crown of achievements”, and have never said so.

    I know that this isn’t the way you see yourself. It’s the way I see you.

    He might dismiss it – after all, it’s the Adam Smith Institute and he’s a public servant

    That doesn’t mean a thing. One of the leading members of the German liberal democrats – now minister for economic cooperation – was a public servant as a department manager at the German employment agency, and joined politics to abolish the agency. That said, he’s reserved himself the right to return to his old post, should he leave politics before retirement age. A public servant won’t necessarily subscribe to the kinds of arguments you dislike.

    Oh, and his insult was the remark on “Thatcher’s junk room”… but I wouldn’t expect Lefties to recognize such a remark for the crass slur that it is.

    I wouldn’t expect “righties” to recognize the crass slur in it, either.

    Now, I believe that can see one reason as to why you disagree with my post – it would mean what many people refer to as “big government”, and the concept would go wrong because in your view, big government can only make it go wrong. Are there more reasons for you to disagree with it?

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  16. “That is a presumption, not a fact – unless you can prove that the collapse of the euro is the only way to put an end their recurrance.”

    No it isn’t. Either we get sovereign default together with a liquidation and restructuring/shrinking of the banks (which would preclude the need for bailouts), or the bailouts will continue until the Euro collapses – similar to what happened in the Weimar Republic. This isn’t presumption, it is opinion based on an understanding of principles backed by historical precedent. Fiat money systems have always collapsed when the issuing authority over-issues the currency, and this is (to my knowledge at least), always a result of the State over-spending in one way or another.

    “And still, the number of ifs says nothing about the likelihood that it would go wrong.”

    I rather think it does – given that bailouts of this magnitude cannot continue indefinitely without currency collapse.

    “I know that this isn’t the way you see yourself. It’s the way I see you.”

    Ha! You don’t “see” me at all then! You know what the first thing I say is when I call someone on the phone? I ask them if they are busy – to establish whether I am interrupting them and give them the opportunity to call me back later.

    “…a public servant as a department manager at the German employment agency, and joined politics to abolish the agency. That said, he’s reserved himself the right to return to his old post…”

    Hilarious.

    “A public servant won’t necessarily subscribe to the kinds of arguments you dislike.”

    Oh sure, but they typically do “subscribe” to at least some of those arguments (and there are a lot of arguments I dislike, so it’s a likely bet). Besides, I recognized this contingency with my use of the term “might”. There are reasons why I choose the words that I do – I didn’t say he “will” ignore it, did I?

    “… the concept would go wrong because in your view, big government can only make it go wrong. Are there more reasons for you to disagree with it?”

    No, that’s pretty much it. Other than to count the ways in which big government can make it go wrong – but you’ve already alluded to that point yourself.

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  17. No it isn’t.

    Well, then, Mike. If you agree that my presumption that only government can solve these problems is actually an opinion, too, your presumption may be an opinion, too.

    Either we get sovereign default together with a liquidation and restructuring/shrinking of the banks (which would preclude the need for bailouts), or the bailouts will continue until the Euro collapses – similar to what happened in the Weimar Republic.

    So: no restructuring without sovereign default, Mike? Why not? How is the Weimar Republic a precedent for the situation today? How does Weimar suggest that it’s either bailouts until the euro collapses, or sovereign default, and nothing else? So far, the money which you suggest will be spent is actually guaranteed, but not even spent, and your thoughts leave an important aspect out of the account: the markets’ expecations that decisions are actually made – not only by the EFSF contributing governments, but by the southern governments, too. Hence my post, and its recommendations. Also, the Weimar Republic was apparently required to pay annual instalments which amounted to two billion goldmarks, plus 26 percent of the value of Germany’s exports. That, for sure, undermined trust in the future of Germany’s economy.

    For comparison: the EFSF amount guaranteed by Germany to date is 211 billion euros. Germany’s exports are currently at 78.5 billion euros, reportedly. Imagine 26-percent-accruals of that amount (not by taxes on exports – just to make sure that you don’t get this wrong -, but by balancing the budget, and putting the saved amounts aside, as described in my post. And, obviously, no war reparations of the kind the Weimar Republic had to pay.

    Comprehensive 1920s statistics will be hard to find on the internet – either of us would probably have to go to a good library -, but nowandfutures may provide a glimpse: “Government expenditure at this time [early 1920s] amounted to 6 quintillions to which revenue had contributed a mere 6 quadrillions, one-thousandth as much.” Hard to compare with the EFSF ratio vis-a-vis the German public budgets, don’t you think so?
    Comparisons with history may be useful – turning history into a generalized benchmark, however, without even looking at the dimensions in question (let alone the amounts), is not.

    Fiat money systems have always collapsed when the issuing authority over-issues the currency, and this is (to my knowledge at least), always a result of the State over-spending in one way or another.

    How do you define over-spending, Mike? Any situation where state expenditure exceeds revenues and reserves (in own, or foreign currency)? Or a situation where creditors begin to doubt that the state in question is good for the loans it takes? Or some other situation?

    Ha! You don’t “see” me at all then! You know what the first thing I say is when I call someone on the phone? I ask them if they are busy – to establish whether I am interrupting them and give them the opportunity to call me back later.

    Sure – before you’ve started discussing your pet peeves with them, or if they agree with you anyway, or if politics isn’t the issue (on the phone, chances are that it isn’t).

    There are reasons why I choose the words that I do – I didn’t say he “will” ignore it, did I?

    Then why wouldn’t you simply wait what Tai De will or won’t do? Did you suggest that he might ignore it, or rather dismiss it, to prepare yourself for the disappointment it would spell if he dismisses it?

    No, that’s pretty much it. Other than to count the ways in which big government can make it go wrong – but you’ve already alluded to that point yourself.

    I see.

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  18. “If you agree that my presumption that only government can solve these problems is actually an opinion, too, your presumption may be an opinion, too.”

    I thought you might go for that… but the two are not equivalent. Yours is a presumption but mine isn’t because I can point to ample reason and evidence for my assertion (that either we get default and liquidation or eventual currency collapse), but you cannot do so for yours because you’re in the position of having to prove a negative – i.e. that no other form of governance can formulate, and ensure adherence to, sound accounting standards.

    “So: no restructuring without sovereign default, Mike? Why not?”

    Sure. For a start, the growth of bloated social-welfarism throughout the major European economies, not just the south, was made possible not just because of economic growth but because of a long-term artificial expansion in the supply of credit that did not reflect real savings. So cash-flush banks were buying up bonds for fun. This expansion must be corrected in any case, and that will require the liquidation of not only “assets” held by banks but also of government spending programs that can no longer be sustained by taxation alone. Moreover, it would be absurd and unjust to expect now and future generations of Greeks, via their taxation payments to the Greek government, to pay off the loans given them by German banks. The Greek people did not sign any contract with the banks, the Greek government did and it should not have (nor should the German banks have lent to them in the first place). It is also absurd and unjust to expect now and future generations of German taxpayers to foot the bill for the bailouts – since the vast majority of them were not responsible for the lending policies of the German banks. Default would not only allow people to start dealing with reality rather than gambling other people’s money on conjectural “ifs”, but it would also be a more just solution. Sovereign default would also allow the governments of the southern countries to shrink and reduce their taxes and regulations – which, from my point of view, would be a step in the right direction anyway (except that their E.U. membership might pose some difficulties).

    “How is the Weimar Republic a precedent for the situation today?”

    Granted it is not entirely the same, but the essential similarity lies with the enormous expansion in the supply of credit. In the case of Weimar, this occured over a short period of time in order to pay off war reparations, whereas the artificial credit expansion of today has been going on more slowly, but surely, for decades – long before the Euro even took off.

    “…your thoughts leave an important aspect out of the account: the markets’ expecations that decisions are actually made – not only by the EFSF contributing governments, but by the southern governments, too.”

    Well the markets today haven’t been impressed by the Greek government missing its deficit reduction targets, but even when the EFSF funds come into play, I don’t think it will make much long term difference – the Greek economy is down the toilet, there is no sign of recovery, and the government is still too afraid to get serious with austerity measures. I don’t think there can be a real recovery until we go through sovereign default, a liquidation of all the crap in the banks and a prolonged period of market correction.

    “Imagine 26-percent-accruals of that amount (not by taxes on exports – just to make sure that you don’t get this wrong -, but by balancing the budget, and putting the saved amounts aside, as described in my post.”

    “Balancing the budget” would mean real cuts to annual government spending. Great – they should do that anyway, but throwing that money at the Greek government so it can service its debts to the German banks is just going to delay what is necessary in any case. It would be better for the German government to get its “own” fiscal house in order, never mind that of any other government.

    “How do you define over-spending, Mike? Any situation where state expenditure exceeds revenues and reserves (in own, or foreign currency)? Or a situation where creditors begin to doubt that the state in question is good for the loans it takes?”

    Admittedly, I put that point too roughly, but yes: any situation where expenditure exceeds revenues (yes: I do think governments should be prevented by institutional design from issuing bonds). A State may “overspend” without causing currency collapse of course, particularly if the overspend is for a limited period of time. My point was that I know of no instance of currency collapse that was not preceded by prolonged overspending by a State (or ancient equivalent of a State). With regard to the Euro (and also the U.S. dollar, the British pound and other world currencies), all the ingredients are there to varying degrees – wildly overspending governments, very low to negative real interest rates, absence of savings, bullshit accounting standards, capital malinvestments and so on.

    “Sure – before you’ve started discussing your pet peeves with them, or if they agree with you anyway, or if politics isn’t the issue (on the phone, chances are that it isn’t).”

    Presumption isn’t doing you any favours JR. Put your phone number up on here and maybe I’ll give you a call.

    “Then why wouldn’t you simply wait what Tai De will or won’t do?”

    Because I was responding to one of your comments, and besides, I’m not too excited about whether he does or does not watch the Kevin Dowd talk.

    I’m not interested in responding any more to all this “narcissism” stuff and any other emotive goo you may or may not throw at me.

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  19. Sure. For a start, the growth of bloated social-welfarism throughout the major European economies, not just the south, […]

    Can’t tell from your comment if you mean that “sure, restructuring without sovereign default is possible”, or if you mean “sure, it isn’t”, Mike. Either way, it could turn out to be a normative claim, right?

    Well the markets today haven’t been impressed by the Greek government missing its deficit reduction targets

    That’s why I wrote that simply trusting that the southern states will perform their part of the current plans won’t cut it – see above.

    Presumption isn’t doing you any favours JR. Put your phone number up on here and maybe I’ll give you a call.

    I don’t think I’m doing myself a favor by keeping this discussion with you going over several more days, Mike. Not sure how you benefit from it, but I don’t see much that would benefit me. Quite probably, it would end the way described in the (block)quote I used in this earlier comment.

    So, as on previous occasions, feel free to keep commenting here. But I won’t reply to any further comments of yours, unless I feel that there is something new to them, or something that could be a good reason to rethink the approach I’ve suggested in the post above. This is an invitation to everyone who reads it. After all, this blog should not only inform others, but me, too.
    However, if your comments should begin to continuously outnumber those made by others in the “recent comment” bar, I will take the liberty of deleting a number of yours, Mike. In case of a doubt, write long comments, rather than many.

    I’m not interested in responding any more to all this “narcissism” stuff and any other emotive goo you may or may not throw at me.

    That’s up to you, Mike. However, as I don’t want every discussion with you to go to the same length with pretty much the same end game every time, I decided to state my impression in good time. That isn’t goo – it’s economical.

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