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We Should Have Pushed the Germans Harder
It seems the world is going to regret not pressuring Germany to resolve the eurozone crisis in a timely manner. China’s financial system is now crashing, just as the situation in Europe is coming apart at the seams:
As Americans guzzled and gulped their way through the 238th annual celebration of the Declaration of Independence, China’s financial markets writhed in what some analysts warned could be the Big One — the long-expected bust that would end the world’s longest economic boom.
I guess the current business cycle really is going to end before the 2016 election. There just won’t be anyone left to anchor global demand if China and Europe melt down simultaneously, aside from the Germans, who lack the will.
In a perfect world, Germany would respond to this by allowing both domestic consumption and inflation to rise, either via deregulation, government spending, or possibly both. The last time the world faced a situation like this (the late-90s financial crisis in the developing world), the U.S. responded by raising domestic demand. Since this led directly to the housing bubble, America is unlikely to risk such a gambit again.
Given the problems in southern Europe, Japan, the BRICs, and the Middle East, the only country with the means to raise consumption significantly is Germany. I just can’t imagine any situation where they would do so, except perhaps as part of a global coordinated fiscal stimulus. That itself would be a disaster, given the structural deficits in many advanced- and middle-income nations’ fiscal positions.
On a selfishly partisan level, I don’t relish the thought of GOP politicians being shanghaied into a global coordinated fiscal stimulus. I don’t think GOP voters are going to find the argument “the Germans are forcing us to abandon our principles” very convincing. I can think of only one alternative, but I don’t know if it’s any better: a coordinated currency devaluation by America, China, and Japan against the euro. That would save each country’s fiscal positions, but could very well be just as disastrous for economic growth over the long run.
The worst outcome would be for the U.S. alone to raise consumption. We paid for the housing bubble with an extra 40 percent of our GDP in sovereign debt; we simply don’t have the fiscal space for a repeat of that disaster.
This is not good, people.
Published in General
From what I understand China has a housing bubble that will make ours look like child’s play. Their artificial markets and government controls make it hard to really forecast what might happen. Believe it or not we may not be getting accurate financial data from the ChiComs
And that was so successful, they joined the Euro…
1) Why? 2) That just means the average Greek would be indirectly making the investment.
If they price-in the devaluation, that defeats the whole purpose.
They defaulted on the dollar-denominated debt because they could not devalue because people did not want to lend them money if they could devalue (contrary to your assumptions above). Other defaults have involved combinations of devaluing and default. Sometimes, domestic politics will only allow a certain level of devaluation.
Bull. What are these incentives? How do they apply to a Greece outside the Euro but not one in the Euro?
Agreed. And none of that finds a solution in dropping the Euro. If anything, the solution is to stomp out modern Greek culture and replace it with a more productive one.
Germany would choose inflation.
Ha! Hahahahahahahahaha! Stop it, you’re killing me!
It’s not Germany’s crisis to resolve. Nor is it even the eurozone’s or EU’s crisis to resolve, except indirectly (see below).
What business cycle would that be? The present pseudo-recovery is six years behind Obama’s promised schedule; labor participation rate is at historic lows, and not all of that is from baby boomers retiring; interest rates are being deliberately held at artificial lows, which suppresses our economy and harms the fixed-income dependent poor–those stereotypical widows and orphans the Progressives so loudly pretend to care about; our national debt is at historic and dangerous highs, which also is holding back the present business “cycle;” the Federal deficit remains exceptionally high and will get higher under policies, which will only continue to grow our debt;….
Not even Keynes would buy into this. Keynes held that the stimulative value of government-created demand and the resulting deficit came from its temporary nature. Other than that, he was about as balanced budget centric as the rest of us. Yet even with his deficit-as-stimulus idea, he was, as the Progressives like to say, not nuanced enough. He operated solely from the GDP tautology: GDP = C + I + G + (Ex – Im) where C is total spending by consumers, I is total investment by business, G is total spending by government, and (Ex – Im) is net exports. What he missed, and what today’s Progressives carefully elide, is that G can only come at the expense of C and I, with added friction from government as inefficient middleman. Free market economies (and I’ve seen none better, with lots of other versions of economies empirically tried and failed) prosper when C and I are allowed to work…freely…with minimal G interfering.
Want to get an economy going again? Get government out of the way. That includes no government “stimulus” nonsense, no government as big spender nonsense.
No, Greece’s problem is that it’s in the eurozone at all (leaving aside that the then Greek government lied about its numbers to get in, and the then EU leadership chose to look the other way when the lie was exposed). This was a failure that was ordained by the structure of the eurozone. There are too wide fundamental social philosophical gaps among the 19 nations of the eurozone and among the 28 nations of the EU regarding such basic things as the purpose of money and the role of government in society for the thing to have any durability.
Europe would be far better off existing as three or four separate currency unions with far greater homogeneity in those underlying philosophies, and with those currency unions then working from within a pan-Europe free trade zone.
This is none of Germany’s failure.
Eric Hines
Ganz genau.
There is an inconsistency between the first and last lines of the passage above. The asserted benefits of one’s own currency come when a country is able to impose restrictions on the flow of goods, capital and people to prevent the market from compensating. That’s partially how China got where it is. That’s not compatible with a free trade zone, let alone one that allows free movement of people.
Not so much. NAFTA, in the main, is doing all right.
Eric Hines
??
That would be a testament to the benefits of free trade, not the benefits of currency manipulation.
What specific Mexican practice do you think Greece should adopt other than exporting its poor to the rest of Europe?
We appear to be talking past each other. I’m simply suggesting that Greece and other nations of Europe will be better off in separate currency unions. The several unions then can interact with each other to their mutual benefit in a free trade zone.
What specific Mexican practice do you think is anathema to that?
Eric Hines
Socialism. But like Sweden and China, Mexico seems to be willing, of grudging dire necessity, to moderate to neo-mercantilism.
For that matter… just like the United States.
Let me first say that I don’t like the euro, and I personally think it should have broken up in 2011 or 2012 when China (and the developing world more generally) were better positioned to help cushion the shock on the global economy.
That said, the Germans need to understand that if they really wish to preserve the euro, they will have to permanently subsidize the weaker member states. The euro is an anti-market, anti-democratic, economically absurd political creation, and it can only survive with massive fiscal transfers from stronger countries to weaker ones.
So it’s an economic negative for Germany. What’s the offsetting political positive? More influence in Brussels? I doubt Germany sees it that way. But then, I’ve been baffled by Germany acquiescing to the Maastricht Treaty, the ECM, the EU… all along. The one thing that’s made it make any sense—at all—is Germany’s dire need to be seen as a good global citizen, a “team player,” post-WWII.
That’s no way to run a railroad.
Which is better, a country with a 35 hour work week (Germany) or a 40 hour one (Greece)? There were actually years where the Greeks worked longer hours than Americans.
Of course Greece is at fault here, but the solution isn’t (and never was) to turn Greece into some sort of debtors prison. Like I said in #40, I think Greece should have left the eurozone years ago, when the global economy was in better shape to handle the resulting fallout.
But the whole point is you have not established why.
You cited NAFTA. As the low productivity component of NAFTA, Mexico is presumably your analogue to Greece. What part of having its own currency do you assert benefits Mexico more than if NAFTA was also a currency union?
How does that enjoin the world to pressur[e] Germany to resolve the eurozone crisis in a timely manner?
Eric Hines
I’ve wondered that myself. Why has Germany gone along with all of this? The conventional wisdom seems to be that Germany signed the Maastricht treaty to get French approval for the reunification of the country, but what I don’t understand is why it needed France’s approval in the first place.
Interesting change of subject. Your beef was that one of the benefits of one’s own currency was the ability to control flows. NAFTA demonstrates that free trade and one’s own currency aren’t incompatible.
Eric Hines
I’m not sure I understand your point. At the very least, we could have pressured the Germans into spitting the eurozone into two blocs, a northern euro and a southern one. For that matter, I don’t think it would have been a disaster if the entire zone had imploded early on.
By dragging out the crisis, Germany has brought Europe’s business cycle in sync with the rest of the world. A euro breakup now would happen in a slowing global economy, with China, the U.S., and many developing countries approaching the end of their business cycles. Kicking the can down the road has not made the European situation less dangerous; it has made it more.
My guess: “Sorry about that Alsace-Lorraine thing, but we’re keeping KölnCologne. Friends?”
Based on what authority of Germany’s? With support from what other eurozone nations, much less EU nations? See, for instance, the hue and cry over Great Britain’s presumption in wanting simply to renegotiate the terms of its membership in the EU; they’re not even a member of the eurozone.
Germany, and most of the rest of the EU and of the eurozone, made a good faith effort to help Greece out its economic crisis and to preserve its membership in the eurozone (and even if the current “No” vote stands up, Greece’s departure is not a foregone conclusion). That necessarily took quite a bit of time. There’s nothing wrong with that. Now, billions of euros later, the eurozone and Greece were unable to come to terms, and Germany, et al., are saying (at least publicly), “Enough.” There’s nothing wrong with that.
Regarding the timing if the breakup, should it happen, there’s no good time for such a thing. As to attempting to time it, my experience as a private investor is that those who try to time [the markets] too closely rapidly go broke. If Greece is going to stay in the eurozone, that decision needs to be made in its own time; the only criterion should be that the decision be unequivocally made by all concerned.
Regarding the disruption to the global economy, for the EU, the US (and North America), Japan, and (yes) Australia, the disruption (absent polticians’ pandering and faux panic) will be short-lived and a buying opportunity. The disruption will have some legs only for Greece and the PRC–and for different reasons for those two nations.
Eric Hines
I said no such thing.
I did not change the subject. You did.
I said that the illusory benefits being touted for a country like Greece (simply put being able to force your devaluing currency on people) would require control of flows.
I have never said that free trade and one’s own currency are incompatible. I said that free trade and reaping certain hypothesized benefits of currency manipulation are incompatible.
Free trade and one’s own currency are quite compatible. Even within the EU, many of our limey friends would agree. Others outside the EU would also agree.
There’s also the small matter of FRG’s membership in NATO and the European Community at the time. Reunification was going to be by absorption of eastern Germany into the FRG, not by the creation of a new polity. Keep in mind, too, that France, Great Britain, the US, and the USSR at the time still were occupying powers in the FRG. (As an aside, while I was stationed in the FRG in the late ’70s, the US offered to support renegotiation of the peace treaty with a view to ending our status as occupying powers. The FRG declined: they knew the Soviets wouldn’t agree, and they needed the other three of us to remain occupiers as a counterweight to the USSR.)
You bet the French held out for some quid pro quo to allow reconstitution of the nation that had just a couple of generations prior had been France’s conqueror.
GB also was opposed to reunification, but Reagan was able to persuade her to the contrary.
Eric Hines
What does that have to do with anything?
What’s the logical connection in this statement?
None. The Us has an economy 450% bigger than Germany’s.
As to the original post, predictions of doom and gloom are numerous. By a count of predictions of doom and gloom and imminent disaster and collapse…on Ricochet…we should have had about 13 major depressions in the last 5 years alone.
So, how much weight is there on this sort of doom and gloom posts? Very little.
Second, a Greek exist won’t matter. Pretty much everyone already knew where this was going to end, and the markets have for the most part already taken it into account months or years ago. This isn’t a surprise to anyone.
Third, as for China’s stock market is quite small. A small stock market with very poor transparency, being highly volatile? No surprise there either.
Fourth…doom and gloom. At some point, don’t you ever get tired of doom and gloom being on the horizon every Tuesday?
Fifth, I have no idea what the logical connections between all the stuff thrown in the original post are. Consumption, inflation, debt, stimulus, Germany, China…
What’s the logic here?
There’s none. Just a bunch of terms thrown together.
If Germany or China are in trouble…which BTW they are not!…all this means is that the US appears in even better shape to everyone around the world looking to invest. The US remains the best bet, and all this means is investments will be flocking to the US.
That’s precisely why the US has been able to attract buyers for its Bonds over the last few years.
But more importantly the original premise of the post is wrong. Germany isn’t in trouble.
And Chinese stock markets are pretty inconsequential. No one, not even in China, expects them to behave the way the US stock markets behave. And more importantly, it doesn’t mean the same thing as if the US stock market crashed by that much. The US stock market is a much more efficient market…which means…the signals it sends mean something.
Chinese stock markets aren’t efficient.
Look at HK stock market.
I take it you haven’t been paying attention to international balance of payments politics, or the international macro scene in general. It’s not terribly complicated. Basically, a country’s trade balance is a function of its growth rate relative to the rest of the world. For example, if the U.S. had grown at 5% for the past five years our current account would have exploded (again). Similarly, if the Germans were willing to grow faster, their trade surplus would decrease (though inflation would rise, which is what should happen anyway. The low German inflation rate is hardly the product of free market policies).
This is why so much is at stake for America: given our finances, we just don’t have the money to pursue a “strong dollar/large trade deficit” growth strategy (remember that by definition, trade deficits have to be paid for by foreign borrowing). That means our growth rate is limited to how fast the rest of the world grows.
Until now, we’ve been able to rely on relatively decent growth rates in the developing world, lead by China and the other so-called “BRIC” countries. That may not last much longer.
Huh? None of this is the case.
Like…none of it.
What does balance of trade have to do with anything? Trade deficits aren’t “paid” by anything. Trade deficits mean capital inflow.
None of this is even remotely relevant since you’re describing (wrongly) an endogenous system when you have free floating currencies.
GDP = Investment + Consumption + Exports – Imports
GDP – Investment – Consumption = Exports – Imports
(GDP – Consumption) – Investment = Exports – Imports
Savings – Investment = Exports – Imports
What do you think happens when investment is greater than savings? Where does the money to pay for it come from? Conversely, where do nations get the money to buy more imports than the total value of their exports?
The answer (for floating currencies) is tautological: trade deficits are matched by capital surpluses, i.e. foreign borrowing.
David Marsh’s The Euro doesn’t agree. Unfortunately I can’t seem to copy/paste from Amazon Kindle (it doesn’t even seem to have page numbers!). I managed to find an entry in the book’s bibliography (the author cites it in support of his thesis that German reunification and EMU went together) on google books, though (number 24).
Annoyingly, the author uses an acronym in place of the full title of the referenced work. What is “IFMS”? This is the only citation I’ve found (so far) that isn’t just private interviews conducted by the author.
Anyway, suffice it to say that many people believe German support for monetary union and French support for German reunification went hand in hand.
Under the cultural surface, a huge amount of collective guilt for past sins remains in Germany. Many Germans view promotion of “ever closer union” as a sign of penitence and a clear break with their history.
And even among those Germans who agree that the drachma probably needs to return, nobody has the stomach for watching the ECB strangle Greek banks and the inevitable rationing of food and medication which would follow – to Germans, that would feel too much like a replay of their historical domination of weaker neighbors.
Most of the German public would only support a Greek exit if done amicably. And the Greek government knows this, which is why it is being anything but amicable about the process.