Ricochet is the best place on the internet to discuss the issues of the day, either through commenting on posts or writing your own for our active and dynamic community in a fully moderated environment. In addition, the Ricochet Audio Network offers over 50 original podcasts with new episodes released every day.
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
Ok, and?
To make it more simple even, GDP = total value added – total cost.
But first of all, your formula is wrong. NX=S-I(interest rate)
Second, the formula you’re really looking for is dGDP/dt as a function including exchange rates and interest rates.
Can’t recall the formula off the top of my head now ;)…and no…it ain’t that simple.
But forget the formulas. What do you think is the problem here? Germany and China…aren’t “collapsing” by a long shot.
How so? Net exports is equal to the gap between savings and investment. That’s tautological. One cannot be “wrong” about an accounting identity.
No, I’m not. There’s a difference between mathematical models and accounting identities.
By the way, I never said that Germany is in trouble. My point is that having a Chinese and European financial crisis coincide with each other, at a time when virtually every country in the world is near the end of its business cycle, is a very dangerous situation to be in.
The fact that business cycles were not in sync between the developing and the developed world was very helpful in recovering from the 2008 crisis. A lot of developing countries bounced back quickly, which helped anchor global demand.
The accounting isn’t important here. You have to explain how interest rates and exchange rates impact the levels of the other variables.
Yes, and if an asteroid was to hit the earth at the same time, it would be even worst.
The problem is, that neither is happening.
Ack! I was going to comment, but I see this thread is devolving quickly into competing macro bets.
I agree that the EU requires Germany to make transfer payments. That’s why the Germans have given the Greeks so much money. Everyone involved in this issue (aside from some German taxpayers) thinks that Germany should continue giving money to the Greeks; the IMF, Hollande, ECB, Commission, World Bank, Merkel, etc. etc. etc.
The question isn’t “Should we give money to the Greeks” (unless they leave the EU, which is why Tsipras is so opposed to doing so). It’s “when we give money to the Greeks, should we demand that they act in a manner that will reduce the amount of money they suck out from our economy?” You’ll note that this is normally the case with bankruptcy, bailouts, and successful forms of welfare. Following Bush and Tommy Thompson, the Greeks should be given money to help them recover, but they should be required to look for work while they do so.
Germany doesn’t just prop up Greece. It props up half of Eastern and Southern Europe. Although Germany is wealthy and Greece is small, Germany can’t afford to hand out blank checks, and the Greeks are being particularly unappealing recipients of charity at the moment.
You would have a point, if Germany was behaving in that manner. It’s not. It’s a lot more important that the German government be seen as “punishing” the Greeks then that they limit their own losses. This has been obvious for years.
Look, the U.S. was in a similar (albeit less extreme) position as Greece after the financial crisis, yet our economy grew (if slowly), while Greece’s has plummeted. There were two reasons for this: one, we have our own currency, but our creditors were also much more lenient on us. The Chinese did not demand that we reduce our deficit nearly as quickly as the Greeks did. The Chinese understood that punishing bankrupt countries only serves to increase a creditor’s own losses. They will get their money back. Is there any doubt at this point that Germany is going to lose most of the money it lent to Greece?
I think the Germans are well aware that they will never see a cent of the money they’re owed. And they are also well aware that trying to wring money from a debtor who simply doesn’t have it becomes very counterproductive at some point.
The problem is that in the normal debtor/creditor relationship, after the creditor writes off their loss they also usually refrain from further business with the deadbeat debtor. But as long as Greece remains in the Euro, Germany does not have that option.
Since Greece and Germany are poised to remain joined at the hip for the forseeable future (or maybe not), Germany must do whatever it can to try to change Greece’s behavior going forward. Since Greece seems determined not to change it’s behavior, Germany is applying every type of pressure possible – including insisting (in theory) on debt repayment.
I have no doubt that Germany would be happy to write off all of Greece’s debts if it was actually able to implement a number of the key reforms.
I agree that this is obvious to Krugman, but I don’t think that it’s obvious to Germans or to many of the EU financial professionals I know. If the Germans wanted to punish Greece as their primary interest, they’d have stopped giving them money. The Germans have continued to give money, in large quantities even while the Greek government talks about them being bloodsuckers etc.
If the US government had behaved like the Greek government, it would have been treated like the Greek government (only worse; no country would provide meaningful charity to the US).
The Chinese didn’t have the ability to significantly punish the US; and what would they be punishing the US for?
I agree that Germany is going to lose a lot of its money. I think that the suggestion that this makes it rational to give the Greeks more is hard to sustain, and that if the Greeks had behaved decently, they could have recovered, in the manner of the other PIIGS’ recovery. The PIIS from that acronym aren’t doing great, but they’re in a much better position. Why do you think that the Germans wanted to punish the Greeks but didn’t feel like punishing the Portuguese?
Given that the German behavior (trying hard to get the Greeks to behave in a manner that would allow them to come closer to self sufficiency in future years) is objectively reasonable, and the Germans claim to be focused on that, I think that claiming that they “obviously” have chiefly ulterior motives is to fall prey to Breitbart.com style heroes and villains views of politics.
I. . .did not know Krugman had the same viewpoint. That doesn’t make it wrong. “If the Germans wanted to punish Greece as their primary interest, they’d have stopped giving them money” is a massive oversimplification. German voters want to preserve the euro (which Germany benefits from economically). They also want Greece to be punished. As far as I can tell, actually getting the money they lent the Greeks back is not at the top of the German taxpayer’s mind.
Devaluing the dollar, running 1 trillion deficits, pushing interest rates through the floor, etc. There was a lot for China to complain about (and they did).
The Greeks have lost something like 25% of their GDP over the past five years. They were asked to do the impossible: create a modern Prussian state virtually from scratch (remember, the Greek government had to bring in foreign advisers to teach it such mundane tasks as tax collection), while simultaneously enacting massive economic reforms.
Like I said, Greece should have been ejected from the eurozone years ago. It was cruel to try and keep them in.