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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
Germany’s doing the right thing letting the market do its bloody work. Trying to mitigate the pain would merely make things worse.
Politically isn’t everything going belly up good for us? I mean, we can blame it all on Obama and the Democrats.
Really though I don’t think Greece will be that big a problem for Europe as a whole. Greece is small, and I think by now plenty of people have been hedging for them to drop out of the Euro in a spectacular default. This will be really bad for Greece and the Greek people (poor SOBs), but all of Europe? I guess it will be a blow to the Euro zone’s credibility so in the long run it will hurt cohesion, maybe even stop it.
As to China, I don’t know much about them, but I figure like all communist Governments they lie habitually and grandiosely about their economic statistics. If they pop it might not be as bad as we think since they are probably over inflating their numbers. So the fall will actually be from a smaller height.
Ultimately though I think we can weather economic storms better than China simply because we have more economic fat. China isn’t a friend or an ally so anything to take them down a peg might actually help us over all geopolitically.
This post appears to be based on the flawed assumption that something as simple as increased German consumption would resolve the issues plaugeing Europe. It would be wise to reexamine your basic premises.
Does every American who eats or drinks anything today, guzzling and gulping? How insulting to infer this.
And I don’t follow your cause-and-effect for the housing bubble. I thought Clinton had HUD lower lending standards as a quick DNC minority “fix.” Things then predictably spun out of control because humans acted like humans (a la the Enron energy traders responding to the idiotic California legislature’s energy “deregulation” reregulation). Or did I misread something?
Why wouldn’t it? You seem to be forgetting David Hume’s price-specie-flow mechanism, whereby countries in the classical gold standard adjusted to terms of trade shocks by increasing consumption in nations whose net exports got bigger in addition to decreasing it in ones that went into deficit.
Not quite. What happened went something like this:
I was thinking more along the lines of acting in concert with other countries. Actually, we do have a lot of leverage on paper: our military presence in Europe. I’m not sure it provides much leverage in practice, though, since the Europeans know full well that America wouldn’t abandon them over such a relatively small issue.
The idea that consumption drives an economy is mistaken. It stems from the definition of Gross Domestic Product, which includes only the purchase prices of final consumer goods, and ignores all of intermediate stages: the purchase of capital goods such as factories and machine tools, the purchase of raw materials, and the purchase of intermediate products. Leave all those out and end-user consumption appears to account for some 70% of the economy. But a real economy includes all of those intermediate steps.
Gross Domestic Expenditure (GDE) is a better gauge of the economy since it includes the value of all goods and services at all stages of production produced in a country during a given year (that is, GDE = IE + GDP, where IE = intermediate expenditures).
Based on GDE, consumption accounts for only about 33% of a nation’s economic activity, while business spending accounts for 59%. Economies are production driven, not consumption driven.
Consumption does tend to drive imports, however (this may be even more true for Germany, as it’s pretty much the world leader in capital goods production), and the Germans simply are not importing enough.
There’s a reason for that: the German government (like many European countries) has deliberately stunted the growth of a competitive domestic service sector (it’s something of a ritual for the IMF to chide them for this every year in their Article V report).
From the article:
It’s déjà vu all over again.
’twasn’t Joseph’s words.
The US has a pretty limited role in the Greek crisis. US Financial intermediaries have pretty limited exposure (except for some vulture funds, and they can take care of themselves). The spillovers to the US markets or overall economy also seem minimal.
Our main role here is through the participation of the IMF. We did make a mistake in 2012 in allowing the IMF to become too subservient to the EU. Currently, the US is working to separate the IMF from the other two leg of the Troika (the EU and ECB). For example, the IMF has just published a debt sustainability report which calls for greater debt relief for Greece. This report was published at the insistence of the USA over the objections of the Europeans. This seems an appropriate level of participation by us.
I concur. I leisurely cooked fine beef and fat sausages to perfection, on a rocket ship of an outdoor grill by the pool. I quaffed good Sam Adams beer all the while. Then I lingered at table with loved ones, and now I sip good bourbon under clear skies in the warm night. Hee haw, Eager, you guzzling pig.
[j/k about the pig part. Joe, your pic actually suggests you’re rather svelte. Are you eating enough?]
[Oh, that wasn’t you, Joe. Sorry. WRM’s a pig.]
Why should we care if China’s economy collapses? What is in it for us to save it? The same question for Germany.
True, but he didn’t need to repeat them in the post, going to the link to read it was bad enough.
Because if China collapses and the global economy tanks, America will not be in a position to protect itself from the ensuing economic chaos. To put it bluntly, we spent our way out of each of the past four recessions, and we just don’t have the money to do that anymore.
That picture’s from 2010, I think. I actually was underweight back then, due to what turned out to be a minor and easily corrected thyroid problem (caused by bad posture and lack of vitamins). I keep meaning to get rid of this picture from all of my Internet profiles.
It seems wrong to blame the Germans for any part of the current and coming economic troubles. They produce more than they consume and bear more than their share of the burden for those that don’t. If the interconnectedness of the world brings trouble from misbehaving children like Greece and shortsighted manipulators like China, one really can’t blame those who perform well because they don’t do enough to keep the lid on and the con going. That’s acting like the manager who sets strict rules for good employees to avoid confronting one miscreant, or the parent who punishes both siblings because the one didn’t control the other.
Besides, we’ve pretty much withdrawn our cover from the free world. Other first world nations need to look to their own interests while Russia runs wild, China expands its military sphere, and Islam turns everything red. What could Germans say about our fecklessness?
Command economies are all time bombs. China has internal contradictions that make its pace of growth unsustainable. Greece’s problems were made into a crisis by Europe’s coddling, and the best thing for the world economy will be to let China’s correction proceed.
Yes but for other reasons.
I am flabbergasted that in a post about German, Chinese, and Greek economic practices you single out Germany for criticism.
You criticize a lack of German consumption. However, this is largely a general frugality lack of consumption. Contrast China which targets its lack of consumption against the U.S. via trade barriers, piracy, etc.
BTW, if you want to blame a country for EU trade barriers against U.S. goods, check out France.
Contrast Greece which has a lack of production. Which is worse: producing without consuming; or consuming without producing?
We’re going to manage to defer and delay this one somehow. Just a sense that the “big one” is going to held off until some time after 2016.
Germany can’t “resolve” the Eurozone crisis. The “world” is not going to regret forcing Germany to do more than they have. Greece is a deadbeat socialist nation that has run out of other people’s money. The basic problem with the Euro is that it has one monetary policy and a different fiscal policy for each Eurozone country. This kind of arrangement has never worked. Trade imbalances and different business circumstances within a given country cannot be adjusted by the devaluation of a country’s currency.
The “meltdown of Europe” will only happen as a black swan event. If Greece leaves the Euro, the Eurozone will not collapse. There may be some unanticipated consequences, but this event has been anticipated and planned for. Greece’s GDP is <5% of the EC’s.
As a previous commenter said, economies are not driven by demand. President Obama’s economy is testament to the bankruptcy of that idea. Economies grow because of investment, innovation, and minimal government regulation. Did fiscal stimulus create the demand for the iPhone? Increasing German demand doesn’t solve the Eurozone problem.
The recent US housing bubble was caused by the government dictating that banks issue mortgages to people who could not afford them and then forcing Fannie and Freddie to assume those mortgages, taking them off the bank’s balance sheet. This moved the risk from the banks to the taxpayer but placed no upper limit on how much the banks could lend.
Germany has done enough.
I’d feel a lot better about world financial stability if we had our fiscal house in order.
What do you think a timely resolution would have looked like? What are you sad the Germans didn’t do?
I would too. I think we must reverse course dramatically with a new president in 2016. As bad as our fiscal situation is, we have the most resilient economy of the developed nations.
The global economies have to adjust. Do our leaders know how to bring that about? Is it even knowable? It seems our leaders still have demand driven Keynesian models of some sort in their heads but at least can agree that debt restrains that notion. Adjustment will hurt and hurt some more than others, but the greatest risk to these required adjustments is what our political class will do to save some from it
Agree on that.
I disagree to the extent that you assert a Drachma’d Greece could adjust trade imbalances and different business circumstances by the devaluation of the Drachma.
I do not know if that ever was true or was merely an attempted theoretical characterization of what might happen in a world with very limited flows of capital, people, and information.
Modern electronic commerce and markets really prevent that. They allow pricing-in of various contingencies. They allow international flows of even small amounts of capital. The average Greek can simply invest in assets that track the Euro rather than invest in Greek debt. Are you going to force him to invest in Greek debt and prevent him from moving?
What foreigner would loan Greece any money if the loans were repayable in devalued money? Look at Argentina which was unable to convince the world to make loans in Pesos.
Why would a business expand in a Drachma’d Greece vs. a Euro’d one?
When Greece was using the drachma currency, it did devalue several times for exactly the same reasons that it needs to do so today. It’s not theoretical.
The average Greek would not need to invest in Greek debt. The Greek banks would probably do so. In addition, investors outside of Greece would buy Greek debt. The increased risk would result in a higher interest rate being asked for. Argentina did not devalue, it defaulted. Default is a worse financial event than a devaluation.
With the right incentives, a business would invest in Greece. Unfortunately, the environment for business is very poor in Greece. The government owns most of the large enterprises. The underground economy on which the government gets no taxes is estimated to be about equal to the legal economy. The income and value added tax are extremely high. Over 50% of the working population works for the government. Companies have to pay retirement as early at age 45 for some professions at 100% of current salary. Greece has many successful businessmen. Unfortunately, because of the tax situation, they have all left Greece and moved to London.
Bailing Greece out is just kicking the can down the road. As long as Greece’s economy is as corrupt and nonproductive as it now is, it will not be able to pay back the debt it currently has, much less any additional debt. It’s long past time to take Greece off the dole. The least bad thing for them to do is to go off the Euro.
Economic progress is based on savings and investment – not consumption. China needs to stop constructing buildings that no one lives in, Greece needs to stop paying people not to work and artificially raising the cost of labor through regulations and mandates, and the United States needs to stop regulating businesses out of business.