Tuesday 22 May 2012

Germany: Never a borrower or a lender be

How exactly are we to deal with the Eurozone crisis? It's been going on a long, long time now. Without much sign of coming to a conclusion. The Euro leaders response has been poor. 

Initially,when the UK and USA bore the brunt of the credit crisis, their response was it was not really a Eurozone problem. It was contagion that was the worry. The Darling/Brown plan of bailouts reassured the planet, albeit at great expense, and the world began to look for ways of tackling recession. But as we know, the Eurozone had not dealt well with the credit crunch. In fact for almost 18 months the EU did not even acknowledge there was a problem. The can was kicked along the road by too small and too stringent bailouts. Ireland and Portugal and Italy and Greece and Spain were all in serious trouble and needed serious help.

But each time the euro countries came up with the same solution. Mostly nothing. Followed by a bit of silence. Then denial. Followed by severe market pressures, followed by near panic, limited bailout and a huge sigh of relief when it sort of worked. And back to nothing.

 Now, 4 years after the trouble began, the euro can has finally reached the end of the road and proper action is needed. At present this seems to be the usual mix of fingers crossed that the Greeks will accept the already agreed deal or a firewall to protect the rest of the EU if the Greeks inexplicably don't take the cash, the bitter medicine of the spending cuts and decide to go it alone.
The Greek elections will decide it. I strongly suspect a big dose of reality to emerge at the next election. A no vote to the bailout means an end to its EU safety net and hello to the world of Chinese and Russian cars at German prices. Mrs Merkel is probably counting on the same. Fear of a worse alternative narrowly averts the latest Greek exit.

 But there are no guarantees. And just because Greece stays in only means a worse problem need not be faced. The existing problem still remains. 

The EU says the Grexit firewall is ready. But It's not even properly agreed. And even if it was ready, it's too small. What is really needed is an end to the crisis. Not just words about how the euro is for ever and no one is quitting and everything is in hand. A real gesture is needed.  That has to come from Germany. And it's going to cost Germany. But that is the price for the Euro. 

Germany might resent having to bail out Europe. They've already rebuilt their country from two world wars. Reunified the inefficient, neglected communist half. Created a new Europe wide currency. Established a whole new Europe wide government and a brand new way of inter European trading. Helped make the backward club med countries modern democracies with modern infrastructures and financial systems and governments. And all the while maintained their position as number one on the league table of most successful European economy since 1961. 

But that is what it comes down to. Its plan for break up or fix the Euro. No one else will do it. Certainly not for for free. Sarkozy said the Euro nations could borrow from their own banks. "Each state can turn to its banks, which will have liquidity at their disposal." He pointed out that earning 6% on Italian bonds that could then be financed at 1% from central banks was a "no brainer".

 But that is causing a decade long recession. The interest on the debt is choking. Indebted countries need cheap credit. Really cheap. AAA cheap. They need even more than that. They need a write off. 

The Road to nowhere says The total debt of the PIIGS (Portugal, Ireland, Italy, Greece and Spain) plus Belgium is more than Euro 4 trillion. A writedown of around Euro 1 trillion in this debt is required to bring the debt levels down to sustainable levels (say 90% of GDP).

I expect even more is required. 
So, Germany needs to agree to finance sick Europe. Germany puts its industry behind its guarantees. 
Never mind the EU constitution and the regulations. Its crisis time everyone. Time to do what is needed.

Today Germany can borrow at 1.6%. It borrows as much as it can. Say 2 trillion Euros, backed up by..well Germany. If Germany's borrowing costs goes up, so be it. If the Euro devalues, so much the better. The Euro needs to devalue. 
Germany loans that money to the PIGS at 0.2%- 0.5% more than it borrowed,  for 10 years. No country need go to the markets at 5-6% when they can get cash for 2%., fixed, for 10 years.
Further, about half of the loan is over a 50 year period.  Fixed at an absurdly low rate. The repayments are more than manageable.

After can come all the agreements on Eurobonds and different risk spreads across the different nations. But if the crisis is going to end something has to end it. Germany has gained  out of the Euro. The Euro trades at $1.30. If the Mark was back in place would it be so low? When it was last in circulation it was around $2.00. If Germany really wants to keep the Greeks in the club its going to have to swallow its frustration with them and bail them out. Properly.

Afterwards, when recovery is on the way, they can reorganise the EU to be on a more realistic financial footing with proper financial institutions, and conditional Eurobonds and a joint pooling of liabilities , mutualised debts among members, and federal banks and so on.. But they've waited far too long, doing far too little and just hoping the problem would somehow sort itself out. 
If they can get the French to come in on the deal, so much the better. But if not, they will have to do it alone. 

Enough is enough. The G8 is saying Europe needs to mutualise its debts. Essentially Germany taking on a share of the burden. A German loan or indeed a German 'foreign aid' program is quicker. 
Mrs Merkel knows that German taxpayers won't stand for it any more than UK ones would. Why should hard working Hans bail out his feckless, chav neighbours?
But  Germany is the fourth largest economy, world’s second-largest exporter... its largest markets are its European neighbours.  Germany has avoided recession so far. But for how much longer?
So now Germany must pony up and take on the role of the real lender.

Well, that's my fantasy entry for save the Euro.
Germany doesn't even have the appetite for Euro bonds. Never mind actually taking on the debt.
No doubt Chancellor M has a proper plan B. Just in case the Greeks do inexplicably vote themselves out of the Euro.
The fear is its another do the minimum possible to quell the panic and so the problems of Spain and Portugal and Ireland and Belgium and France and UK continue bumping along.
Until the next crisis. And the whole panic, rinse, repeat cycle kicks in again.


andrew said...

This sounds credible to be as it holds something very distateful for everyone.
You left out the price the germans will extract for all this largesse - an eu (german) veto over the national budget to prevent large or sustained deficits.

Jim said...

As andrew says, whats to stop the PIIGS (and France, Holland etc) just taking the German loans and spending them on bread and circuses, in the same manner as the one that got them into this mess in the first place? What incentive would there be to reform their economies (which would be very painful - basically doing over the 10 years what Germany did in the decade running up to the crisis, driving down wage costs) when they can get cheap money and do nothing? 10 years is light years away in political time. Can't see the French or Italians or Spanish voting for 10 years of austerity and economic restructuring really.

Which brings us back to where we are now, but 10 years down the line and Germany up to its neck in debt too. Who bails them all out then?

Steven_L said...

Sorry BQ, I think you are wrong. The Greeks have largely stopped cooperating with their tinpot government.

While the western media was decrying Zimbabwean inflation rates, the reality was that the middle classes were already importing South African monetary policy and using Rand (or USD).

It's the same in Greece, where huge swaithes of the population (especially small businesses) have decided to deal in cash. The Greeks aren't going to elect a government with a strong enough mandate to drag them out of the Euro either.

Even if the EU throw them out then what is to stop Greek people using euros, and what is to stop Greek companies reporting in Euros?

The country is so ungovernable now that a Drachma would be worth little more than a Zimbabwean dollar.

hatfield girl said...

Greece is sui generis but the other large-deficit countries are not at all like one another either, so it isn't helpful to regard them as being so.

Sometimes I wonder if the re-establishment of city states rather than nation states within the European federation might be a more sensible arrangement. Imagine the cities of the north of Italy released from the transfers to the non-productive South; no wonder Germany is resisting the same trap on a nation-state scale. Imagine London as a city-state with its own hinterland under its own control but without the transfers to the north of the British Isles.

There are lots of models on which to base such a system - starting with Switzerland. Nation states are really defence-based entities too, so their discussion solely in economic terms is partial at best; do we want to lose geo-political advantage because of poorly organised economic relations resting on badly identified (in political terms) economically productive zones?

Weekend Yachtsman said...

Technically, no doubt you're right.

But the German people will only see it that they have to go on working hard, paying their taxes, and obeying the rules, so that a bunch of layabouts can sit in the sun drinking Retsina, or whatever it is they all drink.

The determination of the Political Class to continue their confounded "project" may yet bring about a denouement such as you suggest, but the people who actually work and pay (ie the non-political classes) are not going to stay complacent for ever.

Weekend Yachtsman said...

@HG: "Imagine the cities of the north of Italy released from the transfers to the non-productive South"

Yes many people do imagine just that: back in the 80's my father's friends in Genoa used to say "South of Rome it is Africa" and they would happily have cut the country in half just South of Florence, leaving the southern half to float away.

But it hasn't happened yet.

Anonymous said...

The problem is that Greece is still running a deficit and Greek politicians still seem quite unable to force the people to actually pay their tax (I wish I could avoid PAYE aso resdily...)

So it is already clear that if you were to bail out Greece today, tomorrow it would still be back for more cash, and Greek politicians would say all the right things but do nothing about it. Astonishingly the Greeks themselves seem content to blame everybody but themselves when it is clear they expect to draw on services that they themselves have refused to pay for.

It seems to me that the entire nation is corrupt and bailing it out won't help the underlying problem - it will just make it worse. I suspect that the Germans et al are sorry they even started down this path. They have been sucked in to yet another Greek scam, and been called Nazis for it, as if being asked to balance their budget was some sort of outrageous concept.

But this is Greece. The really big problem is Spain. That can't be solved by Germany. It can really only be solved by printing money to replace all the bad debt before raging deflation takes hold and the whole EU economy falls down a big hole.But the EU won't print money because it is caught by its own dream of making the Euro a reserve currency. Everybody seems to be busily painting themselves into corners.

Bill Quango MP said...

Oh dear. well, I thought most would disagree.

In the longer piece, Andrew, the Germans were given those powers to set budget limits with increases to interest rates for beaches.
And BQ's twist was to make asset sales a condition of bailouts.

Jim: After the bailout the EU does its reforms that it somehow forgot to get round when it was formed. The ECB has its Federal powers. Eurobonds introduced that spread the risk across the entire eurozone ..etc.
The missing financial controls are brought into the EU. As in the USA Federal needs to trump state in all areas.
Its terrible for the independence of nations but its necessary. Otherwise the Euro will never work properly.

Steven_L :Greeks are dealing in cash. But that is because of the situation they are in. There is a danger their euros will be taken away one night and replaced with worthless Drachmas. That can most easily be done from their bank accounts. So they keep their cash in their mattress.

IF the countries debts were removed to say 85% of GDP instead, the country stabilised, the banks working again, then trust would return.
That's the plan. Take away the uncertainty and the risk for the individuals.

If you recall in this country the real panic from Northern Rock, the one that made the Treasury decide that they had only hours, not weeks to sort the nation was the government's dithering over the feeble bank guarantee scheme.

At the time £35,000 Per bank/ family! - A Lloyds/TSB joint account and all the savings accounts and offset mortgage saver accounts and so on were ONLY guaranteed to £35k.

People began to pull their out here. Not just NR, But everywhere.

To Mr Brown's eternal credit he did follow previously given C@W advice.

"It is often just as important to do something as it is to the right thing. "

the Brown government was notorious for dithering. And it almost brought ruin. Yet PM Brown grasped the nettle and raised the guarantee to110k for joint accounts and he let it be known that the government was really, without admitting it, backing all the total amount of cash in all banks to all people.

And since then UK citizens have put their cash back in their banks and no one mentioned a bank run again.

Thats the idea. Like when the earlier euro crisis from January was fixed by lending to banks at unbelievably generous rates. Liquidity returned.

Bill Quango MP said...

HG: Smaller states? A reverse EU project. Alex Salmond will be leaping in joy! England would benefit from allowing Wales to become its own nation. Northern Ireland must surely do better as a part of Ireland.
Scotland expects to be fine as an independent nation.

If Iceland, with a population a 1/4 smaller than Leeds, can be a nation, then why not?
Usually north south. The UK is,I think, fairly unique in Europe.
Usually the Northern counties {Germany/France/Italy/Spain} feel they are supporting the southern.

Weekend Yachtsman: That's why it can't really happen. Those damned elections. The Merkel government has seen its voters slip away. She knows that if she tries to sell them another reunification deal, jam tomorrow if we all work hard, it won't be well received.

But as anyone who does business or holidays in Europe will tell you, the deire to keep the euro and EU is almost universal.

No wonder they think we're anti-social neighbours. Always playing our loud financial banking money music at all hours of the night and being drunk in the street and refusing to salute the EU flag.

Bill Quango MP said...

Anon: I'm no fan of bailing out the undeserving. But the Uk has bailed out itself.
We borrow as a government at 1.5% or less. We lend that to our bankrupt banks. The banks lend that money out to us at 10% or more.
We sliced 25% off the value of the £.

Jim said...

@BQ: All of that sounds pretty much like one of two things - either the Germans call the tune, because they are paying the piper (not very popular though to be told you can't spend more on X because the Germans say so) or the Germans get outvoted all the time via EU institutions, but are expected to continue paying for it all.

Neither are long term solutions.

Anonymous said...

I think the mistake people can make here is the perception of national interests - the Germans here, the French there..

What we're really witnessing here is the trumping of democracy by the trans-European political class. It seems clear that when the Euro was established, it would inevitably lead to a crisis not dissimilar to the one we’re now experiencing.

The most economically “suitable” solution is fiscal union and transfer – this option being pushed heavily now by Cameron and Obama et al. and yet it is the one that makes me so angry I could spit.

Why? Because the politicians win. Fiscal Union will inevitably require Political Union and that will enable to complete marginalisation of the people of Europe from the democratic process. Also Germany’s hard won savings will be spent despite their direct opposition.
So it won’t be a situation where Germany wins – look at the agenda of our own politicians, Clegg, Mandleson, with Mass Immigration, Global Warming, Deficit spending – is any of their agenda in the best interests of the UK…?

Anonymous said...

Don't forget that thanks to the credit "boom" years the Spanish and Irish now expect higher wages than the Germans. Very difficult to unravel that particular problem.

Anonymous said...

Could a small Continental war help? Always good for demand stimulus and anyway, hasn't in been democracy that's got us into this mess? The Generals will turn things around by any means necessary. All be over be Xmas.

Bill Quango MP said...

Anon: it's all about national interests isn't it?
As for wars, we're fresh out of cash for even a small one.

There was a pro Eu program on the Tv yesterday. The reason that Europe has enjoyed its longest ever peace is the EU.

No mention of the cold war and the USA maintaining a huge military presence from 1948 to just a few years ago.
Or that Europe is now a democratic region and democracies don't go to wr with each other.

andrew said...

democracies don't go to war with each other...
wikipedia says this depends on what you mean by democracy and war

Electro-Kevin said...

Germany: Never a lender or borrower be ?

If they really want the single currency to work they could simply *give* back the gold they took from Greece in WW2.

Bill Quango MP said...

A bit of lefty propaganda on wiki there I think. They are always upset that communist countries engaged in war with each other.

Might post it up later. Which of these is a true 'modern' democracy. - WW2 is the most odd on the list. As it was a war of the Democracies against the totalitarian states {with Communist Russia on both sides.}

Spoils of war EK. The Russians took everything from Germany. Shipped factories whole back to the motherland. Even took the locks of the remaining doors. And all the animals they could find that they didn't need to support the army. Occupied, and still occupy, part of the Japanese home islands.
Gave bugger all back to Poland which they invaded {twice}.

We nicked as much gold and precious metals as we could find.{So my book says - I'm not totally convinced there were special companies ahead of the main army searching out Nazi banks, Kelly's Heroes style. But..the book says there was.Looking for loot and secret weapons. Sounds like a computer game to me. Anyone remember Eagle's nest and Wolfenstein?}

Electro-Kevin said...

BQ - Agreed. Spoils of war. But the Russians aren't forcing austerity on the Germans nor trying to create a one-size-fits-all economy.

Slightly off topic (I like the Germans btw) but how is the reunification of Germany something to rejoice within the EU and ...

... yet the break up of the UK something to rejoice ?

Electro-Kevin said...

BQ - Agreed. Spoils of war. But the Russians aren't forcing austerity on the Germans nor trying to create a one-size-fits-all economy.

Slightly off topic (I like the Germans btw) but how is the reunification of Germany something to rejoice within the EU and yet ...

... the break up of the UK something to rejoice as well ?

Budgie said...

Oh dear, Hatfield Girl trots out the tired old propaganda about how well off London would be "without the transfers to the north of the British Isles".

"London" actually "transfers" back to the north only a fraction of the taxes that it rakes in from the north in the first place.

Germany gets its advantage in the euro by a fiddle too. It enjoys a weak currency (the euro) so it can play the mercantilist game. At the same time (well actually circa 2006) when its economy was weak it demanded, and got, reduced interest rates.

I shouldn't have to spell it out on a capitalist blog, but when something is cheap (in this case borrowing) for those economies not in the doldrums, they use more of it. These just happened to be the southern eurozone states at the time.

These problems of the euro were predictable, and predicted by eurosceptics a decade ago. Why the surprise now? It is not the fault of the Greek people; it is not the fault of the Germans either. It is the fault of the EU politicians and their odious tyranny.

Anonymous said...

"The Russians took everything from Germany. Shipped factories whole back to the motherland. Even took the locks off the remaining doors."

Time's revenges. A friend transiting through Moscow airport around 1995, in the middle of the "transition", reported that it was full of people sleeping rough and that even the doorknobs had been stolen from the doors.

"The only thing still functioning was an Irish bar"


Bill Quango MP said...

Budgie: Have you been looking at a Dr Eion Clarke graph?

Anon: When it all turned over it went Iraq in Russia. The copper stolen from the heating systems, and the manhole covers. etc.

Mind you when the USSR did pillage Nazi Germany they certainly had a good excuse.