Germany and the European economy

Great Debates
1

Mods, I’m sorry if this is the wrong forum.

I was listening to the talk yesterday on NPR and there was a brief discussion on the European debt problem. Transcript.

While searching for the transcript, I also found this opinion piece from The New York Times

So that leads me to a few questions.

For a while, it seems it was France and Germany calling for Austerity, but it might just come down to Germany now. How does Germany have the power to force austerity on all these countries? Were they the ones who lent the most to the other European countries? Do they have disproportionate power in the Eurozone?

Let’s say European countries stop agreeing to austerity measures. What would be the alternatives? Could alternative plans be implemented without Germany’s consent?

Finally, let’s say that Germany’s economy starts collapsing. Would they be willing to impose austerity on themselves?

2

Well, the heart of the matter is that Germany is supposed to bail out these struggling states, meaning: the German tax payer is expected to fork over hundreds of billions of Euros.

Germany then can at least demand that the beneficiary countries control their spending habits.

And Germany did go through painful austerity measures some 10 years ago, that was one of the issues that brought down the government of chancellor Gerhard Schroeder.

3

Germany has the problem that much of its export business goes to EU nations. Their industries have out competed those in other EU nations.

Germany has benefited hugely from the Euro money project by obtaining better access to these markets and it is very much in their interest not to allow those debtor nations to fall out of the Euro zone - in effect the money they are supplying in the form of bailouts and loan guarantees comes back to its own economy in the form of exports.

Germany also benefits because debtor nations in the Euro zone cannot devalue their currencies, and have to stick to the same interests rates, and pretty much the same fiscal policies, so it means that German goods do not get more expensive in those debtor nations. The result is a decline in industry in debtor nations and so reduced ability to work themselves out of their problems.

The German taxpayer may think they are bailing out those other economies, but most of the money comes back to them anyway - once the crash comes, Germany will go down the toilet pretty badly, since they will have destroyed their own export markets.

4

Casdave has summed it up nicely-Germany got enormous benefit from the euro-it got access to European markets, and because of the fact that their European competitors had smaller home markets (and higher costs), German manufacturers were able to dominate those markets. In other words-why is the Greek army over-equipped with German Leopard tanks? And why is Greece (or used to be) one of BMW’s largest European markets?
Basically, Germany kept its factories running by putting its European competition out of business. The German Central Bank kept things going by loaning money back to the debtor nations. Now the whole thing is coming crashing down- Greece now has a 3rd-world income level, and cannot buy many Leopards and BMWs anymore. I look for a serious euro crash this summer.

5

Germany has always had a very successful and competitive export industry. It’s not as if this had only started in 2002 when the Euro was introduced.

The Greek certainly did not spend every single Euro on importing BMWs, tanks or lederhosen from Germany. I think this aspect is grossly overestimated, however it was widely used, back in the day, to sell the concept of a common European currency to the sceptical German public.

6

If you have a balance of trade problem, the traditional, and easy convenient way is to devalue your currency - its also the lazy way since it means the local national politicians do not make direct budgets cuts to programs and services.

Its much much harder to take responsibility and to make industry actually work, its much less popular with the local politicians are recognisably involved in making the austerity cutback, whereas devaluation usually takes some time to impact directly and also can be blamed upon ‘the markets’ or foreigners’ and is thus a ready made excuse for local politicians.

The Euro puts the brakes on all that, now local populations have to live with he consequences of their national spending, lack of investment, lack of modernisation and high levels of consumerism.

Greece has been especially irresponsible, in not having accurately accounts, knowing that this was the case, and yet making national plans based upon them. Add in the national pastime of tax avoidance and evasion and an EU that is complicit in this deception and you have most of the explanation you need.

Ordinary Greeks don’t have too much say in all this, except at election time when they vote for political bribery - and all of us will always vote in our own self interest - we will never vote for responsibility - not in any westernised economy.

We all like simplistic blame and simplistic solutions, but we are all in this one way or another and we all have some part of this to carry.

Germans are naturally believing they are blameless, maybe the majority of them are, but ultimately if they take their ball home, they will still suffer the end results of a Euro-crash, and wider markets around the world will take a hammering too, to say nothing of the loss of confidence which on its own can be a very major cause of recession.

The US and the far East cannot afford the Euro-zone to go down but neither of these trade areas are likely to step in if there is little credibility in the Euros themselves - in the end, Germany may withdraw somewhat, the other major zones may stand on the sidelines, and the world economy will take such as knock as to make Japan’s last two decades of stagnation look like a profit party in comparison.

7

When people say that the arrangement benefits Germany, I wonder if it would be more accurate to say that it benefits German exporters. For the average German in the Straße, I’m not so sure. They probably do get the benefit of more jobs, true. But the fact that German exports are artificially cheap in the rest of the eurozone is counterbalanced by imports being artficially expensive. Some of the benefits that German workers would have received through their higher productivity, in the shape of cheaper holidays to the Med, cheaper imported food, and so on, have not materialised.

8

Looking back up to the OP, I have some serious doubts about the sanity of those claiming Spain shouldn’t follow austerity right now. It’s not a matter of whether you want it or like it: Spain has no choice in the matter! With the debt rating cuts, they simply can’t afford the debt they have now, must less taking on more.

Ximenean, you are probably correct. Moreover, the German-European situation almost certainly can’t go on as it is. The trouble is that nobody has an easy, painless way of solving it, and nobody really wants to take tat first step and recognize the facts. Asa result, everyone wants to get theirs now, taking the visible over the invisible. And for German workers, it’s a lot easier to keep the jobs they have in a global down economy than to hope for possible benefits down the line.

That said, I don’t think ultimately any nation on the Continent has a choice in the matter.

9

So basically, right now, it’s Germany bailing out the other Eurozone countries?

Let’s say after a while things don’t get better and they cry, “Enough with the austerity!” If Germany says, “Fine then, no more bailouts.” Is/are there any other country/countries that could step in?

10

There are lots that could. There aren’t any that would. The IMF would probably wind up bailing out Spain and the Netherlands. Greece is such a basket case that it’s probably best to just allow for a market correction there. Other wealthy countries, like the UK, will feel an almost equal impact from a Eurozone standoff, but the UK is not an zone member and has less of an interest in bailing anyone out. Apart from that, the UK has its own debt problems.

A lot of people upthread have pegged this as a problem with German industrial dominance, but there’s more to it than that. Most of the Eurozone is in the proposed “fifth stage”* of the demographic transition model, where birthrate tails off dramatically at the same time as life expectancy increases.

Having a country full of old people means you have less crime and less political turmoil, but it also means you have reduced productivity. That was a big part of Japan’s “lost decade”: an aging population, and stagnant population growth due to tight immigration controls and low birthrate.

I suspect China’s one-child policy will result in an even more dramatic recession when the pre-1979 generations reach retirement age.

*that’s what it was called when I was in college, and it was more of a theory based on patterns in Italy and Japan then a certainty.

11

I mean, Greece owe billions of euros that it cannot repay. So why can’t the creditors demand that hard assets (art, land, buildings, subway systems) be liquidated and sold for cash?
So what if the Athens subway system is now owned by a German bank-who cares?
As long as the present situation goes on, I see no solution. Why not bite the bllet, have a national yard sale pay off the debts and start over?

12

‘Austerity’ is a single word for a policy, the policy is that the German and French states, and also - primarily French - banks will not allow their debtors to default on any part of their loans. Instead they insist on the return of all the capital, and on squeezing the working classes of the indebted nations for as much interest as they can gain for as long as they can.

Too much was loaned by the owners of capital, they charged interest according to the perceived risk, and they refuse to acknowledge it is impossible for several countries to repay the entirity of loaned capital, never mind the interest.

Loaning is a risk, that’s primarily why interest is charged.

A level of managed default is inevitable from Spain to the UK, it’s only a matter of how much pain the respective electorates will be willing to bear and at what point they have enough of this ridiculous charade.

13

With regard Germany, I believe it was only last year China replaced Germany as the worlds largest exporter by value.

The key mechanism is that the southern European countries keep down the value of the Euro, allowing Germany to export outside the EU at artificially low prices.

The entire euro project is based around Germany exporting beyond the EU, and Germany building its economic empire.

14

Why would anyone want to own the Athens subway system? It’s revenue-neutral at best.

15

Because banks don’t want to own those assets. Were the banks to foreclose they would be stuck with a bunch of assets that noone wants to purchase at anything less than a steep discount, if the
Athens subway system were profitable it wouldn’t have a problem paying for its cost of debt to begin with. This leaves the bankers in a pickle because the only options they have are to, 1) Foreclose and take a huge loss on their investments, 2) Hope that somehow the EU can get Greece to at least be solvent enough to pay for their debt.

16

From everything I’ve heard on the news, and elsewhere, Greece did deserve its harsh austerity measures.

But for countries who don’t have high tax avoidance, and who don’t cook their books; Although spending cuts are reasonable to some degree, if austerity is the only solution given, then frankly, in my opinion, it seems kind of punitive.

And, although from an opinion piece, if this (from the New York Times link in the OP) is correct, continually pushing austerity measures seems pointless.

17

I seem to remember that some Finnish politicians did actually make noises about using Greek islands as collateral for bail-out loans. I’m not sure how serious the suggestion was, or if it was just posturing, but they certainly didn’t seem happy about having to lend money to Greece.

18

This is an interesting argument. However, keep in mind that Britain just recently slipped into a double-dip recession after implementing a smorgasbord of austerity measures and tax cuts for the rich. If Britain is an example, it seems to suggest that during a financial crisis, government intervention and taxes on the wealthy should be robust not less. We’ll see though; it’ll be very interesting to see how this austerity stuff pans out in a few years.

  • Honesty
19

That’s not really answering the question as there are plenty of things Greece owns that would be profitable to an investor. The reason private creditors cannot take, or force the sale of government asset is sovereign immunity. In the US, that immunity means the following:

The case of Greece is likely not much different. Here is an NPR Planet Money article/podcast talking about this issue with regard to Greece. Here is another one in the FT. This site puts it succinctly.

So there is no basis for forcing them to liquidate assets in the same way an individual under similar circumstances might have to.

20

The UK spending cuts haven’t really kicked in yet, so I don’t think we can make conclusions like that. So far, the government has concentrated more on the raising taxes side of things.