Why do Germany and the (predominantly US funded) IMF keep throwing good money after bad?

See subject. It’s ridiculous I don’t understand the watershed economic/political events of the Euro.

Thanks,
Leo

To avoid a global financial meltdown?

Phrasing the question as “throwing good money after bad” seems to invite a debate as to the wisdom of the course of action, so let’s move this over to GD.

Colibri
General Questions Moderator

Pretty much this. The short answer is that having the Euro and the various nations having problems in Europe right now tank is much, much worse than attempting to prop things up or at least control how they go south. I don’t think that it’s ‘throwing good money after bad’ so much as ‘desperately trying to make sure the boat doesn’t sink with all hands on board’.

This may or may not be the case: I would certainly suggest that if this is indeed the topic under consideration (the OP being a tad vague there), that by not getting any resolution fo the underlying difficulties, the issue is only being postponed and not in any way solved or even much mitigated.

Part of the problem is that politically nobody in power wants to look at actualy solutions, because they’re too painful and might well result in mass replacement come next election. As far as it goes they likely have little better understanding of finance than the average man on the street. So they kick the can down the road, or grab the easy solutions offered by talking heads, pundits, and think tanks. The easy solution being “get more money” - but of course, that doesn’t really deal with the underlying problems which caused the need. Ah well, there’s not much they can do about it.

The IMF are in business to protect owners of capital from taking a hit on legitimate risk and they do that with, of course, public money.

Germany is all about retaining control - it took 50 years to get this economic empire in situ and the political class really is not going to give it up anytime soon.

Has the IMF ever lost money on a loan?

I read once that they (or the World Bank) had never done such.

But if the "PIGS” countries have had for a long time, and now since they’re living off essentially free (to them) money that it seems that people know they will not, and cannot repay even the principal, what is the point of keeping it together?

I sort of understand the political ideals involved, but of course economics and politics are deeply interwoven.

“free money” Really, is that where you are with this?

I don’t know if you’ve heard of that little ole thing from a few years ago called ‘sub prime’ - that’s what’s done for the banks in Ireland, Spain and to a large extent Portugal. The banks - not the people - wanted too much of that giant bubble.

Greece serves another purpose for Germany, which is why Germany is so very keen for Greece to remain in the euro.

So where are you with this; is the USA some kind of world financial policemen, maybe trying to help those damn Europeans out of another mess?

If they don’t throw “good money after bad”, they could end up losing an even greater amount of good money. If Germany and the other key institutions collectively refuse to bail out Greece, for instance, that’s likely to lead to Greece swiftly crashing out of the Euro, causing bank runs, capital disruptions and loan defaults that would ripple across Europe and potentially cause enormous damage to Germany’s own banking system and wider economy.

Allowing the same sort of fate to befall Spain or Italy could have genuinely catastrophic consequences for Germany, and very serious ones for the US.

People like to imagine these major issues are simple: “just stop throwing good money after bad”, problem goes away. The reality is that could produce a much greater problem. There’s no easy solutions on this issue - in fact all the solutions are pretty dire at this point.

What do you imagine happens if Europe suddenly decides it doesn’t want to “keep it together” and disbands the Eurozone, reintroducing individual currencies? Mass loan defaults, bank runs, strict Europe-wide capital controls, deep recession and risk of the collapse of the European banking system would be almost guaranteed results in such a situation. Does that sound appealing?

I don’t think the European crisis is really all that closely tied to the American subprime crisis. There’s a new line of political rhetoric coming out of Europe (e.g. Barroso’s recent comments) trying to claim that everything was just great in the Eurozone until the nasty Anglo-Saxon bankers fucked-up. Which is just wrong, there were massive structural flaws in the Euro, and the American crisis just acted as a catalyst for Europe’s own: cheap credit flooding into Spain and Ireland from the European core, mostly caused by the ECB purposefully setting interest rates to suit a German economy in the doldrums when the periphery was motoring along, started a construction boom exacerbated by ridiculous tax policies in e.g. Ireland which had developers paying a massively reduced level of tax for most of the decade leading up to 2008. Straightjacketed by the Euro, the only option the Irish had to try to deflate the bubble was to raise taxes in a boom to try to slow things down, which as noted by Martin Wolf is about as likely in a modern democracy as the return of Jesus.

Yes, Greece really is a sui generic case. When you look at Spanish or Irish finances before the crisis they were even more healthy than Germany’s! Greece is just being used as a propaganda tool to paint all the non-Teutonic Eurozone countries as profligate and make it easier to push their economic imperialism.

And the politicians, at least in Spain, wanted both the portion they got from being in the boards of directors of Savings Banks (owned by goverments; many politicians who got on a BoD by virtue of their elected post drew salaries, per diems and expenses from both, and I don’t mean little ones) and from retiring to the boards of directors of Banks, and the grease from making sure that the building permits went to the right people, yes?

Not cynicism, I’ve seen way too much of that directly (clients who had several people dedicated to difussing “payments without invoice” into the GL) and indirectly (the Bros have been working in construction or construction-related companies for the last 12-14 years).

Part of our problem was a decision to base our economy in paving up the country: there simply is such a thing as having too many houses for the amount of people, and we reached it. An economy based on “bricking up” is no more healthy than one based on “sun and sand”, we’d overfocused and a big chunk of that was greed (on everybody’s part, I know more than one “man on the street” who was speculating like crazy).

German exporters benefited from the easy credit available to the PIGS-Greece bought lots of tanks, guns, weapons from Germany. So the German Central Bank had every incentive to keep the charade going.
Actually, Germany would be beter off writing off the debts-the Greeks cannot ever pay the debt off, and keeping Greece in a credit-starvation induced recession won’t allow them to buy many BMWs, Porsches, etc. So do what the japanese banks do-just keep non-paying loans on the books forever.

Sui generis. /nitpick

I don’t think it’s accurate to suggest that Germany helped create the euro with an eye to lording it over the rest of Europe. In truth, they had doubts about the project and had to be pushed into it somewhat by Helmut Kohl, who had a more starry-eyed view of it as a historic step towards European integration.

I still don’t really buy the idea that it has been good for Germany, to effectively have the value of its currency artificially held down. I get the point about it giving German exporters an advantage, but that only really helps those exporters, not Germany as a whole. There are other considerations, and this article makes the case that the euro is not so good for Germany after all.

All that’s true, but remember that most people don’t see the alternative, or what they give up. All they see is the high employment rate, not the expensive imports and lack of domestic investment. Same as in the Broken WIndows fallacy - your loss is invisible, but the gain is very visible. So you ignroe the loss. I’m sure fear plays a role: even if you’re pretty sure that things would be better in the alternative, there’s a lot of political and economic risk which goes along with it. Why not try to keep things exactly the way they are now, and just take the acceptable result rather than the potential better one.

Intriguingly, this is the second instance where Helmut Kohl’s financial idiocy in currency zones resulted in economic disaster: his intitial terms of reintegrating East Germany traded Ostmarks for Westmarks at a 1-for-1 parity. And as any financier could have (and many did) tell him, this completely kneecapped the eastern economy, forcing Germany to pay through the nose to rebuild its already-shaky economy. It’s kinda weird, because it’s so damn similar you’da thought somebody would have realized that the Euro would encounter similar problems.

Eh? The pre-Euro currencies were *not *integrated at 1:1.

Since the USD is the de-facto reserve currency for the world…yes.

The Euro experiment always struck me as very dangerous. Strongly divergent economies need the freedom to have different inflation rates and different interest rates. Surely many economists agreed with that.

Was there serious opposition two decades ago? Do people now see the Euro as a mistake? Iceland wasn’t even in Euro-zone; does Euro commonality get any blame for its banking crisis?