6 ms·

Forget Greece: Europe's real problem is Germany

41 points by cwan 16y ago

aw3c2 16y ago
I am german and that viewpoint is entirely new to me. Thank you for the link.
- barrkel 16y ago
  That it is novel somewhat surprises me. I thought it was commonly known and accepted that it was in large part German banks that were being bailed out when bailing out Greece. Similarly, as I understand it - and have long understood it, since perhaps 2005 or so (I'm Irish) - the property bubble in Ireland was driven by historically low interest rates - only easily possible with an influx of foreign capital denominated in Euro. Inflation in house pricing was so extreme that relying on it became an accepted way of becoming wealthy. Now, in Ireland, lots of people are pointing fingers, blaming politicians, banks, property developers, etc., but the real theft was by the property owning middle class themselves. When people wonder where the money of the boom went, they need only look to people who owned houses. And another problem with house ownership - especially in English-speaking countries - is that it is seen as politically damaging to enact policies that cause house prices to fall, because it reduces the perceived wealth of the middle class. But this very same dynamic is what causes people to be upset, screaming that teachers and policepeople can no longer afford houses on their wages, ergo wages must rise, first time buyer tax rebates / etc. and other stupid policies that just serve to push up house prices even further. It's all pretty depressing, and makes one despair somewhat of democracy.
  - lispm 16y ago
    The number one lender, by far, to Greece is France, not Germany. Germany is distant third.
    - barrkel 16y ago
      Indeed, the numbers I know about indicate that France is owed 66% more than Germany, but that's not very distant. It's also somewhat hard to find a breakdown of debt numbers private and public, owed to entities in other countries. For example, I understand the lump of debt owed to Switzerland was because of a Greek bank being HQ'd there: http://www.read-news.info/financial/switzerland%E2%80%99s-non-exposure-to-greece/ http://www.read-news.info/financial/switzerland%E2%80%99s-no... The bank's deposits are backed by Greece; it's now HQ'd in Luxembourg. Was Switzerland the one you had in mind for second?
      - lispm 16y ago
        France is then lending 66% twice as much as Germany to Greece. '66% more' than Germany is significant IMO. So much for the theory that this was largely for bailing out German banks. Basically France' banks are being bailed out (plus a lot of other countries incl. UK and US). Germany is not especially exposed to Greece's problem. Germany also provides only 11% of Greece imports (though Germany has 20% of the EU GDP). Greece's problems are home made (lots of weapons imports, large military, corruption, country run by a few families, ...). The decision to spend billions on military ships, submarines, military aircrafts, tanks, etc. is entirely political.
        patrickk 16y ago
        Another problem is that tax receipts in Greece are way below what they should be. The Greeks' view is that their government is useless at spending public money, so they view it as their duty to dodge as much tax as possible. One law, for example, allows Greek property owners to avoid paying tax on a building until it is completed - so a lot of property owners don't build the top floor on block of apartments, so it isn't "finished" and therefore nontaxable. We had a similar problem in Ireland up until the 1980s/90s where dodging tax was practically a national pastime - if you rang up your bank, they would advise you on how to dodge tax! They would encourage customers to set up accounts in the Cayman Islands. Even the former Irish Prime Minister was in on the act: http://www.breakingnews.ie/ireland/ojidojsnmh/ http://www.breakingnews.ie/ireland/ojidojsnmh/ The key to solving the tax receipts problem is a strong body for collecting tax and heavy penalties for non-compliance.
  - DenisM 16y ago
    >It's all pretty depressing, and makes one despair somewhat of democracy. The more things change the more they stay the same. "A democracy cannot exist as a permanent form of government. It can only exist until the majority discovers it can vote itself largess out of the public treasury. After that, the majority always votes for the candidate promising the most benefits with the result the democracy collapses because of the loose fiscal policy ensuing, always to be followed by a dictatorship, then a monarchy." http://en.wikiquote.org/wiki/Alexis_de_Tocqueville http://en.wikiquote.org/wiki/Alexis_de_Tocqueville
  - dhs 16y ago
    "I thought it was commonly known and accepted that it was in large part German banks that were being bailed out when bailing out Greece." That's how I - I'm German - understand it, but I think it's pretty much the minority report around here these days. The vox populi still argues that we shouldn't have done it, as if there were an option out of it even now. The majority doesn't grasp what's happening and why it happens, and it seems to be very easy to keep them in the dark right now.
lispm 16y ago
Yeah, there is an economy which is competitive on the world market and that's a problem. Sure.
- anonymousDan 16y ago
  Yes but one of the main reasons it is so competitive is that it benefits from an unnaturally low exchange rate. If germany still had the deutschmark it would trade at a much higher level, making the economy less competitive. The european central bank has kept the interest rate low for a long time, benefiting mainly the german economy. Other smaller european economies were left with interest rates that were much to low. This resulted in a flood of cheap credit, leading for exmaple to a housing boom and subsequent bust in Spain/Ireland.
  - heresy 16y ago
    Proof? In its years of existence the German Mark never reached parity with the US dollar. On the contrary, switching to the stronger Euro made Germany's exports less competitive, not more, outside of the EU.
    - whakojacko 16y ago
      Not quite a fair comparison, as the DEM was exchanged to be ~0.5 EUR when the Euro was first introduced. Thus the DEM reaching US parity would have been equivalent to 1EUR being 2USD, which has yet to happen.
  - lispm 16y ago
    West Germany was competitive with the Deutsche Mark before. It ran trade surpluses then, too. Many German goods are not competing based on price. A luxury car like BMW, Mercedes, Porsche and others doesn't compete (much) on price. Many smaller companies also are market leader not on price, but on service and product quality. China buys German machines and tools not because they are cheap. The US bought offshore wind turbines from Siemens for the Cape Cod wind farm not because they are competitive on price, but because they are the best available turbines for offshore wind farms. For much of the German export industry it makes no difference where they export. If the Euro makes it easy, then many exports go to Eurozone countries. If not then more exports go to other countries outside the Euro zone. The Euro was overvalued in the last year - with the Euro going down, exports to other countries will strengthen.
jasonjones 16y ago
Oh, no! Not again!
sqrt17 16y ago
I've heard the exact opposite point being made about the US: they have a large-ish trade deficit, and quickly increasing debt, but everyone who sells what the US people buy buys US state debt, so everything works out in the end. As an entertaining thought, try to picture what would happen if Greece, or even the US, would go bankrupt (i.e., default on state bonds). I like the idea of "restructuring" bonds by asking people to give up a part of the face value against being insured from the default. (This sounds a lot like the scare game, though... if Greece defaults, the non-insured bonds are nothing, and if enough people exchange their bonds, everything works out and the folks who stuck to their non-insured bonds have the higher face value and get their money).
- kylemathews 16y ago
  > As an entertaining thought, try to picture what would happen if Greece, or even the US, would go bankrupt (i.e., default on state bonds). That's not the slightest bit entertaining to me :)
- anamax 16y ago
  > As an entertaining thought, try to picture what would happen if Greece, or even the US, would go bankrupt (i.e., default on state bonds). Argentina has done so at least once. I prefer default to inflation. With default, either folks stop lending to govt or their lending becomes a donation. Since govts can't be trusted to borrow, either one is an improvement over inflation.
tc 16y ago
While I don't disagree with some of the author's analysis, and the thought behind some of his solutions, one premise of this article is flawed. He promotes the notion that: 1) Germany creates wealth better than other countries, and 2) by saving and investing that wealth rather than consuming it, Germany does a disservice to the world and impoverishes its neighbors. [1] By the same logic, we should applaud billionaires for building mansions and enormous yachts rather than living modest lives and investing in startups and other businesses. And what of all the arguments about the US and other first world countries consuming such a disproportionate share of the world's resources? If we were to consume less, and by necessity save and invest instead, we'd be impoverishing the rest of the world! Germany is perhaps culpable here -- culpable for making bad investments which enabled wealth destruction. And they're further culpable for bailing out Greece, which perpetuates the problem and supports our world's already out of control situation with respect to moral hazard. [1] I'm ignoring his point about currencies here, because I don't really disagree with the notion that Germany engaged in a counter-productive vendor-financing scheme on consumer goods. That's the same boat that China's in with the US. What I'm trying to emphasize is that the problem is who they loaned money to and for what purpose, whereas the author seems to imply that any increased German consumption would have been better than increased savings. [2] The author also seems to think it is misguided to blame the spendthrift politicians in Greece. Whatever you think of the economy of Germany, I can't see what's mistaken about blaming spendthrift politicians.
- barrkel 16y ago
  I think there's a lot wrong with what you just wrote. But just two things: consumption of resources and economic consumption are two different concepts; and the paradox of thrift.
  - tc 16y ago
    Most of the kind of wealth that can be consumed by consumers is stuff that takes real energy and resources to produce, transport, and dispose of. As for thrift, I subscribe to the notion that it's a virtue, and I reject the supposed paradox. We're not going to settle that in this thread, though. That argument has been going on for a hundred years. The Wikipedia page covers the history.
smallblacksun 16y ago
Re: public investment in banks: "That strategy worked in the United States, and there's no reason it can't work in Europe." Isn't it a bit early to say that the strategy worked in the US?
Tichy 16y ago
"Nor will they accept that German industry was able to thrive over the past decade because of a common currency and a common monetary policy that, over time, rendered industry in some neighboring countries uncompetitive while generating huge real estate bubbles in others." I don't really buy it. Germany was strong even before the Euro was invented, and other Eurocountries were already struggling before that. And we see big companies moving out of Germany into cheaper Eurocountries on a regular basis. I am also not sure I entirely buy that there is a right or wrong way to handle a strong export industry. I think ultimately what causes problems is just wasting money (ie on bureaucracy and "bribes" a ka subventions for shoddy businesses).

41 points by cwan 16y ago

aw3c2 16y ago

I am german and that viewpoint is entirely new to me. Thank you for the link.

barrkel 16y ago
That it is novel somewhat surprises me. I thought it was commonly known and accepted that it was in large part German banks that were being bailed out when bailing out Greece. Similarly, as I understand it - and have long understood it, since perhaps 2005 or so (I'm Irish) - the property bubble in Ireland was driven by historically low interest rates - only easily possible with an influx of foreign capital denominated in Euro. Inflation in house pricing was so extreme that relying on it became an accepted way of becoming wealthy. Now, in Ireland, lots of people are pointing fingers, blaming politicians, banks, property developers, etc., but the real theft was by the property owning middle class themselves. When people wonder where the money of the boom went, they need only look to people who owned houses. And another problem with house ownership - especially in English-speaking countries - is that it is seen as politically damaging to enact policies that cause house prices to fall, because it reduces the perceived wealth of the middle class. But this very same dynamic is what causes people to be upset, screaming that teachers and policepeople can no longer afford houses on their wages, ergo wages must rise, first time buyer tax rebates / etc. and other stupid policies that just serve to push up house prices even further. It's all pretty depressing, and makes one despair somewhat of democracy.
- lispm 16y ago
  The number one lender, by far, to Greece is France, not Germany. Germany is distant third.
  - barrkel 16y ago
    Indeed, the numbers I know about indicate that France is owed 66% more than Germany, but that's not very distant. It's also somewhat hard to find a breakdown of debt numbers private and public, owed to entities in other countries. For example, I understand the lump of debt owed to Switzerland was because of a Greek bank being HQ'd there: http://www.read-news.info/financial/switzerland%E2%80%99s-non-exposure-to-greece/ http://www.read-news.info/financial/switzerland%E2%80%99s-no... The bank's deposits are backed by Greece; it's now HQ'd in Luxembourg. Was Switzerland the one you had in mind for second?
    - lispm 16y ago
      France is then lending 66% twice as much as Germany to Greece. '66% more' than Germany is significant IMO. So much for the theory that this was largely for bailing out German banks. Basically France' banks are being bailed out (plus a lot of other countries incl. UK and US). Germany is not especially exposed to Greece's problem. Germany also provides only 11% of Greece imports (though Germany has 20% of the EU GDP). Greece's problems are home made (lots of weapons imports, large military, corruption, country run by a few families, ...). The decision to spend billions on military ships, submarines, military aircrafts, tanks, etc. is entirely political.
      - patrickk 16y ago
        Another problem is that tax receipts in Greece are way below what they should be. The Greeks' view is that their government is useless at spending public money, so they view it as their duty to dodge as much tax as possible. One law, for example, allows Greek property owners to avoid paying tax on a building until it is completed - so a lot of property owners don't build the top floor on block of apartments, so it isn't "finished" and therefore nontaxable. We had a similar problem in Ireland up until the 1980s/90s where dodging tax was practically a national pastime - if you rang up your bank, they would advise you on how to dodge tax! They would encourage customers to set up accounts in the Cayman Islands. Even the former Irish Prime Minister was in on the act: http://www.breakingnews.ie/ireland/ojidojsnmh/ http://www.breakingnews.ie/ireland/ojidojsnmh/ The key to solving the tax receipts problem is a strong body for collecting tax and heavy penalties for non-compliance.
- DenisM 16y ago
  >It's all pretty depressing, and makes one despair somewhat of democracy. The more things change the more they stay the same. "A democracy cannot exist as a permanent form of government. It can only exist until the majority discovers it can vote itself largess out of the public treasury. After that, the majority always votes for the candidate promising the most benefits with the result the democracy collapses because of the loose fiscal policy ensuing, always to be followed by a dictatorship, then a monarchy." http://en.wikiquote.org/wiki/Alexis_de_Tocqueville http://en.wikiquote.org/wiki/Alexis_de_Tocqueville
- dhs 16y ago
  "I thought it was commonly known and accepted that it was in large part German banks that were being bailed out when bailing out Greece." That's how I - I'm German - understand it, but I think it's pretty much the minority report around here these days. The vox populi still argues that we shouldn't have done it, as if there were an option out of it even now. The majority doesn't grasp what's happening and why it happens, and it seems to be very easy to keep them in the dark right now.

lispm 16y ago

Yeah, there is an economy which is competitive on the world market and that's a problem. Sure.

anonymousDan 16y ago
Yes but one of the main reasons it is so competitive is that it benefits from an unnaturally low exchange rate. If germany still had the deutschmark it would trade at a much higher level, making the economy less competitive. The european central bank has kept the interest rate low for a long time, benefiting mainly the german economy. Other smaller european economies were left with interest rates that were much to low. This resulted in a flood of cheap credit, leading for exmaple to a housing boom and subsequent bust in Spain/Ireland.
- heresy 16y ago
  Proof? In its years of existence the German Mark never reached parity with the US dollar. On the contrary, switching to the stronger Euro made Germany's exports less competitive, not more, outside of the EU.
  - whakojacko 16y ago
    Not quite a fair comparison, as the DEM was exchanged to be ~0.5 EUR when the Euro was first introduced. Thus the DEM reaching US parity would have been equivalent to 1EUR being 2USD, which has yet to happen.
- lispm 16y ago
  West Germany was competitive with the Deutsche Mark before. It ran trade surpluses then, too. Many German goods are not competing based on price. A luxury car like BMW, Mercedes, Porsche and others doesn't compete (much) on price. Many smaller companies also are market leader not on price, but on service and product quality. China buys German machines and tools not because they are cheap. The US bought offshore wind turbines from Siemens for the Cape Cod wind farm not because they are competitive on price, but because they are the best available turbines for offshore wind farms. For much of the German export industry it makes no difference where they export. If the Euro makes it easy, then many exports go to Eurozone countries. If not then more exports go to other countries outside the Euro zone. The Euro was overvalued in the last year - with the Euro going down, exports to other countries will strengthen.

jasonjones 16y ago

Oh, no! Not again!

sqrt17 16y ago

I've heard the exact opposite point being made about the US: they have a large-ish trade deficit, and quickly increasing debt, but everyone who sells what the US people buy buys US state debt, so everything works out in the end. As an entertaining thought, try to picture what would happen if Greece, or even the US, would go bankrupt (i.e., default on state bonds). I like the idea of "restructuring" bonds by asking people to give up a part of the face value against being insured from the default. (This sounds a lot like the scare game, though... if Greece defaults, the non-insured bonds are nothing, and if enough people exchange their bonds, everything works out and the folks who stuck to their non-insured bonds have the higher face value and get their money).

kylemathews 16y ago
> As an entertaining thought, try to picture what would happen if Greece, or even the US, would go bankrupt (i.e., default on state bonds). That's not the slightest bit entertaining to me :)
anamax 16y ago
> As an entertaining thought, try to picture what would happen if Greece, or even the US, would go bankrupt (i.e., default on state bonds). Argentina has done so at least once. I prefer default to inflation. With default, either folks stop lending to govt or their lending becomes a donation. Since govts can't be trusted to borrow, either one is an improvement over inflation.

tc 16y ago

While I don't disagree with some of the author's analysis, and the thought behind some of his solutions, one premise of this article is flawed. He promotes the notion that: 1) Germany creates wealth better than other countries, and 2) by saving and investing that wealth rather than consuming it, Germany does a disservice to the world and impoverishes its neighbors. [1] By the same logic, we should applaud billionaires for building mansions and enormous yachts rather than living modest lives and investing in startups and other businesses. And what of all the arguments about the US and other first world countries consuming such a disproportionate share of the world's resources? If we were to consume less, and by necessity save and invest instead, we'd be impoverishing the rest of the world! Germany is perhaps culpable here -- culpable for making bad investments which enabled wealth destruction. And they're further culpable for bailing out Greece, which perpetuates the problem and supports our world's already out of control situation with respect to moral hazard. [1] I'm ignoring his point about currencies here, because I don't really disagree with the notion that Germany engaged in a counter-productive vendor-financing scheme on consumer goods. That's the same boat that China's in with the US. What I'm trying to emphasize is that the problem is who they loaned money to and for what purpose, whereas the author seems to imply that any increased German consumption would have been better than increased savings. [2] The author also seems to think it is misguided to blame the spendthrift politicians in Greece. Whatever you think of the economy of Germany, I can't see what's mistaken about blaming spendthrift politicians.

barrkel 16y ago
I think there's a lot wrong with what you just wrote. But just two things: consumption of resources and economic consumption are two different concepts; and the paradox of thrift.
- tc 16y ago
  Most of the kind of wealth that can be consumed by consumers is stuff that takes real energy and resources to produce, transport, and dispose of. As for thrift, I subscribe to the notion that it's a virtue, and I reject the supposed paradox. We're not going to settle that in this thread, though. That argument has been going on for a hundred years. The Wikipedia page covers the history.

smallblacksun 16y ago

Re: public investment in banks: "That strategy worked in the United States, and there's no reason it can't work in Europe." Isn't it a bit early to say that the strategy worked in the US?

Tichy 16y ago

"Nor will they accept that German industry was able to thrive over the past decade because of a common currency and a common monetary policy that, over time, rendered industry in some neighboring countries uncompetitive while generating huge real estate bubbles in others." I don't really buy it. Germany was strong even before the Euro was invented, and other Eurocountries were already struggling before that. And we see big companies moving out of Germany into cheaper Eurocountries on a regular basis. I am also not sure I entirely buy that there is a right or wrong way to handle a strong export industry. I think ultimately what causes problems is just wasting money (ie on bureaucracy and "bribes" a ka subventions for shoddy businesses).