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Why Germany seems not to want a quick fix for the euro crisis
- sunnydaynow 15y ago"The vast majority of financial transactions, he told fellow finance ministers in a closed meeting earlier this month, “do not serve the real economy”. When markets go astray the answer is not to make the taxpayer step in once more, but to introduce better regulation." Spot on!
- mtts 15y agoWith this caveat that financial markets fund a lot of the real economy as well. So you really don't want banks going bust left and right, as morally righteuous as that would be.
- tomjen3 15y agoWhy not? All that would happen would be that some other previously small bank would get more business. Remember, nobody is too big or has been around too long to be allowed to fail. Assyria fell, so can Goldman Sax.
- prewett 15y agoWhen banks start failing left and right, people start getting scared, taking their money out of banks, causing banks to become insolvent, causing more banks to fail, etc. When a bank fails, you lose money (absent depositor's insurance), potentially lots of it. This is not a good thing. It caused a lot of pain in 1929/1930s in the U.S., and led to the creation of the FDIC. Even 80 years later, we sort of have a cultural memory of bank failures as being a large part of causing the Great Depression in the U.S.
- tomjen3 15y agoWell, yes they do. Unless the bamks are fdic insured, which I believe all banks are.
- tsotha 15y agoBut bank failures cause a run on other banks. If the entire system collapses the FDIC will be unable to make good on its obligations.
- tomjen3 15y agoThe FDIC is backed by the full faith and credit of the United States and just like no politician will vote to reinstitute the draft, no politician will do anything but prioritize those payments very, very high.
- tsotha 15y agoThere isn't enough money. It isn't like they could just issue a few bonds and cover the shortfall.
- anamax 15y ago> When markets go astray the answer is not to make the taxpayer step in once more, but to introduce better regulation." And this better regulation is going to come from the folks who wrote Dodd-Frank, who think that the CRA is a good idea, who keep defending Fannie Mae and Freddie Mac.....
- eru 15y agoNo, no, we are going to get it from the Germans.
- adrianN 15y ago> Think of nuclear fission: it generates useful energy but if it runs out of control you get a cataclysmic explosion. After Fukushima, Germany announced that it would phase out nuclear power. And yet, when it comes to the sovereign-debt crisis, Germany is prepared to live with the risk of economic meltdown. This bullshit analogy nearly made me stop reading the article.
- davedx 15y agoI'm reminded once again of Rumsfeld's "Old Europe".
- deleted 15y ago[deleted]
- mtts 15y agoFunny thing is it gets quite better towards the end :-)
- zerostar07 15y agoYou have almost missed a great article then
- lispm 15y agoIt is simply not clear that the economic meltdown will be prevented by throwing more money at the problem. It will make some people rich, but the root causes are not addressed.
- paulkoer 15y agoAs a German I must say that in my opinion this article captures the German sentiment very well. On the one hand it is short sided, it will likely lead to more economic problems than necessary and the stance of the Euro members (and Germany especially) on Greece is hurting the economy there much more than necessary. On the other hand I do feel that some of this sentiment is justified. After all the example of Italy (Bond markets demand high risk premiums, Italy announces much needed reforms, ECB buys Italian bonds, Italy removes reforms) is quite telling. The same (much worse, actually) applies to the financial institutions. What precedent have we set by bailing almost all of the out. Without a lot of reform investors will no doubt assume that financial institutions are state-guaranteed, allowing them to continue the tails I win, heads you (the state, taxpayers) loose game. Clearly more decisive action is required to deal with the current problems but I think we are deluding ourselves if we believe that we can make it out of this debt crisis only by clever policies.
- mtts 15y agoWhile morally entirely correct (IMHO, I'm Dutch, we also use the same word for guilt as we do for debt) I doubt the Germans can hold on to this position for very long. Apparently the German "Landesbanken" are heavily invested in Greek and other crappy debt, which is a problem because these banks also fund a large part of the "real" German economy. So Germany probably has no choice but to prop up the lousy debt.
- _delirium 15y agoThat's the main quandary that the politicians/economists appreciate but the general public doesn't, I think: either way Germany is stuck bailing out this debt, because in large part it's not really bailing out Greece, but bailing out German banks. The main choice is whether to pay the banks directly (let Greece default on the bonds, then cover the losses to keep banks solvent), or to pay them indirectly (send Greece enough money for it to keep servicing the bonds).
- yequalsx 15y agoI've said this over and over again to Germans that I know and they simply don't believe what you say. They really think that they are bailing out profligate Greeks and that there is no benefit to them. Politically, it isn't feasible for Merkel to come out and say that German banks need to be bailed out. It's much easier to talk about European unity and solidarity as the reason for "bailing" out Greece. Germans pride themselves on their fiscal restraint. They save and abhor debt in their personal lives. I think it would shock them to know that their banks are close to insolvency because they took German savings and lent the money to Greeks and Portuguese. If the German government were honest about the poor state of their banks then the government would not survive.
- harryf 15y agoAs the article makes a point of mentioning Angela Merkel... > All this is true. Yet Mrs Merkel seems to lack a sense of urgency. Despite the world’s calls for action, she does not believe in bold strokes—be it letting Greece default, or issuing Eurobonds to mutualise governments’ debt. Only a slow, step-by-step approach will work. In other words, the pain, austerity and market turmoil will go on for the foreseeable future. ...it's worth pointing out, by comparison to other world leaders, Angela Merkel has a PhD in Physics (Quantum Chemistry in fact). In other words she's more than capable to grasping the complexities of financial markets. Much as it annoys Anglo-Saxons, Mrs Merkel might be right.
- athoma 15y agoCompletely agree. There is a step by step process that must occur.
- zerostar07 15y agoOthers will jump in to say that markets are not predictable like chemical bonds, but i would counter-argue that they should be more predictable and less fear-and-rumour-driven
- yequalsx 15y agoA great quote from Galbraith is appropriate here. "The markets can stay irrational a lot longer than you can stay solvent." I don't know exactly what you mean by should but whether or not fear and rumor should drive markets the fact remains that they do sometimes drive markets.
- gahahaha 15y agoThe quote is not by Galbraith but Lord Keynes. Still true, tho'.
- harryf 15y agoWell quantum physics has this at it's core - http://en.wikipedia.org/wiki/Uncertainty_principle http://en.wikipedia.org/wiki/Uncertainty_principle I'm not saying it's directly applicable but the anyone who has grasped it, should be capable of understanding market effects as well.
- athoma 15y agoEven the title of this article doesn't make a large amount of sense. Of course the Germans want to take part in "fixing" the Euro crisis. But this is the problem with people in the finance world today. All they want is a "quick" fix. "Patch" the hole and the boat will stop leaking. I completely agree, something must be done to avert a double dip however a "quick fix" will not get us there. Most importantly, people need to increase their savings, lower spending.
- DasIch 15y agoIf people save more and spend less, the prices go down, the companies make less money and unemployment figures go up. I don't quite see how this would solve the problem.
- j_col 15y agoPrecisely. That is why Germany does not have a great domestic economy, all of their wealth is generated from exports, i.e. first we lend you the money, then you buy our expensive cars with the money, then we ask for the money back ;-)
- Uchikoma 15y agoAnd then I bail you out with the money from my high income tax. You have the car. The carmaker has it's money. The bank has it's money. I don't have a car. I've paid for all this ;-)
- j_col 15y agoEh, who exactly is getting bailed out? I think you mean loans, which are expected to be paid back in full (and up until very recently, interest was also paid on these "bail outs" making it a profitable venture for the country doing the lending).
- Uchikoma 15y agoWith bail out, I mean you default on the debt and I pay your dept towards a bank.
- smackay 15y agoThe real problem is the uncertainty of the solution. It is not clear whether strong action will have the slightest effect so Germany, given it's calamitous history with financial crises, is probably holding back just in case. The picture of a group of penguins standing on the ice at the edge of the water waiting to see who jumps first (or gets pushed) seems to sum up the situation nicely.
- derpapst 15y agoOne of the many reasons we got that far the global crisis is probably the reactive attitude "jump when the markets tell you so". As a German I find it comforting that our chancellor is not of that kind. One can criticize many points, but one has to agree that she does not fear head wind. Would be nice to have more politicians of her kind in Germany.
- derpapst 15y agoAlso interesting that the Economist continues to come up with the same kind of story every week. Just check the last Economist links that were posted on HN over tha last weeks and you will see that they all have the same message. To be honest, I would expect them to be more diverse.
- zwieback 15y agoThat's what the Economist is all about, though - extremely well written and produced with a very predictable and consistent message and opinion.
- stfu 15y agoThe EU has and always will be a forced construct that Germany will essentially have to shoulder. Other countries were going to tolerate Germany's reunion only when they support the EU. Now that they realize how the construct attempts to level the standards of live across the union, Germany realizes in what kind of downward spiral they tapped. Going to be even more "fun" to watch, when certain rules such as "penalty" for countries that export more than they import are enforced. Germany makes an excellent Hamster-in-the-wheel.
- 64ways 15y agoDebt issuance is money creation, and debt destruction is money destruction. Why is the latter SO intolerable? If nothing fails, nothing succeeds. This is all a result of the myopic human opinion of perma-growth. In the end private industry(the IMF) winds up bailed out, THEN using their ill-gotten gains to scoop up public assets for pennies on the dollar.
- vsl2 15y agoThis article spotlights two of the root causes of the crises in Europe - namely, (i) broken governments that spend beyond their means and the (ii) moral hazard that exacerbates such overspending. Greece Example: Greece spent too much money raised through issuing debt (which increasingly looks like an imminent default) and creditors continued to lend Greece money under the belief that Greece wouldn't be allowed to default by the rest of the Euro countries. There's no painless way to fix this mess, but I don't think giving Greece a massive one-time bailout sends the right message to the rest of the Euro countries (and countries' creditors) regarding moral hazard. The citizens of bailing-out countries (e.g. Germany) will be incredibly angry, rightfully so, and who knows how that will play out. On the other hand, small delaying actions like the ones that have been taken since the Euro crises began only worsen the situation and undermine global confidence in European leadership. Personally, I think the creation of a common currency (Euro), without a corresponding enforceable common fiscal policy, is the root cause of the global impact of this crises. One member of the common currency can bring down many of the rest of the members by contagion so essentially, the coalition is only as strong as its weakest link. The weakest link can be strengthened by enforcement of a common fiscal policy, but there was clearly no such common fiscal policy being effectively enforced in Greece. Another problem with the common currency is that Greece cannot devalue its currency to (i) make its exports more competitive (thereby improving its economy) and (ii) lessen its debt load through inflation. Before the Euro, the Greek Drachma could have been devalued in order to accomplish (i) and (ii). Now, Greece has no way out other than default or waiting for a bailout which may or may not come. No easy answers here, but my guess is that Europe will continue to incrementally increase its "help" to Greece and other struggling countries until a major comprehensive bailout is required. Similar to as in the US with its banks a couple of years ago, such comprehensive bailout will occur, global taxpayers will lose, and the cycle will continue until we see an even bigger problem next time. Happy thoughts to start off my morning...
- jan_g 15y agoMost smaller countries with their own currency can not do (ii), because they can only get dollar or euro denominated debt from international markets/institutions.
- gibsonf1 15y agoI have no idea why Keynesian ideas are assumed as the proper way to solve economic problems when, in fact, they never work. Germany is unusual, especially in comparison to the United States, in that they make a point of only spending the money they have. They have been watching the "wonderful" results of Keynesian intervention in the US recently and around the world and likely noticed that the results are always greater economic disasters. What sense is there in pouring gasoline on a fire?
- Aloisius 15y agoAre you saying Germany has no debt?
- coldarchon 15y agoThere's a difference between investment and debt. If your cash flow equals your debts, it's an investment.
- Aloisius 15y agoSo, if the US has a net positive year where tax revenue exceeds costs, all the trillions of dollars in debt we are in will suddenly become investments? Fantastic!
- DasIch 15y agoGermany uses Keynesian ideas as well for example it launched a Konjukturpaket[1] in 2009. Germany was just not hit as hard and recovered faster, there is nothing particularly unusual about that. [1]: http://de.wikipedia.org/wiki/Konjunkturpaket_II http://de.wikipedia.org/wiki/Konjunkturpaket_II
- lukeschlather 15y agoThe US has been doing extremely half-assed Keynes. It's not working because the bills haven't been large enough to have a measurable effect. Fundamentally I think the problem is the US has been too risk-averse. We've been hamstrung by our inability to accept that we have to take big risks to solve big problems, instead we're neutering any sort of solution to the point here it doesn't present a risk, and consequently can't present a true solution. I think there's a similar issue with this economist article. The assumption that there is a "correct choice" I think is wrong. There are a variety of bad choices, and it's probable that extremely risky choices are the only ones that have a chance of solving the crisis.
- JimmyMiller 15y agoRegulation is not the answer. Intervention by well meaning governments into the market is what has landed us in this mess. Instead of rushing in to save the large banks and other institutions on the backs of the tax payers these institutions should be allowed to fail so that more prudent, efficient mechanisms can take their place.
- fforw 15y ago> and jealous institutions such as the constitutional court. The Bundesverfassungsgericht (federal constitutional court) is the only organ that reliably keeps doing its job, ensuring that the newly passed laws are in fact constitutional -- a test that was failed so many times in the recent past. Calling that jealous behavior is a very strange position to take.
- sprash 15y ago"German politicians are constrained by a complex federal system, a sceptical public, messy coalition politics and jealous institutions such as the constitutional court." You mean German politicians are constrained by Democracy. This article portays it as if it was a bad thing.
- vsl2 15y agoDemocracy I think is the least evil of the types of government that a society can have, but is still inherently terribly flawed (but less than other types of government) because of basic human failings (e.g. moral corruption, greed, "sheeple" mentality). Perhaps only a benevolent dictator could actually make decisions in an unbiased "best for everyone" manner...but then again how long would any dictator remain benevolent once he/she's had a taste of absolute power?
- jasonkolb 15y agoWhile I generally abhor taxes, I really like the idea of a financial transaction tax. It would effectively eliminate the profit margin for high frequency trading and remove a LOT of volatility from the markets. IMHO the market volatility is causing the average person to doubt the stability of the economy and hurting the entire ecosystem. Even a small transaction tax... Say, $1/EUR per trade would remove the incentive for High frequency trading and encourage some more productive market dynamics. I mean, really, who wants to IPO in a market like this? And that removes a pretty significant source of funding for new businesses...
- blue1 15y agoBy drastically reducing volume it would also reduce liquidity and increase spreads. Sweden tested this in the eighties and abandoned after seeing the market substantially dry up (and the resulting taxes as well).
- _delirium 15y agoI can see that happening with a large tax, but surely it's not a step function, where no transaction taxes results in huge liquidity, while any non-zero tax causes a catastrophic drying up of liquidity. How about, say, a penny-per-trade fee? That would discourage trading at the sub-penny level of liquidity, which is not particularly useful anyway, while still making it profitable to provide liquidity if arbitrage opportunities of >$0.01 were involved.
- bluedanieru 15y agoIt would certainly reduce liquidity and increase spreads, but I think that's the point. Stocks are not supposed to be a terribly liquid instrument, yet volume continues to outpace growth in the market. It's true that trading in Sweden basically moved to London when they tried this, which is part of why now you're seeing a push against this unless the entire EU hops on board, or even the entire world (however it will not happen in New York in a million years). There are lessons to be learned from Sweden's experience, but I'm not sure you can necessarily point to as a definitive case study and say "See? It won't work."
- 15y ago
- mise 15y agoIt comes down to the Protestants keeping the Catholics in check :)
- j_col 15y agoThe Greeks are neither...
- hugh3 15y agoEver heard of "Greek Orthodox"? I believe it's quite popular in Greece.
- ugh 15y agoGermany is split in three (35% no religion, 30% catholic, 30% protestant), Greek Orthodoxy is prevalent in Greece. There is nothing particular protestant about Germany and there is nothing particular catholic about Greece.