Why Germany seems not to want a quick fix for the euro crisis

http://www.economist.com/node/21531032?fsrc=scn/tw/te/ar/keepthefireburning

by mrmasa • 15 years ago

103 129 15 years 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!

mtts5• 15 years ago

With 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.

tomjen34• 15 years ago

Why 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.

anamax2• 15 years 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.....

eru2• 15 years ago

No, no, we are going to get it from the Germans.

adrianN• 15 years 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• 15 years ago

I'm reminded once again of Rumsfeld's "Old Europe".

mtts5• 15 years ago

Funny thing is it gets quite better towards the end :-)

zerostar077• 15 years ago

You have almost missed a great article then

lispm2• 15 years ago

It 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• 15 years ago

As 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.

zerostar077• 15 years ago

It only makes sense, right? Personally i am quite pleased that the Germans lead this psychological warfare against the faceless 'markets', that are pushing more and more to funnel taxpayer's money in their ill-gone investments. As a greek, i find it ridiculous that the world's markets are turbulent over a tiny small country like Greece (the only PIGS country that is actually bankrupt), and exaggerate the risks so much. I do agree that markets have changed and it's time for a reform [What lessons have we learned from the 2008 crisis: None].

HSO2• 15 years ago

Have you ever thought twice about what exactly "faceless markets" are? Markets are composed of many agents, people, institutions, and mostly your pension money! It's true. Pension funds and other institutional investors are the single-largest segment, esp. of sovereign bond markets! Now ask yourself, with the Greek government in its current position, if it came to you today and asked you to lend it money, not to invest it in some thing or other but merely to pay back previous creditors, would you do it?! Yeah, me neither...

It's a copout by politicians and the bozos they represent to ascribe individual actions such as "pushing" or "punishing" etc. to aggregates like markets. But just as the laws on the molecular level do not simply reflect those on the subnuclear level of matter, the construct of "representative agents" is a fiction. Aggregation in the social sciences is just as hard and unintuitive as in the natural sciences, maybe even harder.

So why do they do it? Because to anthropomorphize "the market" allows them do demonize it, making things simple for the bozos in describing current developments as some kind of "struggle" between supposedly good central banks and politicians and evil, "faceless markets". Unfortunately, this type of rhetoric completely misframes the issues and leads invariably to wrong decisions by building political pressure at the wrong points in the system.

dageshi• 15 years ago

Greece is simply the tip of the iceberg, the bit above the sea which you can see, whatever solution is eventually found for Greece will likely be taken as precedent for the rest of southern europe.

overgard• 15 years ago

The german government seems really wise in this regard. The notion that there are any easy "fixes" to something as complex and intricate as an economy is very suspect to me. Things like quantitative easing seem way more dangerous than simply making sure your financial fundamentals are sound.

mtts5• 15 years ago

While 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.

_delirium7• 15 years ago

That'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).

jonnathanson• 15 years ago

The sentiment is justified, but the position is untenable. With every passing day, Greek debt compounds massively, and the hole gets bigger. Meanwhile, the uncertainty in the markets causes further volatility and pain for all concerned, and you risk the setting in of total panic. You end up with the worst of both worlds: all the market pain of a Greek default, without the default itself...but with the default still quite likely.

The Greek economy is dysfunctional to its core (even a passing skim-through of Michael Lewis's new book will give you a sense for just how dysfunctional it is). But that isn't the root of the problem. The root of the problem is that Greece was brought into the Euro monetary collective in the first place, and given the credit ratings and borrowing rates of a country like Germany. Banks had a large part in helping put lipstick on the Greek pig, covering up its systemic flaws and getting it ready for EU primetime.

So imagine that Greek dysfunction was like a caged and abused pitbull, and Greece's EU inclusion was like walking into that cage waving a bloody hunk of meat in either arm. Who do you blame when you lose a few limbs: the pitbull, or yourself?

IdeaHamster• 15 years ago

There's an interesting extension of this line of thought. My sister-in-law works in Istanbul for a Greek company. She says that most of the actual profit-generating work done for this company is done in Romania or Turkey. The Greek offices, from what she describes, are more or less completely dysfunctional.

Now, take that insight of conditions on the ground along with a chart of the growth of the Greek vs Turkish economies over the last decade, and then ask yourself: why is Greece a full EU member and included in the Eurozone, while Turkey's membership negotiations have completely stalled (and will probably conclude with Turkey not joining the EU)?

Can you imagine a world where Greece is allowed to leave the Euro, massively devalue its debt (and take the decade or more of restructuring/rebuilding its economy that would come with that), and Turkey with its strong manufacturing sector and youthful, growing middle class is brought in in Greece's place? The EU and the Euro would be in a far stronger position...but it will never happen. Unfortunately, European cultural prejudices are still to ever-present and will result in Greece continuing to be dragged along while Turkey gets shunned.

samstave• 15 years ago

It was mentioned today that the Greek government employs TWENTY PERCENT of the population - and there was a 100-year old constitutional law that prevented the effective firing of anyone working in the government.

This is institutionalized graft and is surely a main contributing factor in the corruption.

Iv2• 15 years ago

I see only one way out : find responsibles and punish them. Through fines and prison terms. Some people have hidden the true state of Greece by fraudulent accounting with the help of experts from Goldman Sachs.

Politician who participated in that should be judged for treason. Financial experts for fraud. Goldman Sachs must be fined heavily for this.

Right now, Dexia is falling despite 6 billions of aid in 2008 and a successful "stress test". Obviously some fraud happened there too. There are many places where inquiries should be made.

Heads must roll, then austerity will become a possibility. Many people see this as just an economical problem but it is a very political one. There is a crisis of legitimacy amongst the people who are organizing the austerity : in most place it is the same people who caused the crisis.

_delirium7• 15 years ago

I'm not sure the falsification of records is really at the root of this, in the sense that it was a deception that did not really deceive anyone. There was a bit of consensual hallucination going on: nobody really believed Greece's numbers, but it was convenient for everyone to pretend to believe them. Lenders who bought Greek bonds should certainly have conducted their own analyses and had a decent idea that the headline figures were not accurate (I would guess they did, actually, but assumed that Greece wouldn't be allowed to default, so bought the bonds anyway).

tsotha6• 15 years ago

Throwing people in jail, however satisfying, is not a "way out".

wnight4• 15 years ago

> investors will no doubt assume that financial institutions are state-guaranteed

They are state-guaranteed. Too big to fail. Every piece of financial machinery for the debt circus is required and they can't get rid of it or let it fail without exposing the same functionality elsewhere.

As long as we use a debt-based state currency the banks can't be allowed to fail. At some point they'll just print new money and start fresh hoping it doesn't happen again.

Until we declare the debt-currency game to be unwinnable and stop playing, we'll keep losing.

harryf3• 15 years ago

As 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.

athoma2• 15 years ago

Completely agree. There is a step by step process that must occur.

zerostar077• 15 years ago

Others 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

yequalsx2• 15 years ago

A 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.

harryf3• 15 years ago

Well quantum physics has this at it's core - 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.

HSO2• 15 years ago

I have no doubt she is intelligent, experienced, and has good intentions. But to make the simple connection from physics background, decades away, to today's financial markets and economies strikes me as rather bold.

You need to have thought about things, and you can't (unfortunately) just read a couple of books or articles to "learn" this subject. You are aware how the economics profession as a whole performed over the last few decades?

EDIT: Just recently, I was complaining to a friend that I am thinking about markets and economics now for almost ten years, one way or another, and I am still just speechless sometimes, asking myself wtf is going on or what does this mean etc. I feel there are many things that I still don't seem to get on a deeper, fundamental level. And I like to think I'm not so stupid either. So, I can fully imagine how tough it must be to get into a situation where you actually need to make a call with real consequences for millions of people, for many years to come, on the basis of very, very limited information. Frankly, I feel a sense of history might be of more help to someone in this position than a physics background.

harryf3• 15 years ago

Agreed. But to me she doesn't need to be a subject expect on financial markets. My point was her education has trained to be able to understand models of complex environments. I'd argue that gives her better chance of actually understanding what her financial experts are telling her.

onemoreact• 15 years ago

Economics and Quantum Chemistry accually have a lot in common. They are both looking for mathematical shortcuts / models for highly complex systems and use similar tools. So sure reading a few book is not going to give you an in depth understanding of economics, but being able to look at the math and call Bull !@#$ is invaluable.

EX: It is generally accepted that money is created when a bank creates a loan, however, you can make also make a similar argument that it's only when banks fail that new money is created. Both are in some ways true, but the second is actually a more useful when looking at what happens when the economy takes a real dip, because the banks created IOU's not money, but the FED get's to create money to replace those IOU's.

That's not to say Economics is easy, lacks depth, or had no concrete progress. However, there is a wide range of models out there and evaluating there relative merits in the short and long term during such complex times takes deep analytic insight.

jasonwatkinspdx• 15 years ago

I don't know if this was the above posters intent, but from what I gather lots of qaunts and other statistically minded finance workers have a background in physics because the math education they've received is highly applicable.

hugh36• 15 years ago

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.

I also have a PhD in quantum chemistry, and I don't think this in itself qualifies me to understand economics any better than anyone else.

Actually there was an interesting article on the subject of why smart people so often make really bad politicians.

The tldr: "So why do intelligent people consistently make such a hash of things? Because they are smart enough to talk themselves into anything. Ordinary mortals don’t engage in fancy mental gymnastics to reach conclusions that defy common sense. But intellectuals are particularly prone to this."

http://reason.com/archives/2011/10/04/why-smart-presidents-d...

morsch• 15 years ago

Because they are smart enough to talk themselves into anything. Ordinary mortals don’t engage in fancy mental gymnastics to reach conclusions that defy common sense. But intellectuals are particularly prone to this.

Huh? Citation needed. For both of those claims. Actually, three claims: 1) Intelligent people talk themselves into anything. 2) That is why they make a hash of things. 3) Ordinary people do not engage in mental gymnastics to reach conclusions that defy common sense. Also, which is it, intellectuals or intelligent people?

Confusion• 15 years ago

Nobody grasps the complexities of financial markets. Everyone is just along for the ride. If anyone grasped the complexities, they would either be able to solve the current mess or be able to tell it is unsolvable. Instead, everyone is handwaving, guessing and trying whatever ridiculous thing they can to keep the system from collapsing.

There are a few that have found how to profit from what's going on: not because they understand how the system in general works, but because they understand some minor parts a bit better than others.

athoma2• 15 years ago

Even 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.

DasIch2• 15 years ago

If 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_col4• 15 years ago

Precisely. 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 ;-)

smackay• 15 years ago

The 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.

derpapst3• 15 years ago

One 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.

derpapst3• 15 years ago

Also 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.

zwieback2• 15 years ago

That's what the Economist is all about, though - extremely well written and produced with a very predictable and consistent message and opinion.

derpapst3• 15 years ago

Zwieback - that's the coolest alias I've seen for a long time :-D Are you plattdeutsch?

stfu• 15 years ago

The 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.

tomjen34• 15 years ago

It is only going to be fun if you can watch it from afar.

Those of us who live in Europe see no point in antagonizing somebody who isn't a pain in the ass.

beachgeek2• 15 years ago

Sounds like you don't want to join the Turkish army then...

64ways• 15 years ago

Debt 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.

vsl22• 15 years ago

This 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• 15 years ago

Most smaller countries with their own currency can not do (ii), because they can only get dollar or euro denominated debt from international markets/institutions.

hugh36• 15 years ago

What's "smaller" in this case?

I thought that most countries didn't need to borrow money internationally, they just sell bonds primarily to their own citizens.

gibsonf12• 15 years ago

I 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?

Aloisius2• 15 years ago

Are you saying Germany has no debt?

coldarchon3• 15 years ago

There's a difference between investment and debt. If your cash flow equals your debts, it's an investment.

DasIch2• 15 years ago

Germany 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

lukeschlather• 15 years ago

The 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.

hugh36• 15 years ago

You're making economics sound like a religion rather than a science, there. If Keynesian economics hasn't worked in the US, then there's two possibilities:

1. It was too small or wrongly applied, or

2. Keynesian economics doesn't really work

gibsonf12• 15 years ago

For actual Economic theories with a causal basis, the Austrian School wins with Von Mises the clear leader. Keynes simply can't work and never will - more Keynes means an even worse economic disaster.

jtbigwoo• 15 years ago

...they make a point of only spending the money they have.

Germany has the third-highest public debt in the world with only the fifteenth-highest population. Their debt is much higher as a percentage of GDP than the U.S. (83% vs. 62% according to the CIA world Factbook. [1]) They've spent plenty of money they don't have.

[1] https://www.cia.gov/library/publications/the-world-factbook/...

lispm2• 15 years ago

But Germany was/is in a very different situation. We are absorbing since twenty years a formerly communist econom - the GDR. Germany had little choice than invest a lot of money to do so. If you look at current policies, they are much about getting the debt problem under control.

Uchikoma6• 15 years ago

Germany bailed out a bankrupt state in the 90s (the GDR).

fforw• 15 years 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• 15 years 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.

vsl22• 15 years ago

Democracy 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• 15 years ago

While 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• 15 years ago

By 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).

_delirium7• 15 years ago

I 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.

bluedanieru3• 15 years ago

It 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."

seunosewa• 15 years ago

Are you 100% sure?

anamax2• 15 years ago

> Say, $1/EUR per trade would remove the incentive for High frequency trading and encourage some more productive market dynamics.

Why do you think that?

These trades net far more than $1 (or one euro).

Yes, they're looking for pennies, or less, on each share, but they're not trading single shares.

mise• 15 years ago

It comes down to the Protestants keeping the Catholics in check :)

j_col4• 15 years ago

The Greeks are neither...

hugh36• 15 years ago

Ever heard of "Greek Orthodox"? I believe it's quite popular in Greece.

ugh• 15 years ago

Germany 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.

Why Germany seems not to want a quick fix for the euro crisis

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