Monday, June 20, 2011

Germany is the problem, not Greece

Edmund Conway at The Telegraph makes a case that "Germany - not Greece - has 'destabilised the euro area and is one of the biggest road-blocks to its ultimate recovery" in Why Germany must exit the euro.

I agree, although admittedly this may be confirmation bias on my part. By way of disclosure, I have been saying for some time that the problem is Germany and have predicted that Germany will be forced to exit the euro first for political reasons, namely, voters are unlikely to approve the required transfers that only Germany can make in the absence of a fiscal union in addition to the existing monetary one.

The problem is the strength of the core, particularly Germany, rather than the weakness of the periphery. Germany's export economy has colonized the periphery and left them without the means to meet their financial obligations to the core's financial sector, which, according to neoliberal thinking, must be protected above all else as the source and allocator of capital. This ends by forcing austerity on the periphery, resulting in social unrest in the absence of a bailout, which Germans consider inflationary if monetary and unfair to them if fiscal. This obviously is not working, and no permanent fix is in sight. Bandaids are not doing it, either.

The EMU suffers from poor design, along with a fact that should have been obvious from the outset — Europe is not an optimal currency zone. Regardless of this, the Europeanizers pushed ahead with a plan that did not contain contingency planning for imbalances resulting in distortions and ultimately crisis.

See Bill Mitchell, Doomed from the start

If Germany exited, then the Deutschmark would be properly valued in the market immediately and the euro would fall. Now, the euro is undervalued wrt Germany, favoring Germany's export economy, while being overvalued wrt to the periphery, disadvantaging much of the rest of Europe, especially chronic net importers. It is already being said openly that what Germany attempted and failed at in WWII, it is accomplishing financially and economically through Eurozone asymmetry.

If the EZ is to work as a currency zone, then either a fiscal union must be established allowing transfers, or else the design must be revisited taking into consideration an optimal currency area. Presently, the economic disparity is creating too great an asymmetry.


Crake said...

“If Germany exited, then the Deutschmark would be properly valued in the market immediately and the euro would fall. Now, the euro is undervalued wrt Germany, favoring Germany's export economy”, made me wonder about states in the US that might be enjoying this in trade between states.
Is there any published data on US states’ trade balances with each other? I am curious which states are net exporters to each other and which are net importers to each other within the US (so not including data of trade with foreign sectors.) Anyone know if any websites with such information.

Tom Hickey said...

Crake, the fact that you are asking shows how much it means in the US — zip.

In fact, the states that receive the most in federal transfers are the one's complaining most about "big government intrusion."

Crake said...


I was mainly wondering about commercial trade between states but yes, that is a good point on federal spending. Many southern states top the list for federal money received less taxes paid. In other words, those states push a lot of public services to the federal government I assume and are subsidized by other states, yet their elected officials are the most vocal about the burden of the federal government.
Something funny on this: During the mid 1990s budget battles, Michael Moore produced a documentary showing that Newt Gingrich’s district was the #1 district for federal funds (mainly from military bases and contractors and even a recreational lake and many nice public parks and other recreational sites developed and managed by federal funds for those military and contractors and were open to the public.) It was a funny documentary. I do not think many knew who he was at that time so many fell for his antics. He organized town folks for an organization against federal spending to march in a yearly parade of the main town in the district. After organizing them, he made signs with the front stating things like “stop federal spending now” and the backs had messages denouncing specific federally funded projects around the town, including signs telling people to give up their federal funded lake. The townsfolks he organized showed up for the parade and were all eager to hold the signs against federal spending as they marched. They did so and marched a while until they realized what was actually on the signs (one side read, stop federal spending and the back side had slogans against specific projects in that town.) People standing at the parade would cheer as they read the front of the signs then after seeing the back, they angrily yelled at the people with the signs, who then read the back of the signs, threw the signs down and then started yelling at Michael Moore. It was pretty funny.

Anonymous said...

Yes, let's condemn Germany for producing world class technology and exports while praising Greece for tax evasion and a huge bloated civil service with early retirement. Makes sense to me....

Tom Hickey said...

Anonymous, I don't have a horse in this race. It seems pretty clear to me that the people who put the EZ together, who are representatives of the financial sector, should have foreseen at the least the possibility of a crisis and prepared for it. They are either stupider than I would expect, or they were planning on cram downs to solve issues that might arise. Blaming the periphery is like blaming the victims in the US mortgage debacle when there was widespread malfeasance on the part of creditors.

Moreover, it is pretty clear to me that to solve the crisis in Euroland, the powers that be are going to have to deal with the asymmetry that they knew existed from the get-go. Financial austerity is not going to work for the simple reason that debts that cannot be repaid won't be.

The only viable way I can see for the periphery to get the funds required without either debt restructuring or fiscal transfers is through exporting, and the euro with Germany in the EZ makes that impossible since the value of the euro works against the periphery. If the euro fell significantly in relative value, it could be though. That would require Germany exiting and maybe the NL, too.

Maybe I have some confirmation bias going here, as I said at the outset. What is your solution?

Anonymous said...


I have no solution. The Euro was doomed from the start. For political homogenization, peace after two wars and statist wet dreams to control almost every aspect of the economy they ignored the innate unworkability of a non-sovereign currency. My only observation above is that blaming Germany for Greece's complete inability to compete on exports while wanting to claim a German standard of living simply doesn't make sense.

googleheim said...

crake points out what mike norman has said many times about the southern states

i have pointed many times in this blog about how germany is the austrian elephant in the room taking up all the oxygen