[sandee]

"The only institution that can provide immediate relief is the ECB. As the lender of last resort, it must do more to save the banks by offering unlimited liquidity for longer duration against a broader range of collateral."

This line of thinking is been pushed a lot. Its a one sided view. Why is it so difficult to understand the German point of view, or at least put it across to readers ? Germany insists that covering up the problems by printing money is just treating the symptoms not the root cause. The root cause is the bad monetary policies at some of member nations. They correctly understand than politicians guarantee of fixing the bad monetary issues (once printing is done) is wishful thinking. What they want is either go through painful process of austerity in these nation or tighter political/financial integration where member nations have say on finance budgeting in countries (in which case there could be common bonds).

I am neither a US or EU resident. I am not a finance guy. But the approach taken by Germany seems very sensible to me. What i see over and over again is the US/UK media and economist pushing for the solution that they have taken in their countries (monetary easing), to solve EU problems. Is there a agenda in this or whether its just that they want to make their policies appear right is open question.

I for one think that if Germany gets through this crisis (without blind printing) it will open the new era of EU dominance in the world. EU would come out as the most financially prudent currency and society (a more integrated union, almost like a country). In such a case the high debt, bad finance strategies of US/UK appear foolish.

Keep going Germany ! Long live EU

[nhaehnle]

At the very least, the position of Germany is deeply hypocritical.

After all, Germany was among the first batch of countries who violated the 3% deficit-to-GDP rule in the Maastricht treaty.

The German approach is a holier-than-thou approach, believing in blindly following rules that are elevated to moral principles ("Thou shalt not have a deficit.") without regard for the implications that this has for the well-being of their people.

What the Eurozone really needs is functional finance: define your goals for the real economy (e.g. full employment, high real living standards) and then do whatever it takes to achieve that in the financial arena.

[1010011010]

"What the Eurozone really needs is functional finance: define your goals for the real economy (e.g. full employment, high real living standards) and then do whatever it takes to achieve that in the financial arena."

... just wish away reality by printing more Euros?

[nhaehnle]

... just wish away reality by printing more Euros?

The term "printing more Euros" is rather inaccurate. When people talk about "printing money" it tends to be an indication that they either (a) don't know what they're talking about or (b) are not interested in an honest discussion.

Printing money is irrelevant. Spending money isn't.

As for the reality: The reality is that there is vast under-utilization of resources in the real economy. That's what a recession is all about, after all. I'm not a growth-fanatic, but real people are hurt by that development via the crazy amounts of unemployment, especially youth unemployment.

Furthermore, this under-utilization is an indication that if someone were to massively increase spending in the real economy, the economy would likely react significantly by adjusting the size of its production, and the reaction in terms of price level would be minimal.

So in that sense, if I indulge your misguided metaphor for the moment, it is actually the anti-printing folk who are wishing reality away: in their fantasy world, the recession will just end without any spending involved. Out here in the real world, this is not how it works.

(But note that the type of spending matters. Just throwing more money into the hands of the financial sectors is not going to help. Direct job creation is necessary, and in the case of Europe, there are some very obvious candidate projects, such as installing large amounts of solar energy capacity around the Mediterranean, along with the transmission capacity. That's just one pet idea though, there are plenty of other useful things to do.)

[1010011010]

Recessions are about liquidating previous malinvestment. Thanks to expansionist credit policies, in part.

[nekojima]

"But the approach taken by Germany seems very sensible to me."

Germany is looking to create a rules-based system that every country follows and is accountable to, like they were supposed to when the Eurozone was created. This isn't a bad thing, but its forcing the PIIGS (Portugal, Ireland, Italy, Greece, Spain & Cyprus, if anyone ever notices how had that's getting, but its small anyway) to play chicken with the financial markets and increasing their interest rates to a point that forces them to fix the structural faults in the national budgets.

Germany rightly shouldn't be paying the costs of Greece's, or soon Italy & Spain's, pension obligations and the hundreds of billions in Euros of debt built up over the last decade or more because of poor national policy. Though that is what is happening for now. The current fight, which is being missed by most of the media, is whether Germany will be paying the future costs of the PIIGS+C as well and Angela Merkel is aiming to create a new rules-based system to force these countries to increase productivity, reduce labour regulation and stop spending on wasted projects. Good luck to her...

[tsotha]

>Germany is looking to create a rules-based system that every country follows and is accountable to, like they were supposed to when the Eurozone was created.

Right, but they're running up against a very fundamental problem: There isn't any mechanism to enforce the rules. The worse the Greeks (and others) behave the more money the Germans are expected to provide to clean up the mess in return for "This is really the last time I promise" kind of assurances.

Of course what Merkel wants is a kind of United States of Europe, where everybody surrenders enough sovereignty this sort of thing can't happen. But will the other countries go along? Paint me very skeptical.

[umarmung]

Exactly.

Printing is also a fiscal policy that happens to be implemented by central banks.

Without a fiscal backing for unlimited asset purchases or printing money, no central bank is able to act. A central bank implements monetary policy transmission by controlling liquidity. They cannot provide funds to insolvent institutions or be exposed to risk of default/credit risk without backing.

To put it in Mervyn King's (head of Bank of England) words: too many people misunderstand the concept of "lender of last resort". Central banks have access to this facility or are able to print because governments back their own solvency by perpetual state existence and unlimited taxation.

Without a fiscal union, the Eurozone/EMU has no meaningful guarantee of perpetuity nor taxation. The market would recognise this sooner rather than later and nothing structural or fiscal would have been fixed.

Printing can only come after fiscal union. If you have a fiscal union, then you should not have needed to print in the first place since you should have set strict rules on leverage! But if for some reason you did need to use lender-of-last resort, it would meaningfully exist due to the fiscal backstop.

[polshaw]

This is not a simple issue. The costs of financing debt are going through the roof. Austerity is killing growth which becomes a vicious circle as tax receipts fall. So the German policy of waiting (however well reasoned) makes the problem worse.

Perception is important here, either the markets (in terms of buying debt) or the populations (a run on banks) could bring things crashing down.

Meanwhile, Germany is booming on the back of a (for Germany) weak Euro, and this crisis has already claimed the governments of Greece and Italy. Fiscal rules should have been sorted when times where good (IIRC Germany were one of the first to break the rules on borrowing, years ago). As is, if someone breaks the rules others are powerless to act.

I can't say I share your optimism for a 'new era of EU dominance'.. austerity and no growth everywhere.

[JanezStupar]

Wishing growth on Italy and Greece is a noble cause.

But it is not really Germany's fault that Italy's and Greece's leadership decided to push their heads into the sand for so long.

These issues were known for decades, the core of EU spent a lot of effort trying to bring up the subject and the usual response from the fringe was that: "We are sovereign nations, this is strictly our business and you can kindly fuck off!"

It is not Germans fault that people across south decided to vote for populist governments, while they were busy reforming their economy.

The way Germans see it probably is that if they succumb to pleas for unconditional help from south - the EU is certainly doomed in the long run. If they do not, the Euro might be doomed, but the EU has a chance of rebirth in the long run.

Europe is on a sort of crossroads the Yugoslavia was on in the late 70's, early 80's - when the Yugoslav leadership decided, that we can borrow our way out of this, the aftermath is well documented I believe.

[nhaehnle]

Beware of the Fallacy of Composition.

A lot of the "virtue" of Germany is actually a vice when extrapolated globally. The current position of power of Germany can be traced back to its net exports. Quite often in the last two or three years, you could hear commentators proclaim that if everybody followed the path of net exports, the crisis would be over. There are only two problems with that:

1. It is simply impossible for everybody to be a net exporter. That's the fallacy of composition.

2. The way Germany became a net exporter was by savaging real income of the majority of the population. If you look at data for how the quotient of (real income / labor productivity) developed in the Eurozone, you will see that while the majority of countries had a reasonable development (the quotient is around 1), Germany's quotient for this development is much lower. German workers are being cheated out of their share, which means Germany is essentially price dumping in the global market.

Right now, Germany is essentially sending presents (real goods) into the rest of the world in exchange for promises (financial claims on the ROW). The majority of Germans are working their ass off and not getting anything in return, just so the top 0.01% of the population can increase its power base by accumulating financial assets.

To say that other European countries should follow this path is deeply cynical, and probably comes from not seeing the whole picture.

[mafribe]

This description, while not being without merit, omits an important part of the picture: while it is true, that the majority of german workers had to live through an extended period of no/low wage growth, or even wage reductions, german wages are still substantially higher than greek wages. So by your (implicit) argument that all that matters here is wage levels, Greece should be doing much better than Germany. But clearly it is not. So other factors must be at play. It is quite clear what these other factors are: higher labour productivity, higher education, less corruption and so on. Printing money is not going to help with any of those . So really your position is not seeing the whole picture.

[nhaehnle]

We are actually largely in agreement. If you reread my comment that you replied to, you'll see that I was writing about the "real income / labor productivity" quotient.

The point is that the exchange rate with which countries adopted the Euro was more or less appropriate when it was set. Since then, the different development of the countries has changed the level of the exchange rate that would be appropriate if the countries still used different currencies.

So the question is: has the picture of corruption in Germany vs. Greece changed significantly in the last 10 years? Has the unit labor cost (which is real income / labor productivity) changed significantly between Germany and Greece?

Those are the questions you need to ask to understand where the differential is coming from.

[JanezStupar]

The Germans spent last decade reforming their pension system and labor market. They did it in the middle of economic boom. They urged everyone else in EU to do the same, especially the weaker economies.

They managed to secure a consensus and everyone (labor, capital and the state) is reaping the rewards.

In southern and eastern Europe, the unions an "leftist forces" managed to blow a hole in any attempt to reform pension and labor markets.

The key argument is that Germany giving in to these forces would mean a perpetuation of the root problem.

The way I see it this is a family issue, where father refuses to support one of his crack addicted kids, while the mother pleads "Please, you are breaking the family apart." Forgetting that there were previous confrontations in which she sided with the kid and didn't support the fathers demand that the kid goes on a rehab.

[JanezStupar]

Nice bait and switch you did there.

We were talking about economy as a whole, while you only fixate on labor market and capital market.

Greece had a plenty of raise in wages - see how well it worked out for them.

Beware of the Marxist fallacy. Nowadays in Europe anyone can join the ranks of "Evil capitalist" and secure a "bigger piece of pie" for themselves.

[polshaw]

The question is not 'is it Germany's fault' but rather what is in the best interests of germany. The Euro failing is surely not. Particularly as Germany has unprecendented strength within the EU today.