[mseebach]

The problem with stimulus spending in a place like Spain is that someone will have to lend them the money to spend. They either have to charge pretty high interest (which exacerbates Spain's already high deficit) or give a discount on the interest, such that it no longer reflects the risk the lender is taking. Most anti-austerity calls seem to suggest the latter, which basically amounts to redistribution from those countries (Germany, Netherlands et.al.) that did not enjoy the easy living during the boom years that Spain did.

[jwcooper]

Germany isn't completely innocent here though either, even though it can look like they were frugal during the boom years.

From Michael Pettis [1]:

The strength of the German economy in recent years has largely to do with its export success. But for Germany to run a large current account surplus – the consequence I would argue of domestic policies aimed at suppressing consumption and subsidizing production – Spain and the other peripheral countries of Europe had to run large current account deficits. If they didn’t, the euro would have undoubtedly surged, and with it Germany’s export performance would have collapsed. Very low interest rates in the euro area (set largely by Germany) ensured that the peripheral countries would, indeed, run large trade deficits.

The funding by German banks of peripheral European borrowing, in other words, was a necessary part of deal, arrived at willingly or unwillingly, leading both to Germany’s export success and to the debt problems of the deficit countries.

[1] http://www.mpettis.com/2011/07/19/current-account-dilemma/

[mseebach]

It was certainly very convenient for the germans to have some takers for their cheap bonds, but the fact remains that nobody forced the peripheral countries to live beyond their means and to refrain from implementing necessary reforms.

[graeme]

The difference is that in the past, the peripheral countries were able to live beyond their means without such drastic consequences.

Too much debt? Devalue the peseta and drachma. Exports increase, imports decrease, unemployment adjusts. Lenders knows that they must charge higher interest rates to those countries.

That process can't happen anymore. So the same behavior that was mildly damaging before suddenly became very, very damaging. Neither Southern nor Northern European leaders fully recognized this problem when they created a single currency.

[dpe82]

Some recognized the problem, but they were largely shouted down. The single currency has always been a political initiative, not an economic one.

[Someone]

I think they fully realized the problem, but did not think it's consequences through enough; there were (and are) fairly stringent rules for entry to the euro zone (http://en.wikipedia.org/wiki/Euro_convergence_criteria), but were lax in enforcing those rules. There are several reasons for that. Let's say the economy of X is down because it is inherently weak. Do you fine them because of it? Do you think that would help their economy? Also, if half the economies are breaking the rules, how are you going to get a majority in the EU parliament for bringing those fines?

[gyardley]

Nor did anyone force countries like Germany to share a common currency with them.

I've never really gotten why one country would want to share only a currency with another country, while leaving their social and economic policies independent. But now that that's happened, the combination gets to stand or fall as a whole.

[tsotha]

The plan was "harmonization" of tax and spending policies. It's not really any secret the people actually running Europe were trying to cobble a United States of Europe together, first by sharing a currency and then by moving all the decision making to Brussels over time.

Of course Italians and Spaniards don't have any desire to become Germans, and vice-versa. The currency part was easy - the "harmonization" part will take generations if it happens at all.

[dpe82]

Indeed. It's hard to "harmonize" countries or regions that don't speak the same language. Workers can't easily move from country to country to take advantage of job opportunities (and thus spread culture through direct interaction), and there's little shared media.

[onemorepassword]

Language is a doable barrier to overcome, and so is harmonizing various regions on a regulation level. Remember that in Europe those cultural differences exist within countries and have for centuries. Hell, Brussels itself symbolize that.

If you think they don't easily move from country to country, I suggest you visit London, Amsterdam or Berlin.

Harmonization is a political issue, and what hampers it is selfish and corrupt politicians.

Making it a cultural issue is dangerous nonsense. An average Greek would be quite happy to live under German style regulations, if he could trusts the authorities to play by the rules. Ordinary people and their cultural differences are not the problem.

[brazzy]

Except lots of workers are doing that right now. And there's a reverse movement of retirees. Maybe the crisis will after all end up faciliarting that harmonazation whose lack caused it...

[tomjen3]

Germany struck a deal with the big counties after the liberation of east Germany that allowed them to reunited. The common currency was meant as a way to tie Germany to the rest of europe and prevent them for going Nazi again.

Germany agreed because reunification had been a dream for decades.

[touristtam]

... the liberation of east Germany ....

You will find that "collapse of the East German state (DDR) after the wall was brought down" is more inline with history.

... and prevent them for going Nazi again ..... ?

Sorry but this is wrong on at least two level:

1. Nazism is a political movement (regardless of your political inclination). And thus not directly impacted by having a currency or another. 2. Nazism is way too present, still, in the memories for it to make a come back in Germany as a legitimate political endeavour.

The creation and adoption of the Euro currency was a natural political continuation of the ECSC (see http://en.wikipedia.org/wiki/European_Coal_and_Steel_Communi...) and extension of the European Union. Now yes the initial intend is to prevent future Pan European war through economical cooperation, but not solely to prevent Germany "to go Nazi again" (despite the comment one can read about French President Mitterrand and British Prime Minister Thatcher regarding the future of Germany in Europe, neither of which should be regarded as anything but power hungry political leaders).

[dualogy]

> nobody forced the peripheral countries to live beyond their means and to refrain from implementing necessary reforms

Actually, to "force members to stop such ways" was the plan for the EUR/ECB/Maastricht from the beginning. But it's either not working out as planned, or taking way longer than planned.....

[graeme]

This seems backwards. I think Germany is to blame, but for keeping interest rates too HIGH.

A higher Euro would INCREASE Spain's trade deficit. Spain needs a looser monetary policy than Germany is currently allowing. If the Euro were lower, they could export more and the real value of their debt would decrease.

[stretchwithme]

Those who borrow a lot must import a lot.

Those who produce more than they consume export what they do not consume.

Its simple physics.

To produce more than you use is a virtue. Germans are hardly to blame for their virtues.

I guess their failure was in lending to those without the means to pay back.

[nhaehnle]

Economics is not a morality play, and from a global perspective, net exports (that is, exporting more than you import) are not a virtue.

Where there is a country that exports more than it imports, there must necessarily be a country that imports more than it exports. That's just simple math.

This trade automatically is reflected in a flow of monetary assets from the importer to the exporter; in this case, a (partially indirect) flow of monetary assets from Spain to e.g. Germany. That's also just simple math.

Speaking as a German, it is incredibly frustrating that this simple insight is almost never acknowledged in public discussion here. There is simply no way the Euro can survive while Germany insists on being a net exporter forever.

What is even more frustrating is that the German elite successfully plays a divide-and-conquer strategy. Most people perceive the Euro crisis as "Germans against the South", whereas in reality, it is the German elite against the German and the Southern people, considering that the German net export "success" has largely been managed by keeping German wages low (when measured against the appropriate benchmark, i.e. productivity).

[stfp]

Come on, it's anything but simple physics.

Macroeconomics has nothing to do with "common sense" family finance hygiene or the mind-numbing model you describe.

[nhebb]

Germany seems to be getting blamed for the economic problems in Spain and Greece, but when I read a line like this:

> The strength of the German economy in recent years has largely to do with its export success.

I think, well, at least Germany actually makes something. I'm not familiar with any major products or services coming out of Spain or Greece. Maybe it's the American in me, living a life inundated with advertising and branding messages, but when an economy is not based on agriculture, natural resources, or tourism, it seems logical that it should be known for something - preferably making something.

[Someone]

It is the American in you; both Spain and Greece are known for agriculture and tourism. You won't see them advertise in the USA because they have plenty of people closer by to sell to.

Spain exports plenty of citrus fruits, wine, and olive oil and also somewhat is the Florida of the EU in that elderly people move there after retirement.

Greece is a bit similar. It has plenty of tourism, and exports wine and olive oil. It also has attractive rules for merchant shipping (Wikipedia claims the Greek merchant shipping fleet is the largest in the world).

[jorgeortiz85]

Have we totally forgotten Keynes? My spending is your income. The resources of an economy (in this case, many of Spain's workers) are lying idle. The entire country would be wealthier if they were put to work.

Further, I don't know what you mean by "easy living", but Spain was more fiscally responsible than even Germany before the crisis. Spain's deficits are not the result of irresponsible borrowing and spending (as in Greece), but rather of a collapsed economy because the investment money (mostly German, etc) that flooded the country before the crisis evaporated just as quickly after the crisis.

[brc]

Te entire country would be wealthier if they were put to work...doing something productive, in which the investment of their labor were to return future benefits.

The problem of most 'stimulus' spending is that this does not happen.

[justincormack]

They spent the last ten years building houses no one wants now and creating a property bubble. It wasn't deficit spending it was just excess borrowing. Sure it created jobs for a bit but then they went away just leaving a lot of debt. Somehow you need to actually build a sustainable economy.

[brc]

No argument from me, private borrowing to spend on unproductive assets is just as bad as public borrowing to dig holes in the ground and fill,them in again.

The key is productive work- work that people are willing to pay for without incentives or coercion.

[loumf]

We got out of the great depression by turning labor into bombs and destroying the results of productivity. And by hiring people to kill people.

It really can't get more unproductive than that.

Sure, I'm all for doing something productive -- that's icing on the cake. I'm not for using it as an excuse to do nothing.

[Paradigma11]

Every politician is a Keynesian in a bad economy, but only then.

[tomjen3]

No we have not fogotten him. We should, though because he was wrong. Stimulus doesn't work.

[brazzy]

Except he was right and austerity works even less.

[adventured]

Except he was wrong and well managed austerity does work. When it's actually employed. Cutting government 1%, or holding spending the same, is not austerity.

The ideas of Keynes are responsible for the last decade of economic disaster around the planet.

Austerity has been proven to work over and over again.

Just ask Sweden, they're a proof case that managed austerity works exceptionally well.

http://www.bloomberg.com/news/2012-06-06/booming-sweden-s-fr...

Or ask Latvia, a recent case of successful austerity.

http://www.nytimes.com/2013/01/02/world/europe/used-to-hards...

http://www.cnbc.com/id/100558455

However, Latvia employed REAL austerity. They cut deep. Not the slow motion - we don't really want to cut anything - train wreck that people like Krugman are claiming is austerity (see: Greece or Spain).

Over the last 30 years China has radically reduced its public to private spending ratio. It has been one long managed austerity process. No surprise it has boomed accordingly as private capital was left free to be invested to actually grow the economy, which is not something consumption based Keynesian policies can accomplish.

Most government spending doesn't create wealth, sustainable jobs, and it doesn't produce anything. It's consumption paid for by production. The more you tip the balance toward government consumption, the more disastrous the consequences. Greece, Italy, France, the US, Portugal, Spain, Japan, Britain, etc. are all obvious examples of following Keynes policies the last few decades. It has led to destruction.

[mseebach]

The thing about Keynesisnm that everybody conveniently forget is that you need to cut spending and tighten up during boom-years, so you have a lean, effective economy that might actually respond to stimulus spending when the bust comes around.

[gamblor956]

I take your "facts" with a heaping pile of salt, considering that Sweden has one of the highest tax rates in the Western world, Latvia's economy is smaller than most U.S. states and is smaller than the economies of NY, LA, Chicago, or Atlanta, and China's government has spent more in the past decade to rev up its economy and keep it going than the rest of the world combined. China spent billions on the Olympic facilities alone, not including the hundreds of billions they spent on other infrastructure projects of the past decade, or the subsidized loans to factories, farms, bio-tech companies, and real estate developers that would generally be considered illegal under various WTO pacts and accords if China was considered a 1st-world nation. (Most major Chinese corporations are government-owned; in some industries, all of the major Chinese corporations are government-owned.) China's recent (within the past 6 months) reduction in government spending has virtually killed it's construction and real estate sectors, and it has a huge debt bubble which is on the verge of collapsing.

[megablast]

I am guessing well managed stimulus would work. This is the no real scotsman problem.

[wnight]

No it's not. What a true austerity program looks like is really straight forward. Spend less than you earn.

[ekianjo]

put to work by who? Stimulus has not worked very well for the US after 2008, has it? And Spain does not have trillions of dollars to spend in stimulus anyway. Stop dreaming.

[anigbrowl]

We haven't had that much fiscal stimulus in the US releative to the size of the economy. It's a missed opportunity considering money is basically free right now and T-bills return a fixed coupon (so even if interest rates were 5% in 5 years' time it would have no effect on the cost of servicing debt issued today).

The EU has trillions to spend. This is a federal problem, but some countries in Europe don't want to admit because they want to cling to the illusion that monetary union can exist indepedently of fiscal union.

[ekianjo]

> that much fiscal stimulus in the US releative to the size of the economy.

I knew this was coming. "The stimulus didnt work because it was not big enough". Always the same excuse coming from Keynesians. "Aspirin did not cure my Cancer because I didnt take enough". Sure, when you attack the wrong causes in the first place you get very poor results, unless you get lucky.

[tptacek]

This is a comment that literally says nothing.