Wednesday, August 29, 2012

The euro crisis barrels on toward ???

"Wenn der Euro auseinanderbricht, dann wäre Deutschlands mühsam errungene Wettbewerbsfähigkeit vernichtet." ("If the euro breaks apart, then Germany's laboriously achieved competitiveness would be destroyed.") - Wolfgang Münchau, Merkel in der Euro-Krise. Deutschland ist erpressbar geworden Spiegel Online 29.08.2012

That's the reality looming over Germany in the euro crisis. I've been (half-)joking with European friends and acquaintances that when the next recession hits Germany, I'm looking forward to being able to say all that time that the recession happened because Germans are lazy, corrupt and incompetent. Because I've been really surprised the last two years at how persuasive the attitude among Germans seems to be that the economic troubles in Europe are due to national characteristics of the economies most affected by the depression: Greeks are lazy, Italians are corrupt, etc. Cheap nationalism, in other words.

You really have to wonder how serious all that talk has been over decades about how Germans wanted to be good Europeans, they were "working through the past" of the Second World War and the Holocaust and the Communist years in East Germany, etc. Because now that their leaders are encouraging them to fall back on cheap nationalist prejudices to explain why economic troubles happen in a depression and how a currency union can exacerbate them, even create its own problems, I haven't seen much sign of resistance to those attitudes on either the personal or the political levels.

Yannis Ioannou in this cartoon of 08/24/2012 shows Greek Prime Minister Antonis Samaras grovelling under the Princess Angela von Merkel's feet
It would be far closer to say that because of the corruption or at least deviousness of the conservative New Democracy (ND) Party in Greece working in tandem with German and other banks, including our own American star Goldman Sachs, Greece ran up a public debt load that was unsustainable after the depression began in 2007. It was a problem that the Greece and EU could have solved relatively easily and cheaply in itself, compared to what has happened. But stunningly bad German and other European leadership along with the dynamics of the euro currency union have turned it into a looming disaster that's very likely to destroy not just the euro but the "European project", i.e., the EU.

And the mistakes were innocent ones. They were driven by greed and ideology. The greed of German and other European banks that didn't want to expose their weaknesses by taking a loss on Greek debt. The dogmatic "ordoliberalism" and nationalistic arrogance of German Chancellor Angela "Frau Fritz" Merkel. The fecklessness of the social-democratic parties from Greece to Spain to France to Germany in their unwillingess to challenge Merkel's disastrous austerity economics (for countries other than GermanY) during a depression.

And the problems should have been anticipated, and were by economists to whom the EU elite chose not to listen. The experience of the US and Europe in the Great Depression embodied in Keynesian economics shows that austerity economics in a depression only increases the damage and prolongs the duration of the depression. The experience of the gold standard during the Great Depression is actually a closely related experience to that of the euro currency union. (On the latter, see Barry Eichengreen, who "wrote the book" on that topic.) Japan's "lost decade" in the 1990s showed how a present-day economy can linger in a long depression. Argentina's crisis of 2001-2 showed the perils of having a currency link to other countries during a debt crisis.

I don't mean to say that the behavior of a walking disaster like Frau Fritz is fully irrational or unexplainable. On the contrary, like dogmatic American anti-labor politicians such as John Kasich and Scott Walker and Paul Ryan, she saw the depression as a chance to severely weaken organized labor in Europe. And, in her case, to make Germany the controlling power within the EU, an attitude reminiscent of the Brezhnev Doctrine in the Warsaw Pact but probably in her case stemming less from her East German socialization than from her interpretation of how the former East Germany was absorbed by the former West Germany after unification. Plus an authoritarian inclination and a real mean streak.

Münchau's Spiegel Online column two weeks ago, USA auf dem Weg in die Spardiktatur 15.08.2012, compared Frau Fritz' economic policies to those advocated by Republican Vice Presidential nominee Paul Ryan. Because, he wrote, Ryan is a politicians "der nicht allzu kompliziert rechnet und seine ökonomischen Thesen in pseudo-moralische Kategorien einbettet" ("who doesn't calculate in a particularly complicated way and embeds his economic theses in pseudo-moralistic categories").

Münchau said of the kind of drastic austerity measures that Ryan advocates for the US and Frau Fritz is imposing in Europe, "Um in der Praxis zu funktionieren, verlangt Ryans Konsolidierungsplan faktisch nach einer Diktatur. Das gilt auch für den europäischen Fiskalpakt" ("In order to function in practice, Ryan's consolidation [austerity] plan would require a dictatorship.") And he adds that the same is true for the European fiscal pact that Angie has demanded of eurozone members, the Intergovernmental Treaty on Stability, Co-ordination and Governance in the Economic and Monetary Union that more-or-less outlaws Keynesian stimulus during a depression and gives Germany a de facto veto over the national budgets of other eurozone countries.

In the more recent article, Münchau takes note of the genuinely constructive and substantial recent move of the European Central Bank (ECB) in buying up substantial amounts of eurozone sovereign debt to prevent rates on Spanish and Italian bonds from pushing those countries to the edge of bankruptcy and setting off a major bank run. He's even to willing to see signs of optimism is recent comments by Frau Fritz hinting that she may have some recognition of the massive damage her austerity policies are doing in Greece.

But he warns that the current situation is "ziemlich verzweifelt" ("really desperate") for Germany. If the euro breaks up and Germany has to go back to its own currency or to a mini-euro, the new currency's exchange rate would be much higher than the euro's and that would hammer German exports. German exports have benefited in a major way from the euro, and Germany is a particularly export-oriented country.

Then there's Target 2, a mysterious-sounding name that calls to mind American rightwing talk radio paranoid obsessions, e.g., the UN's Agenda 21, a current bogeyman for Tea Party.

But Target 2 is a real thing, though "real" in this case means electronic financial records, but real nevertheless. It's the clearing account for eurozone trade, including capital flows, in which the receiving country's central posts an asset (like a loan receivable) and the contributing country posts a liability (loan payable). Due to its favorable eurozone trade balance and capital flight into Germany, the German central bank (Bundesbank) has been making a lot of these "loans". Almost a trillion euros worth, as Münchau notes. This means, simplified, that if the eurozone breaks up, Germany would be instantly "out" of up to a trillion euros. He quotes former Chancellor Gerhard Schröder (SPD) saying that if the euro falls apart, Germany can "pack it in" (einpacken).

Trying to grasp Target 2 is going to blow some minds among our American pundit corps if the euro falls apart. But when you hear the likes of David Gregory and Ruth Marcus start talking about "Target 2", that's a good sign that the euro crisis has reached a critical point and is almost certainly beyond redemption. Also some US pundits heads may just explode right there on camera when it comes up.

Münchau also takes note a factor that has been very prominent in the euro crisis and which cuts against any optimistic hopes such as his own: "In Momenten der Krise sind Staaten nicht immer rational in der Bewertung ihrer Lage und ihrer Interessen - ebenso wenig wie Pokerspieler." ("In moments of crisis, states are not always rational in the evaluation of their situation and their interests - just as little as poker players.")

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1 comment:

Anonymous said...

Excellent article, thanks you!