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Monday, January 30, 2017

Germany is destroying the Euro!!

It is depressingly ironic that 62 years after the 1953 London Debts Agreement conference it is now Germany that is refusing to write down debt. Before becoming the Greek Prime Minister, Alexis Tsipras, had stated that a similar conference was needed again. In 1953 West German debt was written down by some 60%, and they were given 30 years to pay the balance; today it is Greece that needs to write down debt – but the biggest obstacle is Germany!

It is no secret that Greece cooked the books to join the Euro, aided by Goldman Sachs! But that is not the cause of Greece’s present predicament – rather, it is the practical reality that the disparate countries that formed the Euro did not have enough in common to make the common currency work. The countries were at different stages in the economic cycle, and tax, interest rates, wage rates, and inflation rates, are all different. For a single currency to work for all 19 countries in the Eurozone there needs to be fiscal as well as monetary union.

Countries like Portugal, Italy, Ireland, Greece and Spain prospered initially when the banks from Germany and other countries offered large loans at what were, for them, historically very low interest rates. The banks had decided that they did not need to factor in risk, as all these countries were in the Euro!! So where did all the money borrowed by the Greek banks and the Greek government end up? One undiscussed area of Greek government expenditure is, of course, defence.

Until the financial crash in 2008, Greece was spending in excess of 3% of GDP on defence, the highest rate in NATO. Greece has, in theory, more tanks in service than Germany, France and Britain combined!! And this money was borrowed from mainly German banks to buy military equipment, much of it from German arms manufacturers.

Most arms deals are corrupt so it is no surprise that the former Greek defence minister, Akis Tsochatzopoulos, is currently serving 20 years after being convicted of accepting bribes from four German companies, Krauss-Maffei (tanks), Daimler Benz (military vehicles), Ferrostall  (submarines) and Rheinmetall (anti-aircraft systems). It is also no surprise that in Germany there have been some fines but no German politicians or captains of industry have done actual time.

By 2008, the reckless lending was showing that the Euro was just a fair-weather currency. The major flaw was that for countries like Portugal, Italy, Ireland, Greece and Spain, the Euro was vastly overvalued, and they needed to devalue to make their economies competitive, in order to have any chance of surviving the world-wide recession. But being in the Euro precludes an individual country devaluing, so that an internal devaluation, otherwise called ‘austerity’, was the only option! It is that austerity that is crucifying the Greek economy and even the International Monetary Fund (IMF) admits that the latest offer from the EU will still leave Greek debt unsustainable and, ideally, needs 30 year grace period before recommencing debt repayments1.

Just as the Euro is overvalued for some countries it is undervalued for others, especially Germany. As a result, their exports are ultra-competitive, both within the Euro Zone and outside, especially industrial equipment and luxury cars to China.

Keynes pointed out that if one country had a surplus, then other countries would have a deficit, and if the country in surplus did not spend the surplus then, after a period of say, 1 year, the surplus should be returned to the countries in deficit. When he wrote this in the 1930s, it was, of course, the USA that was in surplus. Today it is China (US$ 172.5 billion) and Germany (US$ 188.4 billion)2.

The question that needs to be asked in the Eurozone is – how does Germany propose to transfer this surplus back? Should it be by the Government, by the individual citizens, or a combination of both?

If the Germans had used their surpluses to buy goods and services from the poorer Euro countries, although the current Euro crisis would not have been averted, it would certainly have been less severe. If the German banks had not been so keen to lend money to all and sundry at low rates, then there would have been a few less property bubbles. Now, it is probably too late for Germans to reform, withdraw their savings and start spending, ideally by going on lots of expensive holidays to Portugal, Italy, Ireland, Greece and Spain!

Another way to return the surplus is for Germany to recognise that the real gains it has made from the Euro will more than offset the costs of writing off the loans to Greece and the other countries.

There is a great amount of political capital tied up in the Euro, but salving the political reputations of nations and individuals will not solve the Euro crises. If Germany will not return the surplus and really wants the Euro to survive, one other possible solution is for Germany itself to leave the Euro. This would immediately create the devaluation that the other countries urgently need.

Michael Gold.

@radicalmic

michael@radicalsoapbox.com

1http://www.theguardian.com/business/2015/jul/14/imf-report-greece-needs-more-debt-relief

2http://www.thenation.com/article/163673/what-would-keynes-do#

Comments
5 Responses to “Germany is destroying the Euro!!”
  1. Dave says:

    Good diagnosis Mike. I don’t think Germany is ready for either of your prescriptions yet but when the prospect of debt defaults re-emerges, and after their elections they may be. Meanwhile spreading this analysis should discourage harshness against the ‘south’ .(Expect more dodgy credit which can be written off later.)
    btw Robert Mundel who basically designed the Euro was very much into reducing national elected authority for the benefit of the <1% http://www.guardian.co.uk/commentisfree/2012/jun/26/robert-mundell-evil-genius-euro

  2. norman says:

    New chit has come to light (to coin another Keynes cologualism) half the people west of Urals been in this pissuar since 1990s while global GDP doubled an the price of eggs went to hell in a ham basket an yer granny got pushed under the bus.

  3. martin says:

    Interesting argument. But you – or a subeditor – should really know how many countries are in the EU. (Hint: it’s 28 after Croatia’s accession. Not 27)

  4. George Talbot says:

    A useful recap of post-war Europe but what about the Exchange Rate Mechanism (ERM)? It had fixed but adjustable rates that Keynes would have welcomed. And what about capital that he realised governments must be able to fetter so they could set exchange rates to balance their current accounts, with a little restraint on trade? Then each nation could balance its savings and new investment so ending the other cause of intractable debts? Not what the US, UK, international corporations and banks want but look where their ideals have got us!

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