Germany pushes France toward periphery

Hollande_Merkel

You know, post June-2012, I genuinely thought we’d moved past the back and forth, chicken and egg arguments within the Eurozone, but alas, we are here again:

German central bank head Jens Weidmann has strongly criticized French efforts to reduce its budget deficit, just days after the European Union granted Paris more time to meet EU requirements. He warns that French delays could damage the credibility of euro-zone rules.

France needs more time to get its budget deficit under control. That much was made clear last Friday when the European Commission announced it was granting Paris until 2015 to bring its budget deficit below the maximum 3 percent of gross domestic product allowed by European Union rules ensuring the stability of the euro.

But on Wednesday evening, Jens Weidmann, the president of Germany’s central bank, the Bundesbank, said he is adamantly opposed to the move. “You can’t call that savings, as far as I am concerned,” he told the daily Westdeutsche Allegemeine Zeitung in an interview. “To win back trust, we can’t just establish rules and then promise to fulfil them at some point in the future. They have to be filled with life,” Weidmann said.

I would advise readers to take note of this chart to appreciate the irony of comments about “damaged credibility” in breaking treaty rules.

And there’s more from Germany:

Germany wants further reforms and savings in crisis-hit euro zone states, according to a report obtained by German magazine Spiegel in which Berlin evaluates progress made under strengthened EU budget rules.

The rules have managed to spur in all euro zone countries a “general political mobilization towards structural reforms and greater competitiveness”, Spiegel cited the report as saying in its edition published on Sunday.

However, in Italy there remained “further room for labor market liberalization”, while in Greece and Spain further reforms to overcome rigid labor laws were “essential”.

In order to improve its finances, France had increased its revenue intake, but also needed to cut spending, the report, prepared by Chancellor Angela Merkel’s office continued.

And then some more from Schäuble:

Germany’s finance minister has signaled his opposition to any move by the European Central Bank to buy asset-backed securities to help indebted states, telling his party it would amount to “covert state financing”, according to German magazine Spiegel.

Spiegel said in its edition published on Sunday that Wolfgang Schaeuble made the comment during a meeting of his Christian Democrat (CDU) party last Wednesday, telling those present the purchase of asset-backed securities (ABS) by the European Central Bank (ECB) would infringe European rules.

German newspaper Die Welt, citing a central bank source, said last Wednesday a majority of ECB Governing Council members seemed to be in favor of the central bank buying ABS.

I’m not going to go through it again, you can see my most recent comments on France’s economic issues here , but it seems, at least in an election year, the German elite are happy to continue of the path that means further economic retrenchment across the zone, including the second largest Eurozone economy, France.

But that’s not the end of it. This week Schäuble has also taken a swipe at the proposed banking union, something that is supposed to be ratified in the coming months:

German Finance Minister Wolfgang Schäuble has warned that rushing to establish a European banking union could backfire if existing treaties in the bloc were violated. He called for a two-step mechanism.

Wolfgang Schäuble told the Financial Times on Monday that creating a central authority to wind up failing banks in the 17-member eurozone and beyond should not be tackled before binding treaties were amended accordingly.

Seeing the urgency of the scheme to prevent taxpayers from bailing out lenders in the future, however, the minister hastened to add that Europe did not have to choose between a legally shaky authority now and delaying repair work.

He suggested a two-step roadmap, with a first measure aimed at creating a mechanism of national authorities and relying on national funds rather than making a central institution responsible for bank resolution.

So, as we’ve seen many time previously, when it comes time to actually move in a direction of shared responsibility the Germans baulk and demand legal and/or political changes first. What’s more, you may remember that the banking union has already been diluted, mostly by demands from the Germans , to a point where is is relatively useless to any country that is already in strife.

Equity can only be injected in good banks, not bad ones , and there can be no external help given for “legacy” issues unless the burden is taken on by the sovereign. So any country that is already having banking systems issues, namely Spain, Greece and Cyprus couldn’t actually access the banking unions safe-guards even if they were in existence today. So basically they are left to fend for themselves and the entire idea of “separating the banking system and the sovereign”, as specified as the aim from the June 2012 EU Summit, has fallen by the way-side and we are back to the old “chicken and egg” arguments about fiscal responsibility and control versus moving forward with a tighter fiscal and banking union.

To make matters worse, as I discussed in late April the Bundesbank appears to want to scuttle the ECB’s OMT, or at least water it down to a point where it could potentially destabilise the current calm in the sovereign debt markets.

With France facing rising unemployment and falling industrial output, the European commission has already predicted the country will be in recession this year. It is very likely that within a few months we will start to see a fall in consumer spending and once that occurs we will see household wealth begin to fall as unemployment begins to undermine asset prices and the French economy start to show similar dynamics to that of its southern neighbours.

It would appear, for whatever reason, that the German economic elite are happy to see France head in that direction, while the nations that are already there are left to themselves to try an work out how to get back out.

Comments

  1. It may also be that Germany is trying to teach it’s southern neighbours the hard fiscal lesson it knows only too well ie don’t take on Debt and structure your economy around it unless you have the wherewithall to service it. Perhaps Germany wants to see the economic and Budgetary re-structuing measures not just spending cuts dressed up as nasty “austerity”. Germany has proven it’s ability to manage it’s budgets well. The Socialists in France may have some ways to go in that regard.

    The charts shows Germany’s debt at 4.2% of GDP. Bond rates show the market is pretty compfrtable with that.

    Yes it’s an election year but the arguments are valid. Why should Germans work to 67 so that Greeks etc can sit on the beach at age 60? I’m sure Germans are over that.

    • Or perhaps, governments should not bail out private banks with public money. At the extreme, guarantee the deposits (up to a certain modest amount) but let the banks fail and do NOT take on private debts that are unsustainable even to governments.

      If private lenders were made to explicitly take a hair cut, maybe they would not lend as unwisely.

      I note that in fact many bondholders have taken haircuts, but there was a random, non-transparent and policy-free free for all in getting to that point, and the connection between the lending practices and who got to take the haircut was arbitrary to say the least.

  2. Why are we blaming so-called ‘austerity’ for the results of decades of mis-allocation of resources; decades of mis-applied Govt expenditure; decades of over-budget expenditure by Govts distorting the private enterprise economy; decades of CAD’s; mountains of resultant debt.
    Now it seems the fact that Govts are SLOWING THE RATE OF GROWTH of their expenditures that is the major cause of the bind in which we find ourselves. Generally Govt is not cutting expenditure.
    Then all we do is demonise the Germans for suggesting it is about time Europeans lived within their means. The mere sugestion by that we all can’t go on living off the future and indeed degrading the planet in the process is a cause for revisiting all the old German hatreds.

    Surely if we are going to re-orgaise economies towards an economically, and indeed environmentally, sustainable future we ought make a START rather than just kicking the can down the road.

    • Flawse, Germans certainly weren’t complaining when Greeks/Spaniards were busy selling houses to each other and importing Audis, BMWs, Mercedes and Porsches from Germany. Siemens, a German company, was even caught bribing Greek officials for public infra contracts.

      They are two sides of the same coin. And I think they deserve each other.

      • +1 The german financial aristocrats have just absolutely played Europe – Germany owns it.

        History will look back at this game and see it for what it is, and it sure isn’t a commercial union.

      • Mav,

        All the more reason why Greece/Spain etc need to play a much smarter game. If you embrace Debt then there are consquences. The thing is the Latins and Meds thought they could deal with it menyana.

        Well, it aint so. No doubt they are looking at Germany feeling agrieved and with some justification. Too late- the Debt is on their books now. That’s the thing with Debt, everyone loves the toys it buys at the time but it becomes and orphan when it gets too hard to pay. A good lesson for nations to learn.

      • The smart think to do is for Greece/Spain default on debt that can never be repaid even after 5 years of Troika administered medicine. How many more years of austerity do you think is needed before debt is repaid? 5 more years? 50 more years?

      • Thanks for the link DE.

        I am not saying it is one sided, I said ;” No doubt they are looking at Germany feeling agrieved and with some justification.”

        What I do mean though is that the road to excessive Debt is paved with many good intentions but the destination is always the same. Govts and nations had choices all along the way. The Billions spent on building out the Costa’s in Spain, the massive pension rorts in Greece- everyone assumed that Govt would foot the bill. Well they did in fact, with populations turning a blind eye to the basic fact that Govt derives it’s revenues from Taxpayers ie them. If you own the toys then you own the Debt.

        This is not the first series of Sovereign defaults nor will it be the last. The best course is damage control, exactly what Germany is attempting. Good lessons for all here.

      • dumb_non_economist

        GSM,

        If you lend money to your neighbourhood crack addict don’t be surprised if he can’t pay up

  3. Loved the deficit/GDP chart. When can we get some Estonian politicians in to replace this Rum Corps?

      • Entirely predictable?

        When most of Europe UE is well into the teens and rising rapidly, opposite to Estonia?

        If it’s so predictable why is it not being emulated all over?

      • That’s right Mav. On MB it’s NEVER ever a Debt or Govt spending problem. It’s only a “how better to tax ” problem.

      • “a new kind of “internal devaluation”, if you will.”

        Good for remittances and diversification of National income?

      • What exactly are you suggesting, GSM?

        That Greece and Spain follow the Estonian example and actively encourage 25% of their working age population to move to Germany?

        There is a ‘scalability’ problem with your Estonian solution. It is ok for a tiny country like Estonia to go this route, but I don’t suppose the Germans will appreciate it if the proverbial Mongolian horde descend on their fatherland in search of a job.

  4. I was reading yesterday an analysis on Germany and their conclusion was that Germany did not perform any better than anyone else but as they do not have kids, they have a lower unemployment, do not have to spend much on infrastructure, have low realestate cost, can accept lower salary as they do not have kids to feed etc…
    it was more demographic than anything else, and they were also somehow lucky that their main export, machinery, was something needed by china, not undercut by it.

  5. Alex Heyworth

    The reason Germans have some reason to feel aggrieved is that they have already been through what the southern Europeans are now experiencing, only because they did it earlier it was much less painful for them. Germany went through a period of significant structural reform in the early 2000s and has also experienced a very long period of wage restraint. German consumer spending has hardly budged over the last 15 years, while at the same time their energy costs have continued to rise under the pressure of subsidies for solar and wind power.

    Partly because of this restraint and the structural reforms and partly because the common currency allowed their economy to thrive on exports to the rest of Europe, funded considerably on the strength of money borrowed at the low interest rates enabled by the Euro, they have found themselves in a strong position.

    The German public (and maybe their politicians) are very aware of the first part of this equation, while discounting the second part.

    Of course, their southern neighbours have been profligate on the basis of cheap borrowed money, as has been their habit in the past (how many times as Greece defaulted over the last 150 years?) But the German banks should have seen that coming and been more cautious with their lending.

  6. GSM, the moralistic tone is quite misleading. It is equally valid to describe the Euro crisis in these terms…

    For well over a century, Germany has organised its own economy to take advantage of demand in other economies. In this sense it is the original parasitic neighbour. For most of the period since WW2, it was the world’s largest exporter, and only recently has been displaced from this position by China.

    This structural imbalance in the German economy has its counter-weights in neighbouring economies, where trade deficits have become endemic and have been financed by German capital flows. From one point of view, the German export machine is a vendor-financed ponzi racket: they will sell you a new BMW and make a low-interest loan to you to finance the purchase, requiring you to pay twice for same goods.

    Of course, in a currency system based around the needs of the German economy, this led to a credit bubble characterised by massive excess lending by German banks, who stood to make great profits by the creation of new assets, all of which are fundamentally under-written by taxpayers in Germany’s neighbours.

    In other words, it is impossible to understand or describe the economic circumstances of one country in Europe without also placing it in its systemic context. It is system-wide flows that have largely determined developments in individual territories.

    • breifly,

      I suppose you have been to Germany and Europe in general so I would also imagine that you have picked up on quite a difference in the work ethic and national discipline/order that is present in Germany say versus the Greeks , Spaniards and French.

      This I think too goes a long way toward why the present circumstances are as they are. Debt is a serious issue in Germany , historically and more recently with the fall of the Eastern Block and former East Germany returning to the national fold.

      In relation to the points you make re: parasitic neighbour, equally I think Germans could view the Meds similarly. In fact one could say given the complexities and history of the “neighbourhood” , Germany finds itself presented with circumstances that offer limited choices as to how it could manage it’s export driven economy and have driven those policies in full view. They make no secret of their economic strategy.

      There is no moralising just observations. When you (of sound mind) have willingly chosen an economic path founded predominantly in Debt, it is now a bit rich to be blaming the neighbours for your own past choices and decisions.

      Consequences, consequences- nobody likes them.

      • dumb_non_economist

        Yes GSM, that’s right “Consequences, consequences- nobody likes them,” and now Germany has to face them for Vendor Financing a customer who had a poor record for repaying.

        How can anyone be straight faced indignant for lending beyond the recipients capacity to pay, must be where our banks learnt their lending practices from.

      • “Yes GSM, that’s right “Consequences, consequences- nobody likes them,” and now Germany has to face them for Vendor Financing a customer who had a poor record for repaying”

        Yes that’s true and my point is made- Excessive Debt is an orphan so best not ever go there.

      • GSM, my point is that debt is a consequence of the economic structure and its associated trade flows. Of course, debt is an important part of the German economy too. System assets in Germany are around 400% of GDP, but, needless to say, many of those assets are held in other territories. For every borrower, there must also be a lender.

        The German model of economic development, which relies on the creation and accumulation of export surpluses, literally CANNOT be emulated by all other economies at the same time. That is, not all economies can be in surplus with each other simultaneously. Germany has always been a willing seller to others, but a relatively reluctant buyer, and this has generated permanent current account surpluses – the source of their excess savings, which they have been pleased to lend to others.

        The other side of the German economy is the dual labour market. There is the high-skill, high-wage workforce, and there is the “temporary worker” underclass, who work for far lower pay and have far fewer workplace protections.

        For mine, I always found the French, the Belgians, the Dutch, the Spanish and the Italians and the British to be as industrious as the Germans. The Greeks also worked hard, but had a much less sophisticated economy – still, in many ways, an almost pre-industrial economy – and as a result their output was less “valuable”.

        I think the cultural explanations for economic variability do not illuminate the story much. And they are also offensive because they effectively say, for example, to the unemployed Portuguese graduate, “You are inferior to the Germans and you deserve the poverty that has descended upon your sorry head.”

        This does not explain what has happened to Europe’s lowest paid workers and it does not define a resolution to the crisis in Europe. All it does is blame the victims.

      • I suppose you have been to Germany and Europe in general so I would also imagine that you have picked up on quite a difference in the work ethic and national discipline/order that is present in Germany say versus the Greeks , Spaniards and French.

        Personally I find this kind of generalisation is dishonest and borderline racist.

      • Alex Heyworth

        “Personally I find this kind of generalisation is dishonest and borderline racist.”

        You may not like stereotypes, but they generally have some basis in fact.

        And if you don’t like them as an explanation for the tendency of some nations to be repeat offenders in the profligacy stakes, you need to put forward a better explanation.

      • Germany’s economy is unquestionably more dynamic than others in Europe. The enormity of the surpluses it built up after the introduction of the euro were a consequence of the euro, but that doesn’t change the fact that Germans are more productive than some other Europeans. The cultural explanation is indeed abused, but that doesn’t mean it is entirely without merit. People blind to ramifications of cultural differences in economics suffer from the nowadays-ubiquitous misinterpretation of political correctness, wherein one believes it is racist or offensive to suggest that cultural differences may confer an advantage or disadvantage on certain groups.

        Nevertheless, the crisis did spawn from the EMU. Because Germans are more productive, they needed to be experiencing rising living standards. They needed a currency that was appreciating as a reward for their productivity. Although this is just, if you want to couch it in those terms, it is, more importantly, an economic necessity. Germany’s industrial powerhouse must reward German consumers by way of higher purchasing power. When Germans achieve this, they will naturally increase consumption and import more. The rising currency will also act as a brake to Germany’s export engine, and so the kind of unsustainable imbalances we observed in the Eurozone would not emerge.

        The EMU prevented this adjustment from taking place, so what should have led to appreciating northern currencies and rising northern living standards, and depreciating southern currencies and falling southern living standards, instead manifested in the form of big capital and trade imbalances. Furthermore, interest rates set in accordance with Germany’s needs meant a sudden and sharp drop in interest rates for many countries, and as a result a big increase in credit demand. And of course, this debt expansion was the necessary consequence of German surpluses. The private of the public sector had to be leveraging up in the periphery, if the Eurozone was to avoid sharply higher unemployment.

        And this is the point missed by many. With Germany refusing to provide internal demand sufficient to absorb its excess production, demand HAD to be provided by the periphery using German savings. Within the EMU, if the deficit nations had followed the path so regularly prescribed ex post facto, and taken steps to reduce labour costs, lower domestic demand and gain competitiveness vis a vis the northern economies, then Europe would have had much lower growth or possibly a recession, since everyone would have been following the consumption repression model simultaneously, meaning insufficient demand to cover production and recessionary conditions.

        Now, perhaps the US could have taken up the slack and pushed its current account way into deficit to absorb Europe’s excess production… Hold on a minute, that sounds familiar.

  7. The problem in Greece is not that they have particularly excessive debt. They don’t. System-wide debt is about the same as here or in the US – at about 270% of GDP. The problem has been the failure of Greeks to pay taxes combined with an external deficit, which, together with other public-sector rorting has bankrupted the Greek State.

    Of course, this has all been facilitated in the first place by the common currency, which disguised risks in Greece and encouraged a rash of hot-money credit creation until the GFC.

  8. GunnamattaMEMBER

    This has been the longer term issue for people looking at the Eurozone since about 2009. Even when the first Greek crisis broke almost all analysts and economists were pointing to the internal linkages in the Euro financial system and identifying that while the financial system was quite interlinked (and had facilitated the fiscal obfuscation which saw Greece and the PIIGS in the Eurozone in the first place) without bringing about any political side which recognised those same interlinkages. That has always meant that whatever starts at the periphery will make its way to the Franco German core.

    Germany (and other Northern Euro nations) have been able to run current account surpluses through being able to export into weaker euro nations with the exchange rate between them fixed meaning that fiscal contraction has been the only palatable (for Germany) response in Spain, Italy, Greece etc. The financial systems in those nations (and also Ireland – which has faced a different issue stemming from the austerity of its government standing behind a financial system insanely attached to property in the mid 2000s – and which largely missed its chance to call the bluff of the ECB and EU/Germany) are directly linked to the Euro core – Germany and France. Have a look at the major bondholders of the banking systems of the heavily indebted nations.

    It isnt just the Germans – although they are being cast in a role here as the antithesis of just about everyone else. Europe needs to get its head around the fact its financial system is relatively united in a way its politics isnt. Less than 18 months ago I spent about a month whizzing around Europe interviewing economists and major fund managers about how they saw the crisis playing out (about 20 of them – some of the largest banks in the world – on behalf of Russian banks). Not a single one of them saw anything other than a country or countries leaving the Eurozone OR the Eurozone coming to terms with the fiscal transfers necessary to keep the project alive. The problem is that there isnt really a mechanism to bring about the necessary fiscal transfers. National governments collect taxes which means that national governments need to explain why they would be directing fiscal flows to some other batch of taxpayers (or non taxpayers as the case may be). Good luck selling that in Germany or anywhere else.

    This is why there has been such an effort to prevent the bondholders from taking the haircut, which in turn has meant that fiscal tightening, (in the case of Cyprus outright theft of depositor funds) has been the only national response. The moment there is a significant haircut on bondholders of the indebted euro sovereigns or the banks in those sovereigns (which in many cases have books which are like something from a horror movie) those receiving the cut (and then needing to accommodate it in their mark to market or financial reports somehow) will largely be other Eurozone banks, with French and German banks at the core.

    The problem for Germany is that once the contagion has reached France (and the French should probably thank the Spanish for having held off on asking for help for as long as they have) then it is German banks who are in line to take a hit. People have been noting this for a long time. Ultimately it is not (as countless people have recognised) not so much a national problem, but one of the structure of the EU and the mechanisms that bind those nations together.

    I have drifted in my view on this – I never really thought they would kick depositors as they did in Cyprus. I think that message has carried to elsewhere in the Eurozone, and I think it guarantees a run on banks of the next Eurozone nation in the firing line (money on Slovenia, but you could never discount Spain or even Italy now, indeed in the worst case why stop there?) which means that the risk of the politics of one nation (the elites) simply failing to keep hold of wider society (in the face of riots protests whatever) becomes greater.

  9. The most pressing task in resolving Europe’s Euro troubles is to find jobs for all the technocrats whose livelihood depends on keeping the Euro show on the road.

    How many years more of this debacle do they need to suffer before they finally cut their losses and return to national currencies.

    Ever closer union is no solution to the problems of the Euro.

    Monetary union requires fiscal union which requires political union which requires cultural union.

    What more needs to be said ???

    If they want to salvage the most important parts of European integration they need to get rid of the Euro asap.

  10. The problem is rooted in geography and is therefore highly unlikely to ever be resolved. The whole point of the EU is to bind a more industrious & dynamic Germany to the rest of Europe. Best explained by George Friedman.

    The State of the World: Germany’s Strategy
    http://www.stratfor.com/weekly/state-world-germanys-strategy

    The State of the World: Germany's Strategy is republished with permission of Stratfor.”