Germany Leaving the Euro?

May 12, 2010 · Posted in Global Economics · Comment 

Well, first off: No, that ain’t happening. As much as I wished. At least not until the Euro completely falls apart. No other people consider the Euro their pet project more than German politicians.

Zerohedge posted something about rumors and a clip with a statement from Gregor Gysi, the head of the socialist party in Germany:

What he’s essentially saying is the usual communist nonsense about curbing evil speculation against the currency and in the end he says that “something will be decided on Friday and I have no idea what it’ll be …”.

But hey, there’s nothing better to distract people from the obvious issues than some fun rumors …

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German Parliament Approves Bailout for Greece

May 7, 2010 · Posted in Global Economics · Comment 

As a mere formality the German Bundestag has approved the bailout for Greece, and with that yet another aid package for German banks:

German lawmakers on Friday approved the country’s share of the rescue package for debt-laden Greece after a boisterous debate in which the finance minister told them they had no alternative to the unpopular measure, The Associated Press reported.

The lower house of Parliament voted 390-72, with 139 abstentions, to authorize granting as much as 22.4 billion euros ($28.6 billion) in credit over three years. That is part of a wider 110 billion euro package backed by eurozone members and the International Monetary Fund.

Chancellor Angela Merkel’s center-right governing coalition was joined by one of the three opposition parties in approving the aid. Germans dislike the idea of rescuing another country from its financial irresponsibility.

The upper house of parliament, which represents Germany’s 16 states where Merkel’s government also has a majority, was expected to add its approval later Friday.

”We have to make this decision and we have no better alternative,” Finance Minister Wolfgang Schaeuble told lawmakers ahead of the vote. ”Any other alternative would be much more expensive for the Germans, would be much more dangerous, would carry much bigger risks.”

Schaeuble said central bankers and the IMF agree ”it would be disastrous to risk … a member of the European currency union, Greece, now becoming insolvent.”

”This is about defending the common European currency as a whole, and with it we are defending the European project,” Schaeuble said.

”The situation is very serious and no one can make out that we are already out of the woods with today’s decision,” Foreign Minister Guido Westerwelle said. ”What is important now is that we must extinguish the fire so no brush fire spreads in Europe, and we must at the same time fight the cause of the fire.”

Geeez, could these guys at least have the courtesy to come up with some different nonsense than the one they have been feeding us over the past years? All this pathetic and fuzzy nonsense about defending the currency as a whole and how doing nothing is far worse than throwing more money at the problem, blah blah blah … come on people, we’ve heard it before and it’s simply embarrassing! :)

Bailing out Greece is unpopular in Germany, which has Europe’s biggest economy. Merkel long took a tough line on aid, and opponents have accused her of dragging her heels ahead of a regional election this weekend.

Sigmar Gabriel, the leader of the biggest opposition party, charged that Merkel had ”destroyed trust in the credibility of Germany’s European policy.”

Gabriel’s Social Democrats abstained. They had hoped to couple the vote with a call for a tax on financial market transactions — which Schaeuble described as unrealistic, given a lack of international support.

The Greens, also in opposition, voted in favor. But the hard-left Left Party objected to the rescue package on the grounds it would make things worse for Greece.

Left Party lawmaker Gesine Loetzsch described the austerity package to be implemented in Greece as ”brutal” and accused German leaders of doing too little to control markets.

”Speculators are Taliban in pinstripes, and people in our country must be protected from these Taliban,” Ms. Loetzsch said — a remark that drew a rebuke from speaker Norbert Lammert.

… you know how bad things are when the only ones who are remotely making sense are the commies.

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The Failing European Experiment – A Wakeup Call

February 11, 2010 · Posted in General Economics · Comment 

The NYT writes Germany, Forced to Buoy Greece, Rues Euro Shift:

As Europe edges toward emergency guarantees to stem market panic over one of the most profligate members of the euro bloc, the country that the region turns to for leadership, Germany, is suffering from growing doubts about the European experiment it long championed.

Reluctant German leaders now find themselves forced to help Greece remain solvent, or risk watching markets attack one weak member after the next, from Portugal to Spain to Italy, threatening the stability of the euro, the European currency Germany fought so hard to create.

In a conference call with the finance ministers from the 16 countries that use the euro and the president of the European Central Bank, Jean-Claude Trichet, officials said that some action had to be taken to calm markets and take pressure off Greece. But what form that rescue would take — be it loans, loan guarantees or a promise to buy Greek government bonds — still had not been decided Wednesday night, ahead of a summit meeting involving all 27 European Union governments on Thursday.

What did appear clear was that Germany, with an assist from France, would have to take the lead. “The Germans are the only ones with deep pockets,” said Daniel Gros, director of the Center for European Policy Studies in Brussels. “If it was just Greece, they could consider letting them go down the drain, but it threatens the entire euro zone.”

Berlin has been mostly silent on the matter. That is partly to put pressure on Greece, as civil servants struck there Wednesday to oppose cutbacks that the government has promised in order to rein in its enormous budget deficit.

But a bailout will be politically awkward for Chancellor Angela Merkel’s government. It is precisely the financial millstone that opponents warned about when Germany gave up its treasured mark, a move that a majority of people here, in contrast to their political leaders, opposed at the time.

“If the German government would just transfer money to Greece, people in Germany would feel their worst fears had come true,” said Thomas Mayer, chief economist at Deutsche Bank.

The role of savior has been thrust upon Germany by default. The euro bloc has myriad rules and regulations intended to avoid the need for prosperous members to rush to the aid of those with weak economies.

But the markets have ignored the rules, fluctuating with unconfirmed reports that the Germans have agreed to rescue the Greeks, which often carry the implicit warning that everyone will suffer if they do not. As the largest European economy with the most fiscal flexibility, Germany is crucial to any euro zone effort to save Greece.

The apprehension in Germany runs much deeper than a single crisis. It comes in the same week that Germany gave up its most cherished title, world export champion, to China, heightening fears of a declining stature and importance globally.

Germany also faces a demographic challenge, managing a population that is not only graying but shrinking. Last month the government announced that the population dropped below 82 million last year for the first time since 1995. That means fewer people trying to pay off a growing national debt, with a projected budget deficit of $118 billion this year.

After Mrs. Merkel’s re-election in September and triumphant turn on the world stage in November for the 20th anniversary of the fall of the Berlin Wall, her approval ratings have fallen to their lowest levels in more than three years. Criticism of her government over infighting in the governing coalition — mostly over tax cuts and the budget — has risen steadily. She has been noticeably reticent about the crisis in Greece, speaking out far more forcefully on populist issues like tracking down tax dodgers hiding money in Switzerland.

“It’s a conscious decision to keep quiet,” said Jakob von Weizsäcker, an economist at Bruegel, an economic policy research institute in Brussels, who used to work for the economics ministry in Berlin. “In reality, they are thinking about what they could do.”

The pressure was apparent in a harsh statement against the idea of a bailout issued Wednesday by the coalition partners in Mrs. Merkel’s government, the Free Democrats. There should be “no direct financial help for Greece,” the statement said. “It would send the absolutely wrong signal to other euro countries that no country has to strain to save any more.”

But even German opponents of the euro said a bailout appeared likely. Joachim Starbatty, a professor of economics at the University of Tübingen, was one of four professors who sued before the German Constitutional Court in 1998 to stop the formation of the currency union, which the court rejected as “obviously without foundation.”

Professor Starbatty said he believed that Germany would bow to pressure and back measures to protect Greece from market pressure. “Looking at it realistically, I think you’ll see some form of help that isn’t too damaging for the donor countries,” he said.

Peter Bofinger, professor of economics at the University of Würzburg and a member of the German government’s independent council of economic experts, said in its report that last November, the council recommended that the European Union could give guarantees for newly issued government bonds from a country in Greece’s predicament, if it had presented a workable plan for getting its finances in order.

After European governments helped stabilize financial institutions during the crisis, it was necessary to send a signal that they would not be allowed to break the currency union, Professor Bofinger said. “It’s important also for politicians to show, we will not allow you to rock our boat. We did so much to save you, you destroyed yourself almost, but we saved you.”

The truth is very simple: The best that can be done for the people of Greece is to not provide one cent of assistance to its corrupt, bloated, and union-controlled government apparatus. A country’s bailout is like a corporate bailout, only many times worse! From this logically follows that the absolute worst Europe could do to the people of Greece would be to give their rulers any more means to continue their irresponsible policies.

The European Currency Union and the European Union itself are both such gigantic failures that it is already pre-ordained that the entire experiment will go down in flames sooner or later. Now is certainly not that time yet. What we are seeing are just a few more cracks emerging in the structure of the system. The European bureaucrats will come up with some sort of pseudo solution to paper over and patch the Greek problem for now.

But the structural problems remain. Remember, this is not the first time a European country has abused the EU’s lucrative transfer system, and it surely won’t be the last! Portugal, Italy, and Spain are in very similar situations. Almost exactly 1 year ago we had the same debate going on. Back then I wrote:

Consider the European stability treaty dead. One member state after another will violate the requirements. The fact that a bailout of some Euro states by others is discussed, just shows how torn this European Union really is, how severe its imbalances are. With discrepancies like these, it is completely unfeasible to maintain a currency union. (…) Individual responsibility per member state rather than complete collectivism should be aspired. Unfortunately Europe has not been very keen on individual responsibility. In Germany, France, and Italy, all one can hear is rants about “neoliberalism”, “anarchism”, “capitalism on steroids” which supposedly are to blame for the financial crisis.

Even if the Greek government were saved to the detriment of the people it tyrannizes, this won’t be the last time we’ll be having this discussion, and it sure as hell won’t get any better!

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Germany Votes for Change – Free Democratic Party Posts Best Results Ever

September 27, 2009 · Posted in Global Economics, Politics · Comment 

The elections in Germany are over and the political landscape is changing drastically. Personally, I am excited about the results. After 11 years of absence the Free Democratic Party (FDP) is returning to government with 14.6% of the votes. Their main agenda in a nutshell:

  • more net income from gross income for more growth, more jobs and more prosperity
  • more freedom through stronger civil rights
  • more education for better prospects for the future
  • more competition and lesser ideology in environmental policy for more energy
  • more confidence built through international dialogue

Back in May I wrote:

A strong FDP (Free Democratic Party) in the next German coalition would be the best thing that could happen to Germany. No change will emanate from SPD or CDU, just as in the US no change can emerge from Democrats or Republicans in their current state.

The FDP will have to govern in a coalition with the CDU/CSU, the conservative party. Economically, CDU and FDP have more overlaps than on civil policies. The FDP will attempt a reversal of the excessive intrusions into the privacy of Germans commited by SPD and CDU governments over the past years. It will be interesting to see whether the FDP will be able to push through their point of abolishing compulsory conscription into the German military.

The most important push will be on tax policy. The FDP aims at drastic tax cuts, with tax brackets at 10%, 25%, and 35%. How close the conservatives will be willing to move to these demands remains to be seen.

There is a danger that looms for the freedom movement in Europe: If no drastic and real changes are made to the status quo, Germany’s economy will continue to ail and unemployment will not improve. People will then falsely conclude that a pro-freedom party’s program has failed, that more freedom does not bring more prosperity, and once again cast the majority of votes for the big government parties, be they socialist or conservative.

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Deflation Continues in Germany

July 30, 2009 · Posted in Global Economics · Comment 

Deflation is and has been a global phenomenon for a while now. Germany, too, is not exempt from it:

Consumer prices in Germany, Europe’s biggest economy, posted their first annual decline in 22 years this month largely as a result of lower oil prices, preliminary government data showed Wednesday.

Prices were down 0.6 percent on the year in July — the first fall since March 1987, when they declined by 0.3 percent, the Federal Statistical Office said.

It said the decline was fueled by sharp year-on-year declines in energy and fuel prices, which peaked in July 2008.

Germany’s inflation rate hit zero in May and edged up to 0.1 percent last month. Several other European Union nations have reported a fall in prices this year.

Contrary to what the article goes on to assert, deflation is of course a desirable phenomenon that restores balance and sanity.

As I explained recently, regarding deflation in Japan:

Two fallacies in common reports in the media:

1. That there is a possibility of an impending deflation. – The truth is: Deflation is here and now, has been for a while, and will be for a while.

2. That we have to “fear” deflation. – The truth is: Deflation is a good thing, as I pointed out a couple of times:

Deflation is in essence a correction of the previous misallocations created by inflation.

What turns deflation into a bad thing? When the government tries to stave it off by spending billions and trillions of dollars, thus prolongs the correction, continues the misallocations, and increases the debt burden on the taxpayers. If you want to get an idea of the long term outlook for the US economy, look at Japan. The credit and stock bubble there burst in 1989, and has been deflating on and off since then.

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Germany Considers Constitutional Amendment Against Deficits

May 31, 2009 · Posted in Global Economics · 2 Comments 

The Financial Times writes:

The next German government is almost certain to crack down on spending and drastically raise taxes after the lower house of parliament yesterday adopted measures that come close to banning budget deficits beyond 2016.

The controversial constitutional amendment, part of a reform of federal institutions, will prohibit Germany’s 16 regional governments from running fiscal deficits and limit the structural deficit of the federal government to 0.35 per cent of gross domestic product.

The amendment still requires approval by a two-thirds majority of the upper house of parliament which represents the regions. The vote is scheduled to take place on July 12 and is expected to be approved.

The most sweeping reform of public finances in 40 years was an “economic policy decision of historic proportions”, Peer Steinbrück, finance minister, told parliament shortly before MPs endorsed the amendment with the required two-thirds majority.

The vote underlines Berlin’s determination quickly to plug the holes that the economic crisis, two fiscal stimulus packages and a €500bn ($706bn, £437bn) rescue operation for German banks are expected to blow in the public coffers this year and next.

In 2009 alone, legislators from the ruling coalition expect the federal budget to show a deficit of more than €80bn, twice the current all-time record of €40bn reached in 1996 as Germany was absorbing the formidable costs of its reunification.

This figure does not include the deficit of the social security system, which is expected to rocket too, as unemployment rises to an expected 5m next year.

The constitutional amendment, popularly known as the “debt brake”, allows a degree of flexibility in tough economic times, just as it encourages governments to build cash reserves in good times.

Yet economists have warned the new rules could force the next government to implement a ruthless fiscal crackdown as soon as it takes office after the general election of September 27 if it is serous about hitting the 2016 deficit target.

“Given the massive fiscal expansion we are currently seeing, the ‘debt brake’ will lead to a significant tightening of fiscal policy in the coming years,” Dirk Schumacher, economist at Goldman Sachs, wrote in a note.

In a separate assessment, the Cologne-based IfW economic institute said the federal government would need to save €10bn a year until 2015 through a mixture of tax rises and spending cuts.

Klaus Zimmermann, president of the DIW economic institute in Berlin, said the next government might have to increase value added tax by six points to 25 per cent. This would be the biggest tax rise in German history.

The “debt brake” could complicate Angela Merkel’s re-election bid. Under pressure from parts of her Christian Democratic Union, the chancellor recently pledged to cut taxes if returned to office in September, though she pointedly failed to put a date on her promise.

The Free Democratic party, the CDU’s traditional ally, has made hefty income tax cuts a key condition for forming a coalition with Ms Merkel’s party should the two jointly obtain more than 50 per cent of the votes.

The debate has cut a deep rift within the CDU, which was threatening to deepen further yesterday as opponents of tax cuts seized on the constitutional change to back their arguments.

Günther Oettinger, the CDU state premier of Baden Wurttemberg, said “promises of broad tax cuts are unrealistic… First we must overcome the crisis, then we need more robust growth, and when we finally get more tax revenues, we should use them to repay debt, finance core state activities and for limited, very targeted tax cuts.”

Oettinger is wrong when he says we have to overcome the crisis first before cutting taxes. It is the same old argument that governments advance again and again so as to procrastinate necessary changes. This amendment is something that states around the world should mimic in one way or another. It is high time to institutionalize fiscal responsibility by legal means.

A strong FDP (Free Democratic Party) in the next German coalition would be the best thing that could happen to Germany. No change will emanate from SPD or CDU, just as in the US no change can emerge from Democrats or Republicans in their current state.

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