Should we focus on what Angela Merkel says and ignore what she actually does? Or should we ignore what she says and focus on what she actually does? This is important, because the difference between what the German chancellor says and what she actually does is widening by the day.
We hear from the German government that it is ready to do whatever is necessary to save the euro, but actually it is doing as little as possible. Every time the Germans are asked to clarify what they mean when they talk about taking actions to save the euro, they spoof and bluster – but do very little.
This raises the question whether Germany actually wants to save the euro in its present form. And if it doesn’t, what does it want?
The working assumption of the European elite and Europhiles here in Ireland is that Germany will eventually subjugate its own interests for the greater good of European solidarity.
This means in reality that the Brussels mainstream view is that Germany will ultimately accept the responsibility for paying all or part of the debts of the rest of the eurozone. Such a prospect chills many millions of German people. The assumption of the europhiles is that Germany remains, in the words of the great chancellor Willy Brandt in the 1970s, “an economic giant but a political pygmy”.
What if Germany 40 years later in 2012, is a bit less of an economic giant and also a bit less of a political pygmy?
The europhile elite seem to be stuck in the 1970s or 1980s, when a divided Germany did not have either the “permission” or the “confidence” to stand up for itself. Germany has changed, but the European elite has not. The new Germany has moved on.
Ahead of today’s Greek election, it might be interesting to speculate that the German view of Europe could be quite different – and that Germany’s interests and those of Brussels are not indefinitely aligned.
Quite apart from why the Germans might not want go for the europhile solution, what if Germany has figured out that the solution – the mutualisation of eurozone debts – will not solve the currency’s problem?
Let’s try to see things from the German perspective. If I were German, I would suspect that the reason the periphery has huge debts is that they tried to have German lifestyles without the German work ethic. When you want something you can’t afford, you borrow to get it. This is the oldest trick in the book.
So, unless the Italians and Spanish and Irish are prepared to create products for sale at the same rate as the Germans do, we have to borrow to have the lifestyle the Germans have earned. We rent prosperity, rather than earn it.
How could you best see this?
Well, let’s look at Italy, because the relationship between Italy and Germany will become the crucial one with the eurozone. The choices made by these two countries will define the next ten years.
For far too long, Italy has been the butt of Anglocentric jokes and jibes, largely manufactured in the London press. But Italy is a proper economy with a proper industrial base, and a long heritage in manufacturing, design and finance.
However, since joining the euro, Italy has lost enormously vis-Ã -vis Germany.
Look at the chart. It shows how, until joining the euro, Italian industrial production and Germany industrial production more or less moved in tandem.
These two countries with their large industrial base were able to compete with each other, and the end products of this competition were proper jobs for millions of European citizens.
But since joining the euro, Italy’s industrial production has slumped, while Germany’s has soared. Why is this? It is because the Italians used to maintain competitiveness with Germany by regular devaluations of the lira, which obviously worked. Italian local costs would rise because the Italians tolerated higher inflation than the Germans. Every so often, to rebalance things, the Italians devalued the lira and got a boost to competitiveness, and this allowed Italian industry to compete.
This is not in any way unusual. Successful devaluations have been at the heart of the industrial policy of many countries. Italy, Sweden, Finland, Spain and Ireland are cases in point.
Without devaluations, Germany is simply too strong. The reason why Germany is so strong is that its productivity is so much higher.
Its cost of capital is low and the workforce is highly productive, generating more stuff per euro invested than anywhere else in Europe.
This gives the Germans a competitive edge. The more productive German worker should be “rewarded” by having a strong currency, stronger than anyone else. But in the eurozone, the German worker isn’t rewarded with a stronger currency that would mean he could go on cheaper holidays to Italy.
The surplus the German worker makes doesn’t go into his wages, it goes to German banks.
Then this gets recycled because the less productive Italian borrows the surplus German cash to maintain his lifestyle, which he is no longer earning.
Ultimately, Italy takes on more and more debt.
Now, if the EU forces Germany to accept the mutualisation of all debts, will this solve the underlying problem – which is the falling Italian productivity vis-Ã -vis the German worker?
Of course it won’t.
In fact, by backstopping the Italian’s debts with the German money, it gives the Italian the incentive to borrow more, not less. This leaves the German picking up the tab.
Therefore, in the context of punishment and reward, not only is the German not being rewarded for his hard work and superior productivity by being paid in a stronger currency, but he is actually being punished by being asked to dig deep to pay Italian debts.
This interpretation is how the world looks from the perspective of a German worker and voter and it explains why, in the latest You-Gov survey, 69 per cent of Germans want Greece to leave the euro zone.
It seems reasonable to suggest that what Germany wants is a stronger, tighter euro to protect it from the implications of continuous infusions of cash to the periphery. This is a core euro centred around Germany. Then the EU can let the Italians and others revert to devaluations, which will work.
This solution makes perfect sense if you are German. As for chancellor Merkel, this approach – moving towards a core hard euro and a periphery soft euro – could explain her behaviour of the last few weeks. Putting Germany first might leave Merkel isolated in Europe, but she would be very popular at home.
You decide what is the priority for an elected politician who is facing an election next year and who wants to get voted back into office.
What Germany says and what Germany does. Our biggest problim in Ireland is we don’t think outside the box. But we also need to grow a huge pair of ba:::::: Ireland/government seem to be a lot like the German government,they play a game with the Irish people. Ireland survive on exports /farming/and the export led section. What’s this government are doing is putting the domistic system here back 30 years .starve a plant of water and it dies. Look at all the Irish people leaving,look at all the machines/ tools/jcbs beening sold and sent to warmer countries. What we will… Read more »
Will Germany backstop the euro and is it paying for others’ profligacy? Well, it all depends (a) how much the euro is worth to Germany and (b) where the money eventually, finally ends up. The euro has been guided – you might say controlled – by German interests. The interest rate has followed German domestic interests. It was low when the German economy needed boosting at the same time as a higher interest rate might have helped cool down the overheating Irish economy and property bubble. The eurozone – enthusiastically enlarged by Germany – enabled Germany, as a huge exporter… Read more »
Jeez, the germans seem to be taking all of this very well to be fair to them. I’ve been hearing they’ll do this and do that for the longest time now…and in fairness they haven’t done anything. They must have a lot more in the bank than they’re letting on.
Subscribe.
The Germans are doing what is in their best long term interests; Wow who would have guessed that
Germany bank s want their carelessly lent money back; Wow who would have guessed that
Merkel is a politician; Wow who would have guessed that
Wow welcome to the reality of politics David
But you may have a point as Enda Kenny does not get this
Enda Kenny is “nice man” but we need a leader
KENNY the GOOD but not good for Ireland
http://www.irisheconomy.ie/index.php/2012/06/18/will-germany-blink/
You have to register (for free) with the FT to read Munchau’s article.
David,
As usual a couple of years ahead of the curve, it seems we may have a stronger and weaker euro area/currency it will take a few years for this to sink in, maybe when unemployment is 30% in Spain and Greece
Who will win the next German election?
http://yanisvaroufakis.eu/2012/06/19/the-greek-election-as-a-manifestation-of-europes-hobbesian-moment/
No electorate will vote for reality. The contract between citizen and government (more accurately between government-dependent citizens and their employer/provider government) has bebased to a contract of mutual connivance. It is a mutation of the democratic principle. Democracy does not require political parties or governments or elections. The sooner this archaic political system and its puppet-master ponzi monetary system is swept away by the nearing economic tsunami the better.
That’s another well explained article by DmcW and one which attempts to go deep. I would go a step deeper and focus on the process by which money is created as the root of the problem. All the money in the economy, even German money, is created through bank loans and this is why every euro has a corresponding debt. All banks, even German banks, cancel money out of existence through loan repayments and this is the basics of how modern economies operate. Germans may be quite productive but any Italian money required to purchase their products can only be… Read more »
The deliberation by Merkel between hard & soft is Porn.
This is the nest level after debasement of any currency and is more ethnic in objective than in union of sovereign minds.
David, Germany will choose the option suited to their mittelstand, landesbanken and savers. It will depend on which country gets hoisted onto the pyre first, Italy or Spain. If it is the former, Germany reverts to the D-Mark over a long weekend as it does not have the fire power to finance the Italian public debt of €2 trillion. If it is the latter, Germany will get the centralized bank control it is holding out for as a “do ut des” for allowing the ECB to backstop the ESM through the issuance of a banking license and shore up the… Read more »
Lets look at this from Germanys side what’s in it for them,from all I read it’s Germany calling the shots and it seems to be a bad deal for the fatherland . What Germany seems to be asked to do is to use its money to prop up the euro,regardless of who they export there goods to. If they pull the so called plug on the euro will they survive,I think they will more than survive. I can’t get my head around why Germany wants to be in the euro,because they surly can’t keep propping up the euro ponzi credit… Read more »
I’ve worked in the UK all my life. The work ethic is tough but rewarding if you want to make a bob. But it has its drawbacks too. Generally speaking over a career, through work, I’m there or thereabouts. I don’t know anything about the German work ethic barring what I have read but it seems very thorough, albeit quite mundane. Deco will SLAUGHTER me for this, but while yes we must work, for that is the way it is, we also must live. A quality of life respecting local traditions and cultural nuances is as much a part of… Read more »
http://bit.ly/Lb5Nyh
I’m really getting to like this guy.
He keeps saying what I said two or so years ago, just after David McWilliams said the same thing.
Which, I suppose, makes me piggy in the middle.
Pigii.
Geddit?
Oh never mind…………
The publics relationship to the financial crisis can be likened to that of an elderly dependant parent who realizes that her son has taken up gambling and is busy squandering a considerable fortune. The publics reaction to the crisis can be likened to that same parent recommending that her son visit a different gambling house in the hope that they might go a bit easier on him.
Germany : Karlsruhe Constitutional Court Strengthens Parliamentary Rights, Offers Basis To Defenestrate ESM In what is effectively a smashing defeat for the ESM as such, and provides for courageous parliamentarians an opportunity to refuse voting on the ESM altogether, Germany’s Constitutional Court in Karlsruhe ruled this morning that the German Parliament must henceforth be informed “as early as possible” on international negotiations, such as the ESM, and allow for the Federal Parliament to participate in these matters, before the government can conclude treaties or issue internationally binding declarations. The court said that a stronger involvement by Parliament into such treaties… Read more »
German Economists’ Open Letter Protests ESM: “Madam Chancellor, Stop This Policy” June 19, 2012 (EIRNS)–In what they call an “extra-parliamentary query,” a group of 40 economists and legal experts has sent an open letter to Chancellor Angela Merkel recommending that Germany not ratify the ESM. They call on the government to stop the policy of “conditional rescue packages,” which they say have long since been discredited in past interventions into Ibero-America’s crises. The group also asks the government about scientific surveys that prove that Germany has benefitted from the euro, which they doubt, and that furthermore prove that Germany would… Read more »
The Government made recent hard and soft options relating to their decisions to cause to delay the releasing of the Revenue tax demand notices to tax payers who had made early declarations , until after the recent elections .
Suddenly …this week they all appear …why did it take so long for the early bird disclosure tax abiding citizens to have to wait so long ?
Fudge & Fudge & Co
Well, now it appears that Merkel has blinked. She has consented to a bailout of Italy, and Spain with money that she will find impossible to get from the German Bundestag. And that is before she asks the citizenry. Meanwhile the Dutch and the Finns will start demanding things like accountabality, and collateral from the PIGS. This will cause a massive problem in Greece, where the two parties who created the mess are now going to form a coalition, on the pretext of saving the Euro, as the currency of the Greek state (which is bankrupt). The financial assets markets… Read more »
Hi David. I fail to see how it became the sole responsibility of the Germans to ‘save the Euro’. How can one country be responsible? How did this happen to Germany? Doesn’t Luxembourg use the Euro? Could they ‘save the Euro’? Why do I read about Angela Merkel every day? Why not Elio Di Rupo, the prime minister of Belgium? They have the Euro, don’t they? I think more should be heard from Lawrence Gonzi. The Maltese have every reason to lift their voices and ‘save the Euro’. Maybe Enda and the School Teachers will ‘save the Euro’. God help… Read more »
[…] First… Hard and Soft Options http://www.davidmcwilliams.ie […]
Germany stormed thought the group stages of Euro 2012 and there have been German flags sprouting up all over the place here since then. The Germans are definitely not afraid of a bit of the old nationalism. Can’t wait to see what happens on Friday…
http://www.youtube.com/watch?v=ur5fGSBsfq8
Money is relative, Germany is “rich” in relation to others in the EZ, this is a flaw in the Euro, if Germany balances it’s “wealth” with the rest of EZ then EZ can function again but the flaws will still have to be fixed. The problem with Markel solution at least up until Los Cabos it appears was that she wanted to fix the flaws first. I believe Germany has been told some home truths in the last months by EU leader and others. Merkel wanted austerity and fiscal union etc before balancing the Euro this is a insane dangerous… Read more »
Ireland should have a “Plan B” even if it is only used to wave or hinted to at the Euro Zone but it makes sense to have a Plan B
Which PIGS will beat Germany Portugal, Italy, Grease or Spain?
Wetend End Boys..Dead End Town….Which Do You Choose….Hard or Soft Option :)
Here’s a pic of the Angela Merkal lemon squeezer; ‘out’ some years back, making a good comeback now.
[2nd row down, third in from the left…….]
http://www.google.ie/search?q=angela+merkels+lemon+squeezer&hl=en&prmd=imvns&source=lnms&tbm=isch&sa=X&ei=O__hT-DRKpG6hAe3pZi-Aw&ved=0CEsQ_AUoAQ&biw=1619&bih=798
Excerpts from Tragedy and Hope by Carroll Quigley: Commercial Capitalism The Primary Goal of Capitalism The Operations of Banking Were Concealed So They Appeared Difficult to Master Bankers Obsessed With Maintaining Value of Money Bankers Create Money Out of Nothing The Dynasties of International Bankers Bankers Felt Politicians Could Not Be Trusted With the Monetary System Money Power–Controlled by International Investment Bankers–Dominates Business and Government The Power of Investment Bankers Over Governments … and so on The link below contains 10 pages of excerpts. In the article there is link to more article containing 40 pages of excerpts http://www.wanttoknow.info/articles/tragedy_hope_banking_money_history Thanks… Read more »
Remember Volcker, the Volcker Rule supposed to control banksters? Well here is Volcker’s true face!
Volcker Confesses to $2 Trillion Swindle
LPAC has learned that former Federal Reserve Board Chairman Paul Volcker is conducting a call-up campaign against the reinstatement of Glass Steagall, arguing that the so-called Volcker Rules are sufficient because they do not “punish” bankers by demanding that they take responsibility for the more than $2 trillion in still-outstanding gambling losses.
—-
Imagine that? We must bail out the banks not punish banksters! So Volcker has made a public exhibition!
Can some body out there explain to me about all this talk about taking money out of the pension fund,
What’s the fund for if not to pay for pension and if the money is taken from the fund what happens when the money is needed for pensions and the money is not there.
Just to clear up some loose opinions above : At G-20, the British Empire Agreed with Itself that Germany Must Bail Out the Entire Trans-Atlantic Banking System About the only thing that the participants in the June 18-19 G-20 summit could agree upon, it seems, is the spelling of the names of the next blowout victims: Spain and Italy. Other than that: 1) British media like the {Daily Telegraph} trumpeted “reports” that a bailout package worth 750 billion euros (about a trillion dollars) had been put in place, including funds from the EFSF and the (non existent) ESM, which would… Read more »
Germany : Adenauer Grandsons Denounce Euro Bailouts June 20, 2012 (EIRNS)–Stephan Werhahn (59), grandson of Germany’s postwar Chancellor Konrad Adenauer, denounced the present German Chancellor’s policy, saying that “the founding fathers of Europe like Robert Schuman, Alcide de Gasperi, and Konrad Adenauer wanted to build a strong and independent Europe, but now with the bailout funds and billions in rescues we are demolishing it.” The bailing out of struggling Eurozone states like Greece had “nothing to do with the European vision of the founding fathers,” he said, adding that he has quit his longtime membership in the CDU, the party… Read more »
Will Greece force Germany out of the Euro or will Germany force Greece out of the Euro?
Tomorrows sports headlines – Germany forces the Greeks out of the Euro
[…] […]
[…] full article at source: http://www.davidmcwilliams.ie/2012/06/19/hard-and-soft-options […]
[…] papers. I’ll quote a few of his remarks, but you can read the whole column at this link: http://www.davidmcwilliams.ie/2012/06/19/hard-and-soft-options. It is short but a great […]
[…] papers. I’ll quote a few of his remarks, but you can read the whole column at this link: http://www.davidmcwilliams.ie/2012/06/19/hard-and-soft-options. It is short but a great […]
[…] papers. I’ll quote a few of his remarks, but you can read the whole column at this link: http://www.davidmcwilliams.ie/2012/06/19/hard-and-soft-options. It is short but a great […]
[…] The growing difference between what Angela Merkel says and what she does […]
[…] The growing difference between what Angela Merkel says and what she does — David McWilliams […]
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