Not Just a German Problem: Lessons from the EMU Sovereign Debt Crisis for Global Adjustment

by Matthias Matthijs on January 19, 2011

The German question never dies. Instead, like a flu virus, it mutates. (The Economist, 21 October 2010)

In late September 2010, Brazil’s Finance Minister Guido Mantega commented in Sao Paulo that the world was “in the midst of an international currency war.” His comments effectively ended all the premature praise for the G-20’s efforts at international cooperation with regard to the global financial crisis. In vogue came the assessment of the actual lack of cooperation as evidenced by the growing tensions and fault lines between the new global institution’s main protagonists, China and the United States, who disagree so starkly on the origin of the global macroeconomic imbalances. Those systemic imbalances – a large US current account deficit balanced by large current account surpluses in China, Japan, and Germany – have been identified as one of the main causes of the credit crunch of 2007-8 which led to the Great Recession. The central issue preventing a unified solution to the current crisis is whether the main cause of those imbalances is a global savings glut in Europe and Asia, or deficient savings and too loose monetary policy in the United States. This disagreement has risen to the forefront of the existing crisis debate as evidenced by Mantega’s remarks. No one point of view, or ‘’narrative,’’ so far seems to have won the day and allowed cooperative steps forward.


Recent developments only seem to have made a bad situation worse. The United States claims that China is prolonging and worsening global imbalances by deliberately keeping the Chinese currency, the renminbi, undervalued vis-à-vis the US dollar. China points to the US Federal Reserve’s fresh round of quantitative easing (a policy Wolfgang Schäuble, Germany’s Finance Minster, has called “clueless’‘), which pushes down long term interest rates and fuels speculative capital flows into the emerging markets, forcing many emerging markets to respond with short-term protectionist measures such as capital controls. China argues that the US should take fiscal austerity measures at home, while the US argues that China should develop its internal demand and allow its currency to float according to market principles. With no agreement reached on how to deal with global imbalances during the November 2010 G-20 meeting in Seoul, notwithstanding vague commitments to “mutual assessment processes,’’ the sense of malaise in the global economy due to the lack of a clear policy direction has only been reinforced.

All comparisons are flawed, but without too much of a stretch of the imagination, one can see a smaller version of the global economic debate being played out within the Eurozone today. Strong, “competitive,’’ and export-led Germany is playing the role of China, and the United States is being played by the “spendthrift’’ Mediterranean countries of Greece, Portugal, Spain and Italy, as well as former Celtic “Tiger’’ Ireland (inauspiciously referred to by financial markets analysts as the “PIIGS’’ countries). Of course, the comparison is not entirely apt, since the PIIGS obviously do not (or no longer) enjoy the United States’ “exorbitant privilege’’ of being able to borrow internationally at low rates in their own currency. Furthermore, just like at the global level, the Eurozone is currently in turmoil, facing a “crisis of survival’’ in the words of European Council permanent president Herman Van Rompuy in late October 2010, which has caused many analysts to doubt the future of the European project altogether.

In effect, the global financial crisis – triggered by the fall of Lehman Brothers in September 2008 – and the subsequent European sovereign debt crisis – prompted by Greece’s pending default in February 2010 – saw two dormant economic powers rise to the fore in the battle for economic ideas: China in the G-20, and Germany in the European Union of 27. The rise of Germany and China has been a long time in the making, at least twenty years. What is striking, however, is the similarity between their political-economic positions. China and Germany have always been skeptical of the Anglo-Saxon model of short-term finance capitalism. Their economic models – based on robust export growth and long term investment in the real economy (read, manufacturing) – have weathered the financial storm of the past three years remarkably well. While the real growth data of both economies has been impressive, what matters for the purposes of my analysis is that German and Chinese policy elites fundamentally believe they had it right all along: that their political economic model is superior to that practiced elsewhere, and in particular, to that of the Anglo-Saxon world.

Just as the ideological divide between the United States and China at the global level has significantly widened since the financial crisis began, so has the divide between Germany and the PIIGS in the Eurozone, particularly in recent months. Germany has taken on a more and more strident and uncompromising tone while driving its own political-economic ideology in the face of competing crisis narratives.

The role of Germany in exacerbating the EMU sovereign debt crisis has been particularly controversial. First, let me put Germany’s role in context. As Carmen Reinhart and Kenneth Rogoff remind us in their recent book This Time Is Different, financial crises often lead to fiscal and sovereign debt crises. Eurozone governments, after having bailed out their financial sectors with an unprecedented infusion of public money, found themselves with all the bad debt they had taken on from those private sectors on their own balance sheets. As the initial focus of the financial markets shifted from private debt in 2008-2009 to sovereign debt in 2010, concerns about the long-term fiscal solvency of Europe’s periphery led to the collapse of confidence in PIIGS bonds and subsequent capital flight to safety. Bond traders sold risky Mediterranean sovereign debt and purchased perceived risk-free assets such as German Bunds and US Treasuries. This led to a highly fluctuating euro-dollar exchange rate and widening sovereign yields within the European Economic and Monetary Union. Now, it is the rescuers that are in need of rescuing.

As Peter Spiegel and Gerrit Wiesmann reported in the Financial Times in mid-November 2010, the drive by Angela Merkel, Germany’s chancellor, to amend the Lisbon Treaty to set up a new bail-out system where private investors bear more of the cost of future Greek-style rescues, was very much resented by other EU leaders when she appeared to steamroll it through a Brussels summit in late October 2010. This resentment has only grown since bond markets plummeted in reaction to Merkel’s proposals in the weeks since, and as the Irish crisis resulted in yet another messy European bailout, the bond markets shifted their focus to Portugal and Spain, and the crisis refuses to go away. Since Europe finds itself now in a moment of unusual uncertainty, any solution to the crisis will depend on the competing explanations, or crisis “narratives,” that are lying around. I can identify at least five competing – but not mutually exclusive – crisis narratives that are currently out there.

The first explanation of the EMU sovereign debt crisis is summed up by Martin Feldstein’s view that this is a crisis of institutional design. The EMU never was and never will be an optimum currency area, so they “had it coming all along.” The Commission’s theory of “endogeneity” was always flawed, if not dangerous, according to this view, since it confused European federalist dreams with economic and political realities. Introducing a single currency was not going to speed up the process of integration, but would create a whole new host of economic problems. The current crisis seems to vindicate this view, even though there is little evidence for it.

The second explanation, partly associated with the German policy elite view, is that this is a budgetary or fiscal crisis. The Stability and Growth Pact (SGP) was far from “stupid” – as Romano Prodi once called it – but a rather good idea, and ignoring the SGP and its “excess deficit procedure” in 2003 as the Council of Ministers did in the case of France and Germany itself set a dangerous precedent for smaller, peripheral countries that their fiscal profligacy would go unpunished. This was in many ways the German nightmare scenario of the early 1990s: other EU members would free ride on German credibility and be able to borrow cheaply, eventually undermining the credibility of the whole Eurozone.

The third explanation – the other half of the German policy elite view – is that this is a crisis of competitiveness in Southern Europe. North-South divisions grew after the euro launch in 1999, with labor costs widening and total factor productivity divergences pricing Mediterranean goods and services out of the European market. In this view, Germany is more competitive than the rest of Europe because of the painful reforms enacted under the Schröder governments during the early 2000s (Hartz IV, etc.), serious wage restraint and high productivity. The introduction of the euro in 1999 took away all incentive in Southern Europe to continue the “necessary” structural reforms, hence leading them to continue along their old bad ways.

The fourth explanation – the Martin Wolf view – is that this is a crisis of intra-European macroeconomic imbalances. Initial bond spreads in the 1990s allowed financial market participants to buy higher yield Mediterranean bonds and sell their lower yield Northern European bonds. This flooded Southern European countries with capital, fueling a cycle of housing booms and consumer spending, causing their current accounts (and goods markets) to adjust. Since EMU members indirectly share liability for private sector debt, the SGP would have to be complemented with an ESP (“External Stability Pact”).

The fifth explanation, often ignored, is that this was a crisis of “efficient” financial markets. Interest rate convergence took place while financial markets were asleep: the EMU crisis would have never happened if financial markets had “correctly” priced the sovereign debt holdings of different European countries. As Jacob Kirkegaard from the Peterson Institute for International Economics has argued, the current high yields for certain countries mean a return back to “normal” as deficient policies are now met with instant default premiums. If one takes the fifth explanation seriously, governments should think twice before they try to please the markets: austerity as a response to spiraling debt is likely to make matters worse in the short run. This explanation asks the rhetorical question: if it is true that financial markets tend to under price risk during economic booms and over price it during recessions, why should we trust them next time? They never make the same mistake twice?

All five explanations for the 2010 EMU crisis are plausible to some extent and should probably all be addressed if the Eurozone wants to emerge stronger out of its current shambles and prevent a similar future crisis. However, some explanations are more plausible than others. There is no doubt that Greece and Portugal suffered from more chronically weak public finances, while Spain and Ireland had very healthy fiscal positions for the past ten years, but saw their booms being financed with large inflows of private capital. The competitiveness argument applies to the whole Mediterranean, but not to Ireland. Given the environment of high uncertainty, the crisis narrative is just as important as the objective facts themselves, and to understand the solution to the crisis, we need to look at how the European Union has responded, which economic ideas have informed those decisions, and why.

In many ways, it is remarkable how the two main “German” explanations of the crisis – fiscal profligacy combined with a lack of competitiveness in the South – have informed European decision making thus far. This has led many analysts to conclude that Germany is “powering” its way through European Council meetings and using its influential position of economic strength to bully its European partners. From that point of view, the “German problem” – dormant for some sixty years – is back with a vengeance, and a new generation of German leaders, with no sense of historic guilt for World War II, sees Germany as a ‘normal’ country with legitimate domestic and national interests. German solidarity with the European Union has reached its limits and the current crisis is nothing more than the country finally flexing its economic muscle.

Now, as tempting as this explanation may be, the reality is much more complicated than that. Germany does not “run Europe” or impose its will on its fellow Eurozone members – like some kind of Diktat from Berlin. Rather, it uses its powerful position as Europe’s “indispensable economy” to persuade their European partners during the decision-making process of puzzling a solution together that their ideas are ultimately the right ones. The fact that their economy has seen the fastest quarter-on-quarter economic growth in 2010 since reunification and that business confidence in the country is at record highs obviously only strengthens the German view that their anti-Keynesian austerity approach to their domestic economy has been right along.

As both the Wall Street Journal and the Financial Times reported this year, the initial European crisis solution was puzzled together in a series of messy, panicky and often rather embarrassing meetings at the level of the Eurozone’s finance ministers in Washington and Brussels during the spring of 2010. Those accounts would seem to suggest that the final outcome to the Greek crisis in May 2010 was a compromise between the major players with help from the IMF and the Americans. It also shows that the EU bureaucracy works quite well, given their lack of experience in dealing with “real time” financial crises. However, Germany still seems to be the linchpin, without which any solution would have been elusive.

I would argue that Germany had the most convincing crisis narrative, in the sense that it is considered the most appropriate by Eurozone leaders. Of course, the Germans are all too aware that their own well-being is bound up with the fate of the euro. But, even more so, the Eurozone’s fate is bound up with Germany. And given German banks’ heavy exposure to Greek, Irish, Portuguese and Spanish bonds – and the calamity those countries’ default would mean for the German economy – Germany saved Greece and Ireland partly to save itself, just as it is likely to save other EMU members in 2011. In the case of Greece, Germany did so against huge popular discontent at home, where the voters were all too aware who was footing the bill for the Mediterranean party. So, naturally, without strict conditions on profligate states and the imposition of losses on risk-happy creditors, all would be taking free rides on Germany. Even though critics rightly pointed out that a formal debt restructuring mechanism would raise the cost of borrowing in the PIIGS countries and frighten already skittish markets, once Angela Merkel convinced Nicolas Sarkozy that it had a case, the others could not do anything else but grudgingly agree.

However, just because Germany seems to have won the narrative debate for now does not mean that the German position is inherently sustainable. The point remains that the current EU proposals for a formal debt restructuring mechanism might go a long way to calm the markets in the short term (even though that is questionable, given recent events in the Eurozone), but they do not solve many of the crisis’ underlying problems. In the case of Ireland, it is hard to understand why a fiscally sound country which has slashed public spending and public sector wages over the past two years in response to the 2008 financial crisis could solve a banking crisis with even more austerity measures. Yet, that is what they are doing. And it is even harder to believe that the Irish population will support these policies for the next ten years just to remain in the Eurozone, when its main trading partners are the US and the UK.

It is simply impossible for the rest of Europe to become more like Germany if the whole point is that Germany could only be Germany because the others were not. German growth was fueled by buoyant demand in Southern Europe made possible by excess German savings. Any current account surplus means that another country has a current account deficit. By the iron logic of the balance of payments, that also means that one country’s capital inflows are another’s capital outflows.

If Germany wants the Eurozone as a whole to become more like Germany, this would only exacerbate the existing global macroeconomic imbalances, with the next financial crisis just around the corner, putting into doubt the fragile “green shoots’’ of recovery most heads of state keep pointing towards in order to reassure their grumbling electorates that the worst is over.

So, the German lesson for the world economy is clear. China has been growing at record levels partially thanks to a surge in net exports, not solely because the Chinese are inherently more competitive (even though there is probably something to that point), but because someone else wants to buy their goods. If the world wants to avoid another 2008-style credit crash, something will need to give.

If all that happens is that the US does its share towards global re-balancing by slashing its own budget deficit, we risk deflating our way to another Great Depression. China, just like Germany in Europe, will need to respond to fiscal austerity abroad with an accommodating demand stimulus at home, and allow other countries to rebalance their economies, especially their trade balances. The current state of the global economy is a “catastrophic equilibrium” at best.

{ 41 comments }

1

Steve LaBonne 01.19.11 at 4:19 pm

The current crisis seems to vindicate this view, even though there is little evidence for it.

Many economists, including rather distinguished ones like Krugman, would beg to differ with you about that. Something like the scenario now unfolding was foreseen by them right from the inception of the Euro. If Germany’s EU trading partenrs had been able to devalue when necessary, Germany would have been much less able to emulate China in exporting its way to full employment at others’ expense.

2

chris 01.19.11 at 5:48 pm

ISTM that the German/Chinese stance is fundamentally predatory; it strengthens *those* nations at the expense of impoverishing and destabilizing their counterparties. (It takes a lot of impoverishing to bring down an economy as strong as the US’s was thirty years ago, but it’s looking more and more like a banana republic these days.) This is why everyone else is so pissed off at them right now, but from their own internal perspective, those policies are working fine to promote the national interest, so why not continue them?

For example:

the voters were all too aware who was footing the bill for the Mediterranean party

That would be the Greek people in the future. Nobody gave money to the Greek government to repair its fisc; they *loaned* it money at interest (premium interest, even). The end result (barring default) will be that the Greek people will end up having to pay *more* than the cost of the entire fiscal mess while the Germans make a tidy profit off the crisis (that’s what loaning at interest is all about). Unless the debt burden is lightened by inflation — something the Germans are trying strenuously to prevent.

I have nothing against the Germans as a people (or the Chinese for that matter) but they really are beggaring their neighbours and at some point it has to stop. Or be stopped.

3

christian_h 01.19.11 at 6:37 pm

I have nothing against the Germans as a people (or the Chinese for that matter) but they really are beggaring their neighbours and at some point it has to stop. Or be stopped.

Yeah, let’s have a war… oh wait. Not a great idea. I would advise to stop talking about what “the Germans” or “the Greeks” or “the Chinese” are doing, or suffering, right now. Because German workers will not agree that they profited from German capitalism’s successful drive to depress wages and undermine job protections. And Irish capitalists made out pretty well during the boom.

What “Germany” is doing has not in fact “worked” for the vast majority of German workers. Millions of them may be technically employed but make so little money that the welfare system has to top up their wages just to reach the so-called existential minimum (which is not what most people would call a living wage). Even those that still have good industrial jobs have seen their real wages shrink for two decades now.

I would hope that people who think of themselves as at least vaguely left wherever they are will not allow themselves to be fooled and played off against each other once again.

4

Henry 01.19.11 at 6:50 pm

bq. What “Germany” is doing has not in fact “worked” for the vast majority of German workers. Millions of them may be technically employed but make so little money that the welfare system has to top up their wages just to reach the so-called existential minimum (which is not what most people would call a living wage). Even those that still have good industrial jobs have seen their real wages shrink for two decades now.

Sheri Berman discusses this in a contribution to be posted tomorrow.

5

chris 01.19.11 at 7:36 pm

Because German workers will not agree that they profited from German capitalism’s successful drive to depress wages and undermine job protections.

Greek workers didn’t benefit from being ruled by kleptocrats, either, but they’re now expected to pay the bill nonetheless. I think the theory is something along the lines that if they didn’t want the policies their government implemented, they should have voted in a different government; a principle that, if it applies at all, applies equally to German voters. If they really do disagree with the wisdom of their country’s policy, then they can change it without needing international conflict (and I agree that that outcome would certainly be preferable).

On the other hand, if they can’t be bothered to change governments when they have the power to do so, then I don’t see what’s so wrong with assigning them responsibility for the consequences of the one they’ve got. (China is a more difficult problem, though, since it isn’t a democracy. The Chinese people arguably couldn’t really install a different government if they don’t like the one they’ve got, or at least not without a civil war.)

6

Steve LaBonne 01.19.11 at 7:38 pm

On the other hand, if they can’t be bothered to change governments when they have the power to do so, then I don’t see what’s so wrong with assigning them responsibility for the consequences of the one they’ve got.

What if they get much the same crap from both major parties? A feeling very familiar to those of us in the US…

7

chris 01.19.11 at 9:12 pm

First of all, unlike the US, Germany has more than two parties; which ones are “major” is determined by their level of support from the electorate. If the Germans really wanted a Green government, they could vote in a Green plurality (or even majority) and the Greens would ipso facto become a major party, and the same goes for any of their minor parties.

Second, the parties occupy the political positions they do in order to appeal to voters, and become minor or irrelevant if they fail to do so; which means ultimately they can only wag the dog for as long as the dog (electorate) puts up with it. The US’s major parties have stayed major for so long because they’ve been good at giving the electorate what the *majority* of the electorate wants. (And if the majority isn’t too bright, well, welcome to the worst form of government except for all the others.)

8

Steve LaBonne 01.19.11 at 9:15 pm

If the Germans really wanted a Green government, they could vote in a Green plurality (or even majority) and the Greens would ipso facto become a major party, and the same goes for any of their minor parties.

I really think this underestimates the barriers to such a government in the German situation, even though they clearly are lower than in the US. For example, the voters are bombarded with an endless stream of “serious” pro-financier propaganda from the corporate media, just as in the US. Let’s be cautious about blaming the victim.

9

Omega Centauri 01.19.11 at 10:12 pm

Let’s be cautious about blaming the victim.

Its partly the victims fault for being an easy mark. But, we have to recognize that those with the media exposure to form public opinion, have benefit of increasingly effective research in emotional marketing and propaganda, that wasn’t available just a few decades ago. The balance of power in terms of who gets to propagate their agenda has changed very significantly.

10

chris 01.19.11 at 10:24 pm

Let’s be cautious about blaming the victim.

…Unless he’s the Greek or Irish taxpayer. Those guys totally deserve higher taxes and dramatic cuts in public services so that the holders of their governments’ debt won’t have to take a haircut.

The question of the people’s moral responsibility for the actions of a democratic government is perhaps a tricky one, but it seems to me to apply at least as strongly to Germany as it does to the debtor states. Yet the populaces of the latter aren’t going to be allowed to declare collective bankruptcy or repudiate the debts run up (or foolishly/corruptly and gratuitously guaranteed) by the prior regimes. So why let only the Germans off the hook for their recent governments’ actions?

11

DFC 01.19.11 at 10:47 pm

I do not consider the germans wages “depressed” compare to others countries (for example US), taking account the healtcare and education system for example, or their safety nets. Even in absolute terms the average salary in Germany is quite good (in 2008: 41,000 Eur/y aprox 55,350 $/y, and now a bit higher tha that)

Germany is in an exceptional position as “the” global expensive luxury goods supplier. In the kind of society we are (in US or China or Athens) to be a “winner” requieres to drive a big and expensive german car, and they do not suffer a price competition to sustain the market share, may be the opposite…

Germany sells “made in Germany” from the end of XIX century, and then they can pay higher wages for that, and also the production they sell is more difficult to be outsourced (certainly a Porsche made un China will lost most of its glamor)

I do not agree with the idea that the depression in the South of Europe will damage a lot of the German trade, now, in fact the East Asia demand of german goods is skyrocketing, due to the demand of the rising new middle class in those countries, and largely compensate the lost of demand from the PIIGS

The real fact is that Germany, even unwittingly, is becoming more and more as the hegemonic power of Europe, based on the weight of his economy. It is again the old “drang nach osten” reloaded

12

tsts 01.19.11 at 11:31 pm

Reading the comments, I get the feeling that many of the disagreements are there because the whole crisis really has three layers to it that need to be separated somewhat:
(1) the initial real estate/credit-rating/CDS issue,
(2) the currency/trade-imbalance issues, and
(3) the various national failings and vices that are specific to each country.
One can discuss which layer is more important, but it seems to me that the first layer, on which the US looks bad as they basically allowed bankers to rip off everybody, was the trigger. This exposed the second issue, the trade balance and currency exchange issue in Europe — but I guess eventually that would have surfaced anyway at some point fairly soon. On this second layer, Germany does not look good, but neither do the others. (The argument that you need two parties to an imbalance cuts both ways — you can use it to argue Germany is not innocent, but by the same logic neither are the other parties.) And the third layer then hugely complicates things politically, as it makes it easy to attack other countries’ failures based on stereotypes. We have the tax evasion in Greece, the attempt to build an economy on banking and enabling tax evasion in Ireland, and I guess the extreme aversion to even moderate inflation (and need to be always right) in Germany, and this riles everyone up and blocks solutions. I don’t have one, either, but sure looks like a mess.

13

IM 01.19.11 at 11:50 pm

German growth was fueled by buoyant demand in Southern Europe made possible by excess German savings.

Hold on! That is very popular explanation, but is actually true? I looked up the numbers from 2009: Total export of goods 803 Billion Euro.
Exports to PIG: Greece 6.7, Ireland 3.7., Portugal 6.2 Billion €,sum 16.6 Billion €
Exports to Spain: 31.3 Billion, sum PIGS 47.9 Billion €
Exports to Italy: 50.7 Billion, sum PIIGS 98.6 Billion €

So PIG is 2.1%, PIGS 6.0% and PIGS 12.3% of all german exports.

Now you can say 2009 is the wrong year, but I don’ think the picture changes much

So I don’t think German growth is dependent or did depend on exports to southern Europe. Now if you add Austria and Switzerland, but that would stretch southern Europe too much.

14

David 01.20.11 at 1:57 am

It was fueled by demand from the other EU countries.

15

christian_h 01.20.11 at 5:49 am

Chris, you’re completely missing the point I was making. I am certainly not “blaming” Irish or Greek workers any more than I am “blaming” German workers. I am blaming German, Irish, Greek etc. capitalists. I am blaming the bankers who bet on a boom fuelled by credit and now demand through their pet politicians to be bailed out. I do however refuse to fall for nationalist rhetoric employed by the ruling classes in the various countries involved in a transparent attempt to obscure their own responsibility.

As for your rather amusingly dumb ruminations about German politics, or the politics of liberal “democracies” more generally – you’re either incredibly naive or you are being dishonest and just pretending to actually believe this nonsense. (Just as one example you actually suggest that the German green party is in any way left or differs in its views on political economy from the other neoliberal parties – this only proves you have absolutely no idea what you are talking about.)

16

christian_h 01.20.11 at 6:04 am

DFC: the argument that “German wages are not depressed relative to other countries” is both false in the generality you are presenting it, and irrelevant. The plain and undeniable fact is that German wages have been depressed in real terms for a long time; and that there is now a large number of workers who do not make a wage they can live on. It is likely true that wages of workers in other countries – the US for example – have fared even worse. But this is a result of the relative power of labour vs. capital in those countries, not of some witting or unwitting machinations caused by some inherently German trait (“Drang nach Osten” – seriously? Lighten up.)

Similarly of course it is not a feature of Irishness that US, German and other European capitalists saw profitable opportunities for investments of surplus profits in Ireland during the boom. It is a feature of capitalism. I can seriously not believe how quickly nationalist prejudice comes to the fore even in supposedly educated left-ish people. Depressing.

17

The Creator 01.20.11 at 8:12 am

It would appear that, however much the German capitalists may have screwed their workers (and christianh is no doubt very well-informed), they have not done so as viciously as some other European states have done, and in a broader sense Germany is now in a somewhat better as well as more sustainable economic situation than other European states. One doesn’t have to be a cheerleader for corporate capitalism to believe that.

A great deal of the debate around the German/Chinese failure to suffer socio-economic immiseration, it seems to me, stems from nationalist resentment in the Anglo-Saxon-oriented world. That is, countries like the United States and Britain, and some other European states to a lesser degree, appear to have adopted policies which could not be sustained, in order, when the policies provoked calamitous consequences, to use the consequences to impose still more draconian policies. The problem being that those consequences and those policies are harming the international standing, authority and economic power of those states. In other words, many of the debaters are saying “How dare you stand tall just because you haven’t cut your feet off as we did!”

Lastly, it does seem to me that what is happening in Europe is a little like what the wealthy nations did to Latin America and Africa in the 1980s. If my suspicions are correct, neocolonialism is simply coming home to the continents which created it.

18

salvo 01.20.11 at 8:14 am

christian_h

I’m living in Germany myself and I totally agree with you. The problem is really that the average worker in Germany is absolutely taken hostage by the German economic model too, which tends effectively to force them to deteriorate their own conditions to remain ‘competitive’, effectively a permanent race to the bottom. You are absolutely rigth to point out that the main profiteers from this model are the ‘capitalists’. Unfortunately, as in the other parts of the western world, those who control the mass media are able to obfuscate this evidence and infuse the public with their ideology and to promote the idea the conflict evolves along national borders though in reality it’s only the old conflict between ‘oben und unten’.

19

dsquared 01.20.11 at 8:17 am

Greek workers didn’t benefit from being ruled by kleptocrats, either

They did mate, they did. The Greek governments that ran up the debt weren’t for the most part kleptocrats. The money wasn’t spent on international bankers or property development or whatever. It was spent on buying political stability in a basically very unstable polity by providing social benefits, pensions and good public-sector jobs at a level much higher than Greece could actually afford. This isn’t about assigning blame – as an economist I’m very reluctant to treat macroeconomics as a morality play – but the average Greek worker absolutely *did* see the benefits of the debts that were run up. It’s really very unlike the USA or UK in that regard.

20

IM 01.20.11 at 12:06 pm

I am still of the opinion that Greece could afford a welfare state on the level they have, but that they were not willing to pay the taxes needed for that. Without a considerable pro tax mentality you can’t have a welfare state.

And they did spend to much on defense.

21

Dennis 01.20.11 at 12:59 pm

Hi All, I would just like to pipe in here re: China. I feel that the comments re: China’s model = German model > Anglo-Saxon model are not quite accurate.

1) The Chinese economy is highly unstable, and requires a tremendous expenditure of capital to maintain its razor thin margins. Unlike the BMW or Siemmans or the host of all those SME German companies that are really really good at making whatever it is they specialize in [or so the Economist led me to believe in this article: http://www.economist.com/node/17572160%5D the Chinese do not posses world beating companies. Obviously there are lots of big companies but none of them have a product that I would buy because its theirs. Therefore, as the Chinese inflation continues to leap upwards thanks to QE2 it is just as likely that the Chinese manufacturing base will decline and move back to Mexico or other developing countries.

And as a subset of this, a tremendous amount of Chinese economic growth is underwritten by easy capital. One of main reasons for the continued decline of Chinese consumption as a % of their GDP is not cultural but rather practical — the Chinese government is engaged in a policy of financial repression that transfers the savings of the Chinese people to the Chinese banking system. Since the mid 90s, when Premier Zhu Rongji ‘resolved’ the budget crisis of the Chinese bankrupt SOE sector by off loading it onto the balance sheets of the Chinese banking system, the Chinese model required increased, and loose, financing from Chinese banks. This continued subsidization of a large part of the Chinese SOE by the banking system, which in turn is forcefully subsidized by the Chinese people is heavy incredibly detrimental effects in all kinds of strange ways, including the acceleration of the Chinese property bubble: http://chovanec.wordpress.com/2010/07/23/more-data-points-on-china-real-estate/

2) The Chinese need to manipulate the dollar requires a vast consumption of US treasuries, which is one of the main reasons for the historically low interest rates in the United States. These unreasonable low interest rates created two problems (a) they directly encouraged more leverage in the United States and (b) they increased demand for high returns on AAA securities, which of course is one of the reasons that spawned the whole structured finance disaster.

3) China already suffered a major economic crisis in the early 1990s when, in response to the surging inflation of the late 1980s severe economic breaks were applied. In the mid 90s the Chinese economy may have contracted by 50%. And to assume that their economy isnt going to suffer another crisis just yet is also naive. Its akin to gloating in 1988 that the Japanese model is superior to the Anglo-Saxon one.

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Doug T 01.20.11 at 1:11 pm

I’m no economist, but aren’t your explanations 1 and 3 saying more or less the same thing, with 3 just being the concrete example of the general point argued in 1?

#1 says the economies of Europe aren’t integrated enough to have a single curency–that you really would want to allow different nations to float independantly, because they’ll have different specific local macroeconomic conditions and needs.

#3 is then the specific example of thos different macroeconomic conditions–Germany is more productive and so is able to capture export market share by producing more or better goods at the same price as Southern European countries. But the solution for the Southern European countries in such a case ought to be to inflqte/devalue their currency relative to the Deutschmark to rebalance competitiveness. But because of the monetary union, they can’t do it.

So #1 is the general diagnosis, and #3 is the specific way in which the underlying condition of #1 has manifested itself.

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chris 01.20.11 at 2:33 pm

Well, I certainly don’t know much about the detailed political positions of German political parties. But I have little patience with “The People really want X, but all the political parties have banded together to refuse to give it to them!” line of conspiracy theories. It’s hard enough to swallow that crap in a two-party state, let alone a multi-party one. The rewards of breaking ranks would just be too great if the people really *did* want X, and once one politician or party succeeds, others will follow.

Usually, it’s fairly transparent that that theory is being advanced by someone who *personally* does want X, but too few of their countrymen agree with them (or care as much about the issue as they do) to actually move the parties in that direction and they don’t realize it. (Using your social circle as a mental proxy for the electorate is one common cause of this problem. Highly nonrepresentative sample.)

Ultimately your comment comes quite close to declaring all Western democracies frauds that are not actually ruled by the people thereof, which is a little too radical for me to take seriously without a good deal stronger evidence than you have so far provided.

Similarly of course it is not a feature of Irishness that US, German and other European capitalists saw profitable opportunities for investments of surplus profits in Ireland during the boom. It is a feature of capitalism.

Of course it’s not a feature of “Irishness” — what does that even mean? It’s a feature of the laws and policies of the Irish government at the time (and of the governments of the creditor nations). Either the Irish people control their government or they don’t, so unless you’re going to seriously defend the theory that Ireland is a secret dictatorship, with great power comes great responsibility and the Irish are just as responsible for their government’s actions as the Americans, Germans or anyone else not ruled by an actual dictatorship.

Perhaps you didn’t pick up that I was being sarcastic in the first paragraph of my comment 10. I don’t think the Irish or Greek taxpayer is really “totally” to blame, but they are to blame to the same extent any electorate is responsible for the government they elect, which is the same extent the German electorate is responsible for beggaring their neighbors.

I can seriously not believe how quickly nationalist prejudice comes to the fore even in supposedly educated left-ish people. Depressing.

It’s not prejudice to evaluate the consequences of actions that have already happened. I’m not going to go around kicking every German I meet because I disagree with the policies of the German government, but institutions do matter and the Germans, just as much as Americans or Greeks, need to rein in their institutions and shape them up (if for slightly different reasons and in slightly different ways).

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Oliver 01.20.11 at 2:34 pm

Actually, #3 and #4 are aubpoints of #1

Number #5, even if true, is useless, as the damage has been done.

Number #2 also boils down to #1, unless you are saying that southern politicians would have had to impose German wage developments on their countries.

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christian_h 01.20.11 at 3:14 pm

Ultimately your comment comes quite close to declaring all Western democracies frauds that are not actually ruled by the people thereof,

Yes that just happens to be true. The “people” do of course make choices within tightly structured bounds, but ultimately it’s a question of real power. Of course the people need to “rein in their institutions” but to believe they can do this by voting once every four years is beyond naive.

It would appear that, however much the German capitalists may have screwed their workers, they have not done so as viciously as some other European states have done

This is true, and is probably a consequence of a mix of issues, most importantly stronger union organisation but likely also of the way small highly specialised industry that is hard to relocate dominates in parts of Germany.

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chris 01.20.11 at 4:04 pm

naive

The next-to-last resort of the conspiracy theorist: accuse anyone who doesn’t believe you of naivete. (If that doesn’t work, fall back to the last resort: they must be another part of the conspiracy!)

Show me the evidence. If you don’t have any evidence but are totally convinced anyway, I’m just going to conclude that you are a nut.

ultimately it’s a question of real power

People who are being lied to have the real power to reject the lie (especially when the truth is available on another channel). They’re just not always bright enough to exercise it. Deception is the resort of someone who *doesn’t* have real power and needs access to the power actually held by someone else.

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Steve LaBonne 01.20.11 at 4:15 pm

Deception is the resort of someone who doesn’t have real power and needs access to the power actually held by someone else.

There are about a million historical examples of why this is complete bullshit. On your account, rulers with actual power would never need to use deceptive propaganda. Yeah, right. By the time you resort to this kind of “argument” you’re no longer even trying.

Even the best democracies are highly imperfect, and sham democracies are a dime a dozen. Sorry your worldview is unable to encompass, you know, the world.

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someguy 01.20.11 at 4:28 pm

“If all that happens is that the US does its share towards global re-balancing by slashing its own budget deficit, we risk deflating our way to another Great Depression. China, just like Germany in Europe, will need to respond to fiscal austerity abroad with an accommodating demand stimulus at home, and allow other countries to rebalance their economies, especially their trade balances. The current state of the global economy is a “catastrophic equilibrium” at best.”

Why? Did China and the world suffer a catastrophic meltdown in the 90s? I don’t think that is a compelling narrative.

I think the real risk would be yet another private asset bubble. Japanese real estate boom. But would that happen in the US or elsewhere?

I am guessing if you swapped the deficit for full employment there would still be plenty of demand for Chinese goods and we currently probably don’t have an asset bubble. Demand for Chinese goods remains high with no asset bubble. I don’t think demand for Chinese goods was mostly fueled by the 90s asset bubble.

I think the US can and should take care of it’s own business properly without worrying that it will cause a catastrophic drop in demand for Chinese goods.

No need for coordination and no need to match narratives. My main worry would be another asset bubble.

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chris 01.20.11 at 6:23 pm

On your account, rulers with actual power would never need to use deceptive propaganda. Yeah, right.

Rulers with actual absolute power wouldn’t, if they existed. But no human being has absolute power; they have to exercise power through underlings who have the free will to refuse or plot against them. Usually someone has the actual power to depose the ruler (the praetorian guard, for example) and has to be convinced not to exercise it. (Although, in general, it’s not necessary to deceive them to do so; “honest” bribes often suffice.)

Assuming that there can be only one party with (or in) power in a given situation is a dangerous oversimplification. It’s precisely because rulers aren’t the only ones with power that they have to try to influence what other people in society are doing, or get deposed.

(Although it’s true I expressed my point poorly by saying that people who use deception “don’t have real power”; they may very well have some, but are trying to access someone else’s power through deception to augment what they could do on their own.)

Anyway, it’s one thing to say that sham democracies exist, and quite another to say that *all* democracies are shams secretly controlled by the Powers Behind The Scenes. There really is a difference between a republic and a banana republic.

If either you or christian wants to argue that the US, or Ireland, or Germany, actually are sham democracies, right now, you’re welcome to put up some evidence any day now. This thread is getting somewhat tedious without it. Until then, I’m going to go on believing that views that are politically marginal in a democracy are marginal because not that many of the electorate subscribe to them, and the first step in de-marginalizing them has to be convincing the people of those nations to support them.

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Steve LaBonne 01.20.11 at 6:36 pm

Anyway, it’s one thing to say that sham democracies exist, and quite another to say that all democracies are shams secretly controlled by the Powers Behind The Scenes.

It’s also one thing to make an argument, and another to erect straw men. As I said, ALL democracies reflect the will of the electorate only imperfectly. In the US at the moment, there is a very large discrepancy between quite a few policies majorities consistently say they want, and the policies (well to the right of those the voters want) actually offered by EITHER party, and I call that a very significant degree of imperfection. In Germany, as I have mentioned before, the voters didn’t want the Euro in the first place but they weren’t allowed to have a say.

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DFC 01.20.11 at 6:54 pm

christian_h: the average real wages are much more depressed in countries like Spain, or even in US with the economy growing than in Germany. If you compare the use of food stamps, the mortality and morbility, the millions of people in the level of poverty, the long term unemployment, etc… in US, and you compare them with Germany, you will see a big difference between the two models. Which do you prefer?

The economy in Germany has been stagnant and the real wage growth was much more difficult in the last decade, but at least the unemployment and the social network was not serious affected in the “sick man of Europe” in those days, and even during the worst part of the existing crisis also not

IMO the scientific and technical revolution in the last part of XIX century was leaded by Germany, and the driving forces below this huge increase in productivity and efficiency in the industry was due the relevant force of the labor movement and the “Bismarckians” welfare state rules, for the first time in history
Before, when the existing situation was the child work, no health insurence, no working hours regulation, no job safety regulations, no unemployement subsides, etc…the labor costs were so small and elastic that it was not necessary to increase dramatically the productivity, there were not any incentives for that

I think that has not changed too much at least in Germany

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chris 01.20.11 at 7:43 pm

It’s also one thing to make an argument, and another to erect straw men.

When you’re arguing with two people some specific sentences may not apply to both. In particular, christian said at comment 25 that “that [all Western democracies are frauds] just happens to be true.” I think it doesn’t happen to be true, and the degree of imperfection of modern Western democracies is not that high and nowhere near high enough to justify a statement that the people of the US, or Ireland, or Germany aren’t in charge of it (however true that may be in some other nations that purport to hold elections).

The sidetracking about what is and isn’t “real” power and who uses deception when are just distractions from that.

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Steve LaBonne 01.20.11 at 7:46 pm

The sidetracking about what is and isn’t “real” power and who uses deception when are just distractions from that.

Then stop doing that! I gave a very specific example, that German voters can’t be held responsible for the effects of a common currency that they didn’t want but had no way to stop.

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chris 01.20.11 at 8:56 pm

@33: But the commonness of the currency is only part of the problem; monomaniacal insistence on combating inflation regardless of the effects on countries overburdened with debt is a larger part. (Do you really think it’s inaccurate to say that is in substantial part German-driven?)

Actually, probably the largest part is the absence of fiscal unity; within most modern countries, the richer parts of the country would be paying taxes that, on net, supported the poorer parts and tried to lift them out of poverty, but Europe does not (or not to any significant extent), which is why Germans enjoy a comfortable welfare state while the Greeks can’t afford the same without large deficits (and therefore, in the estimation of some, don’t deserve it).

And to the extent that Germany has made any attempt to lift poorer (including former-Warsaw-Pact) countries out of poverty, it’s been by *loaning* them money, at profitable interest — not exactly a charitable contribution. In fact, the comfortableness of the German welfare state probably partly rests on their interest income from the rest of the continent (and world).

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IM 01.20.11 at 9:19 pm

>In fact, the comfortableness of the German welfare state probably partly rests on their interest income from the rest of the continent (and world).<

Not really if you look at the numbers.

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Steve LaBonne 01.20.11 at 9:19 pm

The inflation-aversion is not maintained without heavy doses of propaganda. And you don’t need “Weimar” to explain it, plenty of Americans who should know better have also fallen for this. Inflation obsession serves the interests of bankers, in every country. And they spend a lot of money and effort lobbying and propagandizing for their interests.

The fact remains that the Euro is a key and nearly indispensable part of the mechanism by which Germany has exported contraction and unemployment. And to repeat, even though this may actually have been in their selfish interest, German voters nevertheless never wanted the Euro and don’t want it now. It’s an elite project. Most of the blame should be apportioned to the elites who have benefited by far the most.

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christian_h 01.20.11 at 10:52 pm

Just to be clear: arguing with someone who thinks that not naively believing in “democracy” is a “conspiracy theory” is somewhat pointless. The understanding of society as one structured by class (and race and gender etc.) is not a conspiracy theory. The ruling class is not some cabal of people sitting in a back room and determining the fate of nations over a bottle of expensive liquor and cigars. Things are a bit more complicated than that.

In a capitalist democracy like Germany, people have choices. They can choose to vote – every some years – for a party whose program appeals most to them. For example, they could choose to vote for the Green party in the 80ies because they agreed with the party’s decidedly left-wing programmatic stances.

Once a government is thus selected, it magically turns out, however, that much of their program will not be implemented. The usual excuse being that it cannot be – that “there is no alternative”, that we have to be “realistic”. And to some degree, those excuses are valid. Not of course because the right-wing policies invariably adopted are the consequence of the laws of nature, but because socio-economic structures of society, and in particular the balance of forces between various groups in society, constrains what politicians, once in power, can do.

On top of this there is of course the effect of the social circle politicians, especially the leading ones with ministerial positions and such, converse in, and the effect money has on access and hence on who they listen to.

Examples of the consequences of this abound: the Greens turning neo-liberal once in power, Labour and social democratic parties turn towards neo-liberalism with a third way fudge, and even strongly left-wing parties like the Linke in Germany seeing itself forced to vote through one attack on the working class after the next where in power (Berlin – the city/Land is a particularly egregious example of this).

This does not mean voting makes no difference whatsoever; but that it is at most a secondary area of the power struggle constantly waged in capitalist society, and an act that can effect change only within certain very limited parameters. To step outside these parameters, or to gain advances for the oppressed and exploited even within them, requires social struggles well outside and beyond the regular act of voting. These struggles also need to be ongoing, given capitalism’s capacity to incorporate and commodify just about anything (see the transformation of feminism to “shopping you way to liberation” etc.).

Ultimately I believe (full disclosure) that “there’s but one solution, revolution!”

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chris 01.24.11 at 4:30 pm

It’s an elite project. Most of the blame should be apportioned to the elites who have benefited by far the most.

I have to disagree; such an elite project *could not succeed* (in a real, as opposed to sham, democracy) without the acquiescence of a large fraction of the electorate. (It may be possible to achieve with a technical minority depending on how democratic the voting system actually is. And of course if some groups are systematically disenfranchised… real vs. sham democracy may be best viewed as a continuum rather than a dichotomy.)

IMO, propaganda does not remove the responsibility of the people for the ordering of their democracy. Propagandists can only be defeated when the people identify and reject the propaganda as such, an end which cannot be advanced by moaning about how elections don’t accomplish anything because the elites will always be in control. The learned helplessness of the people is one of the primary tools by which the elites often *do* stay in control, but it’s not a law of nature, it’s a particular outcome of politics in particular times and places, that the people have the power to alter if they’re sufficiently motivated to do so.

This is neither practically, nor in my opinion morally, equivalent to a genuine lack of choice such as the subjects of a dictatorship have.

P.S. Also, the elites are to some extent defined after the fact; just changing the composition of who counts as an elite can be a significant change in the power structure of a society, even if the result is still a government controlled by “elites”. Any concentration of power in the hands of anyone creates, in some sense, an elite, but it doesn’t follow that all societies that have a structure of government are aristocracies.

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Steve LaBonne 01.24.11 at 4:50 pm

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hix 01.24.11 at 5:09 pm

Amusing to suggest EU integration is based on some kind of elite prophaganda on a website written in english by EU hostile elites . What we see in e nglish publication is a neverending drumbeat prophaganda, usually made up stories about evil bureaucrats in Brussel against EU integration, in particular by publications controled by a few very wealthy people.

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bianca steele 01.24.11 at 5:12 pm

chris:
This is way off topic, but your comment makes no sense. You are describing a real democracy, one person one vote, no representation or separation of powers osw: an “elite” would thus be the 51% that gets legislation through. You are holding the other 49% morally responsible for the opinions of others–to, as you say, “identify and reject them” in order that they can be considered by you as morally OK.

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