Thoughts on Greece

Greece seems to have slipped below the front pages. We've moved on to other things. I haven't.

I don't have much to say here, but I can't say nothing. This is too important. I'm just going to record my thoughts, for whatever little they are worth.

I have been Googling around, trying to understand the recent "Agreement" and how it is supposed to work. And I've failed.

1. I'm not at all sure we even have an agreement. Can Greece actually deliver on these 38 items before the end of this month? Will enough of the bondholders agree? Will the Eurozone parliaments actually ratify the deal and come up with the money?

2. Even if we do have an agreement, will Greece actually stick to it? Would anybody really trust future Greek governments to stick to it? Will future Greek governments actually be able to stick to anything, even if they wanted to? Can Greece avoid becoming an ungovernable "failed state" if it tries to stick to the agreement?

3. Even if we do have an agreement, and even if Greece does stick to it, will it actually start bringing the debt/GDP ratio down?

For what it's worth (not much), my answer would be "no" to all three questions.

All the Agreement does is make it harder for Greece to abandon the Euro and redenominate its debt into Drachmas (because the new bonds will be governed by English law not Greek law). So the eventual default, when it comes, will be even messier than it would be otherwise.

And I don't see how any of the parties to the Agreement can really expect it to work. Which raises the question: so what are they doing?

A majority of Greeks want to keep the Euro.

"Most Greeks want to stay in the euro zone, the poll showed, with 77 percent saying their country must keep the currency "at all costs", the same percentage as two months ago."

That's the underlying problem. The Greek people themselves refuse to exit.

I think everyone else is just going through the motions, because they don't want to be the ones blamed for the "Agreement" failing. They don't want to be blamed for taking Greece out of the Euro. It's a game of chicken, where each side wants someone else to be the first to reject the Agreement. I hope they are indeed planning for failure.

Comments

[Luis H Arroyo]

Bingo, Nick, just on the target.

[anon]

Good post. I think Greece could be "rescued" relatively easily, and even keep the EUR, if they agreed to a combination of rigorous austerity on the government's part (to demonstrate credibility and improve the fiscal outlook), soft "incomes policy" (to bring prices and incomes into balance with the rest of the Eurozone) and investment subsidies (to boost expenditure and attract foreign capital inflows). The stock of debt would then be very high, but quite manageable in the medium-long run. However, it's not even clear that Greek government actors are willing to seek a solution: default and devaluation is going to look more and more attractive.

[Determinant]

The appalling thing is that lenders refuse to take much pain when they themselves lent money to a problem borrower. They cannot refuse default risk. It seems international lenders are more effective than the demonstrators in Syntagma Square in resisting change.

The English Law thing is a canard; it is impossible for the High Court in London to exercise effective jurisdiction over Athens. Interestingly at a government interview/test here in Canada I was asked just such a question, how far does the Act run. The answer: Canada, that is as far as our courts have jurisdiction. There are nice plaques that mark the Official Boundary in the middle of bridge crossings that shows exactly where Canadian court's jurisdiction stops.

[Bob Smith]

I suppose being governed by English law might have some value, if Greece had any significant foreign assets. The jurisdiction of English courts may stop at the Chanel, but courts in Canada and the US (and I suspect other jurisdictions) will generally enforce foreign court orders (as an articling student, I once worked on a Canadian injunction that was ultimately enforced in the US and the UK). Mind you, the practical limitation is (a) Greece doesn't have many assets located in foreign jurisdictions and (b) what they do have (embassies and the like) are probably protected by some sort of sovereign immunity doctrine.

Mind you, I can suggest a more mundane reason why the agreement is governed by UK law. Think about it, if you're negotiating a massively complex debt restructuring between dozens of parties, would you go to (a) London, which is a global financial capital and probably has one of the, if not the, deepest pools of legal talent in the world (as well as sophisticated commercial courts with a hefty body of jurisprudence) or (b) Athens, where the lawyers are on strike 2 days a week. To ask the question is to answer it.

[genauer]

For me, as a German, "high-tech" globalist, still pro-European die-hard agnostic, it is a first, to cite the bible in writing:

For what is a man profited, if he shall gain the whole world, and lose his own soul? or what shall a man give in exchange for his soul?
http://www.kingjamesbibleonline.org/Matthew-16-26/

There is a very deep disappointment setting in, in Germany, over the last few years,

that a lot of our EU neighbors are not what we thought.

Western, and that was for most of the time "European" civilization was built on

truth, trust, the rule of law, treaties to be kept, debt to be paid, self reliance, and compassion.

One reason for the core EU was the iron will to not let the devastating belligerence leading to WWI and WWII ever happen again.

Another, that Europe is together just one small 7% part of the world.

And this floating agreement style, around the core 6 nations, worked for quite some time surprisingly well.

But we now come to a point where the periphery got in, but does not want to play by the rules.

What worked as loose rules, "Auftragstaktik", "Maastricht criteria" does not work anymore, and is replaced by strict, detailed micromanaging, infringing on "national sovereignity".

Consensus rules, exploited too often to extract some "extra", now subjugated to last minute, weekend summit, do or die, "before the stock exchange in Tokyo opens" decision making. Most the times now prepared by Mama & Papa, France & Germany, with a coalition of some "the willing" Not exactly democratic in the way we used this word.

But Greece is the poster boy for extremely generous financial help mainly generating a sense of entitlement.

My neighbor countries Poland and Czech prosper with an extremely lower amount of help given.

And there comes a point, where also an Amish community ejects those who are not willing to live by the rules.
I ll do understand most of what is said in the movies.

"http://news.yahoo.com/bosch-ceo-tells-magazine-greece-no-place-eu-005151046.html"

Those came from the suebian area, where Bosch, a very honorable company, is centered.

We do not worship the golden calves, market cap, GDP and its growth as a purpose in itself.

At some point, it is better to live in a smaller EU, but with people you can trust and who share common values.

[genauer]

I should have been more precise in one point:
The never ending criminal attacks on the Maastricht Treaty: no bail out, no money printing.

There are no attempts to renegotiate, just permanently, deeply dishonest trying to break it through the back door.

[Jon]

The English Law thing is a canard; it is impossible for the High Court in London to exercise effective jurisdiction over Athens. Interestingly at a government interview/test here in Canada I was asked just such a question, how far does the Act run.

It cannot be so weak. There are already some English law bonds in circulation. They are trading at 0.70, about twice the value of the Greek law bonds.

The answer is that these bonds are enforceable by the ECJ which assuredly has a reach over Greek accounts directly.

[Determinant]

@genauer:

As you brought up the EU and WWI/WWII, there can be no better explanation for it than that of Sir Humphrey Appleby in 'Yes, Minister':

THE DEVIL YOU KNOW

"The Common Market: We went into it to screw the French by splitting them off from the Germans. The French went in to protect their inefficient farmers from commercial competition. The Germans went in to purge themselves of genocide and apply for readmission to the human race."

http://www.jonathanlynn.com/tv/yes_minister_series/yes_minister_episode_quotes.htm

Oh, and since I like to get value for money for that European History course I took in First Year University, German Hyperinflation was self-inflicted and was over, gone and recovered from by the late 1920's. The Weimar Republic was doing well economically in 1928/29. The Depression and German Hyperinflation were two separate, discrete episodes separated by a number of years.

Therefore hyperinflation had very little to do with WWII.

[Scott Sumner]

Nick, Good post. In my view the Greeks should leave the euro, I'm less sure about the other troubled economies. It's clear that the British vision for the EU was the right one (a big free trade group with floating currencies) and the Franco-German vision was the wrong one. All this needless suffering.

Genauer is right about the cultural incompatibility--that problem goes away if you have a looser free trade zone.

[W. Peden]

Determinant,

I wouldn't want to understate the importance of the Weimar hyperinflation on WWII: its destabilising effects on German society and its inculcation of inflationphobia into the German national psyche are still having consequences today. However, it obviously wasn't a direct factor in the rise of Hitler (who was still a fringe politician when the hyperinflation ended) and I have little doubt that WWII would not have occured if there had been a better policy response to the Great Depression in Germany.

In many ways, German society prior to 1914 was one of the most stable and cosmopolitan in central Europe. Its prospects for evolving into a model liberal democracy were very good and most of the spilt ink since 1945 on the supposedly innately totalitarian tendencies in German Imperial culture is bunk. That's what's so disturbing: if "it" (German history from 1914-1990) can happen in Germany, then it can happen anywhere given a fairly short list of events.

Which is why money matters.

[Bob Smith]

Jon, ultimately no one can enforce any law, Greek or English against the Greek government in greece, since ultimately it makes the law in that country. The ECJ? What was Stalin's line about the pope, "how many divisions does he have?". How many divisions does the ECJ have?

[J. Bandlow]

Felix Salmon has been very good on this. http://blogs.reuters.com/felix-salmon/2012/02/24/greeces-bond-exchange-its-official/ for just the most recent example.

[Determinant]

@W. Peden

German Inflation began actually during WWI because Germany chose to finance its war effort by borrowing and inflation while Britain, France and Canada relied on Income Taxes. The Weimar hyperinflation was a continuation of that policy. The Versailles reparations were payable in gold or foreign currency (meaning US dollars and sterling) so they couldn't be inflated away.

Germany was the leading light of 19th Century science and the history of math is the history of Germany until the 1920's. But Germany was not a liberal democracy in 1914, it had a recurrent fault of using military gestures to solve domestic problems and both the Kaiser and the Chancellor had strongly and successfully resisted any form of "Responsible Government" as we understand it in the UK and Canada.

If money matters because of inflation, then the tragedy that was the Depression in Germany also shows that money matters because of deflation and tight money.

In point of fact, Germany resumed payment of the Versailles obligations after Reunification and the entire debt was discharged in 2010. Coincidentally so was Lend-Lease/Mutual Aid between US/Canada and the UK.

Which probably demonstrates more than anything that debts should not, under any circumstances, be beyond the ability of the debtor to pay or be allowed to impair organic economic growth. Growth means that debt will take care of itself which is why Versailles is now a settled account.

[W. Peden]

"But Germany was not a liberal democracy in 1914, it had a recurrent fault of using military gestures to solve domestic problems and both the Kaiser and the Chancellor had strongly and successfully resisted any form of "Responsible Government" as we understand it in the UK and Canada."

It was evolving into a liberal democracy. They would even let women vote. Also, the use of military gestures to solve domestic problems is sadly not a distinctively German characteristic!

"If money matters because of inflation, then the tragedy that was the Depression in Germany also shows that money matters because of deflation and tight money."

Absolutely. German inter-war monetary history reminds me of descriptions of cholera we heard in high school history: victims were drained of fluids from both ends. Analogously, German civil society was drained of its stabilising influences, first by inflation and then by deflation.

I'm not sure that debt was the key issue, though British critics of the Treaty of Versailles who were embarassed by the failure of appeasement subsequently built up the importance of Germany's debts. That's not to ignore the obvious and correct point that sometimes debts are so great that defaults/bailouts are a lesser evil than social collapse.

[genauer]

@Scott
We have since a long time the EFTA (European Free Trade Association). The UK staid that way until 1973. Norway for example opted to stay this way.
So, everybody, especially the UK, who just wants this, should go back to this status, and let the core do its own thing. The point is, they entered the EU and then again and again started to obstruct, demand special favours, like their special rebate, they kept out of the Euro, fine, they didn't want to adopt the Social Charta, fine.

Now those EU treaties have become some hodge podge over the years, and when the topic of tighter budget rules within the 17-member Eurozone came up, it turns out we need for otherwise no good reason the unanimous consent of all 27. It didnt infringe in any way on what the UK is doing, but Cameron was trying to blackmail the rest to agree to some capital market rules exception he wanted for UK, in exchange for his signature. It is a very rare thing to leave one member completely isolated, but this was too much for everybody else.

And from now on, if somebody just wants to block, it is "who wants to do bilateral agreements, the rest leaves the room, now". This makes for sure not for climate of mutual happiness.

[Mandos]

The Greeks refuse to exit because they've been threatened with terrible consequences if they do...

The agreement itself is nuts. The whole process underlying its creation is nuts. The point of the exercise is to buy time to insulate the rest of the Eurozone, so that Greece is deprived of its economic nuclear option. That Greece is going to default at some point and probably be expelled from the Eurozone is...increasingly less in doubt.

[anon]

Mandos, I'm not sure that "the rest of the Eurozone" can be meaningfully nsulated from a Greek exit. Bailing out their banking systems is not the issue anyways: the real problem is that Greek exit would send a powerful signal to money-starved Eurozone states (whichever they happen to be at that moment; we used to talk about Germany as the "sick man of Europe" and Ireland as "the Celtic tiger") that devaluation and exit is a real possibility. Thus the Eurozone would fall apart sooner or later.

The best solution IMHO under these constraints is to "rescue" the Grecians as per above, run a stable monetary policy at the ECB and let states use local policy to address temporary NGDP shortfalls.

[genauer]

On the 1923 Hyperinflation, I pretty much side with @Determinant. This was self organized, and did not just come somehow about. It was basically an internal default by another word.

And it was just a small part of a much larger general conflict. Something probably most of you are not aware, that his was going on in parallel with the "Occupation of the Ruhr" (wiki it) , the resistance to completely impossible demands of the Versailles treaty.

I read Keynes 1919 The Economic consequences of Peace, last Summer, and I understand now much better,
why so many Germans between the Wars were itching for the next fight with France. And I think this also goes a long way to explain, why France and Germany to the present day do not let a shred of air mail paper get in between us, to the outside. This arch enemies pandoras box will never be opened again.

After 1923 the new Reichsmark was stable relative to the Dollar. and this had very little do to with the Great Depression.

I know this mythical German angst of Inflation is endlessly trotted out, to explain things. We did the next internal default (a.k.a. "Währungsreform" 1948) without Inflation. It was a Helmut Schmidt 1972, who declared "Better 5 % Inflation than 5 % Unemployment" (go wikiquote)And just imagine that 5 % umeployment was considered horrible. We had this multi target policy (not only Inflation) as well at that time.

@Determinant and Peden
when did we have deflation in Germany. Honest question, in the past I did learn from somebody else to see the post WWII inflation in the US.

@Determinant
All nations financed the war both by raising taxes and debt. England was in fact pretty famous for being able
to run huge debt at very reasonable rates, by having a long history of never defaulting. A nice picture for English War debt: http://bit.ly/ACTTO6

@Mandos
From my perspective Greece was starting pretty openely the blackmail back in July 2011, and did try to push the trigger in October. To make sure that everybody knows, that they do not have the slightest chance ever again, is an important paart of the present parcel.

One other lessons we took from the inter war period was, that you really have to prevent the creation of a "Dolchstosslegende", even at considerable cost, because this is a very powerful long term poison.

[W. Peden]

Genauer,

Germany experienced deflation from 1928-1933, by an average of about 4% per year and with output falling at about the same rate during that period.

[W. Peden]

"So, everybody, especially the UK, who just wants this, should go back to this status, and let the core do its own thing."

Absolutely, though the other side of such a move should be a reduction of powers of the EU countries in the EEA (so that EFTA countries and EU countries are equal in their influence) combined with a reduction of barriers between EFTA and the EU. Many countries are in the EU for trading reasons and have become closely interlinked; it would be a breach of faith for the EU to penalise such countries when they move outwith the EU so as to make the Eurozone work better.

A free-trade zone in Europe and a single currency both have their virtues, but trying to combine the two has been a disaster.

(It would have probably been better to have a system of currency boards based around the Deutschemark rather than the euro, though.)

[anon]

"It would have probably been better to have a system of currency boards based around the Deutschemark rather than the euro, though."

If you're going to have several currencies, pegging exchange rates to one of them (the DM) through a currency board makes very little sense. You might as well adopt flexible exchange rates and target monetary policy to local economic conditions. On the other hand, adopting the DM as single currency would leave most countries exposed to severe macro instability as monetary policy would target West Germany only.

[Phil Koop]

"That's the underlying problem. The Greek people themselves refuse to exit."

I think that's exactly right. Greece is now, apparently (just) making a primary surplus, so a euro exit is possible. But as you say, Greeks don't want to leave the euro ... because they like its purchasing power! But that is an illusion: Greeks cannot continue to consume more than they produce without external support, and there is no political support for it. So if they want to continue to be paid in euros, they will have to accept a lot fewer of them.

Meanwhile, the unwillingness of the rest of Europe to face the problem directly has damaging consequences for both sides. It seems to me that the decision to make the ECB senior to everyone else will severely compromise its powers going forward. Chuck Norris walks into a room and says "everyone do the opposite of what I want, or I'll kill you!"

[Mandos]

From my perspective Greece was starting pretty openely the blackmail back in July 2011, and did try to push the trigger in October. To make sure that everybody knows, that they do not have the slightest chance ever again, is an important paart of the present parcel.

Yes, funny you should speak of "pushing the trigger in October", by which you presumably mean the referendum attempt that came at the end of October. What happened thereafter was utterly infuriating. It was a denial of democracy. It was Greece's only leverage and its sovereign right.

One other lessons we took from the inter war period was, that you really have to prevent the creation of a "Dolchstosslegende", even at considerable cost, because this is a very powerful long term poison.

It's a really funny way to avoid creating a Dolchstosslegende---sacrificing Greece's sovereignty to preserve a set of policies that are utterly daft for the health of the Eurozone (that are in reality a form of bank bailout). I'd say that the Dolchstosslegende has if anything been well and truly made.

[Determinant]

@Genauer:

Germany didn't have high income taxes in WWI and has considerably more inflation and deterioration in foreign exchange rates than the UK did. Similarly Germany's taxation and civil mobilization efforts in WWII were less complete and less effective than those put in place in the UK.

Germany did not have the second part of effective debt management, effective income taxes to service that debt. The result was that they resorted to inflation in WWI and pure default after WWII.

Britain was a more effective economic manager during wartime and a more credible economic manager afterwards by being able to contain inflation and to service its debts credibly. Anybody can run up debt. Not everyone can effectively manage and repay that debt.

@W.Peden

As one of my history profs said, speculative history isn't history. In 1914 the executive in Germany, the Kaiser and the Chancellor, emphatically were not subject to the legislature. Women voting is nice, but the vote didn't matter because the Reichstag was powerless next to the UK Parliament or the French National Assembly. That was the problem. The Kaiser and Germany never made the final, critical leap to Responsible Government drawn from and controlled by the legislature.

@Phil Koop

I have contended through several threads that the ECB is not nor has it ever been Chuck Norris. It isn't a real central bank.

[genauer]

I have now tried several times to post a comment

[Sorry - got caught in the spam filter. SG]

[genauer]

Poden,

- do you have some evidence to support your deflation claim ?

- EEA (just wiki it), always something new in the european alphabet soup, lets see:

this is the EU plus the following 3:

a) Iceland, 318 k people, promised dutch and UK savers higher returns, which they guarantted to be backed up
with deposit insurance, defaulted, reimbursed their own people, and stiffed other EU people,
the nationalist crime confirmed 2 times per public votes,
but both NL and UK are man enough to take care of that without German help.

b) Liechtenstein, 33 k people,
One individual, "The Fuerst", holds 100 % of GDP as wealth, well known tax cheat haven,
for every citizen 2 mailbox only "corporations"
"the United States Senate's subcommittee on tax haven banks said that the LGT bank, which is owned by the royal family, and on whose board they serve, "is a willing partner, and an aider and abettor to clients trying to evade taxes, dodge creditors or defy court orders."

c) Norway, 5 m people,
"Export revenues from oil and gas have risen to 45% of total exports and constitute more than 20% of the GDP"
"30% of the labour force are employed by the government, the highest in the OECD.[71] 22% are on welfare and 13% are too disabled to work, the highest proportions in the world"
makes a total of 65 % not working (in private industry)
"Cost of living is about 90% higher in Norway than in the United States and 50% higher than the United Kingdom"
A sovereign wealth fund worth 140 % of GDP

In such a situation, that basically the whole country can live on what 10 % of them
extract of natural resources, I would not like to join a payer association too.

Their interpretation of a free trade zone goes for butter as far as

"www.huffingtonpost.com/2011/12/09/norway-butter-shortage-_n_1139350.html"

"Now, the ingredient is being sold on Norway's leading auction website
for $13 for a 250-gram piece, Reuters reported, which is about four times higher than its normal price."

I pay for 250 g Butter 99 cent, regular price.

Now, Poden, why should any of these people have any say about what is decided in the EU?
What of their rights you even want to extend ?

No pay, no say, and classic examples of criminal free riders. And very disappointing from a moral perspective.

those are the people we want to eject, and not getting even more illegitimate obstruction options.

[Mandos]

a) Iceland, 318 k people, promised dutch and UK savers higher returns, which they guarantted to be backed up with deposit insurance, defaulted, reimbursed their own people, and stiffed other EU people, the nationalist crime confirmed 2 times per public votes, but both NL and UK are man enough to take care of that without German help.

Yes, they defaulted and took care of their own voters according to their voters' preferences as a responsible government does.

[Determinant]

W. Peden's deflation claim is also my claim and it's historical fact. Google is your friend but it is also the actual case as found in proper history books at universities.

The Iceland incident is all about size. Iceland's banking default injured a small number of British and Dutch savers who had and have other market choices. Further the British and Dutch are also partially at fault because they let the Icelandic banks into their markets in the first place. As a counterexample Canada does not let any foreign banks offer products here without those banks being insured by the Canada Deposit Insurance Corporation; foreign banks are liable for CDIC premiums for their activities in Canada. Seems a sensible policy to protect Canadian consumers for banking activities conducted in Canada.

Greece is a sovereign borrower whose people don't really want it to default and leave the Euro while Germany and France don't want a default either. If either had really wanted a default it could have been done by now. They want payment instead of default and are oblivious to the effects of austerity, which is not the same as taking a default and moving on.

Iceland and Greece are different incidents with vastly different causes, effects and solutions.

Norway is something else entirely and you illustrate a version of "Dutch Disease" which is also what we have in Canada. Stephen Gordon doesn't think it's so much of a disease but I disagree.

[Mandos]

Oh, and I nearly missed this: genauer just called default, a completely legitimate option that one takes when one weighs the risks and benefits, a crime...

This is exactly the problem here. Creditors take risks in extending credit, including the risk that all guarantees may be hollow and unenforceable (can't get blood from a stone). Some Europeans seem to want to take this all out on the hides of the Greek public.

[vjk]

genauer:

You write: "a) Iceland, [...] promised dutch and UK savers higher returns, which they guarantted to be backed up with deposit insurance, defaulted, reimbursed their own people, and stiffed other EU people"

Iceland as a sovereign state *did not* promise anyone anything -- its banks did. Neither did it, as a sovereign, "stiff" anyone. Its sovereign obligations had never been in danger of defaulting, as opposed to say Greece.

If the EU people were dumb enough to trust blindly private banks that failed why is Iceland as a sovereign is to blame ? If your vacation house in Spain burns down and the insurance company goes out of business, do you expect the government of Spain to build you a new house ?

Admittedly, the legal basis of Icelandic deposit insurance is a little tricky in this situation, but as far as I am aware there has never been any government guarantee, either explicit or implicit, to bail out Iceland private banks. The question of such bail out was put to the referendum and answered in negative. What's the problem ? Setting aside the deposit insurance complication, why your investment into anything should be riskless ?

[Lorenzo from Oz]

Greece is The Weakest Link in the euro chain. So its crisis is the worst. But that is a distraction. It is so easy to pick flaws in Greek political economy that it is easy to get distracted by the fact that this is a much wider crisis.

Yes, the euro was a bad idea: some crisis due to the institutional differences between European economies, given the insufficiency of equilibrating mechanisms, was always likely. But there is a difference between the likelihood of crisis and the cause of a specific crisis. The cause of this crisis is the tight money policies of the ECB. It is just that those policies affect the most dysfunctional Eurozone polity (Greece) worst: but that is what one would expect.

People hyperventilate about hyperinflation but excessively tight money is worse: Weimar Germany survived hyperinflation, it did not survive the massive Bank of France/Fed induced deflation aka Great Depression. It is clear, for example, that Bernanke will do whatever it takes to avoid deflation.

But there is tight money which is not actually deflationary but still deeply damaging. Particularly in a situation where debt has shot up because, for example, a bunch of debt-happy Mediterranean economies were allowed to "piggy back" on "hard money/low interest rate" credit. Mediterranean economies which could no longer use the devaluation option to restore competitiveness. With the most debt-happy, the most dysfunctional, economy ending up the most exposed.

And if folk who should know better fail to discuss the culpability of the ECB, then it finds it even easier to avoid accountability. (See my discussion here.) Particularly if many of those who are willing to discuss central bank responsibility are utterly fixated on inflation, so apparently do not care how many bankruptcies, job losses and soup kitchens are left in the wake of bad monetary policy.

[genauer]

Gelassenheit, Ordnung, Meidung

3 core principles of Amish communities

- Gelassenheit

is certainly the one, which comes first, and on which I have to work most for myself

- Ordnung

as in German Ordnungspolitik, which I perceive now more and more as a significant part of the "secret sauce".
But I see many elements of that in japanese kaizen, aime and the founding fathers "federalist papers"

- Meidung

Determinant, Mandos, vjk,
I never bought any of that Iceland, Greece etc. stuff. I have no personal skin in that.
I am not going into details of icelandic advertisements, and how to interpret them,
especially if I didnt trust them in the first place : - )

More to the opposite, being for many years very careful with personal judgements
("Richte du nicht, auf das du nicht gerichtet wirst"), it confirms in many ways my careful, tentative judgments
and decisions.

I do not agitate to invade them, steal their money, or anything.

All I say is that I do not want to have any contact with them, nor taking any liability for them,
nor giving them any right to decide on any aspect of my life, and the life of my community.
They should just keep away from me. And we have some pretty precisely defined borders for that.

I just reserve my right, to come with neighbors, I do trust, to agreements without the others.

[genauer]

As in this Sunday NYT:
"Bankruptcy is morally abhorrent and is not consistent with the values we hold [ ..] It is a dishonorable discharge of debts.”

And something I wrote to friends at the West Coast, 2 month ago:

From the mouth of the Polish Foreign Minister, Sikorski
(http://www.economist.com/blogs/easternapproaches/2011/11/polands-appeal-germany citing Kant’s categorical imperative

“the entire practice of lending money presupposed at least the honest intention to repay. If this condition were universally ignored, the very idea of lending and sharing wealth would be undermined. For Kant, honesty and responsibility were categorical imperatives: the foundation of any moral order.”

Mr Sikorski concluded:
“I demand of Germany that, for your sake and for ours, you help [the euro zone] survive and prosper. You know full well that nobody else can do it. I will probably be the first Polish foreign minister in history to say so, but here it is: I fear German power less than I am beginning to fear German inactivity.
Germany, he said, was Europe's "indispensable nation".
You may not fail to lead. Not dominate, but to lead in reform.”

This is now the time and the place that Germany takes the lead. I have trust in Schäuble, Merkel, Jens Weidmann, and Jörg Asmussen.

[Nick Rowe]

Promises are supposed to mean something.

[Determinant]

Lecturing Canadians about the Amish is silly. Mostly because they live here in significant numbers. Nice people, but you do know that many own phones, which due to "interpretation" must be in their own box on a pole by the road, not in the house.

They are as human as the rest of us.

Second, your English is getting hard to understand. I take it you don't like being on the hook for Greece's debts. Tough. Canada has been a working federation with interprovincial transfers since Day 1 in 1867. In any working federation, the rich parts subsidize the poor parts. In Canada every province that contributes to Equalization, the unconditional transfer of funds through the Federal Government, has been a recipient at one time or another.

British Columbia, Alberta, Saskatchewan, Ontario, Quebec and Newfoundland have all contributed either currently or in the past but are now or were recipients. Ontario was a contributor for a long time but is now a recipient. Newfoundland received Equalization for decades but is now a contributor.

Greece will pay a big price if it defaults, it will be justifiably shut out of credit markets for years. But it won't move on until it does. Further, no lender has the right to say that credit risk doesn't exist or should not exist. That is both silly and untrue. But the EU and Euro are a federation and its constituent parts are at odds over paying for it. Canada got over this debate decades ago. Grow up.

[W. Peden]

Determinant,

"As one of my history profs said, speculative history isn't history."

Hmm, that seems to be entirely wrong: if we are interested in why things happen/happened, then we need to pursue causal explanations. If we are to engage in causal explanations, then we have to have counterfactually solid propositions. If we are to have counterfactually solid propositions, then we have to engage in speculation about those counterfactuals.

The question "What would have happened in Germany if key events between 1914 and 1933 had not occured?" is a perfectly normal historical question and one that is necessary to understanding the significance of each of those events. In particular, I think that WWI, hyperinflation and deflation all drove Germany further away from achieving a lasting liberal democracy, even though WWI (in its direct effect) resulted in a liberal democracy.

The wider lesson from this is that war and economic crises, even when they have apparentely liberalising effects in the short term, are destabilising and therefore usually deliberalising in the long-term. A Weimar Republic based on a gradual transition from authoritarian state to democracy, such as occured in Britain and America, would have had much more stable foundations than a nation founded in a war that radically changed central Europe forever and which greatly increased the pressure for the hyperinflation.

That's not to say, however, that given the situation in 1919 the best approach was a return to authoritarianism. The Weimar Republic (aside from a too strong executive) was about the best response to an awful situation and had the Great Depression been handled differently there were still good chances of its success.

[Nick Rowe]

My hunch is that if Greece dropped the Euro, and made its bonds payable 100% in Drachmas, the bondholders might actually get a greater value than under the Agreement. OK, suppose the Drachma depreciates 50% against the Euro. That would still be better than the 30% or so they are supposed to be getting now (if they do indeed get that 30%). If reverting to the Drachma helped loosen monetary policy in Greece, that could create a real recovery, and improve Greece's capacity to pay.

BTW, when people borrow money, they normally don't say "this is a gift, right?" or treat it as a PWYW exchange (as in Livio's post above). If the lender hadn't been led to expect something in return, why did he make the loan? Sure, sometimes stuff happens, and we can't always reasonably be expected to deliver on our promises. But the promise must have some weight, otherwise why bother?

[Mandos]

BTW, when people borrow money, they normally don't say "this is a gift, right?" or treat it as a PWYW exchange (as in Livio's post above). If the lender hadn't been led to expect something in return, why did he make the loan? Sure, sometimes stuff happens, and we can't always reasonably be expected to deliver on our promises. But the promise must have some weight, otherwise why bother?

This is poor people morality. The rich don't think that way: there were many foreclosures of homes owned by the wealthy over the course of this current crisis. The creditor extends credit because s/he believes it is in the interest of the debtor to pay it back. For poor people (you and me; by this I mean anyone who is less than three or four paychecks away from losing their homes, which is most working people), we have credit ratings to do this for us.

The weight of the promise is the consequence of defaulting. The definition of serfdom is a debt which you cannot pay off and cannot default. (cf. student loans...)

When it comes to legislators, anyway, there is a prior "creditor", the people whom they represent. And that's a duty, not a debt.

[Mandos]

Oh, and...in re firewalls and Greece:

Luxembourg Finance Minister Luc Frieden said it too: “If the Greek people or the Greek political elite do not apply all of these conditions, they exclude themselves from the Eurozone.” All of these conditions. Then the crucial words: “The impact on other countries will now be less important than a year ago.” And that’s has been the strategy all along.

Via here. Maybe the firewall won't *actually* work, but European finance ministers certainly *think* that they've successfully robbed Greece of its only leverage (by coup, effectively).

Pure Shock Doctrine, all of it.

[Tim]

VJK:

The situation with Icelandic Banks was the following the UK and Netherlands were required under EU-EEA law to allow them to open branches and accept retail deposits. However they were never part of the UK or Dutch deposit insurance schemes and their customers if they looked closely enough would have known that. Iceland was in theory required to provided a deposit insurance scheme for both domestic and other EU/EEA depositors however, the EU rules related to this were unclear and perhaps uneforceable. In Canada some foreign banks such as HSBC open fully Canadian subsidiaries that are autonamous from the parent bank and fully subject to Canadian regulation, CDIC deposit insurance etc. Other banks such as Bank of America or JPMorgan just branch operations located in Toronto that are only partially regulated by OSFI and can only accept commercial and not retail deposits(They can though for the commercial customers issue checks, access to the payment system etc).

[vjk]

Tim:

No disagreement with what you wrote, I think"

"if they looked closely enough would have known that"
That precisely my point. I do not see why the government of Iceland should be on hook for failed Icelandic private enterprises, as our German contributor seems to expect going as far as characterize the Icelandic government behavior as criminal.

With Greece, the situation is dramatically different as it is the Greek government itself that is on hook due to its sovereign bond obligations. If any analogy is to be found (an impossible endeavor taking into account the EMU pecularities), it would be Argentina rather than Iceland.

[Jacques René Giguère]

Counterfactual is part of history.
So is having the right man at the right time.
Wilhelm ! was a tough but rational man. He made one mistake in 1870 by annexing Lorraine, which, unlike Alsace , had never been politically or culturally German. This planted a seed of distrust among Europena Powers.
Then his son Leopld died shortly after assuming office. Two essentiallly rational men, who would have been able to overcome bad institutionnal arrangement, were replaced by the essentially insane Wilhelm II. Somebody who squandered the de facto English alliance by building a navy strong enough to challenge the Royal Navy without the stenght to beat it.
In 1918, Foch decided to let the German army retreat with full arms because he thought his supply lines would be overextended if he sent the Allies into occupation duties.So the "Dolchstosslegende" could be born.
Then in the turmoil of the 30's Germany got he-who-must-not-named while the U.S. got FDR.
Still travelling, so no personnal library available, but it was obvious that, as soon as the mid-20's, Germany was preparing for a war with Poland. But it would have been framed as purely local war, of no interst nor consequences for anybody else.
History is nmade of time, places and the people who design institutions and those who react to that.
I trust Merkel and Schaüble personnally as human beings. I do not trust them to make the right decisions in these circumstances because of their Weltanschauung which doesn't seem to include the old Roman maxim "Salus populi suprema lex esto" (Let to welfare of the people be the supreme law" or as a great prophet said "the sabbath is made for man, not man for the sabbath".

[Tim]

In the Canadian context I should mention Alberta stopped payment on its debt between the late 1930s and 1945 without disrupting the Canadian banking system. In those days Alberta was the "poorest" province in Canada. It seems like one of the problems Europe has is it is not just 17 countries using the Euro but also 17 different banking systems unlike Canada which is one country one banking system 13 provinces and territories.

[Scott Sumner]

genauer, It is the right of each country to try to encourage the EU to move in the direction it thinks best. Britain is doing that. Britain did not join the EU and then set out to change it, but rather to keep it as it was (which worked fine.) It was the core countries who wanted to change it, and they pretty much wrecked it with the euro. In my view the core countries shouldn't be worrying about whether Britain is being obstructionist, but rather think very hard about whether Britain might have been right all along. It seems to me that other members of the EFTA like Switzerland and Norway are doing just fine. If it ain't broke, why change it?

[Nick Rowe]

I tend to agree with Scott on this. It's all a tragedy, really. That which was supposed to bring the European countries closer together is now driving them further apart. The introduction of the Euro was a bridge too far (wrong metaphor?).

Hmmm. My old post still reads quite well on this. (Though Ireland seems to be doing better (i.e. not as atrociously) than I thought it would).

[Mandos]

The introduction of the Euro was partly based on the belief that once Europeans were using the same money, it was only a matter of time before they would see the need to create federal Europe. In other words, it was intended to use economics to force the politics. It's basically the ultimate end-point of an attempt to establish the primacy of economics over democracy. They should have focused on building the European political institutions in a serious way before they brought about the Euro---then the problems would have solved themselves.

In the recent past I had the opportunity to visit Strasbourg and I tried to take a gander at the European political institutions there. Suffice it to say that I'm totally not surprised that Europe doesn't have enough "we" feeling to make this work; there's no effort to make them accessible to tourists, which IMO is a basic function of a parliamentary building in the modern era. The Europarliament is set in an unappealing industrial park, and you have to book tours months in advance---there is no regular visitor's desk, no museum-type amenities, nothing that you'd see in Ottawa or at the US Congress or anything. The cold, uninviting (if avant-garde) architecture kind of drives home the point.

[Determinant]

Parliament Hill has a myriad of tourist accommodations. Capitol Hill recently had a brand new Visitor's Complex installed under its front lawn for both reception and security reasons. Both institutions take visitors seriously.

It also doesn't help that European Parliament politicians are usually the dregs from national politics.

[genauer]

@vjk, tim
on the "Icesave dispute" wiki, the nearly last sentence is:
"On June 10, 2011, the EFTA Surveillance Authority ruled that Iceland should take steps towards paying the full amount to the UK and the Netherlands within 3 months after the ruling.[123] The Icelandic Minister of Economic Affairs Árni Páll Árnason made a statement to the Icelandic Parliament[124] on the same day rejecting this ruling."

So you side with the icelandic defaulter, my opinion is the one of the european majority, that their behavior is criminal. The conclusion of course is, that those vikings are not cultural compatible with us, and we restrict the contact with them to some herring trading.

If I would have said 5 years ago, dont lend any money to icelanders and greeks, you can not trust them, I would have been called racist, from the same people, who now say "if they looked closely enough [they] would have known that"

I had brought up Iceland as one of 3 non-EU countries in the EEA, which will certainly not have any say on anything decided in Europe, and as a typical example of "cultural incompatibility" (in the words of Scott Sumner) of certain periphery entities.

@Scott
Of course it is the right of everybody to bring up his opinion and make his case.

But what Cameron did was very different, he tried to blackmail the Euro countries in a time of urgency to agree to some extreme UK privileges, in exchange for his signature on Euro member budget rules, which are none of his business.
Did you give it any thought why he went under 26 against one in the night 9/12 ? Not a single EU country siding with him, none. The protection against such criminals is the extensive use of bilateral agreements, like the Schengen treaty. This option is now always on the table.

The fundamental question, "more than a trade association, or not" was long ago decided, 1992, and this will not be opened again, every time a new criminal/idiot is elected somewhere.

The consequence is not to give in to Cameron, Greece and the like, but to push forward harder and stronger in the core and give the rest incentives to leave.

@All
it was instructive again to see how many people are openly siding with the habitual liars and blackmail.

We can summarize most of that very simply around the Maastricht treaty. We Germans believed that those who sign it, are people like us, and keep to the basic principles: no bail out, no money printing. What we had to see last year, that a huge majority, verbosity especially in places like the US and UK, who are not part of it, tried to simply break it, not to negotiate on changes.

Soo, the journey will continue with a smaller core of people we can trust. People, who do not like the treaty, are not only free to leave, there will be no secession wars, we will even give them incentives.

A huge three front ("perfect") storm is coming up:
a) our populations are ageing, there will be not more, but often less to distribute around, as long as I live
b) China will not just eat the lunch of Greece or Portugal, those guys are fit, clever and hard working.
c) the energy / CO2 question

We are determined and prepared to survive it.
But we do not have time anymore to discuss the best pedagogical approaches for Greek tantrums.

I think most European people know very well, that they can count on our help, if things do not turn out as positive as planned, but when we see they try hard.
www.youtube.com/watch?v=dU391h882uE

[Determinant]

Germans don't declare personal bankruptcy?

Grow up, Genauer. Living in a federation means that your part will not always get its way. Germany signed up for the Euro which had insufficient provision on the fiscal side. Even Germany broke the 3% deficit rule repeatedly.

You can always not bail Greece out and let it default. Most of us here think that's actually the best course of action.

[Mandos]

We can summarize most of that very simply around the Maastricht treaty. We Germans believed that those who sign it, are people like us, and keep to the basic principles: no bail out, no money printing.

The Maastricht treaty has turned out to be dumb. A bad straightjacket that needs to be redone from top to bottom and was predicated on a theory that has turned out to be false.

All working federations with single currencies have a form of permanent bailout, if you want to think of it that way. You're writing on a Canadian blog, from a country that has basically codified the Permanent Bailout as an "equalization formula".

Soo, the journey will continue with a smaller core of people we can trust.

Except that, under the current official German attitude, this core will be eternally shrinking as they are eaten by ongoing uncorrected imbalances. Greek culture is a side issue; it will happen even under utmost probity.

[J.V. Dubois]

On the Bank Bankrupcy: I think genauer may right here. According to current EU law, you may offer banking services abroad and actually, you may not refuse foreign (EU) banks to open branches in your country if they have a bank license in any EU country. The point is that even foreign depositors who have their money in banks in EU (through network of foreign branches) do pay their deposit insurance in form of lower interest rates. This is a common model in EU banking industry, especially for various banking services offered via internet. It is very easy to have "local" bank branch consisting of bare essentials, while the rest of the business is actually conducted in "home" EU country. Of course I do not know how far this applies to Iceland, as it is not part of the EU but I can imagine why people are charging them with fraud. Such practices undermine the essential advantage of EU as one market that is working according to single list of rules and regulations.

The next best example for Canadians is to Imagine the whole Icelandic business as if Canadian government would refuse to pay deposit insurance to people who do not have Canadian citizenship. Even if one is not required to create a bank Account and even if they did have to pay deposit insurance.

[Scott Sumner]

genauer, You seem to see enemies and criminals all around you, except in some sort of ethical "core" of Europe. I think that pretty much proves my point that the "ever closer Europe" was a tragic mistake.

And "blackmail" is now the term for negotiating? I can't imagine what you think of the French? BTW, everyone knows that there were other countries that agreed with Britain, but that were bullied by the Germans and French into behaving like "good Europeans."

[genauer]

@Scott

What is your problem with me,

a) having the same legal opinion about Iceland as the relevant Court ? I referenced the relevant wikipedia entry and cited it at the begin of my last post. I assumed, that this is good enough for somebody like you, to look it up and verify for yourself. Now, to make it a little easier for you:
http://en.wikipedia.org/wiki/Icesave_dispute
http://www.icenews.is/index.php/2011/06/10/esa-iceland-is-responsible-for-icesave-refund/

b) using the same language as ordinary americans "In essence, he tried to blackmail the rest of Europe" http://www.slate.com/articles/news_and_politics/foreigners/2011/12/england_vs_europe_why_david_cameron_rejected_a_treaty_to_save_the_euro_.html

or "Senior EU parliamentarians" calling this "the UK for trying to 'blackmail' the rest of the European Union" http://www.gfsnews.com/article/3852/1/
The President of the European Parliament, Martin Schulz: "I don't think we should give in to the blackmail of Mr Cameron,"

Could it be, that your usage at U Bentley, Waltham, of certain words, like "crime", "blackmail", is somewhat different from how people in the US and here in Europe use them ?

I know that my active usage of english grammar might not be up to your expectations. The text part of the GMAT, I took recently, practically for fun, 4 days after getting a book for it, was in the upper 3 % of my age group. So, I am confident that my passive knowledge is not too bad, as we say here. In the US I would not have set my eyes on Bentley, but probably more on Stanford or Harward. But I already have a MBA and PhD :-), and plenty of real world work experience.

In this world we use the words "criminal" and "blackmail" in my way, and I did not call anybody an "enemy", the last of your allegations.

Now I would like to invite you to elaborate a little more on your very interesting claim "everyone knows that there were other countries that agreed with Britain, but that were bullied by the Germans and French"

@Dubois
I think your example is pretty close, as far as I know, and I thank you for it.
Disclaimer: I am not a victim there, and not a specialist in this case.

[Nick Rowe]

genauer: whether I agree or disagree, I think you have done a good job of presenting how you, and presumably many Germans, view the question. My main reaction, on reading you, is sadness. I understand that many Germans believe they are taking costs on themselves for the common good of Europe, and are willing to do it, if they thought Greece and others were trying their best. That is to the Germans' credit. But it will make it all even worse, when it fails, as I think it will. Because the Germans will be even more pissed off then. It all looks very different from the British side, for example (I am originally a Brit, and read the British papers a lot). The Euro is doing so much damage to European goodwill. It will get worse. What's Greek for xenophobia?

[Patrick]

FWIW, I think Iceland has every right to refuse to pay, and I admire their pragmatism in refusing to do so. It was a no win situation, and I think they probably took the least bad option. Iceland was bankrupt. In bankruptcy, the debtor is allowed to keep a core set of assets to allow them to start over. The rest is liquidated and dispersed to the creditors in prescribed priority. AFAIK, there is no prescribed priority of creditors when the sovereign goes bust. It's a free for all. So it fell to Iceland's voters to decide the priority. They, understandably, decided to pay themselves first, and then decided there was nothing left over for anyone else. Now, I suppose there is an argument that it would have been fairer had Iceland treated all creditors the same way (perhaps paying a few cents on the dollar to everyone?). But even in normal bankruptcy of individuals or firms, not all creditors are created equal, so their is a precedent.

All the talk about the EFTA court is just silly. Iceland is a sovereign state. If they don't like what the Court decides, they can ignore it. Perhaps they become a pariah in some circles for a while. So what? Germany cost the world trillions and exterminated millions and was granted absolution in not so many years. People will get over Iceland's offenses quickly enough. I very much doubt that the Court has the power to impose anything on Iceland that would be worse than the alternative of laying waste to the economy for a three or four generations. Iceland will simply ignore the Court.

Anyway, in the absence of a negotiated agreement, the usual method for making a sovereign state conform to your wishes when it refuses to do so is war. Somehow I don't think the UK or Holland have the stomach for that.

[Nick Rowe]

Patrick: "Somehow I don't think the UK or Holland have the stomach for that."
A number of people have made that assumption in the past, to their cost. "Nice little fishing grounds you've got there Lief, and a lot closer than the Falklands. And where are Icesave's assets, by the way?"

But in this case, you are probably right. But only because the Brits don't think it would be right to go to war. They usually have the stomach for it, and if this were a cold cost-benefit calculation, and not based on views about what's right, not just for us, but for everyone, then who knows?

Look, the language in this thread of comments needs toning down a bit. (That includes telling people to "grow up").

But it does prove my point. Apart from genauer, none of us here AFAIK is from one of the countries directly involved. The fallout will be messy, and nasty.

Having already "agreed" to write off 70% of Greece's sovereign debt, the creditors have already taken a large hit. What the argument is now about is about the Eurozone countries, plus the IMF (which means Canada etc.) putting in still more money. Not to mention the Target2 balances. If I were German I might very well say "Nein". (In fact, I would say "Nein", and take Germany out of the Euro.)

[genauer]

@ Nick, (and @Scott)

a) BBC poll
since you emphasize your english roots and connections, I ll give you the following BBC links:

Please take a look at:
http://news.bbc.co.uk/2/shared/bsp/hi/pdfs/05_03_11_bbcws_country_poll.pdf
"Germany was again the most positively viewed nation, with 62 per cent rating its influence as positive (up 3 points)."
aa) I am sure it, it will not stay this way, I have seen a lot of hate mongering the last year
ab) Canada is a very close second, congratulations !

via
http://www.bbc.co.uk/news/world-latin-america-12654446

Of course, Germany hidden somewhere at the end, page 26, France slighty more convinced of us then we self ? Well, statistical noise :-)

b) Challenge for proposals for "The Solution"
How do we get out of this mess, with at least some hop of long term stability?
- mainly to the 2 professional economists Nick and Scott, but other input is very, very welcome
- Medium pain for everbody is acceptable, since anything close to Pareto optimal is totally impossible
- the solution has to be acceptable for those who pay the bill, Taxpayers in Finland, Dutch, France, and not to forget Germany

c) a few remarks
- the Greece package just passed the Bundestag, everybody gnashing his teeth, because everybody knows it will not be the end,
but we get the Private Sector now out of the way, making things a little simple in the future

- Patrick is just the latest hilarious example of arguments, Iceland was allowed to sell their deposits under EFTA rules, including an EFTA court, but is not bound to its ruling
- Cameron actually try to pull of something very similar, but since it is very hard to get, what Cameron exactly demanded on this 9/12 summit, can somebody help with that ?

- in general, I do like the language of Scott Sumner for this: "cultural incompatbility"
- many people in Core Europe assumed that our "Ordnung" would diffuse to them, and not their "Chaos" (to put it nicely) to us

- many people in Germany assumed, that these endless "Nazi" extortion games would end after 50 years or so (we do not believe in "Erbsünde" [="original sin" NR]), but after 70 years too many still try to pull this off, and now it will have negative consequences for them

- It was not Germany, which wanted the introduction of the Euro
- Attempts of aligning Euro currencies practically started immediately after the break down of Bretton Woods 1973
- Germany could live very well with going back to the former Bundesbank regime
- Just 7 meters away from my desk lives a neighbor, on less what Greeks consider an unbearable minimum. Being already taxed (technically just "Sozialabgabe"), dreaming about an entitlement to "unconditional minimum income". How would I explain her, that we use her taxes to finance a higher living style for Greeks ?

Now, what are we going to do now ?

Seriously.

[J.V. Dubois]

Nick: I very much agree. I already see how populists depict Greeks (and middeterian "beach" nations as a whole) as lazy frauds that cause most of our troubles and siphon billions from our national bad weather savings. To witness such large scale dehumanization of the whole nation just to absolve political elites of core nations of blame, is truly frightening experience to behold. It is doubly so if it is made in the name of moral superiority coupled with total disregard for direct loses in much larger scale in form of opportunity cost due to incompetency of ECB and high echelons of core european polity.

PS: You almost got me there with that xenophobia remark

Patrik: I generally agree that Iceland had the "right" to do that. However I do not think that this Icelandic "solution" is that much better then the German one from European perspective. It is one-sided solution driven by nationalism which if is accompanied by the same sentiment from creditor nations creates a tidal force that inevitably rips EU apart. It is as much a proof of failure of idea of european unification as is the german bullheadedness that prevents reasonble and realistic exit strategy from this mess. It is really very, very sad and depressing.

[Determinant]

In the spirit of moderation I apologize to genauer for my intemperate comments including telling him and all other Germans to "grow up".

As a point of practicality, the EU/EFTA rules on deposit insurance were flawed. Deposit Insurance should have been mandated for the home jurisdiction of the depositor. Thus Icesave should have had to carry British deposit insurance for its accounts solicited in the UK, Dutch deposit insurance for its Netherlands accounts, etc. Deposit Insurance is supposed to protect depositors individually and prevent a systematic cascade failure collectively. To my mind it is more realistic that depositors be protected by the rules of their home jurisdiction as local government is more likely to meet their expectations and is more able to take quick and decisive action. Plus when a bank like Icesave fails, it should have had the guarantees of each of the state deposit insurance plans it operated in, not just Iceland which was far too small to insure such a large bank. This is simple credit-worthiness as applied to banks.

Note that the British deposit insurance plan was flawed too, it provided for a 10% loss to all depositors and this had to be eliminated when Northern Rock failed. Only a 100% guarantee can prevent lines around the block at branches and a panic, as the practices of the FDIC in the US routinely demonstrate.

[J.V. Dubois]

Genauer: I am from Slovakia, where the discussion regarding the increase of guarantees in EFSF in October cost us our government just 1,5 year into its term. Slovakia is much poorer nation than Germany and stories about opulent greeks stealing financing their EUR opulent pensions financed by poor Slovaks earning EUR 750 on average. I never bought this argument. If EFSF should be refused it should be on the basis that it alone will not help to fix the situation, not until ECB decides to reflate and so that the whole EU economy is jumpstarted again and that Greeks can see a light in the end of the tunnel.

It may very well be so that our country will be next in line asking for help. It is the very exact example of federal transfers in Canada. Every state of federation was clear recipient of those funds at one time or the other. It is the same example as with deposit insurance during bankrupcy. It may very well be so that government taxes poor people just to pay some rich depositors their loses. I do not recall any country that would examine depositors wealth prior to paying out the insurance. The same principle is valid for Greek bailout by EFSF.

[Nick Rowe]

genauer: "How do we get out of this mess, with at least some hop of long term stability?"

1. If the ECB would loosen monetary policy, that would help a lot. I (and probably Scott) would propose the ECB target NGDP level path growing at 5%. But, that does not resolve the underlying problem, which is the Euro itself.

2. Scrap the Euro. It would be easier if Germany left first. Germany could offer to convert all its bonds into NeuDM, at par. Then let the NeuDM float (almost certainly upwards).

It would be very messy. But the only alternatives I can see are: full political union (totally impossible for at least a century, if ever); lurching from crisis to crisis with increasing bad feelings and countries like Greece infantilised (wie in ein kindergarten??) and resentful of Mutti und Vati, who are themselves resentful, until one or the other finally leaves the Euro anyway.

JV: "PS: You almost got me there with that xenophobia remark"

The original is "Do the Germans have a word for "Schadenfreude"?

[Determinant]

On deposit insurance: Deposit Insurance is supposed to be funded by the participating banks, not the government itself. The government may make a *loan* to the deposit insurer, but this is supposed to be paid back from future deposit insurance premiums.

I do not support governments insuring deposits without reservation or limit. Caveat Emptor, or Buyer Beware.

[Nick Rowe]

Genauer:" - Cameron actually try to pull of something very similar, but since it is very hard to get, what Cameron exactly demanded on this 9/12 summit, can somebody help with that ?"

As someone who would tend to be sympathetic to Cameron, I have to say I don't really understand it either. I could see him trying to veto the 9/12 agreement, on principle, which I think would have been right. I could see him trying to prevent the Tobin tax being imposed in the UK, which I also think would be right, as well as acting in his country's interests. But I do not understand his linking the two issues.

It was UK politics. Sceptisism against the EU is very strong in the UK, especially in the Conservative party. He needed to be seen as standing against the EU's centralising tendencies, and also acting in Britain's interests (especially against the French who dislike "Anglo-Saxon" capitalism). It was popular at home. (One conspiracy theory is that Cameron and Sarkozy have a secret agreement: whenever they are unpopular at home, they will pretend to get in a big fight with each other).

[J.V. Dubois]

Determinant: I don't believe there is practical difference between government backed deposit insurance and the government "loan" that is supposed to be paid back by the future "insurance". You may as well see it as a government transfer financed by special bank tax. It still has to be paid by people that had nothing to do with some bank going bankrupt years ago, the moral hazard remains the same. I feel that this may be the same as with the famous Nick's blog about "we owe it to ourselves". If current generation of depositors exhaust the insurance fund for years or even decades to come (as is very likely in crisis of this magnitude), you just threw the burden on future generations.

Deposit insurance is best used as part of scare tactic. The purpose is the same as that of the EFSF. It should dissuade depositors (lenders) from withdrawing their money/credit. Bigger the government commitment in this scheme, means less incentives of depositors/creditors to do so, but the bigger the risk in case of eventual default. I agree that having a small nation such a large obligations of the banking sector was very risky. Will somebody tell this to people that have money in Swiss and Luxembourg banks please?

[Patrick]

Nick: Point taken. And there have been times in history when a similar situation would have led in short order to the Union Jack flying over Reykjavik.

genauer: Look, I see your point. Canada has the same problem with the US. We win rulings in international courts and the US ignores it if they don't like it. Nothing we can do. As far as Iceland goes, I think there were just no good options. The sovereign got to decide who got paid. Fair? Probably not.The UK and the Netherlands have no leverage that can make generations of debt slavery look good to Iceland. Even if they shut them out of EU markets in retaliation, Iceland is small, and it's a big world with lots of people willing to buy fish and take advantage of cheap energy.

And taking a longer view, perhaps if the UK and the Netherlands wait a few years until Iceland recovers, they could impose some tariffs or whatever on trade with a more properous Iceland and eventually recover the money anyway.

[Nick Rowe]

Determinant: "Note that the British deposit insurance plan was flawed too, it provided for a 10% loss to all depositors..."

Wow! I never knew that. Daft. Yep, you will still get a run if there's only 90% insurance.

[Nick Rowe]

The Brits and Canadians did invade Iceland in 1940. But the Icelanders didn't seem too bothered. Then there was the cod wars, the last episode of which I remember as an undergraduate, though that one never got to much shooting, IIRC.

[genauer]

@nick

Thanks for your nice remarks. especially about toning down.

Please excuse for a few, one time, uses of CAPS in this special case.
- Germany (and me) are not involved in any way, shape or form with this Iceland thing
- I made it already clear, that Germany will not get involved in anything NL and UK will do with Iceland.
- One reason I wrote this long excursion about the Amish, was, that I want to have this ABSOLUTELY clear, that Germany will not use any violence, even far below "war", in all those financial disputes.

WE DO NOT DO WAR, especially not about money, or petty insults, nor singular murder.

We went into Afghanistan with our Allies, the US, on the basis of Nato Chapter V, not because they really needed us, but because we are Allies.

We are now completely surrounded / sheltered by NATO ALLIES (well, technically there is Switzerland, but if we would spot one of her soldiers, we would ask, whether we can help him with his map, or some traffic money : - )
The first time in our history, and it feels soo good.

And to avoid any misunderstandings, in the very moment, anybody violates NATO territory (that does not include the Falklands), we would not hesitate to mobilize the full force of the fatherland, to support our ALLIES. We temporarily deactivated the draft just one year ago.
30 years ago we trained with our US and Canadian allies to airlift over the Atlantic at least one full combat division every day to our potential frontline. And we do not forget our friends.

We are still EXTREMELY hesitant to get involved in any other violent conflicts, like Libya.

@Determinant
In the spirit of moderation I accept your apology.

Discusssion can be heated, if the heart and compassion is involved, Not that this ever happened to me, LOL.
If somebody thinks, I have to apologize for some words, please speak up.

@ Dubois from Slovakia
It is kind of perverse, that you have to pay into this mess. We (speaking as an individual generously for my fatherland) do appreciate it a lot, that Iveta Radicova put european principles so high. We will not forget this, not messing up the situation any further, although it is just absurd.

I ll put the youtube link in my former posting to show that for all folks trying hard, there are strong German shoulders to lean on. Hoping that in 30 or 40 years down the road, you will help pull the cart, too.

I am soo happy to see my polish and czech neighbors to prosper. And with so little help from the EU, so far, they can really be proud of.

[Determinant]

@Nick:

That little tidbit came out during the run on Northern Rock. If you recall, there were panicked lines around the block and a flood of internet account closures. I read in the Globe & Mail (in those balmy days before the storm blew onto Canadian shores) that the Financial Services Compensation Scheme only insured 100% of deposits to 2000 pounds and 90% thereafter up to 33,000 pounds,

http://news.bbc.co.uk/2/hi/6994746.stm

Much to economists' pleas and laments to the contrary, Northern Rock customers were eminently sensible and reasonable in standing outside the bank participating in the run. As you said, the British deposit insurance scheme was crazy and it had perverse incentives.

One of the best things about living next to the US where the FDIC is very good at its job is that the CDIC has learned that you need to protect 100% of deposits up to the limit, which should be well above the range for retail depositors. Thus we protect 100% of $100,000 of deposits in Canada.

Speaking of "shock and awe", I have listened to NPR profiles of how the FDIC works. FDIC teams do just that. They filter in to a location over a series of days so as not to create a panic by all checking into hotels at once. They drive up to a problem bank at the close of business, preferably on a weekend. They take the place over and hire the bank's staff temporarily to go through shutdown procedures. They have people who hand out pamphlets to customers to say what has happened and what to expect. It is all very orderly and by Monday the bank is usually sold to an white knight or ordered into liquidation. The FDIC tries very, very hard to prevent panics.

[Mandos]

- Just 7 meters away from my desk lives a neighbor, on less what Greeks consider an unbearable minimum. Being already taxed (technically just "Sozialabgabe"), dreaming about an entitlement to "unconditional minimum income". How would I explain her, that we use her taxes to finance a higher living style for Greeks ?

But part of the solution *does* involve paying her more...this is the solution that is least acceptable to Germany as a polity, but it does involve paying her more.

[Jacques René Giguère]

Mandos:"But part of the solution *does* involve paying her more". Looks like the old quip about foreign aid being the poors in the rich countries paying for the rich in poor countries. But having a full union would mean that onlt the rich would pay for the poors. Even if the rich were to be proportionnaly more numerous in some locations.Though the canadian experience shows that a lot of people forget that it is not this province who pays to that province though there may be more higher-taxpaying individuals in some province than others.

Nick: I recall reading the memoirs of a guy from the VanDoos (to non-Canadians: The Royal 22ème Régiment, an elite unit from Québec) who was in Iceland. He didn't recall that duty as fun. They weren't seen as nothing else than occupiers. The Icelanders were acutely aware of the impracticality of a german invasion ( if it was feasible, someone would have done it, Tobin-Sargent joke anyone?.When the Americans came in, the locals were happy for the cargo.

[genauer]

@nick

just some very, very preliminary comments:

"1. If the ECB would loosen monetary policy, that would help a lot."
This is exactly what we enshrined in the Maastricht Treaty to NOT happen.

"ECB target NGDP level path growing at 5%."
not culturally compatible with Germany

"But, that does not resolve the underlying problem"
Exactly.

"2. Scrap the Euro. It would be easier if Germany left first. Germany could offer to convert all its bonds into NeuDM, at par.
Then let the NeuDM float (almost certainly upwards).
It would be very messy. But the only alternatives I can see are:"
This would be extremely messy. Not impossible, but most of our neighbors would really hate us for that.

"full political union (totally impossible for at least a century, if ever);"
I fully agree.

"lurching from crisis to crisis with increasing bad feelings"
This is what me MUST avoid.

"and countries like Greece infantilised (wie in ein kindergarten??) and resentful of Mutti und Vati, who are themselves resentful,
until one or the other finally leaves the Euro anyway."
This, I am afraid, we can not avoid.

Well, just a few first comments, but obviously we still have to work on the answer. The problem is NOT solved.

I am working on something, why, from a German perspective, NGDP targeting is sheer culturally incompatible eeeeeeeeegh

10 years ago, I also laughed about "Ordnungspolitik"

Just a little more food for thought:

http://www.nber.org/public_html/confer/2011/FPFCf11/Trabandt_Uhlig.pdf

And here we got a brandnew Balanced Scorecard
http://ftalphaville.ft.com/blog/2012/02/14/879781/whos-the-most-imbalanced-of-all-eu-members/

If you look up row 6 (private debt) for GRE(ce), then this is one of the few areas, where Greece has no warning sign. If you calculate this back just one year to begin 2011 (with row 7) they were even looking good, speculating this back one more year,
it would have been very good.

But their trouble started in 2009, with the public debt and deficit exploding.
And to blame bank lenders for lending money to the greek government, based on fudged numbers
(remember those Goldman-Sachs swaps ?), for greed, probably and not unreasonable relying also on some backing from the Eurozone, despite the Maastricht treaty to the opposite, this is stretching it considerably, from my point of view.
With a 30-years Coupon higher by just 0.5%

One word of caution, how to interpret this scorecard. Not taking Germany, to avoid sensitivities, but our best in class: LUXemburg. They also got 3 citations (red marks)
Their export surplus (row 1) is too good, and the obvious solution to this is to shrink your export (row 3) by raising your prices through strong wage increases (row 4). In fact perfect behavior in a comfortable situation.

@mandos
Believe me, my neighbor and folks like her have their time coming now. Demography and the pain endured over the last 10 years. Not because of Government interfering in wage setting,
but because of good old economic supply and demand. My cleaning lady already got an accumulated wage increase of 50 % over the last 3 years, and she is worth it, and she knows it. No bad feeling about her quick learning : - )

Youth unemployment in southern germany is at 3%, certainly good enough to cut back on government programs.

[genauer]

I mean,

this is just a perfect example of how we perceive much of outside advice:

http://www.oecd.org/document/50/0,3746,en_21571361_44315115_49743602_1_1_1_1,00.html

sorry, this is probably a little arrogant, but the OECD needs a little bit more people with real shop floor experience, and less paper output

[genauer]

1. One graph I would like to invite you to look at:
http://www.interfluidity.com/ , Figure 1, from the Levy Institute, certainly not some conspiring German Empire builders : - )
2. What do various solutions for the Greek problem, you think about, do to our trading partners (the Volume question : - )
3. Sorry, I was a little verbose last night, because I hear so often all this stories about bad intentions of Germany, often with a generous garnish of old Nazi stuff

[Mandos]

Believe me, my neighbor and folks like her have their time coming now. Demography and the pain endured over the last 10 years. Not because of Government interfering in wage setting but because of good old economic supply and demand. My cleaning lady already got an accumulated wage increase of 50 % over the last 3 years, and she is worth it, and she knows it. No bad feeling about her quick learning : - )

Youth unemployment in southern germany is at 3%, certainly good enough to cut back on government programs.

Except, this is kind of the wrong answer. There's no point in giving with one hand and taking away with the other. You put your finger on the problem (at least the part of the problem that involves German politics) here:

- many people in Core Europe assumed that our "Ordnung" would diffuse to them, and not their "Chaos" (to put it nicely) to us

For something like the Eurozone (let alone the whole EU) to work, it has to be a two-way street. Germany needed to meet its partners halfway---it needed to become a little more like Greece as Greece became a little more like Germany. Otherwise, it looks to everyone else like a soft German (sorry) imperialism. Since you've become attached to "cultural incompatibility", correspondingly I would say cultural imperialism.

Instead, for "cultural" reasons, it insisted on provisions in the Maastricht Treaty that basically guarantee that the whole thing would fail eventually, because it closes off most of the ways of regaining balance within the Eurozone. So what you are telling me is that German "culture" is not really compatible with the idea of a single currency in Europe, without German thinking also being dominant therein. Otherwise, Germany will have to learn to accept noticeable inflation.

[Mandos]

What is Germany going to do when/if François Hollande is elected in France? Assuming he has any guts and sticks to his word (not, of course, guaranteed in these days of Borg-like neoliberal assimilation of elected polticians), he is basically going to insist on the opening of what is basically the kind of Inflationspolitik rejected by Germany.

Merkel will say no, and then you have your dreaded Franco-German rift, especially as the imbalances also start to affect France...

[genauer]

@Mandos

yeah, I should not have used the c-word that often. You are most likely not the only one getting a little itched by that. The "imperialism" is fine, we Germans are used to a lot of language thrown at us. I actually think the currency union is compatible with most European states at least in the core. Lets say minus Greece but plus poland, czech, sweden in the long run.

Hollande, yeah, 75 % marginal tax rate, sounds like a wiedergänger of Mitterand, who was then holding hands with Chancellor Kohl at the graveyards of Verdun, I believe. Or the nowadays openly Communist Lafontaine, who wanted to force the same onto all other Europeans in 1999,
as a german finance minister, via "rapid tax harmonization". We have our fair share of crazies too, no doubt.

We had this German / French left / right cohabitation several times in the past, so far that has always worked out pretty well.

On the inflation, why 2 % and not 1 or 3 or 5?
The higher the inflation the more the government can take as seignorage, the faster you could adjust to imbalances. I know these arguments about "optimum currency area", and that from that perspective 5% is seen by some as appropriate.

One could say, every Eurozone voter picks his favourite number and then we do an arithmetic (or geometric, median) average for the target setting, just as we do it for calculating the real inflation measurement.

I think the real reason for the 2.0% is, that most people in slowly moving countries in the EU accept mentally that 2% is "close enough to zero". Like credit card fees, in former times mutual fund fees. In the moment people do not accept it in this way any more, they implement automatic adjustments for wages, prices, etc. and the adjustment acceleration advantange actually inverts.

I still welcome more proposals for how to fix the Greek problem.

I am in the moment working a little bit on putting my thoughts together in a coherent and short form. wage setting, (fiscal) budget policies, (monetary) inflation targetting, currency and other forms of union, subsidiarity. I hope I get this done tonight.

[Mandos]

I think the real reason for the 2.0% is, that most people in slowly moving countries in the EU accept mentally that 2% is "close enough to zero". Like credit card fees, in former times mutual fund fees. In the moment people do not accept it in this way any more, they implement automatic adjustments for wages, prices, etc. and the adjustment acceleration advantange actually inverts.

This issue---of the effect of inflation expectations---has had a whole lot of bloggy electrons spilled on it these days, including of course in the Rowian comment sections here.

I have more direct understanding than you might realize of the constraints on German society. I'm given to understand that in France electronic payment is nearly as common as in the USA or Canada, but in Germany you must always have a wad of cash on your person and the money leaves your account the moment you do an Überweisung...

But these facts just mean that Germany has been spared having to change the way it does business, while expecting other countries to become more like Germany.

(And yet Germans are very free with the gasoline despite the fact that it's so expensive.)

I actually think the currency union is compatible with most European states at least in the core. Lets say minus Greece but plus poland, czech, sweden in the long run.

The problem is that Poland and the Czech Republic would end up, if not like Greece, then like Latvia, if they were to join now or have joined before. (And I can't imagine how Sweden is "core" to anything...) This issue is eating at France, and if anyone besides Germany is core to Europe, it is France...

Essentially, because Germany has a way of doing business that prevents it from consistently compensating less competitive partners, it is going to crucify the Eurozone on a cross of gold. This is going to be self-defeating in the long run.

You ask for more solutions to the problem but you've closed off all the other exits...

As for German-French comity, it's not a matter of left/right exactly, this time there is a crucial and very specific policy dispute, and Hollande is right to point out that it not only disfavours the periphery, it also is unfavorable to France.

[anon]

"I still welcome more proposals for how to fix the Greek problem."

I've tred to outline these at the start of this comment thread. In my view, fiscal adjustment will not lead to satisfactory results in the short run, unless assisted by increased nominal flexibility plus some sort of demand-side policy. Germany has the opposite problem and could do well by running some light fiscal austerity, which would ease conditions in other countries while avoiding internal instability.

[Nick Rowe]

genauer: "I still welcome more proposals for how to fix the Greek problem."

Some things can't be "fixed". The choice is between the bad, and the very bad.

[genauer]

How the (economic) world works

according to Deutsche Ordnungspolitik (genauer version 0.1 : - )

simple, stable, calculable, reliable, understandable

1. Inflation
The central bank keeps the value of money stable, meaning 2.0 % Inflation rate. It does so by controlling the Interest rate. One target measurement, one control parameter. The interest rate follows in fact pretty closely a Taylor rule. Until 30 years ago people focused a lot more on "money volume", especially M3, but that didnt work so well, and M3 is not something a normal citizen understands or cares about. The ordinary saver and foreign investors care about, what their money will buy 20 years down the road, and how sure they are about that.

Our neighbors had a point, especially after Reunification, that it is somewhat unfair to target only the German consumer situation, under the de facto Bundesbank rule.

Their is "no money printing" to finance persistent government deficits via inflation.

2. wage setting
Wages are set by agreements (maybe after strikes) between the "tariff partners" Employer (association) and employees, the later mostly represented by their worker council or their union (specific for certain industries). The Union ponders the tradeoff between higher wages and unemployment. We now have a few minimum wages, but those are agreed upon by the tariff partners,not set by the Government. If we do not let our own politician interfere, we will certainly not accept the EU, BIS, OECD, G20, greek communist union bosses let do it.

After 1990 the world to the east opened up, and German workers had to compete with factories in Czech and the like, weakening their bargaining power. But also enabling eastern Europe to catch up. Somehow they have to earn the money to buy all the other stuff from us.

The Government has to compete for workers with the private sector, meaning to offer comparable wages, but not more.

If corporations accept too high wages, they are not longer competitive on the World market and will employ fewer number of people.

3. taxes and social redistribution
We have a rich social system, financed by taxes and social contributions.
With the changing demography it is very clear, that we ca not finance the formerly high pensions with full inflation adjustment. All original savings were wiped out in the World wars. We did not make any attempts to rebuild this.

We established the simple rule for the Paygo system: 20 % of wages go to pensions, and their level is set accordingly. Means some real cuts of about 0.5 % per year. Everybody knows this, gets a yearly printout of his entitlements and projections, and can plan accordingly, saving a little in e.g. Riesterrente, with a guaranteed interest rate of 1.75 % now. If we would run a 5 % inflation rate, we would cheat them out of 60 % after 30 years.

We take another 15 % for health insurance, the same constant fights about costs spinning out of control, as everywhere. For a long time the public service union cared only about the wages of nurses, etc. , not doctors, until those, in a very long and bitter fight established their own union, whichh in principle violates the "one factory, one union" rule.

The net income distribution is the same as it ever was, 20, 50, 100 years ago. The lower 10th percentile has half the median wage, the upper twice. We adjust this with the tax laws, having now a total marginal tax rate slightly above 50 %.

Back in 1999 this was 75%, and the rich left for Switzerland, engineers like me for the US.
It was a left / green government, which realized that this has gone too far, and reduced taxes. This leaves only small degrees of freedom for fine tuning.

In the long run, you can grow your debt only with the GDP growth rate, you just decide how close to the Abyss you run it. The target for public debt is 60 %, agreed upon 1992 with our neighbors. Currently we are at 80 %, because of the 2008 Crisis. That means we will reduce it SLOWLY.

To balance your budget you can either raise taxes or reduce benefits. You can run deficits only as long as people believe you, that you will pay it back. Germany was not the only country in the 1990ies, to find out that at some point you have to cut back on social benefits, Sweden, Finland, Denmark, Netherlands, Canada had the same. We had the special problem reunification.

The non-tax paying majority has the voting power, the high tax payers the possibility to vote with their feet and investments.

All 3 areas are controlled in the most simple way with pretty simple and long term stable rules, and with the minimum number of players.

4. Currency Union
What does change with a currency union? the measurement parameter inflation now is counted across the whole eurozone. Thats it. Every government has to finance itself, and can not live of foreign tax payers. (no bail out)

This is what we agreed on with our neighbors in the Maastricht treaty, good, just, working.
We did not agree to money printing or permanent transfers.

Any attempts to break this treaty are a severe violation of our rights.

If somebody does not or can not live by the treaty, they have to leave, and not the good treaty itself destroyed. You do not cut down the apple tree, because you have found one or two bad apples.

5. Current Accounts
In this picture Currents Accounts are not some Goverment decision, but result from Union / Employer decisions, as I lined out for Luxembourg above, in the ScoreCard Comment. If the Current Account of the whole EU would deviate strongly, because of currency manipulation of outside trading partners, we would have a word with them, but this is not the case.

[genauer]

@ anon
"light austerity" is what Germany is doing now.

@mandos
I am not sure I understand your gasoline comment. May you rephrase ?
"has a way of doing business" .... what exactly should that be ?

"Cross of Gold" is actually a very good historic example for shameless pro inflation rhetoric, which didnt succeed, good

with left/right, I meant, that this changed repeatedly between France and Germany, like
Schmidt and D Estaing, or Schroeder and Chirac

with the electronic payments deducted automatically, yes, it is very good, that people can not overdraw so easily. We still have about 10 % people more or less close to personal bankruptcy, especially in the east, because they were not used to get credit.

@Nick
The export volume factored in Euros is 4448 billion, 21 of which are Greek, less than 0.5%
In order to make the criminal politicians of Greece look a little less bad, you would do damage (killing the Euro as a modicum of exchange) to the good people of the 200 times larger rest. Do you agree that this would be completely absurd ?

When you looked at the Scorecard, you see that you have the big problem Greece, Portugal is another difficult case, but we will get them going again, Spain has to fix their special, but solvable problem of very weird labor laws, partially already done. Ireland has to cut a little more, hey, to Germany + x %, what a drama, but they have a very positive demographics.

The rest has as many citations as we.

Sooo, it is now a controlled national bankruptcy for Greece, and as for personal bankruptcy, this MUST NOT be a pleasant experience, otherwise people would do it too often. Portugal and Ireland are watching. But they all have the opportunity to go it alone.

And the rest is of course watching, whether they really want to get into this Euro thing. We will see.

[Mandos]

And with this (in fact the entire "Ordnungspolitik" description),

This is what we agreed on with our neighbors in the Maastricht treaty, good, just, working.
We did not agree to money printing or permanent transfers.

Any attempts to break this treaty are a severe violation of our rights.

If somebody does not or can not live by the treaty, they have to leave, and not the good treaty itself destroyed. You do not cut down the apple tree, because you have found one or two bad apples.

...you've basically in the medium-to-long run doomed the Eurozone. You've passed the sentence yourself. Germany will not adjust one idea to the neighbours---it will view any attempt to change things as a "severe violation of [its] rights---but will run the Eurozone exactly for its own benefit, or rather, the prejudices of its managers. I hope your evaluation is wrong, because it will crucify Europe on a cross of gold. Speaking of which,

"Cross of Gold" is actually a very good historic example for shameless pro inflation rhetoric, which didnt succeed, good

It wasn't "good" that it failed. In the long run, Bryan turned out to be right, and his speech was the intellectual fuel for movements that culminated in the American New Deal---and eventually the end of the gold standard. Developing economies require the flexibility to inflate---as do countries like Greece. Essentially, what you're telling me is that you think that the Gold Standard should never have ended and that you are a gold bug and want to reinstitute it. (And yes I know that "Austrians" and the like read this blog.)

If you're right about German politics, well, Europe needs a William Jennings Bryan, someone who will come right out and say that Germany will have to adjust and accept inflation or leave.

In order to make the criminal politicians of Greece look a little less bad, you would do damage (killing the Euro as a modicum of exchange) to the good people of the 200 times larger rest. Do you agree that this would be completely absurd ?

Once again, given your description of the utterly unyielding nature (according to you) of German politics on this matter, it would instead be to avoid a prolonged depression for those "200x larger rest".

The "controlled national bankruptcy" is not a personal bankruptcy, it is literally a liquidation of some people's lives---as well as the robbing of Greece's bargaining power (they should have played this card when they should, but Merkel basically orchestrated a coup). The way you talk about it starts to make me think that there may be something to the Greek newspaper cartoons. Yes, that's a low blow, but again, you've precluded every solution to the problem.

My gasoline comment was intended to be a joke about (yeah) the Autobahn. Above 120km/h the fuel efficiency of a car drops drastically, but I know that Germans hate driving in speed-limited France...

[Mandos]

And here is an attempt at denying democracy in France just, apparently, to accommodate the German model. Do you think that even if Sarkozy wins, that there won't be an even worse crisis down the road when a future Socialist government needs to spend more to stave off a depression? At that point Germany will have to decide whether it wants to impose sanctions on France.

The Maastricht treaty was a really, really terrible idea.

[Mandos]

And, last thing tonight, speaking again of Crosses of Gold, 2200 Italians listen to an MMT lecture, the MMTistas being basically the modern reincarnation of William Jennings Bryan, explaining to us yet again that there's never any actual need for austerity below physical limits.

And there isn't. But apparently the lack of punishing austerity would be a "severe violation of German rights"---avoiding (a bad interpretation of) Weimar history has become a self-destructive obsession.

[Determinant]

Genauer:

Your model does not deal with current accounts, even if you attempt to mention them. But first, Germany is attempting to wipe out Greece's equivalent of your point (3). Greek rights in your scheme are being eliminated. I don't see how this squares with German thinking.

Second, back to current accounts. If a country faces falling demand it will be stuck with debts that cannot be paid. A country can either accept higher inflation and get back to growth sooner or have a lowering of economic activity to pay off debt. The latter is not done anywhere in English-speaking countries, and Great Britain invented the idea of modern public debt. For very good reason, it punishes the many for the faults of the few and privileges the few, creditors.

On Ireland, the Irish accumulated a very large debt to support failed Irish banks, they did not spend it on themselves. Why exactly should the every single Irish citizen be punished for a few bad banker's actions?

I find the situation that the Irish find themselves in to be tragically sad. Ireland got a slice of economic prosperity for a while but now we are back to difficult times that drove my family to Canada from Ireland in the first place. Tale as old as time.... Alberta firms are looking at hiring Irish immigrants. Can somebody say Corktown?

[genauer]

@Determinant

It does mention the CAs

But first some short editorial comments:
- the posting is, even in this most simple form, already very long
- going into more details, I would not have posted yesterday, and adding a lot of nooks in area, where most people are not interested, doesnt help with the attention
- I bring often German examples, not because I think Europe has to circle around the German Sun, but because I am most familiar with my country. But I think Germany stands here more or less for the northern half, and of course in nearly every aspect "dividing lines" are drawn a
little different. I also put in a lot of personal examples, not because I think I am the center of the universe, but that I know how many things work in practice, and also, that many things we demand now from others, we have suffered ourselve before.
- I put this together as a kind of "minimal, complete System" because these discussions often go in circles. Now lets look, where something might be wrong, where we have to add explanations, or additional elements
- Underlying this model is, that money roughly keeps its value (unlike NGDP inflation) and that what you give one person, you first have to take from another
- whats also not in (yet), is unemployment. It profits nobody if 20 % of a people sit at home, do nothing productive, or even worse, and are brooding

- To Greeks equivalent of (3)
This is perfectly in line with German thinking / doing. We also informally, not officialy promised people to have the pensions rise at least with inflation. But the demogrpahics do not support it, we did several times some kind of short term fixes, paying more and more entitlements via taxes, cutting things like accounting for school and university years, most people didnt really see, but I had a printout made in the (good) old times, before I moved to the US. But that was never enough, so to not exceed the 20 % on taxable income, we had to cut the pensions by real 10 - 15%, and break the inflation linkage. Of course that didnt go well with the elderly, and they tend to vote more :-) You can in fact predict the outcome of all federal German elections since 1990 on what you did with the pensions in the 2 years before.
so for broken promisies, they have to hold their own politicians to account, and not the German taxpayers.

Soo, the Greek politicians did make a lot of promises and extremely generous pension increases. The OECD college boys calculated a net replacement rate of over 100 %, in comparison to 70 % old German, 50% Germany in 10 years. Well, if you have the money, you can promise it in ever way you choose. But Greek pensioneers are certainly not entitled to get their pensions paid by poorer Germans via endless Euro transfers. And it were the stories about hilarious "pension cuts" of 1 or 2 %, only at levels, practically no German would get, witch infuriated people here, rightfully. Still, if you hear the complaints, it often comes with "the pension financed half the family" and things like that.

- The Current accounts (CA)
Yeah, this is only weakly linked. The problem is, one has to say a lot more. What is really the problem, is the net international position, which is suppose to be the accumulation of this (works roughly for Germany), or even more, the interest you get from it, or pay on it. Debt, permanently rolled over without interest is not a problem.
And you know probably, that the US is running 4 % CA deficits since many years, has officially a minus 4 000 net position, but it is still positive in the financial consequences of that (for more details: "Dark Matter", Barry Eichengreen and others).

Soo, in the moment, I would like to keep this as "works only indirectly", but that creditors get itchy when you have a large external debt and a weak export position, and very limited growth potential, even if this is only between private accounts.

- for "not done in English speaking countries", it is my understanding that Canada also did cout back on unsustainable public deficits. "come hell or highwater", and that politicians got reelected, maybe you add some more details on that example ?

- Ireland, the mother of all housing bubbles
Well, people did sign their buying contracts and mortages themself, didn't they, with the required payments. And with lower interest rates, these did not go up unexpectedly for anybody. Somebody in Ireland signed of on the sustainability of the mortgage, according to irish regulations. Somebody in Ireland got the price paid out. It was the Irish Taoiseach Bertie Ahern, elected by the irish people, who pledged a blanket guarantee for banks in Ireland, to the great consternation of all German folks familiar with that. This lonely, idiotic, nationalist decision forced us to upgrade our FDIC guarantees beyond what we were determined not to surpass. This was not just a few bad (english) bankers. This was a whole people in a mad dash, as in so many other countries as well.
And to be clear, if Germany wouldnt have had high house prices, fueled by all kinds of subsidies, in 1990, in fact we let out the hot air since that, and if we wouldnt have had our reunification problem, we would have participated in that in just the same way. No doubt.

But where does the German or any other European tax payer get into this picture? I know it is so easy to say, somehow this has to absorbed "in the system", but there is no black hole, there are taxpayers on the other side, paying for that. If the Irish People / government decide to default, they will stiff certain banks, and will have to live with the consequences. Their choice. The history is full of all kinds of entities defaulting, see e.g. "this time is different". Yesterday I read something about Sumerians 5000 years ago.

If they decide to stiff the other European tax payers, they will be made to regret this bitterly.

But Irish people so far "suffer" on a very high level (GDP per capita 2010: 37.6 k$ vs Germany 35.9 !), they have a good demography, they have plenty of room to raise taxes on their own people. They fulfil the IMF program precisely, and 10-year rates are back down at 6.8%, more people believe that they will pay their obligation. They should be able to
return to the bond market, end of this year.

In the moment the "every single cititzen" is like half is working, half is actually paying any kind of significant tax, right? The irish debt consist of old debt, on which they pay the same 4.5 % coupon as before. And it is IMF / EU debt, on which they pay 3.5 %, after 2.5% EU inflation 1 % net interest on something like 85 b, or / 208 *1.3 = 50 % GDP. For comparison, Germany pays coupons of 6% for maturities of more than 10 years! Who is the exploited here ?

This actually means that their net interest payments per capita are lower than Germany ! How is this unbearable ?

British modern public debt. I did show their historic debt curve. Impressive, build on hundreds of years of justified trust. Nobody else has that. But important difference to now: the debt was accumulated for winning wars, not for permanent over consumption.

Now, lets try to shoot some real holes into my "Ordnungspolitik" : - )

[genauer]

my comments are still "posted" and then disappearing.

[Mandos]

I guess you'll have to wait until one of the blog owners comes back :(

[genauer]

since the short post obviously came through,
do you know how it works ?
For a while I thought it would be long postings and lots of links.
but the # of links explanation doesnt work.

I broke up the last posting in 2 pieces, doesnt work either.

I think, I am in general a pretty non-insulting person, no reason for any black listing

[genauer]

in the meanwhile,
just a short link, how many people like me feel about
the "no money printing" promise kept:

http://macro-man.blogspot.com/2012/02/ecb-ltro-mr-creosote.html

[Frances Woolley]

genauer - you're stuck in spam. I can see you, but because it's not my post I can't rescue you. Only Nick or Stephen can do that. I've written to Nick to let him know.

[genauer]

Hi Frances,

thanks for your help.

I liked your "How to cope with an autistic economist", a lot.
I just realized in the last few years, after several occasions of "why are people so hostile", that, well, I might be somewhat asperger.
E.G. I was reminded, after decades, at an anniversary, that age 10 I did leave a math exam after 8 min, being sure that 100% is correct, and the rest knew that 1/3 would fail with 45 min available time. People don't forget that they didn't really like me since that time, but they didnt really tell me, in the environment I lived in most the times.

If you talk with Scott, I was a little rough on him here, well, when the furor teutonicus gets going.

[Nick Rowe]

genauer: Sorry, yes, we have a spam filter with very idiosyncratic views on economics. I have retrieved your comments.

[genauer]

@ nick,
we could delete the 2nd and 3rd larger posting, because it is just the same as the first, just split up

[genauer]

@ mandos

first, clarifying language: "the Austrians" a.k.a. Gold bugs, which I am certainly not, have nothing to do with the country "Austria" in the following text

Lets try to explain this in a different way. I learned counting, money, currency under the Bretton-Woods regime, stable echange rates.

When we made vacation in Austria, the exchange rate was always stable at 7:1. You could keep some of this money for remembering.

When we went first time to Italy, the exchange rate started at 5.6 DEM to 1000 Lira, and then dropped rapidly, every year. Even more important, you didnt get back the small change (not so small for me as a boy) like 50 or 100 Lira, but low quality hard candy, resulting in effective transaction costs to the order of 25%. Same, stable currency lowers transaction costs significantly also in grown-up, business, life.

Nobody had to tell me about 1923, to make me hate Inflation and non-constant exchange rates.
All the people we talked to in Italy (in german language in Südtirol) told us that they hated that too, and would wish that the Government in Rome would, somehow via Europe, be forced to a similar discipline.

We then had these various versions of currency pegs, EMU, ECU, whatever else.
I learned that a lot of other countries had the same problem with undisciplined politicians,
and I learned that stable exchange rates like with Austria have nothing to do with other unions.

relevant (German ! for the exchange rate graphs) wiki pages:

de.wikipedia.org/wiki/Italienische_Lira , Österreichischer_Schilling

Austrian Schilling (ATS) vs Deutschmark (DEM) Exchange Rate was always 7:1
Austria is not part of NATO and just joined the EU just in 1995

conclusion: de facto currency union is possible, without any other union

Italian Lira (ITL) vs DEM decayed from 5.6 / 1000 Lira to 0.8
Italy was a founding member of "European Coal and Steel Community" 1951, NATO and whatever else

conclusion: all kinds of union, but no stable exchange rate

The Deutschmark became the Leitwährung, most business contracts were written in.

Then the others said, lets do it together, we want to become as hard and reliable as you. Our people want it too.
OK. But we insisted, as we now see for very good reason, on the conditions of the Maastricht treaty 1992:

with the safety clauses:
- no bail out
- no money printing

and the start conditions:
- inflation within 1 % to the lead group
- no more than 3 % government deficit
- target no more than 60% GDP government debt

and a 10 year trial period, to see who can keep discipline.

Then in 2002 we all switched to Euros.

- Germany went through a rough patch at this time with reunification, we also sliddered along, were busy with our own problems, start conditions were interpreted more generously. We taxed our people up to 75%, and then had to accept that we have to cut benefits, like so many other welfare states before: Sweden, Finland, Denmark, Netherlands, Canada.

At that time most others were booming, and could have kept or targeted easily the conditions.
Greece was then caught with Swap shenanigans, well, you somehow expect people to fix it up.

We now know that we can not trust a number of our (actually only indirect) neighbors.

We remember well, that after WWII a lot of our direct neighbors gave us a lot of trust in advance, we certainly dont forget this.

But that does not mean that the Maastricht treaty is invalid in any degree, or that the German taxpayer is on the hook for anybody else.

We learned last year that a lot of folks, like you, tend to "blame the victim", arguing that since we gave them a finger, they are now entitled to a full arm, and more to come afterwards.

And that stiffens our resolve a lot.

The Greek (politicians) bargaining power was based on sheer blackmail, and now the gun is taken out of the hands of the criminals and habitual liars. So many broken promises, and often followed up with shameless, public bragging about it. This has of course consequences.

[Determinant]

Federations are pay-to-play. Bretton Woods may have worked for Germany but that's because it was a pass-the-parcel arrangement. All currencies were pegged to the US Dollar which was pegged to Gold. The US (and only the US) therefore had to defend the gold rate at all costs or exit Bretton Woods if those costs were unacceptable. By the 1970's the US didn't want to pay for Bretton Woods anymore and left, the whole system crumbled.

It is possible to do everything right and still lose.

In exchange for currency and central bank policies that are sub-optimal, federations with divergent economies (Canada is the leader in this, we are 33 million people spread over 5 time zones and our provinces are more diverse economically than US States or Australia, they have more taxing power too) have to have inter-governmental transfers. Otherwise the sub-optimal policy will choke the weaker regions. It is choking Greece.

I do not argue that Greece has promised more than it can afford and has to cut back. But those who lent to a fool have to suffer too. Greece either has to default outright, default by inflation (a less painful way) or get a transfer from Germany, France, Finland, etc. But because Germany and Greece use the same currency Germany is going to pay either way.

[genauer]

@Determinant

That I learned counting, currencies at Bretton Woods times, does certainly not mean, that I want to go back to this. This was still based on the pretty fictional gold standard, which from my perspective died at the Begin of WWI. And good riddance.

Gold is something like 0.5 % of world "money" , just like Greece is 0.5 % of Euro Exports.
And it would be the same "wag the dog".

For Canada, you have one federal Government, which controls, my guess here, about 75 % of all Government spending (including direct Gov, pensions, health care). Is this right ?
Would be about 20 % of GDP ?

And after all what has happened in 2011, forget about more EU transfers, which are about 0.3 % of GDP, everything else is controlled nationally.

[Nick Rowe]

Determinant: "But those who lent to a fool have to suffer too. Greece either has to default outright, default by inflation (a less painful way) or get a transfer from Germany, France, Finland, etc."

Remember: With the over 70% "agreed" markdown in Greek government bonds, that has already happened. The question is whether Germany, France, Finland, etc. should pay more on top of that.

genauer: I've been reflecting on your comments. Even as a Brit (much closer to the Germans than most, especially after a few beers ;-)) I feel a big cultural divide. (Economists don't usually talk about "cultural differences", and I feel uneasy doing so.) Yes, there is a role for "rules of the game", that we agree to play by, and should stick to. But there is also a role for pragmatism too. There comes a time to look around, at not just Greece, and say "Hmmmm. Maybe these rules aren't working very well. I wonder if we should have a few exceptions, or change the rules, or even play a totally different game??". You can't just keep reading the rule-book, and marching off a cliff.

Thank God (and Mrs Thatcher and Gordon Brown) the UK never joined the Euro.

[genauer]

@Nick

As a Brit I wouldnt have given up on the Pound as well.
It has a long proud history, and this results in low interest rates, even when the macro data do not look so good.
But, especially if I look at this as a (potential) investor, it gives me some confidence, that people know,
that defaulting looks only like the lesser pain in the short run, and act accordingly.

In hindsight, I think it would have been better for all of Europe, and not just for Germany, if we(Germany) would have said no to the Euro idea. But I dont blame anybody, I understand the historical situation.

All this european frameworks, treaties, institutions have now become some total mess. We may have taken a few too many pages out of UK history, which, from our perspective, was a surprisingly well working history of "muddling through". Damned Brits, its all your fault! (ironic! just to avoid misunderstandings)
But people forgot, that this was also accompanied several time with some pretty simple and substantial slaughtering, something we dont want to do today anymore.

I am certainly not an enemy of pragmatism, but one thing we have to do now first, is:

Get this whole idea of people somehow transfering their payment difficulties to some anomymous "system", and breaking laws, treaties, just as it suits them, just completely out of the mind of people.

On a personal level, it is just like insurance fraud, some tangible private benefit, and the costs somehow disappear in anonymity.

Now:
There is no Germany anymore, which somehow pays in the end. You eat what you kill. Period. No matter how many Nazi and Kaiser, Imperialism stuff is thrown at us.

especially @ determinant, mandos:
Any additional money we can squeeze out of german tax payers, will NOT go to Greece, higher GDP per capita Ireland, or richer Italy, but to my poor neighbors, sleeping just 7 meters away from me, who deserve it more, and who we squeezed a little too much, in relation to these others.

For the most of my life, I also didnt like these "culture" arguments. Very hard to put this into numbers and equations, I truly love.
But after many, endless discussions about how we could have done the Reunification better (primiarily: less expensive, this was extracting 100 % GDP out of
western germany, and counting, and very little complaining, relatively), I was forced to realize, that there is something very different compared to most Balkan countries, as an easy example.

Somalia, Iraq, Afghanistan, Greece, all this waste of money, trying to force our way of doing things onto others.

I think, I observed some significant difference between people coming from countries, running an empire (before : -), like US, UK, France, and those who never had that chance.

We more often think things more top down, system building.
They more like, how do I get some extra, cheat a little on those bad above.

Me, of course, as an extreme example. I do not say "the Government" did this or that. I say "I" and "we",
although I never had a job with the government.

It is a cultural divide.