Devaluation and the Euro

"Consider a small open economy with fixed exchange rates. Suppose the central bank announces that it will devalue the currency by 50% one year from today. What are the consequences of this announcement?"

IIRC, the whole point of the Euro was that questions like that wouldn't make any sense, and so would never need to be asked again, and so we wouldn't have to face the ugly answers. It hasn't worked out that way. That same question is back on the exam paper, only in a more ambiguous form.

Nobody knows exactly which assets are denominated in domestic currency units and which assets are denominated in foreign currency units. Maybe bank deposits will be devalued, but bank notes won't. Some debts will be devalued, but other debts won't. Nobody knows exactly how much foreign exchange reserves the central bank has, or can borrow from foreign central banks. The students are raising their hands, asking the professor to clarify the exam question. But the professor doesn't know either, because he didn't write this question.

But there's no choice on the exam paper, so the students just have to do the best they can with what they've got.

The students know roughly what must happen.

People will want to sell domestic currency assets to buy foreign currency assets. The BP curve will shift up, raising domestic nominal interest rates. The central bank will lose foreign exchange reserves, and will seek to borrow reserves from other central banks (Target2). If the central bank runs out of reserves and cannot borrow enough from other central banks, it will be forced to devalue immediately, rather than a year from today. The increased interest rates would cause a recession, which would cause a movement along the Short Run Phillips Curve and reduce the inflation rate. But at the same time the Short Run Phillips Curve might shift up, if firms increase prices in anticipation of the inflationary consequences of the future devaluation. The real exchange rate might even rise, temporarily, thus worsening the recession.

This was precisely what the Euro was supposed to avoid, by making it impossible to imagine a future devaluation. Currency boards were supposed to avoid that too, by making it impossible for the central bank to run out of reserves. Argentina showed that didn't work, because you still need a lender of last resort for the commercial banks; plus high enough real interest rates and a big enough recession will force the central bank to devalue today even if it still has enough reserves.

The same question is back on the exam paper. Currency boards don't work to keep it off. Common currencies don't work to keep it off.

[This post is an attempt to get my economics brain back up to speed after a fortnight in England doing other things. The Euro crisis is the only thing that really matters now. Peter Boone and Simon Johnson are very pessimistic. So am I.]

Comments

[Jon]

What will be denominated in what is indeed the question, and one which ought to ba answered clearly:

The Greek government can start to use it's own currency but cannot default on the debts in has made in euros and neither can anyone else.

If Greece just has a money supply problem, the national currency will start to circulate and the euros will stay in the banks where they need to stay.

It's not like this situation hasn't been practices before (the wildcat banks of yore).

[Simon van Norden]

Thanks for pointing me to Peter and Simon's post. Johnson actually makes the talk by Buiter I heard ten days ago look optimistic (and everyone was stunned by how black his vision was.) It's also worth noting that Johnson is a former Chief Economist of the IMF -- he knows a thing a two about currency crises, financial panics, and their macroeconomic impacts.

[Simon van Norden]

Jon:

"The Greek government can start to use it's own currency but cannot default on the debts in has made in euros and neither can anyone else."

ROTFL!

Really? Just what can anyone do to collect from a sovereign state that refuses to pay? Call the police? Arrest them?

Funny, I thought Greece had just finished "negotiating" a >50% reduction in the debt they owe private creditors. That qualified as a default. Are you saying it did not happen?

[Jon]

Simon, I'm talking about what the greek government would agree to do in exchange for EU assuming supervisory and deposit insurance roles for the Greek banks because the Greek banks hold so much of the debt in question, any backstop of the Greek banks in the fashion I described has to be made contingent on this point.

[Nick Rowe]

Simon: I read the Boone and Johnson piece 3 times. Remembering who they are, and that they aren't hysterical types, AFAIK. I have read the odd anecdotal report about ordinary business breaking down too, even between solvent trading partners, because people just aren't sure of what currency they will eventually pay or be paid in.

I'm not 100% sure I would rule out the military option.

Where did you hear Buiter? Is there an online version?

[K]

Nick,

I think it should be assumed that all Greek laws and all contracts subject to Greek jurisdiction would be redenominated in Drachma. Foreign jurisdiction contracts would be unchanged, and (obviously) subject to the rules of those jurisdiction including bankruptcy law, etc. What interests me most is the jurisdiction of ELA funding (presumably Greece), but more relevantly the MLF and LTRO: are these governed by a supranational jurisdiction?

As to the source of the Panzers in Athens rumour, it's not very credible. E.g. the opening paragraph contains the following piece of grade A hysteria: "Berlin has failed in its efforts to force Athens into subordination by threatening to withdraw the Euro..."

Seriously...

[Nick Rowe]

K: then there are the Target2 balances, which are technically liabilities between the ECB and the national banks. I don't know how those will come out, in practice. This is what I said in my February 24 post: "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." I don't have much to add to that.

Yep, that website didn't seem highly credible. But suppose (say) Greece did really come apart at the seams, and became a failed state, because the cops and soldiers weren't being paid. Is it impossible that other EU states, or NATO, mightn't send "peacekeepers"?

Jon suggests that the wildcat banking era might be a good analogy. I don't know. But I think it will be a lot more complex than the 1930's. Late 1945 Europe might be a closer analogy (minus the physical destruction).

God this is depressing.

[K]

Nick,

Isn't Target2 effected through the MLF+LTRO once direct interbank lending fails?

"Is it impossible that other EU states, or NATO, mightn't send "peacekeepers"?"

I think it is. But they wont be Panzers, and they wont be enforcing the fiscal compact. I assume they'll be blue berets. I really don't think there will be any attempts to squeeze blood from the stone.

"God this is depressing."

I feel like when the twin towers collapsed. I can't quite believe this is happening.

[Ritwik]

I really don't get the hysteria. Soldiers will not get paid? Why?

[Nick Rowe]

Ritwik: because the government is broke and the banks are broke. The cheques bounce. Something close to this is already happening in Greece. Greeks are supposed to get free (or is it heavily subsidised?) prescription drugs. But the government hasn't been paying the pharmacies. So the pharmacists insist on Greeks paying cash up front, and tell them to seek reimbursement from the government. The government has also raided the university (and hospital?) bank accounts, IIRC. It get's into a vicious spiral too, because more Greeks are delaying paying taxes and other bills, hoping that if they postpone long enough they can pay in New Drachmas rather than Euros. Gresham's Law in anticipation. The expectation of bad money drives good money out of circulation.

[Left Outside]

You were in England? Aw, I would have bought you a pint if you let me know you were passing through London. Hope you had good time.

Next time you visit, I won't be able to buy you a pint, because we are all screwed.

[The Keystone Garter]

CIA World Factbook states that there is hydropower potential in Greece. It also states we will balance our budget in 2015...what kind of coup did CPC engineer?
Greece is an oil importer. If they can lower their trade deficit, or even get a surplus, that should help stem the slow bleeding towards hyperinflation. Greece also has high military expenditures. They could sell their 1/2 of Cyprus. It is a teeny Empire protectorate they really can't afford now. Solar thermal power, at least with Euro purchasing power, would also lower oil imports. It would be nice if they could maintain purchasing power while constructing things that lower oil imports.

[Patrick]

My God, Boone and Johnson is depressing. I don't know whether I ought to dismiss them as hysterical or expand the garden and stock-up on ammo.

[Determinant]

Last time I checked Cyprus was a sovereign state and Cypriots have a low opinion of Greeks. Hydropower in Greece. Ok, what rivers are going to be dammed? The place is semi-arid and it doesn't have many.

Speaking of soldiers, the Greek Army is made up of conscripts, I don't believe the pay is particularly good. These soldiers will be civilians in 18 months anyway so a coup like that isn't such a good thing.

Turkey does coups like that, though, but they seem to have broken the habit.

[Peter N]

"SPIEGEL ONLINE: Mr. Ritschl, Germany is coming across like a know-it-all in the debate over aid for Greece. Berlin is intransigent and is demanding obedience from Athens. Is this attitude justified?

Ritschl: No, there is no basis for it.
SPIEGEL ONLINE: Most Germans would likely disagree.

Ritschl: That may be, but during the 20th century, Germany was responsible for what were the biggest national bankruptcies in recent history. It is only thanks to the United States, which sacrificed vast amounts of money after both World War I and World War II, that Germany is financially stable today and holds the status of Europe's headmaster. That fact, unfortunately, often seems to be forgotten."

http://www.spiegel.de/international/germany/economic-historian-germany-was-biggest-debt-transgressor-of-20th-century-a-769703.html

[Ritwik]

Nick: Normally, I recognise the inter-temporal budget constraint, but the government cannot literally be broke. Payments will be prioritized, pharmacies may see their bills delayed, but to reason from there to a coup? What happened with Argentina? Why're western democratic systems perceived to be so fragile? Public servants, including armed forces and doctors, get delayed payments in developing nations all the time. Life goes on.

My hypothesis is that following a Greek exit, forced or otherwise, you'll see some crappy policies being enacted and low/negative growth for a while. Lots of sovereign debt restructuring, of course. But that's that. Greece still remains as beautiful as it was. Feta cheese tastes just as good. And the merchant navy hasn't lost its capability overnight.

If anything resembling a military takeover of large scale violence does start, we would seriously have to re-look at the fragility of all/most developed democracies. Not just Greece.

[ilsm]

Today Germany does not need a Prussian militarism with von Manstein types, field marshalls who can get away with starving lessers, sending their harvests back to the fatherlandt.

That the likes of von Manstein were not hanged and Germany was allowed to reunite are grave errors.

[Peter N]

And then there's Spain.

A link from the estimable Felix Salmon:

http://blogs.the-american-interest.com/wrm/2012/05/26/new-spanish-finance-horrors-shock-the-world/

[K]

Ritwik,

If next month's elections deliver a another deadlocked parliament, that may produce a constitutional crisis just as critical decisions need to be made. Couple that with huge economic pain, mass demonstrations and riots, it seems to me the conditions are there to provide necessary cover for a military coup.

Does that make me feel hysterical? A bit, yeah. I'm old enough (barely) to remember fascism in southern Europe, but I grew up with a strong sense that we were living through a permanent progression towards freedom and liberal democracy. The possibility that that was merely another temporary reprieve from the centuries old equilibrium of brutal dictatorships and imperialist wars does indeed fill me with dread and a deep feeling of loss.

[The Keystone Garter]

Determinant, "hydro" is Greek for water.
I would describe the climate as Mediterranean. But yeah, turning arid is the main risk here. AGW will happen before the end of the lifetime of any dams built and all climate model point to drier S.Europe.
But this is balanced against future rises in oil price, future nuclear meltdown Europe events, and existing unemployment.
Cdn Oil Sands (tar) employs one person per $1M in annual revenue. Vestas (wind) does one per $400k. Manitoba Hydro is one per $160k. For utilities is very labour intensive. IDK about privatization. And this doesn't measure new construction projects.
IDK what rivers. The NW has the most potential. I'll guess: Akheron, Akheloos, Kremasta, Pinios, Aliakmon...my specialty regarding hydrology here is peaty N.Europe and Russia.
And Chretein tried to help Europe (like NDP trying to arrest cdn debt today with corporate tax increase) back when economic problems were easy (before debt). Italy called him a neocon. The mountainuous terrain is very good for hydro and protection from Roman conquerers. At 4%+ of GDP, military seems high and is not employment intensive. Education is and is one % below cdn spending.
Did you know hydro was a Greek word and that they co-invented hydropower?

[The Keystone Garter]

...wow, changed my mind about Cyprus. They are incompetant is a sovereign nation. Germans should take them over. They can't be a European economic ray of light post-explosion.

[Declan]

The sad part is how unnecessary this all is. Having to stop a football game because of a lightning storm or a serious injury is one thing, but having to stop because you ran out of numbers to put on the scoreboard is truly absurd.

[Patrick]

Declan: wouldn't it be stopping the game for lack of a ball?

[Tom]

Jon, no country inside the Euro zone can print their own "money" -- so Greece has to exit to do so (and many claim that's the best at this point).
On the other hand, they COULD print Bearer Bonds, at 0% interest, for one year, and pay off their obligations in such IOUs, especially if they accept such Bonds immediately at 100% face value in payment of taxes.

Such Drach-Bonds could be introduced immediately, and could allow Greece to stay in the eurozone longer, by paying its external debt costs in euros (i.e. from tourist taxes) while paying its local creditors in printed Drach-Bonds (or Drachons? dra-con). As long as companies are not forced to accept Drach-Bonds, tho allowed to (at a discount, perhaps), such bonds are not legal tender.

Of course, this doesn't give Greek exporters the devaluation goose; but they don't lose the euro yet, either.

Germany, too, could do this, and reduce the German gov't borrowing from capital markets, pushing the capital towards funding more private businesses. If Germany did this first, they could more easily push for Greece to follow.

[The Keystone Garter]

...devaluation or splitting off seems always a likely scenario. Goivernments will depreciate or print to avoid riots or malnutrition. MB hydro also maintains grid I assume, here is a pure dam estimate:
http://www.wuskwatim.ca/project.html
Is $276k in construction costs per job year created. The main benefit is reduced foreign oil imports, reduced deficit. Leave it to the grecians on the beaches to do that math.

[Bill Kelly]

Nick,

This may be the Buiter interview you were asking about.
http://www.bloomberg.com/video/80554502-europe-must-act-now-to-avoid-a-default-buiter-says.html

[Bob Smith]

Peter N - great link. Time to stock up on canned goods and small arms.

Actually, the really terrifying specter Simon raises isn't just economic collapse, but the possibility of the political collapse of countries like Spain where there are sharp (and within recent memory, violent) regional tensions. Faced with the prospect of both an insolvent federal government, and bailing out insolvent regional governments, you wonder if the wealthier regions of spain start wondering about hiking out on their own. Or, as Simon suggests, maybe the poorer regions decide they're getting a raw deal, and strike off on their own.

And is Spain unique in that regard? Belgium's ethnic divisions are held together with sticky tape (how many months did it take Belgium to find a government?). There are long running regional tensions in Italy between the wealthier north and poorer south. Even France, the ultimate example of the modern unitary state, has had its issues (albeit relatively minor) with Basque and Corsican nationalists over the years.

The political collapse of those countries would be bad enough, but the collapse of countries with sharp ethnic divides (Spain or Belgium) raises the scare of a much nastier kind of conflict. Sure, the Spanish or Belgians as decent, civilized people (for the most part) so we like to think that they wouldn't start massacring one another. Then again, people used to say the same thing about the Yugoslavs. Right up until they started massacring one another.

[Bob Smith]

Ritwik: "What happened with Argentina?"

Good question, and the answer depensd on the year you're talking about? In 2001, democracy in Argentina survived an economic crisis. In 1930 (at a time when Argentina was one of the wealthiest countries on earth), it didn't. Western democracy is seen as fragile because the history of a lot of western democracies - and Greece is a prime example - suggests that it is.

[Dan Kervick]

I don't understand the precise nature of the ECB risks that Boone and Johnson are talking about. ECB capital requirements are, as I understand it, a price stability management tool. The bank is the issuer of the Euro, and so it cannot have a solvency problem in the Euro. The bank cannot go bust, although it could be forced to relax its current price stability targets or alter its stabilizing mechanisms.

This all looks to me like a lot of misplaced German phobias about their own history. Any suggestion at all of monetizing spending or integrating fiscal and monetary operations sounds to them like a recipe for a Weimar hyperinflation wildfire. Every sign of political ferment and aversion to neoliberalism is a sign of emergent fascism. They seem obsessed with disciplining the formerly fascist countries of the periphery to be good former fascists - like Germany!

Somehow, it is hard for me to believe that a continent languishing in unemployment and stagnation is going to launch into a riot of price increases as a response to a boost in money-financed demand. Won't they just happily go to work and produce more. The only thing pushing the continent into the kind of insecurity and panic that could touch off currency collapse is the atmosphere of Merkelmaniacal rigorism and fear-mongering that is poisoning the economic life of that continent. She really has to be pushed politically out of the picture. Her party of moral fanatics are paralyzing and destroying the EZ.

[Mandos]

Dan Kervick: it's more complicated than that, as I'm sure genauer will be around shortly to tell you.

Germany's entire society and economy down to the local Aldi's grocery is designed around a certain attitude towards money. To the ordinary German worker/consumer, increasing inflation expectations looks like the wholesale breaking of a social contract, and they're very suspicious (and with good reason) that they are going to be the beneficiaries of any compensation or upside.

That is why Merkel cannot move. Note I said "can't." If you can read Der Spiegel in German (particularly the comments section), you'll find that the discussion is cast in entirely different terms, with completely different underlying expectations for the universe. Like an alien planet.

The German worker was a good little boy/girl, and sacrificed the possibility of future consumption to subsidize production and export. For this, the German worker expects to reap a big reward, much bigger than what has hitherto been reaped, in the face of rising Krankenkasse costs, etc. Now you are telling them that the savings that they made, subsidizing exports, are going to be inflated away. And they are wondering, what happened to the margins?

The idea that Hollande got elected on a platform of lowering the retirement age in neighbouring France is viewed as a deep betrayal, with incredulity on German TV.

[Patrick]

Assuming Mandos' story is accurate ... wow. Just wow. Is there really no realization among Germans that their primary export during the naughties was hyper-bubbles to the GIPSIs? Anyway, who do they think was buying all that stuff they were exporting? Martians? No. It was Spanish construction companies.

History would suggest that this won't end well.

[Bob Smith]

"Somehow, it is hard for me to believe that a continent languishing in unemployment and stagnation is going to launch into a riot of price increases as a response to a boost in money-financed demand. Won't they just happily go to work and produce more."

In fairness, the Germans are probably worried about the impact of loose monetary policy on Germany, not the Euro-zone generally. And that's a fair concern (at least from a German perspective). That's the flip side (so to speak) of the Euro. The fact that a monetary policy that's just right for Germany is too tight for the periphery also implies that, absent structural change, a monetary policy that's just right for the periphery will be too loose for Germany. The continent might not launch into a riot of price increases, but Germany probably would (which, I suppose, Germany's critics would say is exactly the point - you can resolve the structural imbalance in the EU by either driving down costs in the periphery - through austerity and structural reform - or driving up costs in Germany through inflation).

I also have some sympathy for the (admitedly, self-rightious) view that a large part of the problem is that the governments of the periphery countries haven't made an adult decision in decades (Higher pensions? Sure. Earlier retirement ages, why not? Shorter working weeks, bien sure! Cheaper tuition? We're not Americans, of course. Paying for it? That's what bonds are for). That doesn't make the German position right, but its understandable.

That being said, faced with the prospect of mass European banking failure, the break-up of the Euro zone, and basically the end of the post-WWII european project, a bout or two of rampant inflation doesn't strike me as the end of the world. And while self-righteousness is fun and all, as a general proposition, if your neighbour's house is on fire, it isn't particularly clever idea to tell him that he should have installed sprinklers like you did.

[Dan Kervick]

Like an alien planet.

Right, Mandos. But what you are telling me is that the Germans are extremely insular, and don't seem to have any conception of living in any kind of "union" at all.

Despite all of these savings, aren't the Germans in fact quite rich? Did the riches come only from domestic sales? No.

[Mandos]

Assuming Mandos' story is accurate ... wow. Just wow. Is there really no realization among Germans that their primary export during the naughties was hyper-bubbles to the GIPSIs? Anyway, who do they think was buying all that stuff they were exporting? Martians? No. It was Spanish construction companies.

Wolfgang Münchau writes a column/blog for Der Spiegel, in German, where he basically channels Paul Krugman and Martin Wolf, for the most part.

Now, Germany is not like the USA, and there is a balance of "traditionally" left- and right-wing voices in the Der Spiegel comments section...typically united in contemptuous rage at Münchau's treasonous voice. The left views this (and I sympathize, obviously), as an opprobrious bailout of bankers who should have long since been jailed, at the expense of the German worker who pays both on the upside and the downside.

The right views this as "lazy Greeks" and demands a return to sound money. 'Nuff said.

And yes, there is a chorus of voices who believe that everyone can produce to prosperity. That's what producing is, duh.

[Determinant]

The German worker was a good little boy/girl, and sacrificed the possibility of future consumption to subsidize production and export. For this, the German worker expects to reap a big reward, much bigger than what has hitherto been reaped, in the face of rising Krankenkasse costs, etc. Now you are telling them that the savings that they made, subsidizing exports, are going to be inflated away. And they are wondering, what happened to the margins?

Wow. Way to not face reality by defining it away (Germans I mean, not you Mandos). I was a good little boy, studied hard, tried to get the right summer jobs, and it didn't get me anywhere. Trying to get a job in Canada's depressed economy is like trying to push spaghetti uphill.

Two can play righteous indignation about inter-war policy. In Canada and the United States, we learned we didn't have enough inflation. And then when we finally set our minds to producing c. 1939-1940, we snapped out of that depression. And then when we demobilized, we shifted that production to consumer goods. Keynesian economics had a lot of credibility by c. 1955.

Then there is the fact that the Weimar hyperinflation was political in origin over the occupation of the Ruhr. It was also over by 1923 and by 1928 Weimar Germany was doing well. The Depression was a different event altogether. That Guy did not appear or get power because of hyperinflation, that was ten years later.

[Mandos]

Right, Mandos. But what you are telling me is that the Germans are extremely insular, and don't seem to have any conception of living in any kind of "union" at all.

Germany is an enormous country by population with a diverse selection of several mid-sized and very different metropoles (as opposed to France's one giant Parisian metropolis). West Germany in particular has had a huge amount of immigration both from other EU countries and of course from Turkey, etc. When you get on the bus and hear a mix of black and white teenagers speak an incomprehensible local dialect, you'll realize that Germans think they're open enough, thank you very much, and no one can lecture them on insularity.

The problem is, across the EU---and not just the EU, this applies to almost all major forms of international economic integration---there is a crisis of democratic legitimacy. Germans did not ask to be made responsible for this crisis, as they see it. They'd have been happy with the DM. They were promised in the Maastricht treaty, that their way of doing things would be respected in it. The point of the treaty wasn't the debt, it was the inflation.

[K]

Mandos,

I think you accurately capture the self-image of the rentier. But you neglect to capture the underlying psychology. While they imagine themselves as paragons of Lutheran boyscout virtue, they are actually just a bunch of whiny socialist pussies. Real men (and women) don't plan to spend their lives slavishly serving The Man and then live a comfortable retirement by virtue of a government provided inflation guarantee. Real men (and women) understand that consumption can ultimately only be deferred through ownership of *real* capital assets with *real* risks. And they don't lend money to deadbeats at juicy rates and then cry to the government like a bunch of babies that their savings are supposed to be risk-free, when the deadbeats turn out, in fact, to be deadbeats.

[Bob Smith]

Patrick, "GIPSIs"? What was wrong with PIIGS? (Plus, in this context, the use of the defined term GIPSIs almost certainly risks a human rights complaint of some sort).

[Mandos]

The continent might not launch into a riot of price increases, but Germany probably would (which, I suppose, Germany's critics would say is exactly the point - you can resolve the structural imbalance in the EU by either driving down costs in the periphery - through austerity and structural reform - or driving up costs in Germany through inflation).

Very likely. For once I agree with Bob Smith. Actually, maybe for twice? 4L of milk in Germany is 2$ cheaper than what it is in Canada, VAT and all. A nice package of smoked salmon can be had from your local Netto for 3 EUR---a steal, compared to the prices I've seen for it in North America. French restaurants are considerably more expensive than German ones.

So that 400 EUR minijob? Yes, very difficult to survive. But possible.

That being said, faced with the prospect of mass European banking failure, the break-up of the Euro zone, and basically the end of the post-WWII european project, a bout or two of rampant inflation doesn't strike me as the end of the world. And while self-righteousness is fun and all, as a general proposition, if your neighbour's house is on fire, it isn't particularly clever idea to tell him that he should have installed sprinklers like you did.

But, you see, it's much easier to yell "Raus aus dem Euro!!!" and "Tsipras is not sticking his grubby fingers in MY pocket, no way."

This is what they think you're asking them: not just not to lecture the neighbour, but to invite him into your house while he is still playing with matches. There is a reasonable demand for democratic legitimacy. If a 100M German-speakers get to vote on how the Athens tax office is run, then a 100M southerners can vote themselves equalization payments. But the French won't allow this tradeoff, so why should the Germans?

But again, I agree with you, the margin has been squandered, and all roads lead to inflation in Germany one way or another. Better to do it and hold the Euro together than not.

[Peter N]

Willem Buiter - Can central banks go broke?

http://www.cepr.org/pubs/PolicyInsights/PolicyInsight24.pdf

[Peter N]

Debt is not a time machine.

There's no Santa Claus and there's no Social Security Trust Fund.

The amount of money available at any point in the future will determine the prices at the time. Even if we saved money by burying it in the back yard, what the money would buy when we dug it would depend on how much money there was as a result of digging. Burying and digging up twice as much money would just increase prices accordingly.

A sovereign's unfunded future transfer payment liabilities are unfunded because they're unfundable.

Europe seems to be discovering this astonishing fact. Who knew?

[genauer]

@Nick Rowe,
please stop promoting racist hate mongering references like your "military option" link.

Beyond that:
Well, as a German, I find it often puzzling, what people somewhere else assume of us, our motives etc.

1. Maastricht treaty
no bail out, no money printing, these are not just some vague "promises". It is the law. period.
Not subject to majority votes. Breaking the law, and stealing from your neighbours is just criminal.

2. Germany "insular"
The extreme opposite is the case. There is no country on earth, which has more neighbours, somebody counted 11, I reach 10, compare that to Canada, or the US. Germany sits right smack in the center of it all. Our trade / GDP is much higher than most other (larger) countries.

3. popular Germany
The recent Pew poll (Germany 1st by a large margin) and BBC popularity (first time only 2nd, with Japan 1st this year with some deserved Fukushima sympathy) are extremely good for Germany. Apparently all the constant hate mongering of certain Anglos, Greeks, and lefties did not make a dent. This is quite some social capital to spend, hitting some folks sheen bones : - )
Most people in the world honour LONG TERM reliable, honest, effective, trustworthy (ten year rates are now MINUS 1.0 percent after tax and inflation) and helpful neighbour, who uphold the law.

4. Germany is different
We were the first to have universal health care, retirement plans (since 1885), which also explains, why only 43 % think they need to own their home. We (nearly) dont have any of those skyscraper wastelands, the social geography is not centered around 1 capitol, incomes do not increase with city size, many cities above the size of 50k are blooming, with an emphasis on "walking distance"

The Maasstricht treaty enshrines the time honored Bundesbank principles:
- total independence ("neither praise nor critizise")
- inflation targeting only
all those silly things like phillips curve, BP curve, keynes are for non-german wimps only. If people dont like the treaty, they signed, they should make proposals, how they want out.

Our German Ordnungspolitik works, like swiss clocks and german cars, reliable, robust, simple, long term, as in the Nordic states, and very socially. Others can do for themselves whatever they want, but they are NOT allowed to screw up us here.

Mandos made that point as well, cheap prices from intense competition, in short distance, when you look at quality of live, I challenge everybody, where this should be better. Takers ?

[Bob Smith]

"but to invite him into your house while he is still playing with matches.

Hey, shocking day, I don't disagree with you (truly a sign of the apocalypse). And your point about democratic legitimacy highlights the fundamental structural problem with the EU. Whatever the formal powers of the EU (and they aren't much to begin with), only national governments that have the democratic legitimacy to have real power to address their problems. Or not.

Moreover, the Europeans lack a shared idendity to smooth over hard-feelings between their nation states. While the prospect of bailing out the governments of, say, Quebec or Michigan, would no doubt be a source of tension within the Canadian or American federations, at least there's a sense of shared citizenship/identity to smooth over the hard feelings on both sides - Quebecers may be Quebecuers, but they're also Canadians (I realize that Quebecers don't always see it that way, but they generally come around when the question of federal money arises). Does anyone in Europe identify themselves as a "European"?

"Better to do it and hold the Euro together than not."

That's probably right, but even as I say it, I can see the other side. It would be one thing if they thought that a one-off burst of inflation (or fiscal transfers) might be enough to smooth the implementation of structural changes in the PIIGS countries (and elsewhere in the EU, ahem, France). Doing something you don't want to do is pallatable if you only have to do it once, and you think that there's an upside. On the other hand, if you think that the PIIGS aren't likely to resolve their structural issues in real terms (through increased productivity and/or lower incomes) then the Germans are faced with the prospect of either an eternity of fiscal transfers to the PIIGS or a monetary policy set to the priorities of the weakest members of the Euro zone.

I can see the Germans (and others) taking the view that that's not what they signed on for. And your mention of Hollande and Tsipras nails the issue right on the head - French and Greek voters are telling the Germans that they aren't all that interested in structural change, or at least the Germans could be forgiven for reading the message that way (that interpretation may be wrong - politicans will say anything to get elected, and there's always the possiblity of Hollande or Tsipras doing the Nixon to China thing). Maybe the Germans figure it's better to make the PIIGS make their call now. Either they reform, or they don't. If they don't, the German eat the cost of breaking up the Euro zone now (and impose de facto structural change through devaluations of the new PIIGS currencies) rather than drag this sick puppy of a currency zone along for another decade in the hope that the PIIGS will eventually get their act together, with no guarantee that, in a decade, the Germans won't be faced with the exact same decision and the exact same costs/risks.

That option isn't great, but I suppose from a German perspective, at least it's not dependent on the dubious promises of Greek (and other) governments who, heretofore, haven't shown themselves to be either particularly competent or particularly good at keeping their promises.

[Mandos]

Mandos made that point as well, cheap prices from intense competition, in short distance, when you look at quality of live, I challenge everybody, where this should be better. Takers ?

Well, the point is that this exists now at the expense of others, not that it isn't very good, and that a balanced Eurozone and the Maastricht treaty were an impossible contradiction. Krugman recently quoted someone else as calling it a postmodern novel in full treaty form.

And he's right. ie, if Maastricht was the condition, then the Eurozone should never have been created, because it can never work that way. Every currency union is a transfer union. French politicians intended that Maastricht would eventually become a dead letter, because the Euro was intended to force integration.

[Mandos]

Most people in the world honour LONG TERM reliable, honest, effective, trustworthy (ten year rates are now MINUS 1.0 percent after tax and inflation) and helpful neighbour, who uphold the law.

But this is not a good thing. The confidence in Germany has been borrowed from its neighbours. Or is beggaring its neighbours.

It's possible to be too productive.

[W. Peden]

Declan and Patrick,

"The sad part is how unnecessary this all is. Having to stop a football game because of a lightning storm or a serious injury is one thing, but having to stop because you ran out of numbers to put on the scoreboard is truly absurd."

"wouldn't it be stopping the game for lack of a ball?"

That's a really easy way to explain the difference between money's function as the unit of account and as the medium of exchange. I'll have to remember it.

The Greek crisis proves that, regardless of whether or not economics has advanced since the early 1930s, economic institutions have regressed. The Gold Standard had its flaws, but there wasn't a huge logistical puzzle of "How do we get off the Gold Standard?" It was staying on it which was a challenge at times. In contrast, the Greek crisis is mind-numbingly complex when one starts to factor in the institutional problems and the vague externalities involved.

If you can judge macroeconomics by the institutions created by politicians, then it has largely moved backwards since the 1920s neo-classical period. I like to think that Irving Fisher, for all his eccentric and quixotic causes, would have never had any time for the Euro. While politics was a factor in it, the neglect of the importance of monetary disequilibrium that emerged in macroeconomics a few decades ago helped legitimise the bad politics.

Monetary economics seems to be cyclical: money goes from not mattering to mattering to not mattering etc. When macroeconomists think that money isn't important and start thinking that credit or the "real economy" or whatever are what is important, then we seem to get some very bad policies from politicians. Unfortunately, we're at the tail end of a cyclical downturn in macroeconomics, just like the early 1930s (with the Austrian School, the Real Bills Doctrine, Fabian Socialism and Marxism all doing well) so we're going to see some 1930s style bad policies, like the apparent "Status quo till I (we) die)" policies of the EU.

[Determinant]

Our German Ordnungspolitik works, like swiss clocks and german cars, reliable, robust, simple, long term, as in the Nordic states, and very socially. Others can do for themselves whatever they want, but they are NOT allowed to screw up us here.

You might want to reconsider your comparison to the Nordic states. Sweden, Norway and Denmark have refused to join the Euro, the Norwegian and Swedish Kronas still float freely. Second, Sweden pioneered deficit stimulus, starting in 1930. That's why they exited the Depression in 1934. Unlike the Germans, they realized the parts that wouldn't work and didn't sign on to them. The Swedes do Keynes more than anyone.

retirement plans (since 1885)

Bismark's over-70 plan which wasn't supposed to be paid to many people since they were supposed to die first?

[genauer]

the maastricht treaty made it perfectly clear, that the ECB is not a fiscal or transfer union. To somehow assume, that some folks just spend, and the others have to pay, against written treaties, is simply hilarious. Better to get rid of such clowns.
There can be no union with fundamental criminals.

And it were those with the current account deficits, who lived at the expense of their neighbours, and have to learn now, that this will not go on forever.

[Mandos]

Does anyone in Europe identify themselves as a "European"?

Did I mention earlier my depressing visit to the European Parliament's Strasbourg branch? No tour, no cafés, solitary art museum with very limited hours, arty architecture by half-hearted committee, and I had to "hold it" until I managed to get back to the shopping mall in downtown Strasbourg.

No, Europeans do not identify themselves as European. But, on the other hand, there's a sense that something has to be made to work...

[Mandos]

Mr. Tsipras is a more complicated figure than the media seems to allow, which is why he remains popular in Greece. The problem for the Greek citizen is that they also lose on the upside and on the downside. On the upside, the benefits are taken by the Greek elites. Then they are stuck with the bill via austerity. Tsipras is willing to admit that Greek society must change, but quite correctly, it can't change when no investments are made at all.

So I for one hope he wins the next Greek election.

[Mandos]

genauer:

And it were those with the current account deficits, who lived at the expense of their neighbours, and have to learn now, that this will not go on forever.

You can keep saying this, but you are denying math itself. This is one place where economics and physics finally aligns. For someone to have a surplus, someone else must have a deficit. Overproduction must go somewhere. It is partly the responsibility of Germany and the German citizen that it has been overproducing. Without the Euro, the other EU countries would have long devalued and flooded Germany with even cheaper goods, unless you think that the Greek is congenitally incapable of producing at all.

[Bob Smith]

"no bail out, no money printing, these are not just some vague "promises". It is the law. period.
Not subject to majority votes. Breaking the law, and stealing from your neighbours is just criminal."

All fair points (well, except about the criminal point, not every breach of the law is criminal). But subject to a huge caveat - laws change. And the Italians, Greeks, Spanish, etc. might be forgiven for saying, yes, well, that was then, this is now, we need a new law which reflects today's reality.

Moreover, is the Maastricht treaty really law? Strictly, yes, it is. But for a "law" to be meaningful it has to have at least one of two elements. First, and Mandos nailed the point, it has to have legitimacy (which in Western democracies requires democratic legitimacy). Laws are generally obeyed and complied with not because they are "law", but because they are seen as being legitimate by the people who are expected to comply with them - we put coins into parking meters not because we fear a ticket, but because we respect the law. But treaties, in general, and the Maastricht treaty in particular, are elite driven forms of law (which, inherently, are negotiated between the executive branches of government of different countries and presented, warts and all, to voters, if at all, as a fait accompli). So no wonder that Europeans didn't (and don't) feel all that compelled to comply with their obligations thereunder.

Second, for laws to be meaningful, they have to have some consequence for non-compliance. If laws are seen as legitimate, the consequence for non-compliance could be as simple as stigma for non-compliance. Treaties are particularly useless forms of law because, even when they contain compliance provisions (and they generally don't), the fact that sovereinty lies at the national level (as it does, EU notwithstanding) means that those treaties are generally impossible to enforce. At best they provide a degree of moral suasion as to what countries should do.

So in Masstricht we have a "law" that is unenforceable and lacks legitimacy. Is it any wonder that the PIIGS (and others) don't feel too bound by it?

[Mandos]

I mean, at a personal level, aside from the lack of Sunday shopping, I like the German way of doing things. I'm not arguing with genauer that there isn't something good about what Germany has accomplished, far from it. My idea of a good lifestyle is Berlin or Munich, not Sicily. I don't spend a lot of money on showing off to the neighbours: I buy exactly what I enjoy, to the amount I can afford, and take on debt only to fund longer-term improvements, usually.

But one reason why I can do that is because someone else is consuming what I am willingly not.

As for K:

And they don't lend money to deadbeats at juicy rates and then cry to the government like a bunch of babies that their savings are supposed to be risk-free, when the deadbeats turn out, in fact, to be deadbeats.

This is, again, at the very nexus of wealth distribution and democratic legitimacy. The German worker did not lend money to deadbeats: she put her money in a safe, local Sparkasse account. Or so she thought. When the Euro was created, she was lied to about what it meant, and then betrayed by the SPD into Hartz IV. If the German worker could be sure that the losses/transfers would be distributed equally across Germany, it would be an easier sell, but you and I know it won't.

In other words, democracy was gamed in bad faith, and intended or not, bankers made out like bandits and left the German and the Greek at each others' throats, so to speak. Or the fiscal equivalent thereof.

It's an old story.

[The Keystone Garter]

All sorts of things are being mentioned here. Spain has banks that have bad bonds investments. France is stupidly lowering their retirement benefits age for able bodied/minded to 60 (instead of GAI to all)...

I see two main issues:
1) Too much federal debt.
2) Tourism/hospitality was 9% of employment and is being cut in half.

Gotta find something else for Greeks to do than tourism services. Can't afford Euro-denominated stimulus because of past spending. To me it just depends on whether the EU wants to pay for whatever unemployed Greeks will re-educate for, or otherwise work doing. The world isn't paying for tourism. I suggested hydro. If no one pays them to do anything it means writing off the debt, and starting from scratch with higher borrowing costs. There is a failure to plan for retraining and/or reinvestment. I like green stuff.

[Peter N]

@Genauer

"Others can do for themselves whatever they want, but they are NOT allowed to screw up us here."

They've already done it, and you were happy to let them, as long as you were making money. If you run a trade surplus in a currency union, somebody else will be running a deficit. You were selling more to the Greeks than you were buying and your banks were happy to lend them the difference. Welcome to the land of moral hazard.

The Greeks don't have and never will have the money to repay you. Your austerity policies are about to bankrupt Spain. Should that happen, I guarantee you, Germany will suffer and suffer more than if it had just forgiven the Greeks their debts and booted them out of the euro 3 years ago.

In a financial crisis swift action beats moral rectitude every time. First fix the problem; then place the blame.

Germany isn't invulnerable. You've got a national debt of around 80% GDP; your banks are broke; and your services sector is as inefficient as the Greeks'. Your exports are very strong, but who will you export to, if your trading partners (including China, by the look of things) are all deep in recession or worse?

Then there's this from der spiegel:
http://www.spiegel.de/international/germany/economic-historian-germany-was-biggest-debt-transgressor-of-20th-century-a-769703.html

[Jacques René Giguère]

Bob Smith: Federal money? QC receives far less on p/c than the MAritimes and everything could be righted by severing the currency union...Anyway,ON,QC,NB and NS have fought each other for the last 4 centuries. That create strong bonds of a friendship of sort. The west never was part of the mutual massacre history . That's the source of their estangement.

There are a lot of admirable things in Germany that should be emulated elsewhere. There are also a lot that shouldn't be. ( So with Canada or Balounistan).
A character in some Asimov ( or maybe VanVogt) once said: "Don't let your moral principles prevent you from doing what's right". Some SF vwersion of "salus populis suprema lex esto". Or, as a great prophet said: "Man is not made for the Sabath but the Sabath for man."
Old wisdom indeed. (Though he was murdered by the righteous...)

A dining table on a cruise ship is not meant to be thrown into the water and climbed on. I am pretty sure the manufacturer doesn't extend his warranty to that case. If the ship is sinking and not rescue boat is available, would or should a german passenger refuse to climb on it?

People were lied to. Sticking to the deal will be even worse.

Laws are respected when they legitimate and useful to the polity. At first, Prohibition was seen as a good thing. Then,it swiftly showed up to be absurd and contrary to the good of the american people. They refused to obey and the law was changed.
Currently in Québec, a rather small dispute about university fees and governance degenerated into something bigger. The government passed a law interfering with the right of assembly. Up to that point,demonstrations were mostly made up of students and concentrated in Montréal. Suddenly,two days after the law enactment, cacerolazos ( pots and pans banging) appeared almost everywhere in the province. People are studiously counting themselves to make sure their gathering exceed the legal limit. A lot of the new demonstrators have nothing to say about universities ( a lot are even on the government side on that issue) but they are incensed by the absudity of the law. Police have refused to apply it and have not made a single arrest. In Montréal, Québec City and Sherbrooke, they sometimes give traffic tickets, though not to grannies pushing baby-stroller.Elsewhere, they don't interfere with the marches. As my good frien the station seargent told me: " I enlisted to protect your house from being burglarized, not to beat you up to save some politician's @£¢."

It should be the same thing with the ECB mandate.

[The Keystone Garter]

These tradeoffs are simple. Spain can bail out their banks and cut future public services, and have less stimulus spending to play with. Or let them fail and risk learning how to channel stimulus loans through Crowns banks or non-crooked foreign banks.
The Americans went pro-banksters in their two party wisdom. The Brits now have permanent child poverty increases and coal.
Every nation has a separate choice to make and separate quality-of-life ramifications.

[The Keystone Garter]

Everyone is crying because rich people's portfolios move quickly. I fight neocons and CPC because I don't think they deserve their net worths. Losing in Canada since petro-boom and losing in USA since 1970s Cold War. Oh well. Greece stays in Euro and hopes for economic growth to bring back tourists or Greece leaves and defaults on debt. If they are ready for stimulus the latter is better. If they don't know how to make green jobs or biomedical R+D or whatever, probably safer BAU. In either event they still have 160% of GDP debt to deal with and world is ruled by rich portfolios who don't care whether Grecians like their entry exit portfolio timing.

[Bob Smith]

"Tsipras is willing to admit that Greek society must change, but quite correctly, it can't change when no investments are made at all"

I'm less convinced of that, but that remains to be seen, Nixon did go to China. Unfortunately, at this point the likelihood of the greeks securing "investments" from outsiders is pretty slim. Unfortunately, Greece's governments (and they're not alone in this) squandered the opportunity to implement those reforms at a time when they could have been done in a way that minimized the impact (and while its easy to blame Greek governments, let's be honest, those governments were responding to the wishes of the voting public - no one gets off easy in this one).

[Mandos]

"Nixon going to China" moments are basically, the voters not getting what they voted for. Every time that happens, it exacerbates the legitimacy problem.

[Dan Kervick]

The extreme opposite is the case. There is no country on earth, which has more neighbours, somebody counted 11, I reach 10, compare that to Canada, or the US. Germany sits right smack in the center of it all. Our trade / GDP is much higher than most other (larger) countries.

"Insularity" in the context I used it does not mean that the German house is not in a neighborhood with a lot of other houses. It refers to an unrealistic sense of self-sufficiency and non-dependency. Germans might have lots of neighbors, but they can't expect to to go right on eating dinner and playing cards around the table while the neighborhood is burning down. And when whole countries are collapsing they don't get fixed by attempting to morally re-engineer them after the fact into prudent German savers.

Germans think they are not to blame for starting the fire? Fine. That's debatable. But tough luck, and welcome to the human race. We don't get to choose our catastrophes on the schedule we want them. The German feeling for order and control is now a mental straightjacket that is preventing them from acting to make the best of a bad situation.

[Bob Smith]

"Nixon going to China" moments are basically, the voters not getting what they voted for. Every time that happens, it exacerbates the legitimacy problem.

I wouldn't say that (or at least not with that example), after all, Nixon did go to China in an election year (and made a point of ensuring that it go maximum publicity). The "Nixon to China" moments often enhance the legitimacy of the policies being introduced because of the credibility of the politician on that particular policy (i.e., no one ever accused Dick Nixon of being soft on communism). Maybe Tsipras will have more success introducing needed reform than his predecessors because if HE says they're neccesary, voters are more likely to believe him. Maybe.

[The Keystone Garter]

...as Gini gets higher because of portfolio rents, countries should reduce debt levels to keep options open. That way when Wall Street throws at portfolio dart, the change in bond yields doesn't plunge your country into this stuff.

[Mandos]

Maybe Tsipras will have more success introducing needed reform than his predecessors because if HE says they're neccesary, voters are more likely to believe him. Maybe.

Only he can deliver some real victories on the one item he needs to, which is ameliorating the worst immediate effects of austerity. This isn't post-war USA. In the Greek context, the reason why SYRIZA is strong is because the other parties are perceived as both incapable of reform and also too easy to capitulate to Germany. If he wins and then caves, he will be seen as just another opportunistic time-server.

Due to its particular history, Greece is not a country that can be turned in a generation into a copy of Germany, not that that is even possible without finding another export recipient... A lot of Greek's internal problems are legacies of how it dealt with the aftermath of the dictatorship. Austerity is the breaking of a contract made between the stakeholders after that period, and opens up the old wounds.

[Bob Smith]

"Austerity is the breaking of a contract made between the stakeholders after that period, and opens up the old wounds."

Probably, which is why things could turn ugly in a country like Spain which has a dark history of its own. Unfortunately, that's the downside of national bankrutpcy, contracts get re-written.

[The Keystone Garter]

Germans except for coal and lack of immigration are doing things right. Have fair distribution. Americans allow currency to lose value. Not a fair distribution since 60s-70s but can maintain high enough employment...USA is reserve currency and I think that's what Germans wanted with the Euro. But the poorer nations of the Euro don't plan their economy as well.

I used to like allowing currency to plummet as a way to fix Gini but I'm watching the world pick petro and banks instead of education and GAI. The Euro doesn't have a mechanism to ensure efficient economy (who matches German level of R+D?) or to ensure employment; Greeks don't migrate to Germany. The point of having a reserve currency is it lets you stimulus spend in a recession, so need to reach for surpluses in booms, and permit stimulus spending in deficits. There is a lot of institutional capital Germany has, that other nations don't. Euro is salvageable as only Greece has high debt.

[The Keystone Garter]

...figured it out: Gaermans never let Gini get high enough to let petro and banks ruin their efficient economy and safety net. Americans did. So where your human capital is banksters and S.Gordon's denier prof colleague, it does make sense to let currency sink as a dumb way to get employment. This is why Germans don't want to print. Tough for an aging population to export a superior model.

[Peter N]

Words of wisdom from Michael Hudson

It's fairly heavy going in spots, if you're not interested in a blow by blow account of 3 centuries of economic thought, but it's worth reading, if only as an antidote to things like the peculiar idea of monetarism without debt or economics with interest rates but no money.

http://www.paecon.net/PAEReview/issue57/Hudson57.pdf

However, Keynes warned, it would be a dangerous mistake for economists “to adapt the hypothetical conclusions of a real wage economics to the real world of monetary economics.” The kind of thinking that underlay “real-exchange economics . . . has led in practice to many erroneous conclusions and policies” as a result of “the simplifications introduced. . . . We are not told what conditions have to be fulfilled if money is to be neutral.”

If money were not neutral, neither was the debt burden. Yet Milton Friedman theorized that:

"Holders of foreign currencies [such as U.S. dollars] want to exchange them for the currency of a particular country in order to purchase commodities produced in that country, or to purchase securities or other capital assets in that country, or to pay interest on or repay debt to that country, or to make gifts to citizens of that country, or simply to hold for one of these uses or for sale . . . Other things the same, the more expensive a given currency, that is, the higher the exchange rate, the less of that currency will in general be demanded for each of these purposes.2 (italics added)"

The implication is that countries will elect to pay less on their foreign debts as the dollars in which these debts are denominated become more expensive. But in reality they have no choice. It is much the same when debtors have to pay their debts as domestic prices and incomes fall. The debt burden becomes heavier. Countries that try to pay less as the debt burden becomes more expensive to service are held in default and confronted with international sanctions, trade barriers and a loss of foreign markets. Price and income deflation thus not only shifts the proportions around, the basic structure is altered as a result of inexorable debt obligations

“The conditions required for the ‘neutrality’ of money, in the sense in which this is assumed in . . . Marshall’s Principles of Economics, are, I suspect, precisely the same as those which will insure that crises do not occur. If this is true, the real-exchange economics, on which most of us have been brought up and with the conclusions of which our minds are deeply impregnated . . . is a singularly blunt weapon for dealing with the problem of booms and depressions. For it has assumed away the very matter under investigation.”

It trivializes the debt problem to treat it merely as one of finding an appropriately low rate of interest to equilibrate financial supply and demand, consumer preference and profit opportunities so that the loan can be paid out of the productive investment of its proceeds. Most loans are not invested in tangible capital formation that increase the borrower’s revenue and hence debt-paying capacity [my emphasis P N]. And even if they were, the problem lies in the inexorable mathematics of compound interest. What needs to be examined is how to cope with the inherent tendency of debts to multiply in excess of the economy’s ability to pay.

{1 “A Monetary Theory of Production” [1933], in The Collected Writings of John Maynard Keynes 13: The General Theory and After (London 1973):409f. Along these lines Keynes criticized Alfred Marshall for stating explicitly in his 1890 Principles of Economics (pp. 61f.) “that he is dealing with relative exchange values. The proposition that the prices of a ton of lead and a ton of tin are £15 and £90 means no more to him in this context than that the value of a ton of tin in terms of lead is six tons . . . ‘We may throughout this volume,’ he explains, ‘neglect possible changes in the general purchasing power of money. Thus the price of anything will be taken as representative of its exchange value relative to things in general’ [Keynes’s italics]. . . . In short, though money is present and is made use of for convenience, it may be considered to cancel out for the purposes of most of the general conclusions of the Principles.”
If money is ignored, then so are savings, debts and their carrying charges. The role of money as a medium in which to pay debts is missed entirely, as is the monetization of debt in the form of free credit creation.}

{2 Milton Friedman, “The Case for Flexible Exchange Rates,” Essays in Political Economics (Chicago 1953), repr. in Caves and Johnson, eds., Readings in International Economics (Homewood, Ill. 1968):415.}

[Peter N]

This comment from http://streetwiseprofessor.com/?p=6394 seems to me to embody a peculiar fundamental fallacy:

"The problem for Europe (and for the US too) is that much of the economic “growth” in the 2000s was phantom. It relied on artificially created bubbles based on debt. Quite simply people have been living at a far higher standard of living – collectively – than they could afford to in Greece, Italy, Spain, and other areas. One way or another, the only way to get back on a sustainable economic growth basis is for people’s standard of living to take a huge cut. Once they are on the correct baseline, real growth is possible. Of course, this is almost politically impossible. All the efforts being done now is not to restart the growth process – it’s to somehow allow people to keep the “gains” made earlier by various chicaneries. But the bills are coming due now, and people can’t continue to float with a little more extra debt to tied them over.

The Germans understand that collapse is inevitable. If they write checks now, they’ll need to keep writing them until they run out of money. They simply have a longer term vision than everyone demanding they write checks now – because they see in the end it won’t matter. Restructuring is only a matter of time.

Comment by Chris Durnell"

It is impossible for us all to "live beyond our means", other than by failing to replace depreciation and consuming saved goods (NOT MONEY). The reason is that our means are our means. If we are living beyond them, where are the extra goods and services coming from? Certainly not from the future by time machine.

Instead, imagine 2 children. They agree that if Sara lends Bill her bicycle for the day, she can have 2/3 of the cake at dinner. Come dinner Bill decides the agreement was unfair; they fight; and the cake lands on the floor.

We can have been living beyond our means when a shortfall of future means over future commitments produces a beggar thy neighbor conflict that damages our current means - a negative sum game. It seems that while financial wealth can't be transported to or from the future, poverty certainly can.

[Peter N]

It's really, really bad in Greece. From FT Alphaville (a great source for this stuff):

"But there was another sign of the liquidity pressures Greece is facing as the head of Public Gas Corporation (DEPA) called for the government to issue a ‘special national emergency’ to try to avoid black-outs in early June. DEPA will soon have to end gas supplies to electricity producers who owe it around €300m. From Ekathimerini:

[DEPA] will also ask banks to forfeit the producers’ guarantees so as to obtain the cash flow it desperately needs in order to cover its obligations to gas suppliers including Turkey’s Botas, Russia’s Gazprom and Italy’s ENI while its coffers are empty.
The question is how long can all this go on for?"

There's more at

http://ftalphaville.ft.com/blog/2012/05/30/1023031/greece-stuck-between-iran-and-glencore/

[marris]

Nick, Welcome back!

(1) If the small open economy had a large quantity of foreign reserves (relative to circulating quantity of local currency), then it could glide the exchange rate down by 50 percent along any path it wants, right? Expectations driven market rates cannot undercut the CB since the CB will always redeem your local currency at a higher rate than the market. Of course, this leads to other weird states, like all outstanding local currency redeemed, foreign currency reserves depleted, and no more outstanding local currency notes.

(2) Could the process above be done in reserve (drain foreign currency and put local currency in it's place)? That would involve CB undercutting the market rates (get more Drachmas from the CB than the market). Or would this be *very* hard because the market rate for a new currency is infinite (I will only give you a Euro for many many Drachma). Does it become easier if the Drachma are asset backed?

(3) Can you recommend a good macro next? I'm currently reading Cowen/Tabarrok. Want something to compare it to.

[J.V. Dubois]

Excellent blog. And since there was a broad discussion of what is right now happening in greece, I would just add a link to a very good blog from a Fernando Aguirre about Argentinian crisis: http://ftalphaville.ft.com/blog/2012/05/30/1023031/greece-stuck-between-iran-and-glencore/

There is a part that may fit well for the situation in Greece

"There wont be a declared SHTF day. Yes, there are events that are like landmarks, milestones in the course of history. But it will take time, society will change little by little, until the new reality is assimilated and accepted, consciously or not, by the entire population. After a few months, you’ll se people talking about before and after certain event that changed their world. For you it may be S-11, for me it’s life before and after the 1:1 (meaning the 1 dollar, 1 peso conversion) or life before and after the 2001 crisis. People use it on their daily conversations. “ So, you’ve been to Hawaii?, wow!” , “Yes, yes but we went back before the 1:1, now it’s impossible to pay for such a trip”, “ Yes, too bad”

This time of uncertainness, until people accept that the world around them changed, takes time, months or even years, and it’s a SLOW decline, slowly slipping down. One day you’ll start seeing more people begging, more prostitutes, houses not painted, cars will start to look a little more shabby, because people don’t have money to fix them, until one day you will tell yourself “wow, this wasn’t like this 6-12 months ago.” Things do not get accepted day over night, a SHTF event may occur in a matter of seconds, but it takes MONTHS to sink in."

[JP Koning]

Nick, good to have you back.

There is a lot of pessimism out there. I think Ireland seems to be giving cause for optimism. See here. Its TARGET2 debt has been shrinking and its stock market outperforming.

[ianlee]

Nick - glad to see you are back - from the land of my cousins who drive - as I like to tell them - on the wrong side of the road - but they do it with great charm. And they just re-elected Boris Johnson, so they surely deserve some credit?

And parenthetically, although my late father was an RAF bomber pilot in the 1944-45 bombing campaign of Germany (that I characterize as the "campaign for social justice and reconfiguration of Germany" that ensured that Germany has been a model country ever since), I find the views and arguments of Genauer most compelling. Indeed, if the countries of southern Europe have been "exploited" and ""suppressed"" by Germany, they and critics of Germany's policies should welcome the opportunity for Greece or other southern European countries to exit the repressive, destructive, humiliating structure of the Eurozone, in order to unleash the veritable manufacturing and economic powerhouses hidden and repressed in southern Europe under the German ""boot".

The larger question which does to appear to have been addressed in this excellent round of analyses, concerns the estimated or projected fallout if the EZ splits apart. As you know, practically every bank and hedge fund are furiously modelling both a Greek exit and a full EZ breakup with estimates ranging from mild to catastrophic in terms of economic losses.

Yet, the underlying productive infrastructure - public and private - do not vanish in a breakup, nor do the highly educated and skilled workforces, legal systems, property rights regimes etc. vanish.

Thus, while acknowledging there will be short, sharp transitional effects and impacts, are not the estimates perhaps exaggerating the negative impact of Greece or EZ breakup?

[Determinant]

Yet, the underlying productive infrastructure - public and private - do not vanish in a breakup, nor do the highly educated and skilled workforces, legal systems, property rights regimes etc. vanish.

Thus, while acknowledging there will be short, sharp transitional effects and impacts, are not the estimates perhaps exaggerating the negative impact of Greece or EZ breakup?

That's the been rub of economics for the last century. Keynes said the very same thing. Depressions rooted in financial crisis *ought* not to have serious destructive effects, after all we are tripping over paper and promises, not physical goods or immutable physical laws, but they are incredibly destructive.

[Nick Rowe]

Thanks all for your comments, and for welcoming me back.

I'm afraid my brain is still not functioning very well. Late Spring doldrums, this happens to it from time to time, so I'm reading, but can't think of clever or even useful responses.

Ian: I sort of agree with Determinant. (Banks matter!) History seems to teach us that a well-functioning economy needs 3 things:

1. The productive resources like labour, land, capital, and the knowledge to use them.

2. A semi-decent set of institutions like property rights and contract law etc.

3. But it also needs a semi-decent set of monetary and financial institutions.

The first will survive a Eurozone crisis, and will only slowly atrophy. The second may be harmed a bit, but will probably survive in some sort of shape. It's the third that will be badly damaged or even destroyed, and it's already happening. It's anybody's guess how long it will take for those monetary and financial institutions to get rebuilt. History may be some sort of guide (1945?), but modern economies may require a lot more complex monetary and financial systems than were required historically, so history may not be a good guide. Swapping olives for chickens with the neighbouring family farm is one thing. International trade is another.

Anecdotal evidence on the use of barter and informal local currencies in the periphery suggest this rebuilding process is already happening (and confirm my view that recessions are always and everywhere a medium of exchange phenomena), but these are tiny crude infants of monetary systems. God only knows.

marris: 1 and 2: that was the theory behind currency boards. With 100% forex reserves backing the domestic currency, they could never be forced to devalue by running out of reserves. It didn't work out like that. Even if there are 100% forex reserves against currency, there aren't 100% reserves against bank deposits, so you can't stop a run on the banks. Plus the high interest rates and recession. Argentina.

3. I use Mankiw's texts at both the intro level and for intermediate macro. I also use Bernanke for more advanced intermediate macro.

[Determinant]

Does it tickle you just a bit to use a textbook by the current Chairman of the Fed, and thus the person who is central to macro in the real world? It would certainly give me a smile.

More to my point above, since c. 1820 with the first British bank runs, society, business and academe have tried to come to grips with how to deal with economic crises and extended slumps caused by financial crises. The trouble is the solutions aren't obvious, often involve counter-intuitive actions like lenders of last resort and frequently lead to breaking or modifying contracts and plans generally. You have to turn everything on its head to get actually get things working again.

Unlike a supply crisis, you can't save and invest your way out of a finance-induced depression.

Speaking of history, Paul Krugman has stated that the current duration, depth and lingering effect of the current Recession is no surprise to economists like him who have studied developing-world financial crises. The script there was the same, things typically take 10 years to work out and unemployment rises and only peaks in the fifth year after the crisis.

I would also note the latest edition of the Economist which has an editorial which in essence calls the current crisis a Depression. We managed to avoid this for 70 years and our luck ran out. I think it is time we need to use the D-word.

[Nick Rowe]

Determinant: a thought: 'The biggest difference between the 1930's GT and the recent recession is that in the recent recession some countries (e.g. Canada) had only a very mild recession, while in the GT nearly every country had it very bad'. I think that's (more or less) true. If it is true, it's interesting. My guess is that the gold standard then and flexible exchange rates now is what made the difference.

If the Eurozone gets worse, I will start using the D-word. But for Canada, touch wood, it would be silly to use the D-word to describe a recession that wasn't even as bad as 82.

[genauer]

I read the numerous responses to my last post, and scratched my head.
All these discussions go in circles, again and again.
And much of this arises, because we know different things and look at different time scales, and use words in different ways, because the underlying “view of the world” is different.
Example 1:
“The GIPSI states reduced their public debt in the 10 years before 2008, and Germany was one of the first “violators” of the 3 % deficit rule”.
TRUE.
But, they didn’t reduce it as much as original requested, and this did come at the cost of a huge household debt increase and massive current account deficits.
But, Germany did go beyond the 3% deficit in 2002, but just 6 weeks later “Agenda 2010” was announced, a long term program to make sure, this will NEVER happen again. It was pushed through with Schroeder’s “Basta” politics, not letting special interest groups, union, do-gooders wear it down in endless detail squabble. Consequence was that the radical left now sits in most parliaments. But you can rely on them to deconstruct themselves.
But, most of you in Canada, and especially the young ones of you, don’t know the 60 years before that. Since the break down of Bretton Woods, effectively since 1969, most European countries, including all Nordic, and even partially Germany, had a habit of running up social entitlements, government deficits, and then either inflate them away, devalue (against the deutschmark), and constantly demanding that somehow Germany should pay the bill, by stabilizing their currencies at unsustainable exchange rates via large buys (see Sarrazin 2012, “Europa braucht den Euro nicht”), like they demand now again. This is nothing new under the sun, and certainly not some “short term panic calming”, but trying to establish long term fiscal transfer patterns, breaking treaties, and effectively stealing from others.
It is a constant theme, the scare tactics to induce the “stability people” into making exceptions, bend the rules a little bit, and then some more, and more. Canadian Naomi Klein describes that well in “Shock doctrine”. In this way a new German government was induced 1999 into the Kosovo war, it partially worked in 2008 to increase bank deposit insurance, when the Irish PM went ballistic.
Most the time we can withstand, like Iraq 2003 war, Libya war 2011, and all these endless attempts to make us unlimited liable for the debt of other people.

[Determinant]

Determinant: a thought: 'The biggest difference between the 1930's GT and the recent recession is that in the recent recession some countries (e.g. Canada) had only a very mild recession, while in the GT nearly every country had it very bad'. I think that's (more or less) true. If it is true, it's interesting. My guess is that the gold standard then and flexible exchange rates now is what made the difference.

If the Eurozone gets worse, I will start using the D-word. But for Canada, touch wood, it would be silly to use the D-word to describe a recession that wasn't even as bad as 82.

I use Depression, always a loose word, in the sense that we had a crash with a lacklutsre, jobless recovery with no end in sight. We are still in the doldrums, the US is still in the doldrums and nobody seems to be getting out. A depression is stagnation without end. There were recoveries in the 1930's, they all petered out and proved ephemeral. The drop stopped in 1933, but in 1938 everyone was still hurting.

Further we have also expanded the welfare state, implemented employment insurance and medical coverage programs, which take the edge off things. It may blunt the knife, but even a dull knife leaves a scar.

As Paul Krugman said, and I share his thoughts (I was thinking the same thing before he said it) the current crisis, even if of lesser depth than the Great Depression, certainly has a strong family resemblance of a kind that 1982 didn't have. In 1982 central banks were trying to wring inflation out of the system and drove interest rates to eye-watering levels. Today interest rates are at rock bottom and we still can't get action.

Further, "Everyone suffered" is a misnomer. Sweden exited the Great Depression by 1934 through an early version of stimulus or Keynesian economics. It's hard to say what happened in the Soviet Union at the time, but one reason Keynes was popular was that he provided an alternative solution to the West's economic problems because capitalism was losing its attractiveness and Soviet Communism looked good.

China, India and Africa weren't even on the radar at the time. It was narrower worldview at that time and we still look at the 1930's through that lens, even if we don't intend to.

[Nick Rowe]

Determinant: IIRC, Sweden was one of the first countries to leave the gold standard, and switch to flexible exchange rates and price level targeting. So it's the exception that proves the rule. The 'rule' is that all countries on the gold standard suffered the Depression together. (Countries recovered in roughly the same order that they left the gold standard.)

[genauer]

just because it irked me,
these complaints about german store opening times.

When I want fresh strawberries over the weekend at 1 am in the morning, just like NOW,
I just walk down the stairs, and 70 meters, and I have them, at a competitive price.
This is german quality of life, you can keep your 5 acres of useless land around your private home

pictures just taken before writing this
http://www.slideshare.net/genauer/open-store

[Mandos]

Genauer:

I assume you are going to a train station store or something in one of the very big cities like Berlin or Frankfurt? I'm pretty sure that in the medium-sized cities and below, this is not so easily available to most. From, um, personal experience. Some stores skirt the shopping hours laws by being open in a train station and defining frozen chickens as "Reisebedarf".

That is cheating.

German shopping hours are *still* inconvenient.

Sarrazin? Really? For Canadians, this is vaguely the equivalent of relying on, oh, Ted Byfield or that guy who wrote "The Black Book of English Canada" (Normand Lester, I think).

If Germans don't want to keep paying, they need to bring their productivity and their consumption into balance. Either produce less or consume more. Otherwise, they will be expected to pay. It's just arithmetic and conservation of mass/energy. Devaluation is not theft.

[Sergei]

Well, pictures of strawberries in the middle of the night?! Yes, I do like strawberries.

But I (dis-)like much more pictures like here or here

Yes, this is the government agency doing the dirty work. And please note that the jobs have no social security at all. ZERO. Not the Europe or its future one would have imagined.

Any takers? :) or rather :(

[genauer]

Mandos,
1. Spätshop
2. Sarrazin

1.Spätshop
It is called “Spaetshop”. This shop and its opening hours are perfectly legal. Before I took the photo last night, I asked the shopkeeper, if this is alright, and explained to him that is for Canadians, and he laughed, and tried to get me a leaflet with the opening hours. There is the one in 100 m distance, next are 400 m, 500 m, 800 meter.
I am living in a normal living quarter in the center of Dresden (550k inhabitants and growing). With a population density above 10 000 / skm (square km). Close to a railway station, the autobahn and the airport, but quiet enough to sleep with open windows. Everything is in walking distance.
Of course the kind and level of services is a function of supply and demand. As with average wage level and unemployment. And changes take time. Years.
If you live in a one family house in a Munich suburb, at a cost of 1 mio (all numbers from here in Euros = 1.23 US Dollar, actually pretty close to “Fair Value” PPP) per house, a population density of 1 k / Skm, 3 % unemployment, average age is 50, where a cleaning lady , who doesn’t speak German gets 14/hr + benefits, people have 3 fridges, and do their groceries with 3 cars in the family, then there will be no Spätshop, ever.
If you live here, with a rental rate of 6 /sqm / month, 10 times the density, formerly 15% unemployment, a cleaning lady with an engineering degree for 6 / hour, Spätshops make economic sense. If you need some garden, renting a 500 sqm plot for about 200 a year: “Schrebergarten” in 200, 600, and 800 m distance.
I tell you all this, to give you a better understanding, why a lot of things look very different to what you are accustomed to. Most Germans are scratching their heads about this (N)GDP fetishism in Anglo countries.
I break my arm, and need somebody to help / watch me under the shower, a phone call, and somebody comes over for 12 €. Cinema 40 meters, A taylor, 50 meter around the door, and so on. If somebody needs it, a whorehouse (officially escort service, of course, and I am pretty sure with physical contact : - ), swingerclub (“adults only Sauna”)
LOL, I just see Sergei’s posting coming in, after I typed the above. Those 400 Euro part time jobs come with health insurance, flexible working times, and there is no physical contact.
Weekly meetings of anarchists, trotskist. The liberal party (FDP)only once a month. The street festival was organized by the FAU (Federation of Anarchists …).
Obama comes, the street is packed with 100 police men, Putin comes, he is mingling with the Russian speaking older German guys here. About a third of the Restaurant menus here are available in kyrillic. The oldest military submarine, built by one of my ancestors, is on display in the military museum 2 kilometers from here. The second one he sold to the Russians : - )
When I bicycled along the Elbe, I nearly run into my defense minister, de Maiziere, visiting a meeting of some armed forces, and joked during his speech, that he is only the fourth choice, because the mayor, and the direct MP were sick, and I forgot about the third guy.
Just to correct your stereotypes about Germany a little bit. Orderly …..
I also grew up with these Stereotypes of e.g. Irish, dumb, poor, drunken, catholic, breeding like rabbits between two Guinness, until I saw, uugh, their GDP per capita is actually 10% higher than ours, but built on huge debt. Are they happier now? I doubt it.

[genauer]

2.Sarrazin
From my perspective, the German Thilo Sarrazin is pretty much the opposite of your 2 Canadian Byfield and Lester.

Just look at their Wikipedia pages.

Sarrazin:
a) Born as a sewlf described “European Mongrel” during tough times (1945) in a rough place
b) A public servant (Beamter) all his life. An administration specialist, not a journalist, and neither an elected politician.
c) With a PhD in economics, he started as a background or little actor, “a little scribbler” and ending up on the board of the holy Bundesbank, not too bad, as we say here.
d) A member of the social democratic party (“left” for you in Canada). They tried to purge Dr. Sarrazin, twice, the party leader Gabriel (entry level teacher) tried to pull a hatchet job on him, unfortunately he just stopped one step before giving reason to purge the party leader himself. Now Gabriels approval ratings are at just 8%, compared to 80 % In the Pew Survey for Dr. Merkel.
e) Sarrazin was involved the last 40 years in many significant decisions, Germany made. Currency snake, reunification, fundamental privatizations, Euro treaty hard definition
f) Sarrazin as the financial minister for Berlin achieved the first (and only) budget surplus. This demanded some tough choices and conflicts. He showed that many excessive expenses did not serve some urgent social “needs”, but were serving the “social/green” privileged. Inferior education results, despite shorter working hours and higher pay. These endless games of some group trying to preserve their privileges at the cost of the working majority, we have this here in Germany too. All those left led “Länder” who live permanently beyond their means, and when the money runs out demanding “solidarity” from those poorer neighbors, who did not live above their income. Just as the same show in Europe now, but at a much smaller scale.
g) Sarrazin is a German model public servant
h) Sarrazin can express himself in clear and precise words. If you read his books, you see systematic tables and diagrams, references to original data and foreign sources like the New York Times and Financial times, far beyond the headlines, and not just to German only cherry picked stuff from leftie “Spiegel”, “Zeit” , like the other SPD wanna be Chancellor Steinbrück. There is a very clear intellectual and character level superiority to the other 99 % of German politicians.
i) And of course, the left/green political correctness “chattering classes” hate him for that. They were out in full force to character assassinate him, many weeks, until they had to realize that the book and the facts are out, and all their criminal behavior only damaged themselves, the Gabriel, Nahles, Claudia Roth, Özdemir, Trittin. People like me and half the population do not forget.

[Mandos]

1. I did a search for "Spätshop Deutschland" and it seems to be primarily a Dresdner thing? The rumour about bad shopping hours in Germany (especially Sunday, but not only...) come from anglophones living in Germany, primarily, who mostly live in the former West. Many of those Länder are quite strict about shopping hours, which means that only gas station convenience stores are open past 10pm (some places 8pm). But the big cities have the U/S-Bahn loophole and 25/7 shopping, with an unfair economic advantage to those who can secure a train station storefront lease.

2. Most of what you describe about Sarrazin doesn't really endear him to me. We have lots of people like that in the English speaking world and they talk nonsense from top to bottom. Actually, the right analogy is someone like David Horowitz or maybe Mark Steyn. Or in the Canadian francophone world, Jacques Parizeau? Ridiculous.

genauer represents basically the German-speaking version of a particular and familiar segment of the anglophone right. HOWEVER, on his opinions on the Euro crisis, both the left and the right in Germany hold to some version of anti-Keynesian politics relative to the Eurozone as a whole, from different angles/direction of course. It's basically old-school Marxists vs. "Austrians". I know Canadian leftists who are anti-inflationary too.

[Mandos]

Also the red-green coalition in the last poll is at 40%, compared to black-yellow's 37%, regardless of leaders' personal popularity. Not that I'm a big fan of the SPD and the Greens (I am way leftier).

Actually, that brings up an important point. Way up there, Genauer brings up Schröder and Agenda 2010.

But, Germany did go beyond the 3% deficit in 2002, but just 6 weeks later “Agenda 2010” was announced, a long term program to make sure, this will NEVER happen again. It was pushed through with Schroeder’s “Basta” politics, not letting special interest groups, union, do-gooders wear it down in endless detail squabble. Consequence was that the radical left now sits in most parliaments. But you can rely on them to deconstruct themselves.

There is an alternate interpretation of what happened. This is one of the disastrous versions of the sort of "Nixon goes to China" politics that Bob Smith was mentioning above. Schröder went to "China", and significantly damaged his party and the unity of the center-left in Germany, by following a policy that did two things:

1. Significantly exacerbate the imbalances that result in the crisis we have now.

2. Reinforce memes in the German public about the necessity of austerity, etc, memes that Genauer is representing here. After all, if the lefty party is doing it...

Worse, it created a sense in the German public that they had sacrificed, as I mention, and that has reached this crisis: they sacrificed something, and they were expecting a payoff, not a second payment to remedy their very sacrifice had created.

And then you have Genauer's hero, Jens Weidmann getting fawning interviews on ZDF HeuteJournal, assuring the German public that they're right: all the GIIPS countries need are a bit more Vertrauen and Wettbewerbsfähigkeit...and Germans need not change anything about how they do things to make the Euro work.

[Determinant]

Late-night strawberries: riiiight.

I lived within walking distance of a 24/7 supermarket. A few years later it started to close at night (after 9pm) as that was what the market would bear.

And I am in sympathy with civilized store hours, I used to work at a call centre that was open 7 days a week and such a schedule plays havoc with any attempt to have a life. For instance, there was the regular parade of e-mails asking to trade shifts for this or that reason (usually centring on children). Christmas, which the call centre was open for (an abomination unto itself) was a horror with the pleading e-mails.

[Jacques René Giguère]

Mandos:comparing Jacques Parizeau to Mark Steyn?! How many times did daddy told you not to read The Gazette-Globe&Mail-Maclean's...;-)

[Mandos]

Fair enough :) I was in a hurry and wasn't intending to make that invidious a comparison. I was looking for Courageous Heroes In The War Against That Dastardly Political Correctness.

(I suppose irony caps don't work as well with reference to Germany.)

[genauer]

Mandos,
we have a little misunderstanding here. I do not doubt that in many areas of Germany the opening hours are bad. But it is not a “rule” thing, but supply and demand, and long term habits. Having enjoyed in the US the opening hours, I know very well, why I precisely live in this area, with a Lidl open on Sunday, in the train station, 10 years ago. The closest Spätshop only came 3 years ago.
Just as Determinant points out, the very most people don’t need strawberries at 1 am, I actually only bought them to make my point, and employees with kids need stable and daytime schedules. I had many discussions here, trying to tell people that relaxing the rules on store opening doesn’t mean that the stores have to be open to the maximal possible degree, but decide themselves, based on customer demands, cost, employee preferences / availability.
Historically most Germans are just used to strict opening hours (gosh, just 15 years ago in Munich it was until 18:30, now I think its 20 – 22:00 there too) and for a little booze, cigarettes and schocolade the gas stations are good enough. Since still a lot of people live in loose suburbs, small towns, they have that car culture. And these small local shops are not viable. When people learn that is is “better” to live closer, this will change there too.

Comparing Sarrazin to David Horowitz, Mark Steyn, Jacques Parizeau? Ridiculous.
I thought shortly about getting into detailed comparisons, but I think a more general address to the differences in the political systems are more appropriate.
But maybe first some direct comments- Of course Schröders politics frustrated the left part of the social democrats. Lafontaine practically left in 1999. And since there was already the alternative of the eastern communists, extending this to the was a viable option and the consequence. Splittering of the “Unity” happens all the time on the left.
In 2002 the accumulated German Current account was negative, and something about that needed to be done, right. That the bursting of the real estate and debt bubble in these countries has anything to do with adjusting the German laws, where do you get these ideas from ?
These “austerity” politics were very successful, after some years, and we do now reap the profits from that. Living Proof that Ordungspolitik works.
What you call “a second payment” is what countries like Spain and Italy want. Large fiscal transfers from the German taxpayers without strings attached, de facto a gift and not a credit. And they don’t get it.
What they get is the ESM, if they sign it. When a government admits, that it is unfit to financially govern itself, it comes under adult supervision by the IMF and the EU and gets with a real structural program and not the placebos so far, cheap credits. Of course they don’t like this part.
I think back what Germany did for reunification, in an extraordinary national solidarity: starting with the rich and safe: marginal tax rates at 60 %,, massive streamlining public employment, later then cutoff of unemployment after 1 year, high numbers of companies and people going bankrupt, cutting pensions by 15 % and eliminating automatic inflation adjustment, and all this long before any pressure from the capital markets. And we had discussion about establishing a property tax. We did not ask for outside help, not in our dreams, and we did not run up substantially more debt.

Now I compare that to Italy and Spain, they are now since one year tottering along insolvency, with massively higher interest rates. Spanish Zapatero and Italian Berlusconi were voted out of office.
But even with Monti and Rajoy both countries have with 43% income tax lower ones compared to our present 48% or former 60%, labor laws in Italy are not through and in Spain are still much more generous.
Italians are richer than Germans, lots of money collectable, home ownership in Spain much higher and they now want to stick their bad mortgages via “bank insurance” to our renting people. When the irish screwed up HRE we already took a hit by 200 b.
Germans scratch their head, what kind of unbelievable brazenness this is, that these folks want “solidarity” via breaking treaties.

If Dan Kervick or Mandos believe, that our position would change with a red/green government, I would like to remind you that Sarrazin and Schröder are social democrats, Greens voted against minimum wages of 3.5 here. Many of them have become real deficit hawks, "sustainable" is the key word.
The German Supreme Court made it clear that unlimited financial obligations are unconstitutional . When Gabriel talks about Eurobonds, the other 2, Steinmeier and Steinbrück remind him, that they implemented the Agenda 2010. Voting for Eurobonds would be political suicide here in Germany, many people would make that clear before the vote and would hunt them down after it.

What we saw in the last 2 years were so many attempts to fundamentally destroy the no-bail, no money printing law, driven especially by the Anglo business press. The brazen glee of people, who thought that this would have a majority in the ECB board, or that we don’t have a choice.
How people calculated sums of what we would lose, if countries go bankrupt, being unaware, that they do not only steal from Germany in this case, but the whole EU and the world via IMF.
That this would make us vulnerable for further endless blackmail. And then these people are disappointed, when I tell them, that for getting rid of them, I would happily pay more.
Why would Germany like to be in a Union with these kinds of people, and bleed through the nose, forever?

[Determinant]

Mandos:comparing Jacques Parizeau to Mark Steyn?! How many times did daddy told you not to read The Gazette-Globe&Mail-Maclean's...;-)

Nevertheless, the fact remains that that Jacques Parizeau is not to be taken seriously under any circumstance whatsoever.

I read La Presse to practice my French (which is coming along very well) but I refrain from reading Le Devoir or Le Journal de Montreal for fear of what it would do to my blood pressure.

[genauer]

“You have to differentiate between credible enforcement powers and joint European control over revenue and spending,” [Merkel] said. “And as long as this is so, joint liability for the debt of others is unthinkable. That also takes care of the debate over so-called euro bonds for now.”
http://www.bloomberg.com/news/2011-12-02/merkel-says-joint-euro-bonds-unthinkable-as-eu-faces-debt-crisis-marathon.html

“I cannot see how you can ensure the stability of a monetary union by violating its legal provisions,” Mr Weidmann argued. “I don’t see how you can build trust in a system that violates laws.”
http://www.ft.com/intl/cms/s/0/641237a8-0dcd-11e1-91e5-00144feabdc0.html#axzz1vJuSv4N9

If we would give in now, we would all go bankrupt in 5 years.

As Bob Smith said, then we believe it is better to have the showdown now.

Mandos, what do you want to change in Germany ?

[Determinant]

How about recognizing that 70% of Germany's exports go to the Euro zone and without a credible commitment to structural rebalancing (including fiscal transfers) to ensure the Euro works, the Euro is doomed. And along with it Germany's exports.

Second, Germany's reunification costs were undertaken outside of the Euro, so the currency problems at the heart of Europe's troubles now weren't problems then.

Third, as was pointed out to me when I visited Greece, the Greek home ownership rate is very high but so is the renting rate. Mortgages were tough to come by in Greece (c. 2000) so people owned their ancestral, family home and rented near their place of work, often Athens. I imagine Spain and Italy have similar practices.

Fourth, what is Germany going to do if its exports dry up (because of devaluation or gross loss of demand due to austerity), another country defaults and takes down German banks in the process?

Fifth, please be careful about Ireland. Many people in Canada have Irish ancestry (myself included). The Irish debt level has ballooned to deal with insolvent Irish banks due to the property boom caused by low interest rates as a result of being part of the Euro, not any profligacy in Ireland. The low interest rates were to cater to Germany instead of Ireland. So Germany, having benefited from preferential monetary policy from the ECB, can do the responsible thing and pay for the consequences of that preference.

[genauer]

I think the Euro could survive the exit of the GIPSIs, where some are now concerned, that after their textbook behavior, they are vulnerable to the bad others:
http://www.independent.ie/business/irish/spain-could-see-us-out-of-both-euros-3126414.html
http://www.theatlantic.com/business/archive/2012/06/spains-game-of-chicken/257933/
Despite this unbelievable barrage over the last year, the German popularity ratings are still incredibly excellent (BBC popularity and Pew Survey)

Even an Irish schoolboy knows, who the reasonable adult in the room is:

‘ONE WAY of putting the referendum that I like is that Brussels and Germany are the mother and father of the EU and the rest of the countries are kids. And some kids spend the money wisely but some, like Ireland, spend it on crazy things.
“So the mum and dad keep giving the kids more and more money. But eventually they put their foot down and say, ‘Right, you can keep borrowing our money – if you sign this form to let us know what you’ll use it for.’ ”
http://www.irishtimes.com/newspaper/opinion/2012/0515/1224316128720.html

Determinant,
You, as the most people here, fall into the trap of the Anglo press, who endlessly try to paint this as the rest of the EU or the world against one Germany.
The opposite is the case, when it is crunchtime, like last December on the fiscal pact, it is the whole of EU / Euroland against one UK.

When Hollande demanded breaking the Mastricht treaty, the count was 3 for him, 2 abstain, 10 in the lawful German corner. There is no majority on the ECB board for more bond buying. It has stopped completely.

[genauer]

Determinant,

German exports worked wonderfully before the Euro and would again after it.
The only GIPSI state showing up at the CIA as large trading partner is Italy with 5 and 6% Im/Ex.
Soo, they will want to sell their prosciutto di parma and cheese, have some German tourists.
I can’t hear this silly argument about German banks anymore, the net exposure to the GIPSIs is now, after the 2 LTROs between 50 and 100 billion. This should scare me into de facto gifts of 1 trillion? I did go through the BIS numbers. With the last blackmail argumenter.
http://www.themoneyillusion.com/?p=14448#comment-158911

The Irish bank problem was due to incredible lax oversight, that’s why HRE and others moved there.
The Irish know that: http://www.irisheconomy.ie/index.php/2012/06/03/what-kind-of-banking-union/
That ECB rates are somehow Germanys fault or subsequent obligation ? Huuugh ? In which world are you living? The Spanish central banker was now also fired.

If we would have it our way, we would be at 5% interest rate now, to cool down the real estate price increase. This whole notion, that the German taxpayer somehow owes anybody one single cent, because of this or that strange argument. Just wipe that completely of your mind. We have seen ZERO valid claim and too many criminal attacks with respect to that. Period.

The more I hear claims like yours, the more I think, let it just crash completely now, not just the Euro, but the EU as well.

Merkels dictum is: if the Euro fails, Europe fails. I think increasingly people think, this might not be such a bad idea. A few years later, you can build something new, and exclude UK, Greece, etc.

Sarrazin says: Europe does not need the Euro

we will find out this Summer

[Mandos]

Genauer:

Your question I will counter rather than answer, because there is a presupposition in there that I do not necessarily agree with. You are making an implied inverse connection between some positive aspects of the German lifestyle that you have chosen to describe and the changes that are required to save the Euro: do one, and you dilute the other. It has long since confused me why you focus so much about what the German lifestyle does and does not contain, when it seemed to me besides the point.

It is not at all clear to me that this is the case. So before I can answer your question, you'll have to tell me what it is about the German quality of life, whose meritorious aspects are largely constructed from decisions made pre-Euro, that Eurobonds or a fiscal union to bring the accounts into balance would affect.

In fact, you suggest further above that you consider fiscal transfers between the Bundesländer in themselves to be morally illegitimate. If so, then it's doubly more difficult for me to answer that question. If you don't believe that a currency union consisting of multiple political entities (in this case, Germany with its Länder, before and after the Euro) need necessarily ever have financial transfers, then there's not much left to talk about.

As long as two entities are unequally productive (which is always the case) and trade with one another, there will be a need for a rebalancing mechanism. What Europe is choosing is the worst possible one.

I agree that Europe probably didn't need the Euro, as I've said before. It was brought in specifically to force a situation where a direct rebalancing was required. In other words, the Maastricht treaty was never intended to work, from the beginning. The very existence of the Maastricht treaty's provisions about bailouts suggests that everyone knew from the very beginning that there was a possibility of a needed bailout. So it was intended to be broken from the very start.

The other countries should just start printing Euros and let Germany decide what it wants to do at that point.

When Hollande demanded breaking the Mastricht treaty, the count was 3 for him, 2 abstain, 10 in the lawful German corner. There is no majority on the ECB board for more bond buying. It has stopped completely.

This means nothing. Central bank boards are unaccountable to the people, and we know now that they are encrusted with vested interests and stale ideologies. So what you are telling us is that they thwarted democracy. It could easily be argued that they should all be fired. I'm in favor of firing all central bankers anyway and transferring their powers to the legislature.

[Mandos]

Genauer: by the way, the evidence you're using that the trade imbalance doesn't matter? The rest of us draw the opposite conclusion from the same data. 7-10 years of an uncorrected trend is long enough to precipitate a crisis of one party cannot defend itself by devaluation,

[TorrensHume]

Nick an interesting post. The key issue is that you identify is uncertainty. Everyone realises that the current situation is unsustainable and that disorderly exits and defaults will be a nightmare. But no one knows what the rules for an orderly euro exit or default are; and whatever rules there are are subject to change almost randomly. So the problem is one of Knightian uncertainty. What is needed is a clear policy statement that explains the rules for exit and makes Mario Draghi’s vision for a sustainable euro area possible.

I don’t think that an orderly euro exit is impossible. Consider this. Theauthorities issue a parallel currency (scrip) while leaving the economy (Greece, Spain, Ireland) euroised. The scrip would initially (on day one be pegged to the euro at one to one (or any other rate, but that would be simplest). The central bank would pre-announce tha the currency would depreciate over time – a Gesselian type currency.

To avoid an immediate one off depreciation, the central bank would stand ready to convert euros into scrip, but scrip would not be convertible into euro. This is essentially what mints chose to do under the bi-metallic standard.

It is possible that the scrip would immediately depreciate by x percent if firms and workers simply added a premium of x % to the (euro prices and wages that they charge). But since the economy is still euroised, the government could chose to accept the scrip at the official exchange rate for payment of taxes and utilities and any other euro liability that citizens have with the government. This would create an incentive for firms and workers to accept payment at the official exchange rate.

Most of the arguments made here have been more fully developed at www.specie-flow.net