Germans: “We have them (Greeks and the other lot) by the balls”

From 2011: “The real reason for Germany’s optimism

…Look, I said, I’m a born pessimist. For the sake of argument, let’s assume a worst case or nearly worst-case scenario for Europe. I don’t believe the euro zone can survive in its current form, and I think Europe is in for a deep recession, not a short shallow one. What would the impact of that be on India, China, and all the other developing countries, particularly in Africa, whose trade is rapidly expanding with developing world’s two giants?

Forget what the response on the panel was. It was unremarkable. What’s interesting is what happened later, during a coffee break, when I got into a discussion with two senior German executives attending the meeting.

The nature of these meetings is that the hallway chatter is always more interesting that the formal program. Part of the reason why is that, particularly when talking to journalists, the businesspeople or politicians tend to regard those conversations as off the record. So I’ll abide by that here. One of the German execs was a consultant, and the other headed what I’ll call a quasi-official German organization.

They were slightly irritated by the pessimism I’d expressed earlier in the day. “Don’t you realize,” one of them said, “that the cost to us (Germany) of bailing out Greece is far less than it cost us to reintegrate East Germany after the wall came down in 1989?”

I almost choked on my croissant. Yes, I replied, I am aware of that. I lived and worked in Berlin as a journalist in the mid 1990s, when that very painful (economically speaking) process was taking place in Germany. But doesn’t that, I said politely, rather beg the question: Germany integrating their brethren, who’d been isolated and impoverished during the cold war, was a dream come true, whatever the cost. Germans, on the other hand paying to bail out Greece is, to average German, rather the opposite of a dream come true, is it not?

He waved me off. No no, he said, it will be taken care of. The Germans, he said, understood how beneficial to them membership in the euro zone has been. Without it, the gentleman said, the value of the Deutschemark would be 50% or 75% higher than it is under the euro. “German industry would be wiped off the map.

Why Germany needs the euro

Here was my ‘choking on my croissant’ moment number two. Most economists would agree with what my friend at the meeting had said; but he seemed either oblivious (not likely) or simply unconcerned (more likely) with the flip side of what he had just uttered. Italy, to take the third-largest economy in Europe, one with a sizeable and modern industrial base, is stuck with a currency — the euro — which is stronger than the old lira would be under current circumstances. But membership in the euro zone means Italy can’t devalue to bring some relief to its exporters.

I pushed back politely. Look, I said, it’s not Greece I’m worried about. It’s Italy. Third-biggest bond market in the world. Bond spreads this morning again heading over 7%(before the ECB intervened this to push them back down again.) Too big to fail, too big to save. Is the government, even one under a new Prime Minister, going to push through sufficient austerity to avoid a default?

Now the consultant perked up, speaking what he too believes to be the unvarnished truth. They have to, he said, because “to be blunt about it, we have them [both the Greeks and the Italians] by the balls.”

Apparently, it´s not exactly working out that way!

This bomb you´ll “never learn to love”

David Beckworth has a very good post: “The Origins of the Eurozone Monetary Policy Crisis”:

I made the case in my last post that the Eurozone crisis was largely a monetary policy crisis. That is, had the ECB lowered interest rates sooner and begun its QE program six years ago the fate of the Eurozone would be more certain. Instead, it raised interest rates in 2008 and 2011, waited until this year to begin QE, and allowed inflation expectations to drift down. In short, had the ECB been more Fed-like the Eurozone crisis would have been far milder.

This begs the question as to why the ECB failed to act more Fed-like. Why did it effectively keep monetary policy so tight for so long? 

For that question he provides a long answer. I´ll boil it down to two panels.

In panel 1 we have the behavior of NGDP relative to trend in 4 “core” countries (you may consider France “borderline”).


From this panel one could infer that the ECB (led by Trichet at the time) was setting policy in order to keep Germany, and only Germany, close to trend. When he increased rates in July 2008, Germany was the only core country above trend. In April and July 2011 Trichet raised rates again. Why? Because Germany, and only Germany, had climbed back to trend!

The negative effect of the 2011 rate rise was stronger in France than in the other core countries. France was on a “slow train” (compared to Germany) back to trend (green dashed trend line). Trichet, a Frenchman, threw France “off the train”!

You can imagine what the German-centric ECB actions did to the “periphery”. You don´t have to, just take a look at panel 2, that contemplates 4 peripheral countries:


Greece was “murdered”! Italy suffered with the 2001 rate rise. It was on the same “slow train” as France, but got ejected!

The amount of monetary tightening experienced in the “periphery” was an order of magnitude stronger than the tightening experienced by the core countries, and in Greece, it was about double the tightening experienced by its “peers”!

Bottom Line: “This is not a monetary union“. As is, the euro is unworkable.