Relying on Fake German Strength

Wolf Richter's picture

Wolf Richter

While we’re sitting on the edge of our chairs, waiting breathlessly for the Greek election, or for Fate to swallow Greece and send financial Armageddon over the Eurozone, stock markets rallied. Not because of a sudden plethora of good economic news, but in anticipation of how central banks might react to the Greek vote—that’s how far this farce has come! As if sheer artificial liquidity could wash away the putrid odor of decomposing debt.

They lined up on Friday to give their spiel. ECB President Mario Draghi would “continue to supply liquidity to solvent banks where needed.” Bank of Japan governor Masaaki Shirakawa was “prepared to take all possible measures” but denied rumors that central banks around the globe would take coordinated action. The Bank of England spoke up. The Swiss National Bank confirmed its iron determination to keep the flood of euros at bay, with capital controls, if it had to; its currency peg would hold, come hell or high water.

To calm the credit markets, it was leaked earlier that Draghi, European Council President Herman van Rompuy, European Commission President José Manuel Barroso, and Euro Group President Jean-Claude Juncker were feverishly bent over a grand plan to convert the beleaguered monetary union into some sort of federal state governed by unelected EU bureaucrats.

So, while waiting for the vision to appear, I skyped with a friend in Germany who owns two restaurants. They’re doing well, he said. 2011 was a record year, and this year looks good too. He’d redecorated, his new menu was a hit, and he was excited, though it was a day-to-day struggle, in a jungle of regulations, with taxes out the wazoo. And what about the debt crisis? He didn’t pay much attention to it, he said.

Indeed. The debt crisis has been good to Germany, formerly the “sick man of Europe.” After Reunification, Germany was marked by high unemployment, stagnation, and lacking innovation. The dotcom euphoria bypassed it. Inflation surged and real wages declined. Industry restructured, ditched unprofitable operations, axed workers. But countries around it boomed. Spain and Greece were riding high. The Celtic Tiger was cleaning everyone’s clock. And Germans became morose. Eventually, the internal devaluation, insidious as it was on the middle class, paid off for industry. Exports took off, and Germany was showing signs of growth.

Then the financial crisis hit. Export orders fell off a cliff, causing GDP to plunge 2.1% in the fourth quarter of 2008 and a horrid 3.8% in the first quarter of 2009. Annualized, those two quarters printed a double-digit decline in GDP. The worst two quarters in the history of the Federal Republic. The German economy lives and dies by its exports.

But as the financial crisis morphed into the Eurozone debt crisis and began infecting the periphery, Germany recovered. Exports to Asia skyrocketed, exports to European countries did well, and a good part of the US stimulus money made its way to German enterprises, such as Siemens and its suppliers. They produced and hired. Exports last year exceeded €1 trillion for the first time ever. Unemployment dropped to a two-decade low. Its budget is nearly balanced, and yields on its debt probed zero. Euphoria set in.

Short lived, it seems. According to a slew of recent data, Germany is backsliding. Its banks are highly leveraged and packed with who knows what kinds of decomposing assets. Its debt, at 81% of GDP, is high for a country that can’t print its own money, and is higher than that of Spain. If China implodes and the US enters a recession, while the Eurozone continues to teeter, German exports will once again collapse. The savior of Europe will find itself in a deep recession, with large deficits, rising unemployment, spiking yields....

“Germany’s strength is not unlimited,” Chancellor Angela Merkel told the Bundestag on Thursday. She was committed to the euro, she said, but would eschew counterproductive quick fixes, such as Eurobonds and other forms of debt sharing. She was addressing President Obama, French President François Hollande, and her European counterparts who have been demanding that the German taxpayer pick up the tab for the profligacy of others.

The same day, the French government drove a wedge into the rift between the two countries, the core of the Eurozone. Without it, nothing will work. Hollande, while in Rome to form an anti-Merkel triumvirate with Italy and Spain, presented his plan to save the Eurozone: institute “euro-bills” (his word for Eurobonds) and use ECB funds to recapitalize banks (via the ESM).

Panic attack, it was called in Germany: the French mega banks, chock full with rotten assets, were teetering, and to avoid having to beg Germany to help bail them out, Hollande wanted to change the rules so that he could ask the ECB instead.

Then, Prime Minister Jean-Marc Ayrault suggested that Merkel shouldn’t “sink into simplistic formulas.” And Arnaud Montebourg, Minister of Industrial Renewal, accused her of “ideological blindness.”

Friday, Merkel hit back. “Pooling the debt may be of interest to some, but in Germany, it would lead to mediocrity,” she said. “And mediocrity must not become the standard in the Eurozone”—thus slapping the M-word on the French.

“If Greece doesn’t get its next loan installment, the Eurozone will collapse the following day,” scowled Alexis Tsipras, leader of the left-wing SYRIZA. By threatening the entire Eurozone with its demise, if he won the election, he ratcheted up the bailout extortion racket a few more notches. The run on Greek banks turned into panic. Eurozone heads of state, already on edge, threatened Greece in return. Everything is coming to a head. Read.... Greece in Panic ... um, Wait!

And here is the hilarious video from down-under comedians Clarke & Dawe that in 2.5 minutes summarizes with superb accuracy the entire Eurozone debt crisis.

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otherleading's picture

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ebworthen's picture

Clarke and Dawe: 

"Because the U.S. is owned by China."



Setarcos's picture

Off topic(ish) but I got "Denied Access" when I tried to post this:

"The United States is one big Indian reservation - and we are all in it. So says Russell Means, legendary actor, political activist and leader for the American Indian Movement. Means led the 1972 seizure of the Bureau of Indian Affairs headquarters in Washington, D.C., and in 1973 led a standoff at Wounded Knee, South Dakota, on the Pine Ridge Indian Reservation, a response to the massacre of at least 150 Lakotah men, women, and children by the U.S. Seventh Cavalry at a camp near Wounded Knee Creek.

American Indian Russell Means gives an eye-opening 90 minute interview in which he explains how Native Americans and Americans in general are all imprisoned within one huge reservation. Means is a leader for the Republic of Lakotah, a movement that has declared its independence from the United States and refused to recognize the authority of presidents or governments, withdrawing from treaties it made with the federal government and defining its borders which cover thousands of square miles in North Dakota, South Dakota, Nebraska, Wyoming, and Montana.

Means explains how American Indians have been enslaved within de facto prisoner of war camps as a result of the federal government's restriction of their food supply and the application of colonial tactics, a process that has now also been inflicted on the United States as a whole which has turned it into "one huge Indian reservation," according to Means.

Means warns that Americans have lost the ability of critical thought and with each successive generation become more irresponsible and as a consequence less free, disregarding a near-perfect document, the Constitution, which was derived from Indian law. Means chronicles the loss of freedom from the 1840's onwards, which marked the birth of the corporation, to Lincoln's declaration of martial law, to the latter part of the 19th century and into the 20th when Congress "started giving banks the right to rule," and private banking interests began printing the money."

At about 1:18:00 Russell comments that "Americans" do not have the attention span of a gnat.  True (though not just of the general population of the USA).  So I do not expect even most participants in ZH to LISTEN to what Russell Means has to say for 90 minutes.

Maybe this modified post will not be "Access Denied", because this time I have left out mention of a ZH contributor, who I thought might offer a cognitive response.

AnAnonymous's picture

This US citizen has a point right: US citizenism has not changed.

It has it wrong though when he states that US citizens do not have the attention span of a gnat.

Fact is that somehow some US citizens are turned into Indians.

lakecity55's picture

"Hollande wanted to change the rules so that he could ask the ECB instead."

Ah, The French being their usual sneaky selvess. Makes me picture Hollande with one of those cartoon mustaches and beret, sneaking around at night. "Pssst, Hey, Mario, Eurobonds?"

silverdragon's picture


Just fuck off.

silverdragon's picture

It just a game, scare the sh*t out of the European masses so they accept a United Europe. Europe finally uniting Politically, Militarily and Monetarily.

Who will be "The Great Uniter"?


lakecity55's picture

supposedly the guy who becomes the antichrist.

AnAnonymous's picture

Who will be "The Great Uniter"?


US citizen playbook.

Zero Govt's picture

"...waiting breathlessly for the Greek election, or for Fate to swallow Greece..."

not "fate" but the vandalising sucking sound of democratic Govt

Govt is entirely predicable, it is a nation-wrecker and insitution of economic destruction leading to civil chaos... see Egypt, Greece and coming to a Govt-ruined nation near you

Good article Wolfy, thanks.

d_taco's picture

Smart money looks at Sterling and the downfall of the UK.

Euro skeptics have their fines month, and my advise enjoy it as long as it takes.

Let see and wait while the marked realize the UK is not a safe haven but a sinking ship.

No Euros please we're British's picture

I think you'll find that the UK isn't the Titanic, but the iceberg. Hit the UK and everyone (USA included) sinks. You think the "smart" money don't know that.

Winston Churchill's picture

All safe havens are relative at this point.

None of he fiats are coming out of this alive.

PMs are the only long term  true safety plays.

Grand Supercycle's picture

Rally warning continues...

SPX & EURUSD bullish daily charts dominate further.

As mentioned, shorts will be slaughtered next week.

falak pema's picture

all this Euro bickering does not address the issue of root causes. Private sector debt is now holding the world hostage and the sovereign debt, now an Oligarchy bubble, is the sacrificial cow to avoid their own impending demise; its mutliplied the cancer of global finance by four since 2008, has the banking cabal. 

So, Wolf, all this Euro bashing, like a mouthpiece of uber-alles anglo world,  is just peeping through the key hole; its "one eyed jack" play. As what is at stake in Euro zone is a slice of the huge, bigger global ponzi cake. Don't hide behind the sham bickering of statist shills who are impotent as the banks own them and the banks collectively are on the Titanic. That is the real issue. The Central banks of Anglo land who can print their own fiat, are not exempt from this risk, far from it; if Euro falls they fall harder. After all, its Pax Americana reserve status that gets hit in its Oligarchical solar plexus. And that... is what Kairos is aLL about.

Understand Kairos and you will understand why when we go down the slope there is a point where momentum takes over from human will, and the laws of civilization imposed by a power construct must then yield to gravity. Past hubris can no longer be hidden behind the steaming stable doors. 

If Athens burns Kairos will emerge and it will be followed by Nemesis. There are no Saviours; as Caesar's world must die before a solution emerges. That is Kairos. All other measures just look like stalling the inevitable.

There are only two ways out of this mess : True deleveraging via depression and paradigm change or War. 

And war is now not the solution as the past forty + years have taught those who fabricated "Pax Americana", since exorbitant privilege became evident. Our money, your problem is now their swan song. That may well be the legacy of Kairos.

AnAnonymous's picture

Lets play US citizen logics

private debt is debt
public debt is debt

debt is debt so private is public.

That is the kind of US citizen logics one can read on this forum.

That said, the division of debt between public and private is typical US citizen false dichotomy to organize gang wars and zero sum games.

Private debt plus public debt is unsustainable in US citizen world. Resulting from the fact that private debt is unsustainable. And public debt is unsustainable.

Still some diversity in the EMU and the greece situation (exhibition of public debt) is different than Spain's situation (exhibition of private debt)

Pushing one under the bus to save yourself. US citizen style.

Olympia's picture

A country in the outmost Southeastern part of the EU has grasped the headlines for quite some time. With only 2% of the EU's economy and just 2.5% of its debt it became the "Witch" that is haunted by puritan Northern Europeans. It is claimed as the epicenter of laziness, lust and unproductively for the whole of the Continent, a bad example that pious Northerns should be feared and loath at the same time. 

This country is Greece and it must be punished! But is it really the witch hunt that has started in 2009 the most stupid move ever made in the entire European history? Is it worth to blame Greeks for the lonely dark winters up in the North and for the depression syndrome that cripples the lives of dozens of millions northern Europeans, as if Greece makes the weather?

In reality the Northern Europeans risk of pushing Greece into the broader global community where it is going to be free from investing heavily in its defense of the Eastern gates of Europe and it will bring about the greatest change in the balance of powers that Europe has felt since the collapse of the Berlin war. This time Germany will not be re-united, rather it will has to pay a dear price for its energy security. Netherlands will not become richer; rather it will have to pay from its own pocket in order to save itself from the flood of narcotics and Asian immigrants.

Austria will not be greater, rather it will have to deal with powder-keg named "Balkans" that has markets Vienna's history.

How Northern Europe shoot its leg, in order to satisfy the populist sentiments of an electorate being used to the fairy tales of "bad witches and pious farmers".


Panagiotis Traianou answers to many of the aforementioned questions and gives a proper solution on his article entitled “GREECE RANKS AMONG THE WITCHES OF SALEM”


lakecity55's picture

Well, if 2.5% of the debt can blow up the EU, maybe they should not have formed it in the first place. Duh.

AnAnonymous's picture

Russia dolls.

US citizens living in Europe uses Greece to hide their own unhealthy situation.

Focusing on Greece relieves and is comfortable when you want to think that there is no structural problems due to US citizen economics.

Remove Greece and the day will turn brighter once again, the fallacy brought by US citizen Europeans.

The other US citizens play with a bigger doll though. They know that pushing Greece under the train wont release the much needed resources to buy time.

But pushing the whole of EMU (check data) will allow resources to be released. Zero sum game.

Russian doll: EMU toys with Greece while the rest of the US citizen world toys with EMU.

All encapsulated as russian dolls.

24KGOLD FOIL HAT's picture

If for some reason those pension funds take a meaningful haircut cuz of all this financial/political fraud, I think the sheeple will finally wake up.  Why?  Cuz the retirees will have their pensions cut in half.  That will cause the pitchforks to be sharpened anf the torches lit.

Therefore, TPTB will monetize to slow down the crash as to make it less noticeable.  Why would they let their system collapse?  Just make some funny money!

Peter Pan's picture

Alexander the Great may have been a bit of an ego maniac, but when confronted with the Gordion knot he did not sit there trying to undo it in the way the legend had foreseen. Instead he drew his sword and cut the intricate knot because he realised there was no way of it being undone.

The present debt situation of nations is similarly unsolvable due to many complicating factors but primrily due to poor economic conditions, different fiscal approaches and structural impediments.

An implosion of debt will no doubt cause issues for insurance companies, pension funds etc but will at least force nations to realise that commitments going forward must be funded by real economic activity and not some pile of useless paper premised on promises.

joe6px's picture

That was Alexander.   There is nobody in our contemporary age that can unify the neccesary prople to reverse the tradjady that is the lack of leadership we face now.  Alexander rode in front of his troops..truely the ledgend goes.  There are many tried and true leaders here, though the most prudent will not come forward until they feel they must.  Also, there are those that do not wish to participate.  They have the preps to sustain them through what will come.  But what will come?  WE WILL DECIDE IT!  A car with a light?  Or our families uniting and provinding for one another.  Let those who trade paper do what they will.  Those of us who produce food and services will let the "ruling" class work the fields for a day...

illyia's picture

Very interesting, as was Bank Guy's comments.

DoChenRollingBearing's picture

Yes, + 1 to each of you.

Another great article Wolf!

CrazyCooter's picture

Reminds me of Ray Wylie Hubbard's song "Hen House" ... lyrics here (scroll) ... rockin' song, just a'int on you tube for free (yet) so I can't link ... still worth a listen and a buck for you assholes in the cheap seats ...



TahoeBilly2012's picture

Mein hinten ist schmutzy!

stant's picture

Gott weiss ich will kein engle sein

stant's picture

god knows i dont want go to heavan when i die. dont force germany to the right thing. the right thing is whats best for germany. leave the euro.inho

falak pema's picture

morgen- guter sex und liebe, schun reiten, nacht wanderung... Sums up Berlin for me, "ich bin ein berliner gremlin.

Write a novel on that theme.

JeffB's picture

Gott weiss ich will kein engel sein?


RoadKill's picture

By making it sound like a centrally planned conspiracy you manage to cast blame on the Germans. Quite conveinant but bullshit.

This starts and ends with Greek, Spanish and Italian consumers wanting to consume not only German cars, chemicals and industrial widgets, but American brands, technology and hightech equipment, Chinease doodads and Japanease/Tiwanease consumer electronics.

But the onlything spain exports is a bit of wine and parma ham and Greece Olive Oil. Italy actually has a lot of stuff the world aspires o own, but they charge so mych for it and sell so few copies it doesnt bring in enough.

Meanwhile the government employs half the population, massively overpays them and lets them retire at 50.

With deficits in both the private and public sector the countries need to borrow money. Obviously the German and French banks were stupid for lending to communists, but the French are commies themselves and Germany was trying to integrate a bunch of ex-commies back into its population.

Its not like BMW loaned the money to individuals in Spain so they could buy its cars.

JeffB's picture

But this isn't just a few countries, it's most of the western world. That's what happens when central banks artificially hold down interest rates to get their economies booming. An artificial boom is funded by unsustainably growing debt. The inevitable result is a painful crash.

Austrian Theory of the Trade Cycle - Prof Roger Garrison, Auburn University

Those of an Austrian bent saw the catastrophe coming a long way off. It was the classic setup for the boom and bust. The central bankers who blew one bubble after another were blindsided by the obvious, however.

Bernanke was wrong while Peter Schiff was right

Living far beyond our means certainly happened in the U.S. where we had to borrow almost 40% of the money we spent a year or two ago, and haven't even agreed on the inevitable austerity plan, much less started on it. They're calling it a financial cliff, and it's unlikely we'll walk off it gracefully.


Arnold Ziffel's picture


(Reuters) - China will take swift counter-measures that could include impounding European aircraft if the EU punishes Chinese airlines for not complying with its scheme to curb carbon emissions, the China Air Transport Association said on Tuesday.


Tit for Tat.

hannah's picture

'Euro-zone countries would pool their debt currently in excess of 60% of GDP, and pay all that off together over decades via common euro-bonds...'


pay off the debt with what? no one will have a job or credit.....there is no 'solution'. the end game is total and absolute chaos.

q99x2's picture

There are ways that people will take over time but for a fraudulent banking to let it crumble and prosecute those responsible for fraud. Investors should lose any and all investments in the fraudulent banking system that is in existance at this time. You don't popagate fraud by supporting it and then expect to come away with anything.


The great cleansing of the criminal element from the top of society is under way.

bank guy in Brussels's picture

Some months back on ZeroHedge, David Zervos at Jefferies may have nailed the whole situation re the EU and Germany.

The bottom line is that Germany and the northern EU countries lent money to the southern EU countries in order to sell northern products and services ... and in the meanwhile stuffed these dodgy loans onto northern Europe's banks, pension, funds and insurance companies.

This is the dirty secret Germany's leaders probably can't yet even admit to themselves.

The bottom line is that German pensions are now half-'funded' by Spanish and Italian bonds and similar ... so Merkel & co., and northern Europe as a whole, have two choices: Let the defaults and EU break-up roll ... which means telling German and northern European citizens that their pensions and social benefits are bust and might need to get cut by half ... leading to revolution ...

Or the Germans can do what they hate, let the ECB print money and inflate like mad ... print the money to take the pressure off of Spain and Italy, print the money to hide from the German people, that they aren't half as wealthy as they thought, print and inflate and pretend they don't know why food and beer prices are going up every month.

'The Ugly Truth for Northern Europeans' -

Ambrose Evans-Pritchard indicates the 'fix' to the EU crisis is the 'sinking redemption fund' proposed by German advisors last year, but previously rejected by Merkel.

Now however Merkel may be pressed into it. Curiously enough, via the leading pressure of Green party leader Jürgen Tritten ... the main German politician who was present at the resent Bilderberg meeting!

This fund is modelled on the 1790s resolution of the various United States' debt burdens after the American revolution, organised by Alexander Hamilton.

Euro-zone countries would pool their debt currently in excess of 60% of GDP, and pay all that off together over decades via common euro-bonds ... but not open-ended euro-bonds or debt-pooling for new debt ... and supervised with veto powers by Germany ... and thus thought acceptable to Germany's constitution.

And also, here in one of William Banzai 7's great creations, is Angela Merkel working to fix the whole situation ...

CTG_Sweden's picture


My impression is that the reason why Merkel wants to save the Euro and bail out other Eurozone members (although not unconditionally) is that CDU/CSU leaders feel more safe the more Germany is embedded into a European economy that includes France which has nuclear weapons and a permanent seat in the UN Security Council. My impression is that they feel that they are afraid to be punished like the Swiss banks were a few years ago for almost completely bogus accusations of embezzling money that belonged to victims of the Holocaust.


My impression is also that SPD and the Green party want to give Spain and Greece all the money they want even if that would ruin Germany. It also seems as if the German electorate is not fully aware of the scale of the commitments which the SPD and the Greens seem willing to agree to.


One thing that strikes me is how reluctant European politicians seem to be to consider other solutions than Euro bonds or sending the bill to Germany. It so obvious that both Spain and Greece are not competitive enough to be members of the same Eurozone as Germany. At least if people in these countries are not willing to cut their pay and benefits to the same extent as people hos done in the Baltic countries. If Spain had left the Eurozone 2 years ago I guess that the housing market would already have begun to pick up since the unemployment figures would have been much lower. A country with a 25 % unemployment needs a depreciated currency. Since Spain had a rather modest national debt (by current European standards), more expensive loans denominated in another currency than the peseta would not have been an insurmountable problem. The longer Spain waits to exit the Eurozone, the greater the pain will be for Spain and other countries in the EU.


The big problem with the EU is that the politicians are fanatics as regards the EU and the Eurozone. The top priority is not accomplish a healthy economy and a good life for the people in Europe. The top priority is to consolidate the power for the current ruling and rather similar moderate socialist and moderate liberal/conservative parties. And they are willing to go very far in order to reach that objective. Unfortunately, it is hard for the general public to understand that even moderate politicians can be fanatics, just like communists, ultra-conservatives, fascists and militant Muslims. Moderate politicians can be very fanatic about consolidating the power for their moderate parties. This kind of extremism is unfortunately very hard for the general public to detect. It is more easy to detect fanaticism among communists, ultra-conservatives, fascists and militant Muslims since these ideologies are by definition perceived as more fanatic.


The solution to the Italian problems is probably not an exit from the Eurozone. Their problem is the high national debt and high interest rates. Italy is probably one of the few countries in the Eurozone which is competitive enough to stay in the Eurozone and would benefit more from reduced interest rates than a depreciated currency. Therefore, I actually think that Germany should consider to give in and allow the ECB to lend money directly, without any middlemen, to Italy at an almost 0 % interest rate during a transitional period, provided that other Eurozone members are allowed to borrow the same amount of money per capita. By doing that, Germany would get free money they could use for building thousands of wind power stations and buy farmland in Africa and South America for biofuel production. They could use that money now when they intend to shut down all their nuclear power plants. France could use their free money to lower the retirement age even if that seems really stupid to me.


However, I think that the Germans would be folly if they would agree to Euro bonds. The politicians in Greece, Spain and Italy have already proved that you just can´t trust them. And now Francois Hollande apparently wants to spend borrowed money recklessly just like Greece did up to quite recently. Of course, Germany could also borrow and spend recklessly. But the interest rates would be higher than now. But that would probably also be the case for France. So therefore I think that Hollande´s stance is a bit fishy. Is he really serious or does he, unlike Merkel, just want to stand out as a nice guy to people in Greece, Spain and Italy?


In the long run, I don´t think that the same currency for many different countries that can´t print their own money when they need it seems as a really bad idea. My impression is that the Euro was not created in order give Europeans a higher living standard but in order create a more integrated Europe for ideological reasons and in order to consolidate the power for the ruling moderate socialist and liberal/conservative parties and their backers. The general objective for the European leaders has not, and is not, to give people a sustainable higher living standard but to consolidate their own power. The don´t love their electorate. They love their own power, their own political objectives and perhaps also their own ideologies. But they have been very good at cultivating an image that their parties and ideologies are about creating a higher living standard for the general public. Most people in Europe believe that the general objective for the moderate socialist and moderate liberal/conservative parties is a genuine ambition to improve the living standard for the general public. But that´s not really the case although I agree that their societies so far generally have created a higher living standard than other ideologies like genuine communism and conservative Islam.


eigenvalue's picture

"German pensions are now half-'funded' by Spanish and Italian bonds and similar" 

Where did you get the "half-funded" number? Source please


"The results may be of little surprise to anyone to have looked at the balance sheets of German pension funds. Most of the major funds dedicated part of their 2010 accounts to detailing their exposure to the peripheral PIIGS economies, and in most cases it amounted to a few percentage points of their portfolio.

A study from rating agency Assekurata in June 2010 found that 20 insurance funds had an exposure to Portuguese, Irish, Italian, Greek and Spanish bonds of a little under 2%.

Some individual funds had found themselves with a greater Euro crisis risk. Some 7% of a €3.2 billion pension fund for newly appointed civil servants in Nordrhein Westfalen was reportedly invested in Greek bonds as of last year."

falak pema's picture

I don't think you understand fully the bank contagion risk. If Spanish/Italian banks tank, their counterparty banks tanks as well as the private/public sovereign debt squeeze on core europe becomes unsustainable. Which means the world economy tanks and Franco-German banks are toast. If the economy and the banks tank in core Europe then all bets are off on the pension fund schemes of these "rich" euro nations. Why ? Lack of growth, age pyramid and bank balance sheet black holes means : 1°  the money has to come from somewhere to fill the bank-hole and it will be from  the accumulated pensions/tax burden of people 2° future pensions for new generations will dwindle compared to ongoing pension funding of baby boomers and THAT will become unsustainable without true economic growth. So the short fall will never be filled until the economy grows again and, the age pyramid being what it is, there will be an inevitable mathematical crunch down the road to pension payments. 

Only this month, the french executive pension scheme AGIRC, government regulated mutual monopoly scheme, has warned government that new legislation for a minor category group which will benefit from the 60 year pension rule is beyond its means, as no provisions exist in current scheme. They could go belly up in 2014 if the government does not find new measures to increase their revenue to match outlays. And this is before the banking readjustment that PROJECTED club-med meltdown will incur on french bank/insurance/pension fund sectors....

eigenvalue's picture

1. I agree that in modern finance, almost everything is interlinked. However, I'm talking about pension funds not banks so please don't make the topic too broad.

2. I think the "half-funded" is sheer exaggeration. Germany is not France. I don't think their pension funds have so much exposure to the PIIGS.

falak pema's picture

french pension funds do not have officially direct exposure to PIGS either; but they get their money from the public who don't have deep pockets now. Something will have to give and it'll be the pensions, thats my point.

There are 50 T of pensions sloshing around the first  world money markets. So it has to be invested SOMEWHERE; and it probably is in club med via bonds and RE schemes, that are too intricate to be analysed before the banks/pension funds admit to it. The day this dries up OFFICIALLY, as marked to market, watch out. All other money is Oligarchy controlled and parked off shore where governments cannot access them...Implosion time will be there big time when that happens. 

JeffB's picture

I would think people relying on pension funds are at significant risk of losing value of their retirement funds. If the ECB doesn't print, there are going to be defaults and rising interest rates as bond holders get nervous, devaluing existing bonds further. It's also likely to continue recessionary/depression like economic conditions for a long time putting further strains on governments and their social safety nets. In a worst case scenario it causes an outright crash and chaos.

If the ECB does print, it's likely to lead to inflation which would raise interest rates & devalue existing bonds, and eat away at the actual purchasing power of the pensions. Even a loss of 5% purchasing power per year could add up quickly. It's very possible inflation could get much higher than that given the structural problems of many of the countries, and the malinvestments that haven't been liquidated yet.

Then the demographics dictate that the aging populations will be starting to have higher and higher percentages of people retiring and pulling money out of their pensions even as fewer and fewer young people enter the workforce. That would have to have the tendency of reducing the market value of those assets.

You have to wonder what the value of some of these newly issued bonds with negative interest rates will be valued at down the road.

falak pema's picture

+10 And it ain't gonna get better for each tranche of retirees! 

Bicycle Repairman's picture

"The bottom line is that Germany and the northern EU countries lent money to the southern EU countries in order to sell northern products and services ... and in the meanwhile stuffed these dodgy loans onto northern Europe's banks, pension, funds and insurance companies."

That is what happened.  Just curious, since this model is now broken (seemingly), what does Germany do going forward?

philipat's picture

You mean a little like China funds the US? Germany will be fine because it produces beautifully engineered products that the whole world wants to buy. As for the US..................................

AnAnonymous's picture

Germany will be fine because it produces beautifully engineered products that the whole world wants to buy.


Absorbing US citizen german production ruins countries. They had to subsidize in a full mercantilistic twist the consumption to provide themselves with jobs and a future.

Same coin here.

JeffB's picture

But if the number of their customers who can afford to buy those beautifully engineered products drops, at the same time the defaults on the loans they made to help sell similar products in the past start coming in, that could cause some pretty serious problems I would imagine.

Rising unemployment, rising costs for the government safety net, lower revenues, a debt already above comfortable levels and tax revenues dropping would have to add some additional stresses to an economy, particularly when banks, insurance companies and pension funds are also stressed. Much of the debt they hold has a very low interest rate so there are certainly some dangers from the ECB cranking up the printing presses if it comes to that. Rising inflation and interest rates would devalue their existing portfolio as well, offsetting the benefit of fewer defaults to some extent. Potentially the cost could be greater than the rewards.


Vet4RonPaul's picture

Ultimately it becomes a matter of who has the means to collect from whom.  Historically this is done through violence or the threat of violence.  Lawyers and accountants don't do well in gun fights.  The US is the only country that no other country can collect from.  The banksters know the street rules and the pecking order of who can collect from whom.  I'm surprised the US's rating wasn't lowered long ago because it should reflect not only an ability to pay debt but also an ability to not pay debt; that should have made us junk.