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The Long Memory of “The Sick Man of Europe”

testosteronepit's picture




 

Wolf Richter   www.testosteronepit.com

It’s astounding just how distorted the coverage of Germany’s role in some grand Eurozone bailout scheme has been—well, at least in the English-speaking mainstream media. Time after time, we’re confronted with the inanest headlines and reports that place German politicians, and particularly Chancellor Angela Merkel, on some kind of invisible verge where they will suddenly, and under tremendous international pressure, come to their senses and ... blink.

And by blinking, Germany would agree to, guarantee, and fund all the panaceas regularly trotted out by those that need them, particularly Spain, Italy, and now loudest of all, due to its shaky megabanks, France. The lasted blast came from the Wall Street Journal where Berlin Blinks on Shared Debt. Others regurgitated it, including MarketWatch. Yet, it contradicted everything that either German Finance Minister Wolfgang Schäuble or Chancellor Merkel had ever been quoted saying in the German press. And indeed, not much later, a spokesman at the Ministry of Finance made it clear, once again: “This is not true,” he said.

In addition to Eurobonds, the basket of panaceas includes other forms of “mutualization” of debt, a Eurozone-wide banking union with the power to bail out banks with taxpayer or ECB funds, a similarly endowed modified version of the still non-existing ESM bailout fund, and an ECB that can buy even the crappiest sovereign bonds of the most bankrupt Eurozone countries to keep them afloat another day (similar to the Fed and its purchases of treasuries and other securities).

But the 17-member Eurozone isn’t a country. It’s but a monetary union within a 27-member free-trade block. And any mutualization of debt would simply transfer financial responsibility from those who spend to those who end up having to pay for it, without any kind of reciprocal control. Even in the US, California can’t shuffle off its pile of debt and its never-ending deficits—though it’s supposed to have a balanced budget—to the Federal Government and its taxpayers. So why should Spain be able to shuffle off its debt to taxpayers in other countries?

That’s how it’s seen in Germany—where Eurobonds are despised by 79% of the people. The ESM, which continues to be pushed by Merkel, has been running the gauntlet ranging from street demonstrations to the Federal Constitutional Court, where it is currently hung up. It should have been ratified by July 1, and while it is likely to get through the process with some delay, any steps beyond it, such as Eurobonds, are considered unconstitutional.

But as if all these reasons still weren’t good enough, George Dorgan—a portfolio manager based in Switzerland—has put his finger on another powerful reason:

The first full-blown bailout Germany undertook, namely the integration of East Germany (only 17 million people), caused the German debt to nearly triple from €430 billion in 1989 to €1,200 billion in 1999, a decade during which even the US managed to reduce its debt for a couple of years. Germany greatly underestimated the integration costs. It led the country into a long phase of slow growth till 2006; and still now the west pays subsidies to the east. Spain, Italy, Portugal, Ireland, Cyprus, and Greece might be better developed than the former communist GDR. But they count over 100 million people and might need even more time to adjust than the 20 years the former Eastern Germans needed.

Merkel hails from former East Germany and experienced firsthand how difficult the adjustment has been for East Germans—and how expensive for West Germans. Reunification wasn’t only funded by debt that will be around for generations, but also by a special income tax, the Solidaritätszuschlag—lovingly called Soli—introduced in 1991. And it’s still around as well. As George points out, the entire period until 2006 was tough on Germany—by then “the sick man of Europe.” That's what it took to bail out a country of 17 million people, raise the standard of living, and make its industries competitive in a globalized economy.

Bailing out in this manner the growing stable of Eurozone countries will be beyond the feasible. As with East Germany, costs will be underestimated, but will then balloon for years or decades. Merkel knows that. Hence her limits on how far Germany would be willing to go.

But the beleaguered Chancellor just can’t catch a break. She has already committed hundreds of billions of taxpayer euros to propping up collapsing countries. In return, she wants them to live within their means and restructure their economies so that the bailouts wouldn’t have to continue for years. For that, she got tossed into the Axis of Evil. And then the Swiss Minister of Defense spoke up. Read..... “You Can Lose Freedom Only Once.”

“These hordes of Eurocrats should be summarily fired and their agencies totally abolished,” said Doug Casey during a pungent interview. Governments in the EU “are all bankrupt,” and Europeans “will be indentured servants of the Chinese.” Europe is like a skydiver, and if they pull the bailout ripcord, “they’ll find there’s no chute… just a bunch of dirty laundry their economists packed as a joke.” Read.... A Eurocrash Is Baked in the Cake.

 

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Fri, 06/29/2012 - 07:48 | 2572653 Snake
Snake's picture

Germany bailed out itself.

Fri, 06/29/2012 - 04:50 | 2572515 falak pema
falak pema's picture

...Why Germany won’t blink....

So Wolf : What happened in Brussels. Who blinked and who winked?

Your predictions seem skewed in the light of reality as here :

Europe Shoots Higher After EU Leaders Agree To Bank Recapitalization Plan - Business Insider

as also mentioned by TD on ZH this morning. 

Lets hear the oracle of testosterone on this! 

Fri, 06/29/2012 - 10:26 | 2573158 testosteronepit
testosteronepit's picture

Indeed, markets do what they do.

But did the summit produce the goals mentioned until a few days ago, the goals needed "to save the euro"? Among them:

- Eurobonds - nein
- Other forms of debt mutualization - nein
- Banking union with tools to automatically prop up banks with ECB or ESM money? Nein (they did come up with a common banking regulator, but they already have one...)
- Common deposit insurance fund -nein
- Allowing the ECB to buy sovereign bonds directly and massively - nein

All they did was tweak use of the ESM to fund banks directly, rather than indirectly via the state, so if you consider that a blink.... but the ESM doesn't exist yet. And significantly, they didn't allow the ESM to use ECB funds.

Germany has already agreed to several hundred billion euros in bailout aid, and that part will continue, up to a point. Merkel has always made clear that Germany would go along with throwing more money into the kitty, if needed. What the blinking part is about is taking on debt, risks, and liabilities of other countries without any way of controlling them (as Eurobonds would do. And that, Germany hasn't agreed to at all. hence, the wait for the big blink continues....

Fri, 06/29/2012 - 12:14 | 2573530 falak pema
falak pema's picture

well, I see you are reluctant to admit what you have said, like here :

The EU Summit To Save The Euro Has Already Failed - Business Insider

And to admit what this analyst says here which is the industry conclusion right now  after this game changer! :

David Zervos: Germany Loses - Business Insider

Its a mile away from your previous conclusions. You have been barking up the wrong tree! 

If the Bundestag and Karlsruhe ratify the concessions made, according to all it will change the face of Euro zone defense. Until first world, not just Euro zone, comes to the financial boil whenever the FED runs out of bullets. 

Fri, 06/29/2012 - 07:13 | 2572585 fx
fx's picture

The comparison to former East Germany is very flawed, though it still has some merits, in principle. The costs to "bail out" East Germany wre so high because before unification the - quite competetive - economy there got almost completely destroyed within a few months. Converting the deutschmark and the GDR-mark at 1:2-1:1 meant an overnight currency appreciation for East german producers of about 200-300 % while the barriers to competition from west german companies completely disappeared at the same time. East Germany had not needed such a "bail-out" if it hadn't been crushed economically by the ill-designed monetary unification. Apart from that, east germany over the decades paid ALL the war reparation costs of ENTIRE Germany towards the Soviet union - equivalent to some €400 billion that the West actually owed the East by the time of re-unification. That being saidmerkel wants to stay in power - so she will rather sacrifice German interests than risk an immediate collapse of Europe's financial system. Currently, there is no significant political party in germany that is demanding an end to the Euro-desaster. But it will come into existence quite soon and then internal political pressure will build up rapidly. my fear is, that by that time it will be all too late though, as so many commitments will already have been made that the point of no return has well been crossed.

Fri, 06/29/2012 - 03:51 | 2572480 Joe A
Joe A's picture

Germany blinked. The result of the summit basically means that banks in Spain and Italy will be bailed out by German and other healty EU country taxpayers without reform conditions. Same goes for ECB buying up bonds from ailing countries. The only condition will be staying without EU 3% budget rules and we all know how easy that is to cook the books. Ask the Greek and Goldman Sachs . Business as usual.

And if countries don't stick to the 3% budget rule, they will get a fine which will be financed by bonds which will be bought by the ECB.

Fri, 06/29/2012 - 05:04 | 2572517 falak pema
falak pema's picture

so the mutual mechanism applies to BOTH ailing banks and ailing sovereigns? That is game changer! and yes, Merkel blinked if she agreed to that! As ECB is now all in to support the sovereigns. I don't know how that will work, as ESM is independent of ECB...

In the memorandum statement issued on june 29 this is not clear in its implications :

...We welcome that the ECB has agreed to serve as an agent to EFSF/ESM in conducting market operations in an effective and efficient manner....

Fri, 06/29/2012 - 05:36 | 2572538 Joe A
Joe A's picture

As far as I got it, that indeed is the mechanism. Details about the result of the summit will come out in the following days. As I see it, it amounts to a transfer of wealth without any reform. BAU therefore.

Fri, 06/29/2012 - 01:19 | 2572355 caerus
caerus's picture

i am now and have always been fascinated by the attempted marriage of nationalism and economic philosophies...economics is at the present time an imperfect science...politics always will be imperfect...the vain attempts of those who believe themselves to be our betters will result, as always, in suffering

Thu, 06/28/2012 - 23:13 | 2572162 Treason Season
Treason Season's picture

The ultimate question that never seems to be addressed is "Is Germany a sovereign state or a bankster's bitch?" Answer that and you have the answer to "Bail or print?"

Fri, 06/29/2012 - 05:16 | 2572528 falak pema
falak pema's picture

what a load of tripe! Show me ONE first world nation state that is NOT a banksta bitch today!

There are no sovereign states in the first world as its one big transnational Oligarchy; aka Apple-Walmart, TBTF banks, Seven sister oil extractive empires, commodity giants who just speculate like BH-Rio Tinto-Glencore and food/grain/bottled water-soda/pharma/GM feedstock monopolies. They run the world! Wake up! 

Thu, 06/28/2012 - 21:51 | 2571960 mjcOH1
mjcOH1's picture

"Nice article. I don't understand why the Germans are getting such a hard time in the media. In the Anglo world, the financial markets generally expect massive monetary ease as a solution for all such problems, ..."

I foe one am also puzzled as to why the liberal Anglo media is calling for wealth redistribution and for savers to fund proflagates.  It's almost like the self-reported skew of journalists to the political left is showing up in their 'reporting'.

Thu, 06/28/2012 - 21:39 | 2571920 neutrinoman
neutrinoman's picture

Nice article. I don't understand why the Germans are getting such a hard time in the media. In the Anglo world, the financial markets generally expect massive monetary ease as a solution for all such problems, although they would never have cut that slack to, say, a Third World country getting help from the IMF -- their central banks lack the "credibility" and "prestige" of the Fed and BoE.

While QE is not money printing per se (contrary to a widespread myth), it is a reshuffling of debts. It still has to be paid off with present and future income. With debt growing faster than income, there's no chance it can be paid off in full, and it's increasingly clear it can't be even rolled over.

This article is good also in that it exposes the German resistance to carte blanche as rooted in the post-1990 experience, not some half-remembered, far-off Weimar hyperinflation. Germany was one of those countries -- like Canada, Holland, Scandinavia, Israel, and some others -- that took the 90s as the opportunity to clean up their acts. They are prospering now as a result.

The US is more like Italy and France -- avoiding the reforms, still hooked to the dollar-as-reserve currency to prop up our bond markets. The deficit countries in the eurozone no longer have such a luxury. Now they're in the position that that list of countries was in, in the early 90s. But they keep wanting someone external to keep paying so they can avoid what needs to be done.

P.S. While much of the bellyaching about Germany is misplaced, I do wonder about one thing: Germany's largest export market consists of its fellow eurozone members. As they slip into recession, Germany is affected and will suffer. That the consequence of Germany's "vendor financing" of the deficit countries for all these years.

Thu, 06/28/2012 - 22:03 | 2571989 Buck Johnson
Buck Johnson's picture

The Anglo world or countries don't want to have that stigma of being classified as a third world country.

Thu, 06/28/2012 - 19:47 | 2571591 zippy_uk
zippy_uk's picture

Germany may not blink, but it could easily break post Euro end game. Greece / Germany - two sides of the same Euro coin.

Thu, 06/28/2012 - 19:08 | 2571479 lasvegaspersona
lasvegaspersona's picture

Wolf

"It’s astounding just how distorted the coverage of Germany’s role in some grand Eurozone bailout scheme has been"

I say this as a serious, professional, educated, tax paying, contributing to society more than I get from society, father, grandfather, voting in every election, trying to be taken seriously (fuck I even carry life insurance) kind of guy....The media is no longer reliable!!! They are owned and any story that goes against their world view they bury and any that confirm they hammer relentlessly. This is now so far past the 'I wonder' stage that to be astounded is a sign of tragic innocence.

I do not subscribe to many of the conspiracies of Zero Hedge but this and market manipulation should not even raise an eyebrow. Those who do not run their lives with these facts as self evident are doomed to wasting a lot of time and having their faces ripped off and and devices shoved up into the body cavity to control their muppetness.

Proceed with your often brilliant writing but please, for your own sake and sanity, do not be astounded.

Fri, 06/29/2012 - 00:51 | 2572334 testosteronepit
testosteronepit's picture

You’re so right. It shouldn’t be astounding, and I shouldn’t be astounded, and I’ll try to never be astounded again. But it happens anyway. It sneaks up on me. I can’t help it. Occasionally, the illusion overcomes me that the stuff I’m reading that I’m paying for is actually worth something. But then, on my better days, I’m just a blogger who reads ZH and tons of other great sites and I’m not astounded at all. Thanks for the reminder. Astounding that I forgot ...

Fri, 06/29/2012 - 07:58 | 2572671 Pope Clement
Pope Clement's picture

Thanks Mr. T

Thu, 06/28/2012 - 18:36 | 2571412 Snakeeyes
Snakeeyes's picture

Bottom line: Socialism kills any country/economy that tries it AND it is almost impossible to turn around without violence.

In the US, we are going bankrupt at lightning speed thanks to entitlements. And Dread Pirate Roberts just sealed our demise.

http://confoundedinterest.wordpress.com/2012/06/28/imf-to-discuss-greece-re-negotiating-debt-france-and-us-should-pay-close-attention-particularly-after-supreme-court-upholds-obamacare/

Fri, 06/29/2012 - 09:58 | 2573070 WTFx10
WTFx10's picture

Government by itself kills any country/economy that created it. They have all failed and the current ones will too.

Thu, 06/28/2012 - 18:35 | 2571405 aleph0
aleph0's picture

“These hordes of Eurocrats should be summarily fired and their agencies totally abolished,”

Those of the 99% that are awake  .... agree !

Excellent 12 Minute Speech by Beatrix von Storch in Karlsruhe
- STOP THE ESM -

Beatrix von Storch 16.06.2012 Karlsruhe

http://www.rottmeyer.de/beatrix-von-storch-16-06-2012-karlsruhe/

In German of course .... but the power of her speech comes across anyway....
.... as well as the applause !

Thu, 06/28/2012 - 18:33 | 2571401 falak pema
falak pema's picture

this guy doug casey sounds like he is talking about the USA; its awesome to hear the pot calling the kettle ...Europe has to grow up outside Pax Americana; and its a very painful wake up call.

Thu, 06/28/2012 - 18:26 | 2571388 kevinearick
kevinearick's picture

actually...CA does transfer its debts...Facebook....pension guarantees...

Thu, 06/28/2012 - 18:17 | 2571364 michael_engineer
michael_engineer's picture

Regarding "printing" by the ECB or FED as a way to kick the can down the road, many have hoped and opined as printing being a way to alleviate some of this financial crisis in some places.  Yet, right now printing is being resisted, and that is interesting to examine.   In the case of the ECB, a lot of the resistance to that effort comes from Germany as it is perceived that the German economy and/or balance sheets will be affected in a negative way as a result.  If true, that explains the German stance.  

 

In the case of the FED, the situation is somewhat different.  When the FED prints, does that dilute the holdings of foreigners who have purchased large amounts of US Treasuries like China or dilute the investments of other holders of US denominated capital and debt?  If so, would they pushback against printing?  If the value of Treasuries, etc. is going to be diluted by successive printing, then why hold onto those investments?  

 

In the past, printing may have been a popular way for countries to try to inflate their way through and out of economic crises.  As long as the expected pushback to printing wasn't perceived to be as bad as the underlying crisis, then printing generally occurred.  But now one has to ask if the pushback effects are getting so large as to be countering the ability to print.  

Thu, 06/28/2012 - 20:37 | 2571725 philipat
philipat's picture

Asians aren't like Americans. They don't push back in your face. Right now, China is stockpiling Gold and has negotiated "Local currency (RMB)" payment agreements with some significant partners which by-pass the dollar AND the Western Banking system entirely. Their holdings of Treasuries and dollars will decline from here.

Thu, 06/28/2012 - 21:42 | 2571917 Solon the Destroyer
Solon the Destroyer's picture

Their holdings of Treasuries and dollars will decline from here.

How so?

The only way that happens is if their trade partners want to be paid in US dollars, which defeats the purpose of the trade agreements. Not to mention, any country can settle the payments for its exports in any currency it wants. No one (with a couple of Axis exceptions) is shut out of the FX markets. They choose to hold that settlement in US$ denominated assets because they want to keep their currencies artificially low against the dollar of the largest market of consumers (and because that sovereign's debt is presently the most secure).

In fact, China has recently acquired Primary Dealer status for Treasury auctions, which flies directly in the face of your thesis.

These bi-lateral trade agreements are good for heavy trading partners. Removes one or two steps of arbitrage from the process... which is now money in their pockets.

Thu, 06/28/2012 - 18:17 | 2571362 stant
stant's picture

fuer frei mutter frecken, ops no bullets,no gun just empty ouzo bottles and no gas money

Fri, 06/29/2012 - 07:33 | 2572623 trilliontroll
trilliontroll's picture

HÄ ?

Thu, 06/28/2012 - 20:42 | 2571741 donsluck
donsluck's picture

The bond market in the EU is working properly. When the fiscal dangers became apparent, the interest rates went up to compensate for the additional risk of holding the bonds. This is being prevented in the USA. In my book, the USA is actually more ill than the EU in a very fundamental way. I believe if Germany sticks to it's "guns", the EU will be a better place to invest then the USA.

Fri, 06/29/2012 - 01:05 | 2572344 AurorusBorealus
AurorusBorealus's picture

I agree.  The Europeans are "having it out" and slowly-but-surely coming to grips with reality.  They will hang the bankers in the end and hang together.  Even the UK is starting to right itself.  Observe that British authorities made public the evidence against Barclays.

What has the SEC done in terms of the massive fraud committed by the major American banks?

It is the Americans who are in denial, and as you observe it is American markets that are the most dysfunctional: bonds and equities.  When this crisis breaks, and it will break soon, it is the Americans who will be hit hardest.

Fri, 06/29/2012 - 08:53 | 2572825 Doubleguns
Doubleguns's picture

Send the vat tax to Brussels from every country in the EZ. Let Brussels back the ECB. Until then all is futile.

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