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Euro Schizophrenia in Germany
Wolf Richter www.testosteronepit.com
My German contacts want to keep the euro. They’ve gotten used to it. They like it in their wallets. Cross-border travel and commerce have become routine activities for which the euro is just so convenient. The euro has been strong despite the upheavals. But now that the European bailout fund, the EFSF, is descending into irrelevance, they fret about the euro’s future. They want it saved. Meanwhile, they're wondering whether to buy Norwegian kroner, Swiss francs, or Australian dollars—but end up buying US treasuries, ironically.
And they’re increasingly willing to pay a price as they grapple with a litany of plans to save the euro.
Plan A: An integrated and centralized Eurozone. To accomplish this, the 17 member states would have to redo their treaties and abdicate some of their sovereignty. José Manuel Barroso, president of the European Commission, the executive body of the EU, keeps proposing that plan. Angela Merkel has made comments in a similar direction. Instead of the toothless Stability Pact, a new treaty could allow Brussels to impose budgetary discipline on Eurozone members.
“The way into bondage,” declared Frank Schäffler, finance guru of Merkel’s coalition partner, the FDP. “He wants to create a super-state without asking the citizens.” Other members of Merkel’s government were also vociferously opposed to this power-grab, calling it an attack on the sovereignty of member states. This will be a tough sell.
Plan B: Eurobonds. Barroso will refloat the idea on Wednesday in reconfigured form named “Stability Bonds,” according to the Handelsblatt, which has a copy of the 41-page discussion document. The Eurozone would issue or guarantee bonds with its combined credit strength. Risk would be transferred from weak nations to strong nations, particularly to Germany, while allowing weak nations to run up budget deficits. Opposition in Germany has been instant and fierce.
Plan C: Allow the European Central Bank to print unlimited amounts of money to monetize the sovereign debt of whatever country needs it. Though the ECB doesn't have the legal power to monetize debt, it monetized €194.5 billion ($262 billion) of debt from the likes of Greece, Italy, and Spain. Compared to the US whose gross national debt is 100% of GDP, or Japan whose debt is 230% of GDP, the Eurozone isn’t all that badly off. Its main “disadvantage” is the ECB’s lack of printing power, the argument goes, though printing trillions of euros would instantly resolve the debt crisis.
The cost would be inflation and devaluation. As in the US, inflation would fluctuate between 2-5% a year, or 30-50% every decade. As in the US over the last twelve years, it would entail the gradual impoverishment of the middle class whose wages would rise more slowly than inflation. So that governments could fund their deficits with free money, the ECB, just like the Fed, would force yields below the rate of inflation. This form of financial repression would devastate fixed-income investors, pension funds, and savers. By taking control of the credit markets through printing money, the ECB would shield Eurozone governments from the harsh discipline that markets can impose. Unrestrained, deficits would skyrocket.
But.... As the turmoil of the debt crisis progresses from proposal to proposal—the EFSF, the enlarged EFSF, the enlarged and leveraged EFSF, Eurobonds, Stability Bonds, Eurozone bank guarantees, a strong central government, or whatever—little by little, with lots of hand-wringing, German resistance to allowing the ECB to crank up the printing press is fading—a sea change for the German soul. Inflationspolitik used to be a cussword, not a solution.
Now all eyes are on the spokesman of the German soul. Brushed off as obsolete since the establishment of the ECB, the Bundesbank has risen from the ashes during the crisis. And Jens Weidmann, its president, is holding his ground.
"I'm convinced that the economic costs of monetizing government debt or deficits are significantly greater than the benefits, and that it won't contribute to solving the current problem over the long term," he said (Spiegel). His solution is political: budget discipline and implementation of the EFSF. The debt debacle "doesn't justify stretching the mandate of the ECB and making it responsible for solving the crisis," he said.
Finance minister Wolfgang Schäuble supported him vaguely. If the ECB were to start printing, "financial markets would quiet down for a few months, but then they would recognize that the euro isn't a stable currency," he said. A far cry from the categorical no of yore.
The new boss of the ECB, Mario Draghi, is also paying lip service to Weidmann—while purchasing Italian and Spanish debt hand over fist.
Merkel's government is under immense worldwide pressure, and fewer of its members are speaking out against Inflationspolitik. Countries like Spain are practically begging for help from the ECB. France is applying hefty pressure. And the US has been leaning on Germany from day one.
In the media, resistance to printing money is being replaced by neutrality or even sympathy. It’s about how to prevent “the worst.” And my German contacts? To keep the euro alive, they’re considering the steep costs of printing money. They may not want to bail out Greece, but they do want to save the euro.
Germany has a plan D, however: exit the Eurozone and start a mini-Eurozone of like-minded states who believe in the exotic concept that a currency shouldn’t lose its value. The ECB could monetize the debt of the 12 or so remaining members. The mini-Eurozone with Germany at its center would issue its own currency. The 27-member European Union would remain in tact, trade would continue, and life would go on after some tumultuous times in the markets. But that solution doesn’t have any support among my German contacts, who dread the unknown and don’t want to switch currencies again.
The euro schizophrenia deepens. German exporters, all along the cornerstone of support for the euro, just cracked: "We need a common market, not one currency”.... The Next Step Towards The End Of The Euro.
Wolf Richter www.testosteronepit.com
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Where's the percentage? The only prize that makes sense in going after would be commercial control of Europe. The objective of commerce is always conquest.
http://georgesblogforum.wordpress.com/2011/11/02/the-daily-climb-2/
I think you mean 'hocked' as the path you describe is anything but hawkish.
"As in the US over the last twelve years, it would entail the gradual impoverishment of the middle class whose wages would rise more slowly than inflation."
Nothing unfamiliar to German employees. As the "Frankfurter Allgemeine Zeitung" (see: http://is.gd/KveOMx) wrote November the 5th the average wage shrank about 7 percent within the last 5 years due to "reforms" for the bottom half of society called "Agenda 2010" - which means dumping of wages, social benefits and pensions.
This was also one of the main-reasons for the quick imploding of the Eurozone as this German measures lead to a trade war against its already very heterogeneous "euro-partners" of countries regarding competitiveness. Oscar Lafontaine, ex-party chairman of the "Linkspartei" and UNCTAD-chief Heiner Flassbeck were constinuous warning against the today's scenaro. The governments didn't care but celebrated social dumping. As Ex-chancellor Gerhard Schröder did at the World Economic Forum in Davos 2005: "We have to and had deregulate our employment market. We have constituted one of he best low-pay sectors in whole Europe."
What we see now is the Boomerang of the big neoliberal coaliton (SPD & CDU).
It's called bundling. If the problem of each state seems intractable then bundle them all together and the problems are magically soluble?
May they hang together.
Thanks for this report from Germany. The "Teuro" is, by definition, an inflation currency, as its introduction in Germany was accompanied by the biggest wave of consumer inflation in the last 20 years. Suddenly people were taking out the same amount of Euro from the cash machines as they did Mark (which was about half the value of the Euro). The German hard-money hawks are blind to the very essence of the Euro: inflation. They cannot import their fiscal-sadism into the periphery successfully without serious anti-German resentment, and perhaps war. In any case, they are confusing ethics with economics.
Maybe he just has crazy german friends. This is anecdotal, after all.
@Wolf Richter .... "My German contacts want to keep the euro. "
Oh really! ... are they Bankers ?
Most Germans I know want the old DM back .
In fact , nearly all Germans that I know still multiply today's EUR prices by 2 to compare to the "real" (DM) prices !
( ca. 1.98 = legacy Xrate )
Interestly, the Green party wanted Benzine at 5 DM per Litre ... we're nearly there !
( ca. 3.4 DM/L. versus DM 0.64 in the '90s )
Yeah, the giveaway (throwaway) was this:
The fact that the pegged Swissie is included in that group makes me wonder if this article is from last year? Has Wolf been asleep?
germany is being sqeezed and the squeezing is working. print, baby, print. its only paper. . the choice is easy. either the squid owns europe if italy and spain go down or china does if it snatches the prize away from the squid or germany can if it can make a reciprocal agreement with the broke and getting broker members. the giant squid is wrapping it's tentacles around europe. a decision needs to be made now. print, baby, print.
And in contradiction to the rest of the world ..the situation in Europe is NOT hopeless....
BECAUSE EUROPE ..contrary to the remaining World ..
in an overall calculation is NOT BROKE
Like for ex the USA
And THAT is the real problem ..because all Europes debtors are running away from their Debts .. they cant pay ... internally in Europe and externally .. foremost ..the United States of America ,who right now is preparing to run away from the WORLDS BIGGEST EVER SOVEREIGN DEBT
So ... huge losses of Capital .. the savings of the European People are about to get wiped out .... THAT is approx whats about to happen .
Where the Fuck is Jon Corzine,and why have NO CHARGES been brought against him or MF...?????
WHAT THE FUCK.......
No USA FUCKING JUSTICE DEPARTMENT....or what.
Useless Mother Fuckers.
It's early days. I wouldn't call the system just, but occasionally bad guys take the fall. They need time to find out where the money was moved and who ordered it. Then those guys turn and testify on their bosses, and so forth.
In my Country Denmark a world famous author wrote a fairy Tale : The Emperors New Clothes . It was about an emperor who got new clothes but in reality got NOTHING and walked around NAKED . People did not dare to contradict facts until an innocent child said :
BUT HE HAS NO CLOTHES !
And thats about what the whole financial mess is about . EVERYONE ..has NO CLOTHES . They are all NAKED in DEBT ... one way or the other .
And what is the answer to that ? Very simple . SPEND LESS , WORK MORE , PAY OFF DEBT
It is in fact very simple !
Everything else is .... MORE EMPERORS CLOTHES : NOTHING !
You don't know what money is, do you? How could you possibly have missed all the articles? All the information? What have you been doing with your 50 weeks following ZH?
Clearly you are unaware that 98% of the money in the EU is debt based. The leverage ratio is 40+:1 and closer to 50:1.
It's ALL credit, all with at least as much debt backing it up. Credit is borrowed into existence. Following your recipe means everything deflating down to 2% of it's current price. The average salary in EU currently about 40k would then be around 1000 euros per year if you are lucky.
Work more? For who?
There will be no employers, all the money they have is borrowed, debt deflation means they go bust. The government`s money is all borrowed or taxed from those who have borrowed. And with no employment or unemployment benefits because the government can't afford any, you have no income so how do you pay off your debt? In fact, how will you eat with all of the companies going bust? No income, no employers, no government who is going to feed you?
Yes your solution is simple. As in simple minded.
Fascinating story. How does it all end?
the emperor loses his hard on.
I hope sincerely the same happens to these GS shills.
Great article. Thank you!
Re:"Though the ECB doesn't have the legal power to monetize debt, it monetized €194.5 billion ($262 billion) of debt from the likes of Greece, Italy, and Spain."
can you suggest where to look to understand the process of authorization whereby the ECB is allowed to buy all the bonds they already have. I imagine there are "trading limits" even for the ECB. Seems to me they've already purchased a trillion euros worth.
wr
By law they cannot monetize in the primary market, meaning they cannot directly buy Italian bonds from the Italian government. As a bank, however, they can and do buy bonds in the secondary market. The Fed works with primary dealers in a similar manner when they monetize US debt. The primary dealers (Citi, GS, JPM...) buy treasuries, a week later the Fed buys the treasuries from them.
The limits are set by the ECB governing council. They report on "open market operations" (which include bond purchases) here:
http://www.ecb.int/mopo/implement/omo/html/index.en.html
Thank you.
Easy, Germans will think like this:
Risk of euro collapse * cost of collapse to Germany vs. risk of hyperinflation when monetizing euros * cost of hyperinflation to Germany.
For example:
0.25 * 800 = 200 > 0.15 * 1000 = 150 -> Monetize euros.
I'd bet the odds are on favour of monetizing. Germans will require strict process for that and supervision is already being implemented for Greece and Ireland.
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Bankers are poisoning the well of information. How does anyone know how the German people feel before it happens? That Germany would sell her inheritance for a bowl of banker pottage sounds like a planted story by the bankers, given the options above.
The unelected EU officials are losing their reputations as representatives of the people, if ever they were. According to Mary Ellen Synon, based in Brussels as a columnist at the Irish Daily Mail: EU collaborator, now Prime Minister of Italy, “Mario Monti is not only a former European Commissioner, but he is also the author of a report commissioned by Jose Manuel Barroso on the future of the single market – which was a report meant to plan ways the powers of Brussels could be further extended into every part of the members states economic and fiscal lives, including taking control of corporation tax rates.
“More, Monti is a member of the Spinelli set, a euro-fanatic group set up by member of the European Parliament and Brussels heavies such as Jacques Delors to press the construction of a final centralized government in a country called Europe.”
As to has Germany hawked its soul to save the euro, the EU, or Goldman, why would Germany or any entity want to be a part of that? Richter, IMO, makes the case that Germany hasn’t sold her soul, and won’t.
Germany has neither heart nor soul: lost when Prussia was lost and its people massacred and scattered. In short, they'll print. But the inflation is going to be much higher than estimated, since Euro, unlike dollar, is not protected as world reserve.
i think there is a bigger game here.the choice is really between a death grip tie to the usa and the dollar or a slavish tie to the yuan. if the euro flunkies were daring they would tie to the yuan and destroy the dollar but the devil they know is the usa and the dollar. if the dollar goes down,however, the western world gives way to china and asia anyway. the dollar obviously goes down but the eurozone will not give in to china, not yet. so their only alternative between these choices is to madly print and go down on their own volition before they have to make the choice
You’re right from the Prussian standpoint, but I don’t see how that translates to the acceptance of inflation. Who’s protected except the printers and their friends when you have inflation like this? And I don’t know if reserve currency status is any guarantee for the dollar; it looks as if the U.S. may not be able to hold onto it.
I still believe it is ludicrous to predict what the Germans are going to do. When inflation really starts, it is going to be horrible and I don’t see the Germans going along with it. If printing is the only way out, the Germans will walk, IMO. They won’t pay the price no matter how much they love the euro.
Who are they ? Who cares what your friends think ? Why do you think all Germans think same as your friends ?
Are your friends ready to live a very poor life after printing euros and will they still be happy to use euro because they get used to it ?
Really, that's all ? Why not Hyperinflation after that ?
The Cutty Stark is insane - I know , I have looked into his eyes and seen madness.
Also look at the faces of the Irish Elite if you could call them that........priceless
http://www.iiea.com/events/crafting-monetary-policy-for-stability-and-convergence
Somethings got to give.
The Act of union 1801 and its consequences goes very deep in this country - we may be stupid but we know when we are getting fucked as we are no Virgins.
does that include getting phucked in the mouth however?
http://www.youtube.com/watch?v=SSqXi9RaGSI&feature=player_detailpage
how 'bout the left ear? eh? eh? answer me THAT one!
I wonder if Merkel and the germans will really have it all their way with plan #1. I mean, sure, in the short term every european country's economy is tied more closely together and the PIIGS have to do certain things.
But the whole political game doesn't end there. There are more people in the PIIGS than there are in Germany. What happens if the majority of the EU members say, "You know, that was a good policy as a start but we want to do something completely different now. We need a new Export Equalization Law that will make countries that export 'excessively' to other EU partners pay them billions of dollars to help kick start those other nations' industries."
How sure is germany that it will always be able to be the tail wagging the dog? Eventually they will have to let the PIIGS vote on things in Brussels and those folks might be hell bent on voting for things germany doesn't want. If everyone's economy is more closely tied together, will Germany always get what it wants? They'd better think about the answer to that very carefully before they do something that might look good at first but hurt them down the line.
""Short of shutting down the ratings agencies and declaring a bank holiday, Europe's interventionists have only one realistic option to get ahead of the decision cycle of markets and "reset" investor psychology. The European Central Bank will have to intervene on a gargantuan scale to guarantee European government debt. It will have to travel down the quantitative easing path of the Fed.
....Strap yourself in for blast off. The firing of the European printing press is going to send precious metals to the moon.""
From Dan Denning at The Daily Reckoning
Here is Plan D: http://www.monbiot.com/2008/11/18/clearing-up-this-mess/
Germany must reduce its current account surplus.
If Germans were just a bit less German, and more like the average Wall St employee, they'd happily fly to Eastern Europe, Spain, Greece etc and blow a load of cash on crack and hookers, helping to resolve the current account imbalances that are the source of this mess.
That's the problem you see. Those irresponsible Germans are just too...responsible!
TY for the Monbiot link...great reading, brilliant historical analysis. If only people knew how Keynes's brilliance, Bancor and Clearing bank solution, has been historically polluted by the US Hubristic clique...and how the Monetarists and corporate welfare shills have disparaged his analysis. Keynes and Joan Robinson understood better than all Capitalism's dark face that is now only too visible; The school of Chicago got it all wrong and fueled the Reaganistic pump to current deregulated financial ponzi Armageddon.
No checks and balances now, no early warning calls, the system just rolls on like a destructive tsunami.
Now the politicians having become total surrogates to mad money line, they can only socialise debt and let the Oligarchs rip off the profits, until it all blows up. The whole shooting match, like the Papal church under the Borgias. A Martin Luther was born then alike a Leonardo da Vinci to bring new breath, vision, to Western civilization. We need another son of the Enlightenment to alight again our candle and thirst for justice and progress. But first must come the fall, the death of old capitalist God in its financialised, ponzi, global clothes, like under the Borgias; before the cycle can rebegin. But there will be blood. As then.
+1 on the Monbiot link...
Keynes name gets bashed lots on ZH but his namesake policies are his in name only.
His Bancor idea is MEGA outside the box thinking (though it implies a more evolved human race to implement it)
...after "the blood" then...
Printing is not a solution to a big spending problem followed by a big debt problem
Address the debt, cut budgets to service it or just default
The socialists and idealists of Europe have caused a financial and political headache of epic proportions ...trying to cobble together this Euro Trash is a worse problem than the sum of its parts
Just get it over with and split up you bloody clowns
careful what you ask for...you might get it.
1. You cannot fix a debt and deleveraging problem by adding more debt and more leverage.
2. You cannot fix a solvency problem by providing more liquidity.
3. Any monetization option will be fiercely opposed by Germany and will ultimately force Germany to have to leave the Euro.
4. Any failure to monetize means defaults which will not only damage the banking system but also deprive Southern European citizens of their savings, their pensions, their jobs and possibly their democracy and their Social Welfare State.
5. Any solutions (such as the ESFS or current austerity requirements) that only work if interest rates are artificially suppressed by government action are bound to fail sooner or later.
6. Any solutions that rest on current growth trajectories (all austerity requirements) are also vulnerable to failure.
what if those German rates are at or near zero because they're about to become de-industrialized? would you call those interest rates "artifically supressed" then?
The proper context is...
What would the Greeks do if they were in the German's shoes? Would they print euros to save the other countries? If they printed and it did not turn out well for Greece, would they default on their commitments?
Next, substitute the Spanish, then the Italians, then the Irish, then the Portugese, then the... you get my meaning.
If Germany prints, their industrial core will transfer/outsource itself to North America within a few years. That would be good for North America.
If Germany/EMU prints, then this should cause the euro to be cheaper in dollars which should make Germany's exports more competitive. This would be bad for North America and Japan too. What would you rather have if the price was the same, a Toyota Camry, a Ford Fusion or a BMW 328i?
German printing today means German taxes tomorrow.
BMW et al will hightail it out of a ``soon to be`` high cost low productivity jurisdiction and look for the best available spot.
US high cost - high military means US based companies will continue to have market access around the world. EU high cost - low military means they are the likely candidates to be `bounced`.
Take the Camry. Let's face it, only pretentious douche bags drive BMW's. The Camry is made better and will last longer. Not to mention BMW's interiors' smell funny after a few years.
the cost of the insurance alone says "Camry." BMW? I could buy a 7 series used in beautiful condition for 5 grand it's so unfixable. you know what's good advice? always check a womans teeth before you marry her. i mean you wanna talk EXPENSIVE...friggin TEETH that need fixin. and dream on if you don't think you need insurance!
I thought that only applied to horses. When my girlfriend comes over next, I'm raising her gums.
"the exotic concept that a currency shouldn’t lose its value"?
why the FUCK is that exotic?
Because it's so rare.
>2-5% a year
Okay I'll go with that.
>30-50% every decade.
Sec...
5% per annum -> 40.12% per decade
4% per annum -> 30.5% per decade
3% per annum -> 26.25% per decade
Diminishing returns are tricky, might want to check your math on other things even if it's off the top of your head. Usually means you've missed something when describing percentages if you are treating them as whole numbers. As an engineer, the program crashes and I can debug it.
Do this with real money and you'll be broke fast.
Worthless article. Regurgitates what everyone already knows and failes to back it's opinion with evidence.
The Europeans failed to create a real union when times are good. Now, you expect them to do so when some countries are still talking about World War II?
What a joke. This should be taken down.
A very good article.
All the western powers are leaning hard on the Germans to print. USA, UK and especially France (the Euro was a French baby).
With all this exernal pressure the Germans will bend over, because they lost WW2 and has not been a truly soveriegn nation since.
Your correct, this article was worthless. It was just done to try to juice the Germans into allowing the printing of money pure and simple. I don't think that Germany is going to allow it, they lived through their hyperinflation period and why do it just to save the other countries that weren't fiscally sound. It would be a different story if it was to save their own country.
Nice Head-Fake article to juice the markets one last time before Black Friday! Here's a little secret for ya: Germany is printing Deutschmark's as we speak. You don't put on a rubber unless you plan to fuck something......