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Why Germany Secretly Loves Greece...
We all know Germany (and the German minister of Finance Schauble in particular) were raising hell about giving Greece another pile of cash before any strict reformation measures were pushed through and approved. That was understandable as Germany was very likely the European country which has experienced the worst period of inflation in the past 100 years, and it wanted to prevent another Weimar-disaster altogether.
In a quite extensive report from the Halle Institute for Economic Research, the authors have tried to establish the total impact of the Greek debt crisis on the German government budget, and the results are even more stunning than what you’d originally be inclined to think.
Source: Report
According to the data, the interest rate Germany had to pay on the newly issued government bonds dropped like a stone, and as far as we’re aware, this is the first official report trying to calculate the total benefit of the lower interest rates for the German government. As you can see on the previous picture, there was a huge difference between the price Germany had to pay in 2009 versus this year, and the researchers are estimating the benefit to in excess of $100B per year.
Source: ibidem
Okay, enough about the past, what does this mean about the future? Even though Germany is opposed against too much government interference in the financial system as well as pumping too much liquidity in the financial markets (by the ECB), it sure looks like it definitely doesn’t dislike the current low-yield environment as it saves billions of euros on an annual basis.
Let’s try to put a number on this. The total German government debt is approximately 1.8 trillion EUR. Every one percent difference in the yield it has to pay on its debt has an impact of 18B EUR per year on the government budget. That means that if the long-term interest rate goes up to 3%, the German Ministry of Finance will have to cough up an additional 40B EUR in interest payments. As the total pool of labor force is approximately 44 million, every tax payer in Germany would see its annual tax bill increase by 1000 EUR per year.
Source: tradingeconomics.com
Germany has no choice. It’s currently running a budget surplus of 0.7% , but this would entirely evaporate when the periods of low interest rates ends, and based on our estimates and the current data, if no tax increases would be pushed through, Germany’s budget surplus would easily be converted into a budget deficit of approximately 1%. This could push the country towards a vicious circle as with a budget deficit, the total debt position would increase, making the country less appealing for bond investors which would in turn increase the required risk premium on its government bonds.
Germany will never admit it in public, but it actually loves the low yield environment. As does every other country either in Europe or North America.
And you know what? It’s addictive. Why would anyone ever want to raise the interest rates again when you’re saving tens of billions of euros per year? Germany LOVES this situation and is in no rush to provide Greece a sustainable solution. The stubborn ‘negotiation technique’ is just a strategy to extend this situation as long as possible.
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Why?because greece takes it in the ass.
Utter BS and silly numbers. The mentioned 1000 Euro relief and the export to Greece is chickenshit. This is a Soros' blame game for suckers and a paid study to fool German voters.
Oh yeah, interest relief for debt Germans wouldn't have. Another (Greece) study concluded, that it had cost every EU tax payer 41 kEuro to have tricked Greece in the EU by G&S. Germans lost hundreds of Billions in interests, wealth and income stagnation due to the Euro. 70% of German export goes outside the Euro zone, to Greece only a fraction of a percent. Return for exported real goods is only funny paper and unrecoverable debt. The risk for tax payers for the EU Ponzi scheme – new loans to pay off old loans, is into Trillons.
ZH stop G bashing, neither Greece bashing nor German bashing is to the point. Investors are just laughing all the way to the bank. In the Greece case, mostly the French bankers, who were bailed out by 77 Bn (DB 33 Bn. and US investors too). Goverments interest and citizen interest are not the same. If ZH wants to give politician and investors a blow job, stay domestic. Clueless article.
Contributor articles at the top of 0hedge are mostly bullshit, except G.W.
You are right.
Inflation Tax destroyed savings to fund Spending by Government; the same thing happens when you expropriate savings through sub-market interest rates and erode capital through asset price inflation.
The debt pyramid consumes equity
Ya mas, mother fuckers!
All this Money gets created, and None of it has to be Paid Back.. Win Win..
Germany loves Greece because the failing EU economies are what keeps the Euro nice and cheap thus German exports cheap and plentiful. If Germany went back to the Mark it's value would skyrocket and their exports would fall off a cliff.
Greece is to Germany what the US is to China: The target of vendor financing (with no hope of getting paid back) with doubtful collateral.
Yeah, how could Germans export and become rich if they didn't have- hang on!:
https://www.youtube.com/watch?v=KO5JS-kuBQ0
PT, excellent short and to the point vid. In fact, it explains everything wrong with this op. I'm sure the Germans want peace and yet war seems baked in to the ponzi Euro.
If you happen to have a history book consult it. There were 17 upvaluation of the German currency in the past. Non competive economies, France, Italy and others need a low Lira, err Euro. While you are at it, consult an economy book too. Devaluation is never a good long term strategy. To manufacture in today's world, a country needs significant imports.
I stopped reading when you said consult an economy book too . I suppose next you would be telling me to read up on Paul Krugman ?
Fair enough. Seems that you havn't read Paul Krugman either. His Nobel price is primarily for this work on the theory of trade, which he mostly did in the late 70s through the early 90s. Krugman is a poor economist and more than a decade of his political writings confirm this. Krugman is a Keynesian, who was a splendid mathematician and communicator, but also a poor economist. The problem with Krugman is that most of his newer statements are off his expertise and political. There he is rarely right - the economic straitjacket of the Eurozone one example - but more often wrong. Besides, economics isn't really science. Economists present ther preconceived notions and silly models and then try and find examples that meet their reality. Like all of us. Yours just didn't fit. Not at all.
Going back to the original point about Germany preferring to have a cheap currency for it's exports stands. Germany's import charges are primarily raw materials and energy which have been dropping in price therefore a cheap currency is irrelevent to thier imports. However a cheap currency is relevent to their exports because it means they can export their products at a much lower price and in much higer volumes. If they were using the Mark the value of the Mark would be higher because they have a very strong manufacturing base which currency speculators and wealth funds would buy into thus increasing the demand for and the strength of their currency and making their exports much more expensive. By using the Euro the German economy has the benefit of using an artificially supressed currency which is hugely beneficial to their own internal economy. Sorry to inform you but I am of the Austrian / Hayek school of thought , however I am very well versed in the Chicago school & Keynes thinking , including Krugman's interpretation. in fact some of what Keynes said was spot on - he stated that during times of trade surplus government should save that money , then unleash government spending during recessions. A lot of his theories would probably have worked quite well had we still been on a sound money system , Keynes would never have anticipated a monetary system where over 97% of the money that existed did so as debt. He would be rolling in his grave.
There is no question about it, that an undervalued currency helps export statistics of less competitive economies and badly run companies in the short run. Its also a reasonable model of commodity exporters, good for investors and stupid managers too.
An artificially suppressed currency, however is in the long run by no means beneficial to a mature exporting economy nor for its citizens.
As you correctly state, they get just cheap printed paper - debt - in exchange for their undervalued real work and goods. You are also not aware about Germans production, import and export structure. Germany's import charges are energy all right - cheaper since roughly a year for geopolitcal and other reasons - but imports primarily half products including high tech. Going therfore to my original point, there were 17 upvaluation of the German currency in the past which were aptly balanced by increased competitiveness of the German industry and better products. The US bought BMW's not Italian Fiats or French Renaults even if Franc and Lira devalued regularily. This resulted in a higher standard of living for its citizens, like traveling or cheaper import of consumer goods.
Furthermore frankly, you interpret and quote Keynes wrong, his countercyclical state spending meant something different than using trade imbalances. Austerity as a cure for deflation is not a good idea, but show me one government which saves money in good times. I happen to be and adherent of Austrian School of Economics, recessions and booms are a part of the natural order, government (and central bank) intervention only worsens the recovery process or more to the point, are the problem not the solution.
While "Austrians" - e.g. Ron Paul- can clearly point to the reckless credit expansion by the Federal Reserve during the late 1990s as the cause of the speculative bubbles, Krugman has nowhere to turn other than to say that we need more control of the state in already rigged markets. The argument of the misused Keynes is well known and sounds a bit like socialisms was a great idea but just implemented wrongly. What is a theory worth, which is merely a political vehicle? In that respect Keynes and the priests of his Church are more political operatives than economists. Sir, I am sorry to say, not impressed. Not at all.
Germany's Greece is China's USA with the difference: US and China have different currencies and the absurdity of China's devaluation (with a US$ 30 bn monthly trade surplus).
Why?
"Bring out the gimp!"