Good article. Long, and no doubt volly will be furious at it, but who really cares. It's interesting.
From ZIRP to NIRP: Virtues of Germany vs. the Vices of Greece; What About "Speece" and Gold?
Virtues of Germany vs. the Vices of Greece
At the heart of the constant bailout bickering in Europe is a fundamental, but seriously misguided notion that a battle is underway between the virtuous and fiscally responsible Germans and the irresponsible Greeks, Spaniards, and Portuguese.
In this incorrect view, the Spaniards have begun to see the light, but the Greeks need a serious lesson in morality.
If we steps back and actually assign blame, we can find plenty of blame to go around.
"
Speece" (my term for the Southern eurozone deficit countries of Spain, Greece, Portugal etc.) made many mistakes, but so did Germany.
It's logically impossible to believe "Speece" was a horrendously imprudent borrower, while simultaneously holding the view that Germany was a prudent lender.
More importantly, neither imprudent borrowing nor imprudent lending is at the heart of the eurozone problem.
Background Notes
Some snips from this post are from an email from Michael Pettis at Global Source Partners. Pettis' email contained a 32 page PDF that I will attempt to condense down to a couple pages, while adding a few pages of my own on topics he missed or went over lightly.
Except where noted, anything below in blockquotes is from Michael Pettis. Emphasis throughout is mine.
In regards to comments from Pettis, he says "As my regular readers know, I generally refer to the two different groups of creditor and debtor countries as 'Germany' and 'Spain', the former for obvious reasons and the latter because I was born and grew up there, and it is the country I know best.
Thus any comment from Pettis on "
Spain" may mean "
any eurozone debtor" and any comment on "
Germany" may mean "
any eurozone creditor".
I occasionally use the term "
Speece" in the same way.
In context, sometimes Pettis says "Spain" and means "Spain". It's usually clear.
Moral Battle Update
On February 27, the German Bundestag approved Greece's bailout extension request, but acrimony remains high.
For example, the
Financial Times noted Germany’s biggest selling newspaper Bild attacked the Bundestag's decision to extend the bailout, with a front page on headline “
Bild readers say No – no more billions for Greece.”
In the Bundestag, Klaus-Peter Willsch, a CDU legislator and longstanding bailout critic, launched a personal attack on the Greek prime minister and finance minister.
“
Look at [Alexis] Tsipras, look at [Yanis] Varoufakis, would you buy a used car from them? If the answer is no, then vote no today,” said Willsch.
And during the intense negotiations between Greece and Germany ahead of this vote, the parliamentary caucus leader of German Chancellor Angela Merkel’s Christian Democrats, Volker Kauder, told reporters "
Germany bears no responsibility for what happened in Greece. The new prime minister must recognize that."
No Responsibility?
Does Kauder really believe Germany has "
no" responsibility? Does finance minister Wolfgang Schäuble who has made similar-sounding statements believe that?
Whether or not Kauder and Schäuble believe their statements, people hear them again and again. Over time, such statements become conventional wisdom.
From Pettis ...
Nationalist Dreams
European nationalists have successfully convinced us, against all logic, that the European crisis is a conflict among nations, and not among economic sectors.
While distortions in the savings rate are at the root of the European crisis, many if not most analysts have failed to understand why. Until now, an awful lot of Europeans have understood the crisis primarily in terms of differences in national character, economic virtue, and as a moral struggle between prudence and irresponsibility.
This interpretation is intuitively appealing but it is almost wholly incorrect. And because the cost of saving Europe is debt forgiveness, Europe must decide if this is a cost worth paying (and I think it is).
Yet, as long as the European crisis is seen as a struggle between the prudent countries and the irresponsible countries, it is extremely unlikely that Europeans will be willing to pay the cost.
Savings Rate Distortions
From 2000-04 Spain ran stable current account deficits of roughly 3-4% of GDP, more or less double the average of the previous decade. Germany, after a decade of current account deficits of roughly 1% of GDP, began the century with slightly larger deficits, but this balanced to zero by 2002, after which Germany ran steady surpluses of 2% for the next two years.
Everything changed around 2005. Germany’s surplus jumped sharply to nearly 5% of GDP and averaged 6% for the next four years. The opposite happened to Spain. From 2005 until 2009 Spain’s current account deficit roughly doubled again from its 3-4% average during the previous five years.
The numbers are not directly comparable, of course, but during those four years Spain effectively absorbed capital inflows above its “normal” absorption rate equal to an astonishing 21-22% of GDP from 2005 to 2009, and of 31- 32% of GDP from 2000 to 2009.
It wasn't just Spain. In the 2005-09 period, a number of peripheral European countries experienced net inflows of similar magnitude.
In principle, it isn’t obvious which way causality ran between capital account inflows and current account deficits (the two must always balance to zero).
To put it differently, German money might have been “pushed” into these countries, as the “blame Germany” crew has it, or it might have been “pulled” in, by the need to finance their spending orgies, as the “blame anyone but Germany” crew insist.
For those who prefer to think in more precise terms, Germany either created or accommodated the collapse in Spanish savings relative to Spanish investment.
If it were the latter case, however, it would be an astonishing coincidence that so many countries decided to embark on consumption sprees at exactly the same time.
Push vs. Pull
I think we can look at push vs. pull another way. To pull credit, one bids up the interest rate. To push credit, one pushes the interest rates down.
From the push-pull interest rate point of view, the "blame Germany" crowd has the better argument.
Arguments Against Debt Forgiveness
Pettis provides a number of widely used arguments against debt forgiveness.
The arguments boil down to a couple of primary beliefs. Most have heard one or both of the following.
- The German people provided Spain with real, hard-earned resources which Spaniards misused. It is not fair or honorable that Spain punish the German people for its generosity. To forgive debt would create a moral hazard.
- Spain had a real choice, and it chose to spend money wantonly on consumer frivolities and worthless investment projects. Had Spaniards acted more like Germans and refrained from excessive consumption — the result of a flawed national character trait — it would not have suffered from speculative stock and real estate market bubbles, wasted investment and, above all, an unsustainable consumption boom and a collapse in savings. It is unfortunate that ordinary Spaniards must suffer for the venality of its leaders, but ultimately Spain is responsible.
(cont'd below)
