So whilst many Germans might think they want a smaller, more cohesive euro zone without the troublesome profligates, the policy elites in fact recognize that a “United States of Germany” under the guise of a United States of Europe, actually suits their aspirations to dominate Europe politically and economically. Which is why the outlines of a deal along the lines of increased ECB involved as a quid pro quo for greater German control of fiscal policy across the euro zone, is emerging. It’s the equivalent of the golden rule: “He who has the gold,rules.”

Not a good outcome for Ireland either apparently as he goes on to quote Warren Mosler:-

And the austerity looks likely to not only continue but also to intensify, even as the euro zone has already slipped into recession.

So from what I can see,  there’s no chance that the ECB would fund and at the same time mandate the higher deficits needed for a recovery, In which case the only thing that will end the austerity is blood on the streets in sufficient quantity to trigger chaos and a change in governance.” (our emphasis)

At least we will have bought some time to prepare for an exit to our own sovereign currency as described by Pilkington and Mosler. 

…But this is where Germany now is. It must either immolate itself and dismantle the Bismarckian state for the cause of EMU, or prepare to finance an orderly withdrawal from monetary union (with the Finns, Dutch, and Austrians) so that the South can breathe again and hope to recover.

That is the choice. All else is can-kicking, denial, obfuscation, muddle, and self-delusion. As is now becoming obvious, the failure to resolve the matter one way or the other is becoming a danger to the global financial system. It threatens to uncork a global depression. Germany must at last decide.  (Link to full article)

“Having followed the German political scene closely for the last five months, it is clear to me that almost the entire German political establishment is out of its depth, ideological, sometimes smug, apt to view the EMU debt-crisis as a Calvinist morality tale, and lacking in deep understanding of what it has got itself into.

One can understand German worries about money printing – and especially the loss of fiscal sovereignty and democratic control – but matters have already moved on. It is too late for that.

As for the EU authorities with their mad contractionary fiscal and monetary policies in an accelerating slump, they seem to have achieved little by toppling two elected governments in one week.

In Italy they have already made matters worse. I doubt that much will change with “technocratic governments” in either Greece and Italy, yet immense damage has been done to democratic accountability.

The EU Project has become both dangerous and insane.  (link to article)

..Perhaps we’re looking at this the wrong way around: Given the continued German aversion to more broadly-based pan European style fiscal programs, which its populace continues to see as nothing but bailouts for lazy Mediterranean free-loaders, there is another way to solve the euro crisis.

Let Germany leave the euro zone.

Let’s leave aside the politics for a moment as there are many who believe that a German exit from the euro zone in effect means the end of the euro because a number of other countries would leave.

So consider this exercise solely from an economic context: The likely result of a German exit would be a huge surge in the value of the newly reconstituted DM. In effect, then, everybody devalues against the economic powerhouse which is Germany and the onus for fiscal reflation is now placed on the most recalcitrant member of the European Union. Germany will likely have to bail out its banks, but this is more politically palatable than, say, bailing out the Greek banks (at least from the perspective of the German populace).

To be sure, this will not come without some cost to Germany: Germany will probably save its banking system at the expense of destroying its export base. The newly reconfigured DM will soar against the euro and become the ultimate safe haven currency. This will mitigate the write-down impact of the inevitable haircuts on euro-denominated debt, because the euro (assuming it is retained by the remaining euro zone countries) will fall dramatically. Even if the euro itself vaporizes, the Germans simply will pay back debt in the old currencies, likely fractions of their previous value. And the German populace would likely find it far more palatable to be bailing out its own banks (as it did during the reunification period), as opposed to spending German taxpayer funds to recapitalize the banking systems of a bunch of Mediterranean “profligates”.

By the same token,, a fall in Germany’s external surplus means a large increase in the budget deficit (unless the private sector begins to expand rapidly, which is doubtful under the scenario described above), so Germany will find itself experiencing much larger budget deficits. In the current German situation, although the country runs a large current account surplus, it is insufficient to offset a high private sector predisposition to save (which means there is some deficit). But the current account surplus does allow for a smaller budget deficit than its so-called “profligate” Mediterranean neighbors, whilst still facilitating the private domestic sector’s desire to net save. As we have argued before, it is the “profligacy” of Germany’s Mediterranean trading partners, which has allowed it to rack up huge current account surpluses, and therefore run smaller budget deficits than the likes of the so-called PIIGS countries.

Once divorce from the euro is complete, Germany will regain its fiscal freedom. This is itself something the Germans should celebrate, providing their government takes advantage of their newfound fiscal freedom. Remember, once it returns to the Deutsche Mark (DM), Germany becomes the issuer, as opposed to the user of a currency, as is the case under the euro, and is fully sovereign in respect of its fiscal and monetary policy. Consequently, the German government can offset the external shock by running large government budget deficits, which will add new net financial assets to the system (adding to non government savings) available to the private sector. Germany might well decide not to adopt this course of action, given its historic resistance to aggressive fiscal policy, but it will no longer be bound by any of the institutional constraints inherent in the European Monetary Union.

In the meantime, the rest of the euro zone gets a huge boost to competitiveness via a (likely) substantial fall in the euro against the newly reconstituted DM. Also, the resultant potential instability means that the ECB would likely have to stand ready to backstop all of the bonds to prevent this from becoming a fully-fledged crisis, but it would encounter less political resistance to doing so, given the absence of a restraining German voice in the European Monetary Union.

It seems like an odd way to consider the problem, but the paradox of the current situation suggests that an exit from the euro zone of its strongest member, rather than its weakest links, might well be the optimal means of saving the euro, in the absence of a fully fledged return to separate national currencies.  (link to full article)

…But even if we do manage to clean up the mess, and put in place effective safeguards against a repeat performance, there is another economic calamity coming our way in the form of an immense demographic crunch. We need to do much more talking about this.

Thomas Molloy alluded to this problem (Irish Independent, March 22) when he said what EU leaders want “is a solution to Europe’s economic problems so that they can continue the process of restructuring their own economies before their dying populations overwhelm their social welfare and pension systems”. I wish them luck, especially the Germans who basically don’t believe in having children anymore. They may be frugal, but that’s not going to solve the problem of a very rapidly ageing population

Here are some facts. In Ireland, one-in-10 people are over the age of 65. In Germany, the figure is already one in five.In less than 20 years, the German figure will be one in three. Eventually there will be a pensioner for every worker. Germany is simply an outlier in this regard. Even Britain, which has a fairly healthy birth rate — meaning it’s not too far below two children per couple — is going to be in trouble.

A report published last week calculated that a British 65-year-old today has received from the state £223,000 (€265,000) — more than they’ve paid in taxes over their lifetime.

But a baby born today will pay £160,000 (€180,000) more in taxes than they receive.

This means young people in the future are going to be hit with an enormous tax burden to pay for the health and pension needs of older people.

(link to article)

….Europe’s whole financial system was out of control, and still is. The North has not yet forced banks to rebuild their capital buffers or nationalize those that cannot do so, understandably in one sense since it might risk a credit crunch. Germany’s policy towards the Landesbanken is a study in paralysis.

That is why Europe dares not lance the boil with “haircuts” and debt restructuring. It dares not risk a repeat of Europe’s Lehman moment in May 2010. It is why the EU has scotched any quick move by Ireland to deflect the shards of pain from taxpayers to senior bank creditors.

How long will democracies accept being made the scapegoat for what is in part a Franco-German-Benelux banking debacle?

Not for ever, judging by comments this week by Avriani, a paper with ties to Greece’s ruling PASOK party. “We should default and return to the Drachma to punish foreign loan sharks who have bled us dry,” it said.

Ireland’s Enda Kenny may ultimately have to choose between his EU club loyalties and his duties to the sovereign nation that elected him. Some within his coalition ranks already seem tempted to retaliate by pulling the plug on EU banks. That would certainly remind Chancellor Merkel and President Sarkozy what this crisis is really about.

Popular revolt is the dog that has not barked since the long slump began. This may just be a question of time. The pattern of the 1930s is that deep alienation starts in year three as austerity grinds on, and in this case tensions on the eurozone peripery can only turn nastier as the ECB tightens monetary policy.

What is clear is that sovereign states are being forced to cut wages and dismantle parts of their welfare state under foreign diktat, with a gun held to their heads. This will not be forgotten lightly. The character of the European Project has changed utterly. (link to full article)

Marshall Auerback on Germany’s divorce with the eurozone…

What happens if Germany decides it wants its money back? If aggressive fiscal policy isn’t the answer, things could get ugly.

Like marriage, membership in the euro zone is supposed to be a lifetime commitment, “for better or for worse”. But as we know, divorces do occur, even if the marriage was entered into with the best of intentions. And the recent turmoil in Europe has given rise to the idea that the euro itself might also be reversible and that one or more countries might revert to national currencies.

As far as the European Monetary Union goes, the prevailing thought has been that one of the weak periphery countries would be the first to call it a day. (In Ireland’s situation, one could make a good case for it on the grounds of persistent spousal abuse.) It may not, however, work out that way: all of a sudden, the biggest euro-skeptics are not the perfidious English, but the Germans themselves. Take a look at these headlines (kindly drawn to my attention by James Aitken of Aitken Advisors, LLP): “Germany and the euro: We don’t want no transfer union” on The Economist, “Jenkins: Where Are the Business Europhiles Now?” on WSJ.com, and even a book by Hans-Olaf Henkel, formerly of IBM (Germany) and hitherto one of Germany’s great euro-enthusiasts (English translation), “Return our Money“.

So let’s consider what happens if Germany decides to follow Herr Henkel’s advice.  (link to article to find out)

Marshall Auerback comments on the eurozone crisis in Ireland’s defense.  As always, a font of good sense.  Germany’s call to punish the profligate may well rebound.

…Much ink has been spilled in the press over the Irish problem and the laxity of the country’s southern Mediterranean counterparts in contrast to the highly “disciplined” Germans. But perhaps we have to revisit that caricature. Not only has the Irish crisis blown apart the myth of the virtues of fiscal austerity during rapidly declining economic activity, but it has also illustrated that Germany’s bankers were every bit as culpable as their Irish counterparts in helping to stoke the credit bubble.

One of the traditional rationales for the creation of the euro was that a single currency and strict Maastricht criteria would keep the profligate Mediterraneans and their Celtic equivalents in line. Instead, critics, particularly in Germany, increasingly see the European Monetary Union as a means for freeloading nations to offload their liabilities onto fitter neighbors.

Not surprisingly, this has engendered much discussion that perhaps it would serve Germany’s interests to leave the euro, rather than booting one of the Mediterranean “scroungers” out. But as Simon Johnson has pointed out, this comforting narrative of German prudence matched up against Irish profligacy doesn’t really stack up:

German banks in particular lost their composure with regard to lending to Ireland — although British, American, French and Belgian banks were not so far behind. Hypo Real Estate — now taken over by the German government — has what is likely to be the highest exposure to Irish debt.

But look at loans outstanding relative to the size of their domestic economies (using the BIS data on what they call an “ultimate risk basis”).

German banks are owed $139 billion, which is 4.2 percent of German G.D.P. [my emphasis] (link to full article)

Ellen Brown’s recent post in Web of Debt is a must read outline of what happened in Germany in the 1930s and by inference, what we must do to avoid hyperinflation in our experiment with quantitative easing now.  Here is the main point;-

While Hitler clearly deserves the opprobrium heaped on him for his later atrocities, he was enormously popular with his own people, at least for a time. This was evidently because he rescued Germany from the throes of a worldwide depression – and he did it through a plan of public works paid for with currency generated by the government itself. Projects were first earmarked for funding, including flood control, repair of public buildings and private residences, and construction of new buildings, roads, bridges, canals, and port facilities. The projected cost of the various programs was fixed at one billion units of the national currency. One billion non-inflationary bills of exchange called Labor Treasury Certificates were then issued against this cost. Millions of people were put to work on these projects, and the workers were paid with the Treasury Certificates. The workers then spent the certificates on goods and services, creating more jobs for more people. These certificates were not actually debt-free but were issued as bonds, and the government paid interest on them to the bearers. But the certificates circulated as money and were renewable indefinitely, making them a de facto currency; and they avoided the need to borrow from international lenders or to pay off international debts.⁶ The Treasury Certificates did not trade on foreign currency markets, so they were beyond the reach of the currency speculators. They could not be sold short because there was no one to sell them to, so they retained their value.  Link to article.

Enough time has passed to evaluate Hitlers successful pre-War policies dispassionately.  That there were undoubtedly considerable successes cannot be denied, otherwise that disciplined hard-saving nation that now controls ECB policy could not have been so fatally seduced but such an obvious madman.  This is NOT an apologia for Nazi ideology.  It is a moot point whether Hitler even fundamentally understood why his monetary policies worked and he did not (to my knowledge) promote them in a knowledgeable way in his published rants .

The essential point we make here is that Hitler renewed the German economy before he started preparing for War; the allied economies were still stuck in the depression doldrums until after War was unavoidable therefore thankfully, War is not necessary.

]]> http://smarttaxes.org/2009/05/20/lessons-from-hitler-re-hyperinflation/feed/ 0 http://smarttaxes.org/2009/02/23/will-germany-deliver-on-the-faustian-bargain-that-created-monetary-union/ http://smarttaxes.org/2009/02/23/will-germany-deliver-on-the-faustian-bargain-that-created-monetary-union/#comments Mon, 23 Feb 2009 10:01:11 +0000 Emer http://smarttaxes.org/?p=339 By Ambrose Evans-Pritchard @The Telegraph.co.uk
Last Updated: 6:57AM GMT 23 Feb 2009
If Der Spiegel is correct, the German finance ministry is drafting rescue plans to prevent default on the edges of the eurozone leading to a full-blown collapse of Europe’s monetary system.

This is an entirely appropriate policy in economic terms. One dreads to think what would happen if the world’s twin reserve currency were to disintegrate at this stage.

But what about the solemn pledge to voters by Germany’s political elites – promiscuously given over the years – that monetary union would never leave them on the hook for the debts of half Europe?

The vast imbalances that have been allowed to build up under the seductive protection of EMU leave German taxpayers facing bail-out liabilities that exceed the cost of reparations after the First World War, in proportional terms. The political ground has not been prepared for this. EMU was foisted on the German people without a referendum, in the face of deep public scepticism and scathing criticisms by the professoriat. This failure to secure a mandate for such a revolutionary undertaking is coming back to haunt them. Link to article