A one-word explanation on why the eurozone cannot inflate its way out of trouble: Spain!

So, Germany seems to have pushed the inflation-phobia monkey off its back. Its finance minister has condoned real wage rises for German industrial workers and the head of the Bundesbank has acknowledged a readiness to allow German inflation to outpace that of the rest of the eurozone. After fifteen years of violating the Maastricht agreement on the need to target the same rate of inflation (at around 2% – see here), Germany is now prepared to compensate the rest of the eurozone for the damage its deflationary strategy has caused.

This is, surely, a good thing, is it not? Yes and no. Yes, it shows that there is some hope that German policy makers will, at last, ‘get it’ that competitiveness is a relative (as opposed to an absolute) concept. And, No, allowing for above average inflation in Germany is too little and desperately too late to do anything about the Crisis we find ourselves in. Ironically, the head of the Bundesbank, Mr Weideman, has just published an article in the FT whose title gives the answer away: Monetary Policy is No Panacea for Europe. Indeed it is not. And the reason is… Spain. Or, to be more precise, Spain is an excellent case in point as to why a further easing of monetary policy, even if German wages are allowed to increase above inflationary expectations, will simply not do. Of why the rot has dug so deeply into the fabric of the eurozone that Eco101 macroeconomic remedies are neither here nor there.

Over the past two years, and following the Calamity that was 2008 in the global financial markets, Europe’s banks lost their capacity to reproduce themselves. Their zombification is nothing new. We have seen it before in Japan, as well as (to a lesser extent) in the US, in Britain etc. The difference in our eurozone case is that bank zombification came hand in hand with the steady erosion in the capacity of eurozone sovereigns to refinance their public debt. In effect, at least five countries (Greece, Ireland, Portugal, Spain and Italy) witnessed a triangular zombification involving a reliance of insolvent banks on insolvent states and a further reliance of the insolvent states on a Central Bank that lacks the tools to manage the insolvency of either the states or of the banks.

To put it simply, yes, Germany’s  ‘success’ at boosting its competitiveness by keeping its wage and price inflation well below the commonly agreed eurozone targets during the past 15 years has ensured that, when the Credit Crunch hit in 2008, the rest of the eurozone fell into a hole. However, this hole is now so deep that the rest of the eurozone cannot climb out by reversing the inflation dynamics within the eurozone. Now, we need something more drastic.

What is it that we need? The first thing that countries like Spain need is an urgent recapitalisation of its banks (see today’s FT article by Roubini and Greene) that does not increase Spanish public debt. This could be achieved very simply by having the various cajas taken over, and recapitalised, by the EFSF (with the EBA appointing new boards of directors). Just take the Spanish government out of the ‘banking game’. That way, the link that keeps reproducing the zombification-reinforcement mechanism linking banks and member-states ends immediately.

Why are the powers that be resisting this? Two reasons: First, as I have argued repeatedly, because the national elites are not ready to give up their extremely cosy relationship with the bankers. Secondly, because Spain’s insolvency (and Greece’s, Italy’s, etc.) is still seen by certain German policy makers as a golden opportunity to impose upon France (via the Periphery) their views on how things should be. You don’t need to take my word for this. Jens Weidemann said so in today’s FT piece (that I already quoted above):  “…relieving stress in the sovereign bond markets eases imminent funding pain but blurs the signal to sovereigns about the precarious state of public finances and the urgent need to act.”

So, here we have it: Spain is being screwed into the ground so as to, supposedly, impress upon it the ‘precarious state of its public finances’. What claptrap! Spain had a surplus in its budget in 2008 and has had a debt-to-GDP rate less than Germany’s. Behind Mr Weidmann’s subterfuge hides an unfathomable truth: Having gutted the rest of the eurozone for years, by squeezing German price and wage inflation below agreed limits, German policy makers are misrepresenting the cause of the Periphery’s woes. Rather than acknowledging the need to europeanise banking supervision, and a part of the eurozone’s public debt, they are offering trinkets in the form of an above average inflation rate. Why trinkets? Because, in view of the deflation that is coming to the deficit countries, having German inflation rise above average is as inevitable as it is useless.

41 thoughts on “A one-word explanation on why the eurozone cannot inflate its way out of trouble: Spain!

  1. Pingback: Perché l’improvvisa disponibilità Tedesca all’inflazione non risolve la crisi: una sola parola, Spagna! | Economia

  2. Pingback: why is Greece in trouble? « power of language blog: partnering with reality by JR Fibonacci

  3. Pingback: Perché l’improvvisa disponibilità Tedesca all’inflazione non risolve la crisi: una sola parola, Spagna! - Dall'Estero - Investireoggi.it

  4. Yanis said, “After fifteen years of violating the Maastricht agreement on the need to target the same rate of inflation (at around 2% – see here), Germany is now prepared to compensate the rest of the eurozone for the damage its deflationary strategy has caused.”

    The “see here” link, above, seems to be broken. So I googled, and the other authoritative reference to inflation targets I couldn’t find was here: http://europa.eu/legislation_summaries/other/l25014_en.htm

    But that says something distinctly different. According to that article each country has to stay within 1.5% of the average of the best three economies. I didn’t see anywhere where it targets a specific rate of inflation for all members. Given Germany’s wage and price policies, wouldn’t Germany then always comprise one of the “three best”. And so, wouldn’t the actual target be largely set by Germany’s own inflation.

    What I read from this article is that the low inflation countries were setting the standard that ALL other countries must meet. And that target was actually being set by countries like Germany.

  5. I followed the link from FT Alphaville and read this: “Germany’s ‘success’ at boosting its competitiveness by keeping its wage and price inflation well below the commonly agreed eurozone targets during the past 15 years has ensured that, when the Credit Crunch hit in 2008, the rest of the eurozone fell into a hole”. Is the purpose of this blog to provide comedy for Asians? It surely is not serious.

    • Show me the “commonly agreed” eurozone targets for wage and price inflation. There is a single eurozone target for price inflation, but no constraints on the inflation in individual member states, and there is no eurozone target for wage inflation. If you were thinking of the Maastricht criteria, they were for joining the eurozone, not for ongoing performance within the eurozone. My point was that while Europe focuses on this silly rivalry between its own countries, its competitors in countries like China and Korea simply plough ahead with as much productivity growth as they can achieve, and win the competition for sales. If Germany can achieve success by, among other things, keeping its wages down, the rest of Europe should be following them, not trying to hold them back.

    • @ Tim Young

      Once again i think we forget that not all countries can have the exact same processes because of vast differences in culture ,climate ,land ,geostrategical significance etc.

      Rules that are too near to everyday human activity cannot be the same for every country. Every kind of everyday human activity evolved after years of adaptation to different circumstances.

      The broader rules however can be the same. Go tell it to the “leaders”.

      Too many uncompatible systems exist today and too many interests ,that interfere with everyone. Too many parameters to control.

      Let me remind you that one of the prerequisites for Greece’s entry in the eurozone was destruction of production and increase of imports. Now suddenly the lazy Greeks are to blame. Not the corrupted politicians of all countries but the people. This is too much ,don’t you think? Generalizations of the worst kind.

      The same when talking about inflation and wage targets. Generalizations. Noone can do the exact same things.

  6. “After fifteen years of violating the Maastricht agreement on the need to target the same rate of inflation (at around 2% – see here), Germany is now prepared to compensate the rest of the eurozone for the damage its deflationary strategy has caused.”

    Almost all the EU failed to achieve 2% inflation – the Germans were under and the rest mostly over. Go to The Economist at: http://www.tradingeconomics.com/spain/inflation-cpi and check out the Spanish inflation rate over the last 15 years – it reached 5% just before the bubble burst. The Germans were a lot closer to the target than Spain was during the last decade.

  7. The Big Lie called LTRO – Long Term Refinancing Operation (or the striking similarities between the Federal Reserve and the European Central Bank)

    The brain child of the ECB’s new President Mario Draghi, the LTRO allows banks to borrow directly from the European Central Bank which is a major departure for the ECB.

    The banks ask for loans that the ECB grants at a nominal 1%.

    To keep Europe’s in business, banks in Italy, Spain, Portugal, Ireland and Greece between them borrowed:

    €489 billion on Dec. 21 2011 & €530 billion on Feb. 29. 2012.

    €1 trillion – so far – because there is every reason to suppose the ECB will decide the only way to avoid a collapse in the banks, they seem determined to keep from their maker, is to pump yet more money into them (LTRO3).

    The banks take the money then use it to do several things:

    1.First and foremost to buy sovereign debt as is the plan.

    According to data from the Spanish Treasury, in just December 2011 and January 2012 alone, Spanish banks and other domestic lenders increased their holdings of Spanish debt by 26% to €220 billion. That’s a whopping additional debt of over €40 billion.

    So exactly how “successful” were those Spanish debt auctions since the auctioned debt was NOT bought by the bond market-at-large i.e. non-resident holders but by domestic holders i.e. Spanish banks?

    Similarly Italian debt has been bought by Italian banks increasing their holdings by 31% to a massive €267 billion in the three months ending in Feb. 2012.

    It starkly clear that neither Spain nor Italy has had any truly successful bond auctions in some time. What they have had is a suicide pact with their own insolvent banks.

    That way the sovereigns claim all was well with them. After all they show surprisingly ‘buoyant demand’ for their debt/bond auctions, while marvelously keeping down the interest they had to offer.

    The result is that private banks are in possession of sovereign debt that would have paid them between 5-6%. So, money they borrowed at 1%, bought bonds that paid them 5%.

    That is a straight bailout from the sovereign’s tax-payer of 4%.

    2. At the same time the largely insolvent private banks desperately needed cash and capital. Cash for day-to-day running & capital to meet minimum capital adequacy rules. Which just means the base of capital against which their massive book of loans sit upon.

    Just think about it:

    The sovereigns could have gone to the ECB themselves and borrowed money for 1%. Instead the sovereigns let the private banks borrow from the ECB at 1% and then the sovereigns borrow from the private banks – when a sovereign sells bonds/debt the buyers of that debt are lending to the sovereign – at 5%~6%.

    Why? – So they could say: ‘We are not having to get bailed out by the ECB. No, we are selling our debt successfully to the market, who love us.’

    It’s a lie but it makes it sound as if the ‘recovery plan’ and the unpopular austerity policies must be working. And at the same time allow the sovereigns to bail-out the private banks without having to tell the people they were doing so. Two lies for the price of one.

    If we now take a look of who ended up with what, the picture becomes rather ugly:

    The insolvent private banks pretend to be solvent but in fact what they have is a vault full of IOUs/bonds from their Nations which in turn claim to be selling their debt but have in fact sold it only as far as down the road to their domestic banks that are only alive at all because they are being bailed out!

    And what of the ECB? In the words of former ECB board member Juergen Stark who recently admitted in an interview with the German newspaper Frankfurter Allgemeine that “…the balance sheet of the euro system, isn’t only gigantic in size but also shocking in quality”.

    The ‘shocking’ quality of the assets are the bad loans that Europe’s private banks couldn’t get anyone else in the whole wide world to accept as collateral. Every time the ECB bails the banks out, each time it ‘extends loans’, it has to accept in exchange as collateral whatever the banks have left in their books, meaning the ‘assets’ that the ECB wouldn’t accept last time.

    What is actually truly happening is that an elaborate debt-laundering two-step has been put in place so that banks can be bailed out by nations who can be bailed out by the ECB.

    But it is done in such a duplicitous way that the banks appear to be merely getting a loan, the Nations appear to be selling their debt as per normal and the Tax Payer, who is actually footing the bill for both, is completely in the dark about the whole thing. THAT is the ECB and our European rulers in action. Feel shafted and lied to? You should.

    If it all seems head-spinningly circular, that is because it is. It is a cycle of lies and debt re-branding. As long as the momentum of the lie and of public belief is in the ‘forward’ direction then all seems to be well. Everyone is selling their debt, no one is being bailed-out and no-one is aware of who is paying. But if the lie and the momentum of belief goes into reverse then all the players start to look more not less vulnerable and at risk.

    What has happened in the last week with the election in Greece and the unravelling of the lies and hidden bank insolvency in Spain is that the momentum of the grand lie has started to reverse. If that reversal is not halted and the truth not quarantined then there will be another clamour raised by Europe’s insolvent banks for the ECB to announce yet another emergency funding programme.

    The fog of burning acidic financial lies that have been rained down on us for four solid years is finally meeting political reality and opposition. Suffering can be ignored and met with the police baton but it cannot be erased forever. We have yet to see what if anything Hollande will do in France and what will happen in Greece and Spain. But the momentum of their lies is, for now at least, running against our oppressors.

    http://www.golemxiv.co.uk/2012/05/the-momentum-of-lies/?utm_source=rss&utm_medium=rss&utm_campaign=the-momentum-of-lies

  8. “Once a fool, Always a fool”

    For anyone puzzled on how globalised banks and hedge funds’ sovereign debt & derivatives speculation resulted in the euro mess, here’s a first rate case study:

    J.P. Morgan Chase Lose $2 Billion

    “[...] If you’re wondering why you should care if some idiot trader (who apparently has been making $100 million a year at Chase, a company that has been the recipient of at least $390 billion in emergency Fed loans) loses $2 billion for Jamie Dimon, here’s why:

    Because J.P. Morgan Chase is a federally-insured depository institution that has been and will continue to be the recipient of massive amounts of public assistance.

    If the bank fails, someone will reach into your pocket to pay for the cleanup.

    So when they gamble like drunken sailors, it’s everyone’s problem.

    If J.P. Morgan Chase wants to act like a crazed cowboy hedge fund and make wild exacta bets on the derivatives market, they should be welcome to do so.

    But they shouldn’t get to do it with cheap cash from the Fed’s discount window, and they shouldn’t get to do it with money from the federally-insured bank accounts of teachers, firemen and other such real people.

    It’s a simple concept: you either get to be a bank, or you get to be a casino.

    But you can’t be both. If we don’t have rules to enforce that concept, we ought to get some.”

    http://www.rollingstone.com/politics/blogs/taibblog/jamies-cryin-dimon-j-p-morgan-chase-lose-2-billion-20120511

    • The Federal Deposit Insurance Corporation is Federally administered; but fully funded by the banks themselves. You can review the role of the FDIC at their official website:
      http://www.fdic.gov/about/learn/symbol/index.html
      quotes:
      “The Federal Deposit Insurance Corporation (FDIC) preserves and promotes public confidence in the U.S. financial system by insuring deposits in banks and thrift institutions for at least $250,000; by identifying, monitoring and addressing risks to the deposit insurance funds; and by limiting the effect on the economy and the financial system when a bank or thrift institution fails.”
      “The FDIC receives no Congressional appropriations – it is funded by premiums that banks and thrift institutions pay for deposit insurance coverage and from earnings on investments in U.S. Treasury securities. The FDIC insures more than $7 trillion of deposits in U.S. banks and thrifts – deposits in virtually every bank and thrift in the country.”
      “The FDIC insures deposits only. It does not insure securities, mutual funds or similar types of investments that banks and thrift institutions may offer.”

  9. “To put it simply, yes, Germany’s ‘success’ at boosting its competitiveness by keeping its wage and price inflation well below the commonly agreed eurozone targets during the past 15 years has ensured that, when the Credit Crunch hit in 2008, the rest of the eurozone fell into a hole.”

    Why? Nothing to do with their own policies, debts and inflation then?

    • Of course not. It was always the fault of others (mostly, of course, the Germans)!

      The Greeks themselves (and the irish, Spaniards, Italians, Portugiese…..) were and are helpless victims of predatory low interest rate loans brutally imposed them by banks from the core zone.

    • Come on Very Serious Sam. Noone plays the victim.
      People ,Germans and Greeks ,can not know the agendas and the actions of the governments. It just happens that the agendas of the German elite didn’t hurt the German people that much until now ,because they were gaining more power ,while in Greece the agendas of the Greek elite didn’t hurt the people that much until now ,because they were selling their soul.

      Now more people blame Greece in general ,because it is human nature to accuse the weaker one. So it is easier for the German people not to think that it is also their government’s fault.

      It is everybody’s fault and everybody should take their responsibilities seriously.
      Governments and people.
      Still once again let us not forget that people do not have inside knowledge. They just live their lives ,with what they think applies. We all do.

      Also let us not forget Wall Street.

      Everything has been mentioned again and again. I hope for no more accusations between people.

  10. Yanis, you’re an impatient man. Spanish banks won’t fail next week, therefore it’s too early to euronationalise them. It’ll be cheaper, cashwise and politically, to do it on the week they do fail.

    Also wage inflation differentials compound pretty nicely, at core +3% and peripheral -1%, which can be done without even touching the nominal wages of incumbent peripheral workers, you’re done in 5 years. Not enough to solve everything but a good component.

  11. Which article of the Maastricht treaty states that the member countries need to target the same rate of inflation (at around 2%)?

  12. “’Tis now the very witching time of night, when churchyards yawn and Hell itself breathes out Contagion to this world.”

    -William Shakespeare

    or when the sh_t hits the fan…

    The Immortal Bard must have been referencing Madrid when penning these lines or, if not, would likely approve of their application this morning. The nationalization of Bankia, the third largest bank in Spain, is not some isolated event that is singular and alone in nature regardless of the expected dampening and muted words and phrases issued by the Spanish government. The cancer has been identified but not isolated and you may be assured that it remains in the lymph nodes of the two major banks in Spain. Fortunately, during America’s financial crisis, many of the sub-prime mortgages were securitized and no longer resided on the balance sheets of the American banks. In the case of Spain we find not only the majority of the mortgages resident at the Spanish banks but we find an added dimension which is a huge amount of money lent to Real Estate developers which is impaired and still on the books of the Spanish banks. Further, in my opinion, none of these loans have been accurately accounted for and they are being carried at whimsical valuations by the banks or pledged as collateral at the ECB where the Spanish bank funding jumped 50% in one month and now stands at $294 billion. Following the bouncing ball; there is now so much encumbrance of assets between pledged collateral and covered bond sales that the actual worth of the two major Spanish banks is now someplace between “not much” and “De minimis” should the situation deteriorate to the point of impairment.

    The Bankia nationalization also required a further injection of capital from Spain which obviously impacts the balance sheet of the sovereign as the government issues press releases trying to obscure the obvious. In Spain for the banks and for the country the math just does not work as unemployment and austerity measures are a toxic cocktail that will soon causes the drinkers to cry out for medical assistance. The jump in ECB loans is the first stage cancer but you may expect a major worsening and a higher level soon where both the country and the banks will require life support from some European institution and in a size that cannot be afforded without toxic shock in other nations. Consequently I again issue a warning on Spain and their banks and advise a great distance between you and them!

    Greece-The Situation Grows Perilous

    The argument for months was that Greece was such a small country that it hardly mattered and why was everyone focusing on Greece. I pointed out that the total debts of this country stood at $1.1 trillion and, since then, have gotten bigger even after the PSI took place. In fact, Greece borrowed $130 billion to pay off $105 billion and the ECB/EIB and the IMF refused to take the hits. Now just the country, the sovereign, owes $517 billion to various parties both public and private which is not only an astronomical number for a country of this size, about the same as the total GDP of Switzerland, but one that cannot be paid back by any stretch of anyone’s imagination. The 120% debt to GDP ratio flaunted about by the EU and the IMF some months ago is the stuff of nonsense, fairy tales and stories that would please the Brothers Grimm. Greece has been a continuing saga of make believe, hopes and prayers answered by no one as the nation is far past the gates that guard the entrance to Hades. Now it appears as if there will have to be another election in June as no one can form a government and the second most populous party wants to either renegotiate the terms of the IMF/EU agreement or leave the Euro and devalue to save the country’s finances and the Greek pride. If this should happen the consequences for the rest of Europe will be severe. You could start with the fact that it would wipe out, by approximately three times the total equity capital of the European Central Bank. If Greece defaults it would not only wipe out the new bondholders but impair the EIB and have a telling effect on the IMF. It was never the size of the country but the size of their debts and in an effort to protect the German and French banks at the time a monster was created by abysmal thinking and the fanciful notion that austerity would solve the problem which it plainly has not.

    Then besides all of this there is the $104 billion owed to the other Euro nations through the Stabilization funds, the $65 billion of Greek bonds bought by the ECB to try and hold down Greek yields and the $135 billion in Target2 funds that the Greek Central Bank owes to the other central banks in Europe. Then it is just the sovereign debt, not the bank debt and not the derivatives and not the private debt and not the municipal debt but just the country that owes $874 billion which is just shy of 300% of their total Gross Domestic Product. $874 billion is also 27% of the total GDP of Germany and the numbers are not just frightening but very scary.

    Greece is now long past the point where growth or Inflation can bail it out. The Europeans have played this game very badly in the attempt to hold the coalition together. The can kicking, heralded by so many as an achievement, has actually exacerbated the situation from a travesty to somewhere out past a calamity and there is no longer any way out without fiscal pain of the most serious kind whether Germany refuses additional funding or whether Greece opts out for their own reasons. We sail at the center of the maelstrom and the markets, quite soon in my view, will one day waken to the “Oh My God” moment which everyone has tried so hard to avoid. There is no longer any way out!

    http://www.zerohedge.com/news/bankia-failed-bank-coalmine

  13. I do not know if you know this but:

    1) The German public sector as share of total employment is much smaller than in Greece or France
    2) Wages are negotiated between unions and representatives of employers or employee and employer –> politicians have and had nothing to say

    • Public Sector received a 6.3% over 2 years in March.
      “Interior Minister Hans-Peter Friedrich, who had led the negotiations with the Verdi union on behalf of the government, announced the breakthrough shortly before 7 a.m. (1 a.m. EDT) on Saturday after all-night negotiations in Potsdam, a suburb of Berlin.”

      Either this minister had othing better to do or he got a second job to make ends meet.

    • Yes. The public sector is one sector where the government has influence. BUT see point numebr 1) it is very small compared to France or Greece

  14. What was more off the “agreed limits”? Germany below the limit or the Club Med above the limit ;-)

  15. Pingback: FT Alphaville » An inflated sense of optimism

  16. It seems that you ignore a third most crucial factor; Governments are not ready to tell their people that they are inevitably going to defualt on their standard obligations to provide for social welfare, without that link between sovereign debt and banking system.
    Why?

  17. Pingback: Links 5/11/12 « naked capitalism

  18. In effect, at least five countries (Greece, Ireland, Portugal, Spain and Italy) witnessed a triangular zombification involving a reliance of insolvent banks on insolvent states and a further reliance of the insolvent states on a Central Bank that lacks the tools to manage the insolvency of either the states or of the banks.

    Italian banks are zombies? For this to be true, they would have to sit on masses of worthless assets which — given that there is no housing bubble in Italy — could only be Italian bonds. Well, this would mean Italy is insolvent which I don’t think is true at all.

    To put it simply, yes, Germany’s ‘success’ at boosting its competitiveness by keeping its wage and price inflation well below the commonly agreed eurozone targets during the past 15 years has ensured that, when the Credit Crunch hit in 2008, the rest of the eurozone fell into a hole.

    There were never “productivity increase” targets or coordination efforts in the Eurozone. Discussions about this started less than a year ago. Also please don’t forget that governments don’t decide about wages and productivity but collective bargaining.

    Spain and Ireland are very special cases as they suffer from a very typical housing bubble that burst. Greece is simply bankrupt and so are its banks. Ireland has been doing quite well handling its banks (although they have taken a lot of debt). Spain will need some help I presume and I hope it will be a direct European involvement in recapitalizing its banks rather than Spain as a whole signing up for EFSF/ESM.

    Also there is no reason for you ridiculing Germany’s modified inflation target. It is an important step towards resolving imbalances within the Eurozone.

  19. With all respect, I have never heart such a naive story. The Germans have had stable real incomes for a long time because they were among the countries with the highest labour costs in the world, they were uncompetitive and in a deep crisis and they paid attention to global competition which Greece never did. Being stuck in a monetary union, even the low interest rate of the ECB was too high for them and too low for other booming countries. Looking at competition inside the Eurozone is never enough, globalization is knocking on our door. The Germans made several tough reforms and now they profit from that for the first time since a long period of sacrifices.

    Greece on the other hand had a careless decade including uncontrolled borrowing, a following bubble and wage increases, partly the result of corruption and nepotism. A low interest rate does not explain Greece’s irresponsible behaviour since adult people should be able to resist the temptations of cheap credits, otherwise they do not deserve to be allowed to handle money. Keeping the books properly is a necessary requirement of course. Moreover, if a low interest rate explained Greece’s irresponsible behaviour, wouldn’t it be better to never offer Greece such low borrowing cost again to protect them from themselves?

    I understand the frustration of the Germans with the Greeks. First they suffer a major crisis, have a long period of sacrafices while Greece has a party. Afterwards, Greece is hung over, needs help and the Germans offer more sacrafices, e.g. in the form of higher inflation which is a big thing if you know the Germans or in the form of loans which they’ll probably never get back completely. And as a result, the Greeks keep on being out of touch with reality and claim that the sacrifices of the Germans caused troubles for the Eurozone. Other countries could have used Germany’s reforms as a role model instead to become globally competitive.

    Moreover, as an economicst you should know what a moral hazard problem is. There have been plenty of moral hazards in this crisis, especially when Europe had to deal with Greek politicians. Mr. Weidmann is right to rely on the markets as an instrument for discipline as long as there are instruments which prevent the worst in the last moment since agreements between countries and rules do not seem to count any longer in Europe.

    Mr. Varouflakis, do you really think people outside Greece take you serious? This smells like the kind of distorted perception and shifting of responsibility which a lot of Greeks have become famous for in this crisis.

  20. …this blogg’s becoming more and more surreal…is this supposed to represent intellectual elite?…wow, good luck then

  21. “Secondly, because Spain’s insolvency (and Greece’s, Italy’s, etc.) is still seen by certain German policy makers as a golden opportunity to impose upon France (via the Periphery) their views on how things should be”

    Err, no. Germany just doesn’t want to pay more and more and more for the partys and bubbles the GIPSIFs entertained over the years. Financed with much to cheap credits -the de facto eurobonds which existed at least between 2001 and 2008. It is a bad joke that a lot of economists call now for official eurobonds, don’t they ever learn from history?

    As for your ‘solution’, the EFSF taking over the zombie banks fo the GIPSIFs: this is not in his mandate and will never be, fortunately. This is squarely against the German constitution, so the Bundestag or at the end the Bundesverfassungsgericht will block any such attempt.

    • The topic is now getting hot. German MEPs received over 800.000 emails protesting against bailouts!

  22. I completly disagree with you , all money power should be taken away from these credit banks …. no centralised authority should have the power to “recaptilise them” as you say.

    Bank credit is compeletly useless in a energy starved envoirment – base money should be given directly to the people into a new treasuary account seperate from commercial banks and the previus credit waste should be taxed via a normal fully fiat system.
    This will gut the banks as it will reduce the leverage power over us.

  23. If they are not (so much) worried about inflation any more why dont they just let the periphery issue new bonds to service its debt,and have the ECB buy them by printing money?I understand thats against the treaty (debt monetization) but if governments were/are willing to accept the new stability pact i dont see why would they have a problem with such a favorable treaty change?After all the debt monetization prohibition was included exactly to avoid inflation,although as i have argued before,this would not by definition be inflationary.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s