Klaus Kastner gives up on the Eurozone (and Greece’s prospects of recovering within)

Klaus Kastner has been in regular correspondence with me and with readers of this blog. A thoughtful commentator, he has held on to the thought that Greece can be revived within the Eurozone under the current mix of ‘fiscal consolidation’ policies. From the outset, he seems to have appreciated some aspects of our Modest Proposal but has maintained the position that countries like Greece can reform from within, independently of what Europe does to re-form the Eurozone. While appreciative of the Eurozone’s architectural faults, and the errors of its response to the crisis, he was never particularly convinced by my emphasis on the Eurozone’s brittle foundations or my arguments that the Eurozone is doomed if it fails to adopt policies like those in the Modest Proposal. Instead he has been consistently choosing to place his emphasis on micro-reforms and on institutional changes that the countries of the Periphery must enact. In a recent post, that breaks with his narrative-so-far, he confesses to have lost faith in the Eurozone project; in the idea that the Euro Area can be maintained in a manner consistent with shared prosperity. He is not the first one. Many of my interlocutors of the past few years, who also thought that the Eurozone was salvageable, have changed their minds, turning to the position that it should be disbanded. For my part, I have not reached that position yet. In my mind, (a) a winding down of the Eurozone can never be smooth or controlled and will, most certainly, lead to another Great Depression for countries like Germany; and (b) the Eurozone can still be saved in the manner that we have been proposing for three years now. Having said that, Europe’s leadership seem determined to disprove me and to confirm the wisdom of Klaus’ recent turn.. For Klaus Kastner’s relevant blogpost click here or read on…

“The idea of a common currency union is a big mistake, an adventurous, reckless and mistaken goal which will not unite Europe but, instead, divide it”
Lord Dahrendorf, 1995.

Since I started this blog, I have tried to be as self-critical as possible; taking differing views into account; pondering them; learning from them; incorporating them into my own views. This is my 11th effort to recognize the erred ways of my thinking – and it is a major one!

To make it short: I now believe that Lord Dahrendorf was right. Right not only then but, even more so, today.

My blog has focused on Greece; I have more or less ignored the situation in other countries of the periphery (and I have not paid enough attention to the German situation). Greece alone had made me optimistic. I had observed, on location, how a small economy which had totally collapsed could be successfully turned around in only a few years with the right domestic economic leadership and the right support from abroad (Chile in the late 1970s/early 1980s). And I thought the same could happen easily in Greece. Well, it’s not happening in Greece because the country does not have the right economic and political leadership nor the right support from abroad.

I had started wavering in my position some time last year but I forced myself to remain optimistic. What has brought me down to reality?

There seems to have been an intensified discussion of late about solutions to the Eurozone (at least in the media and blogs which I follow). I particularly refer to two articles in Prof. Varoufakis’ blog: Six Critical Responses to the Modest Proposal andJames Galbraith on Europe (and the numerous comments to them). Those pieces were indeed thought-provoking!

However, the eye opener was the book “The Euro-Liars” by Hans-Olaf Henkel which I have just read. Henkel is a very provocative individual but one can discard his provocations. However, one should not discard his arguments!

Henkel’s principal – and irrefutable – argument is, like Lord Dahrendorf said almost 20 years earlier, that the Euro does not unite Europe but, instead, it splits it. There is massive evidence today that this is so. In my view, it is of secondary importance to analyze who is to blame for that because that always leads to endless loop-discussions without results. It is far better to recognize reality. And, secondly, Henkel argues that the Euro not only limits (if not destroys) economic potential in the South but also in the North.

It is futile, Henkel says, to impose a currency which doesn’t fit national cultures. Instead, national cultures have to shape their currency. The Euro, as it was designed, does not fit the cultures of countries like Greece, Portugal and Spain (Henkel also adds Italy and France!). Neither is today’s Euro suitable for the North because it makes it too easy for Germany & Co. to export (much of the exports are courtesy tax payers because tax payers lend the funds so that the periphery can pay for imports from Germany & Co. Put differently, a massive export subsidy!). If Germany & Co. were not in the Euro, they would have to become even more innovative and productive to remain competitive in the world and their surpluses would most likely come down.

In his critique of Six Critical Responses to the Modest Proposal, the American Uwe Bott (Bott Consulting, NY; contributing editor to The Globalist) writes more bluntly: There will be no resolution to this crisis until European policy-makers come to grips with fundamental economics. The Eurozone never was and less and less is an optimum currency area. In theory the flaws in the construct are fixable, in reality there is not enough time or political will. It is the inescapable consequence that the Eurozone must be dissolved. In applying the lessons of German unification onto the Eurozone, it becomes unmistakably clear that even a willing Germany could never pay the price to make monetary union in the Eurozone work. The price tag for such exercise would be exponentially greater than the cost of German unification. Moreover, the ability to freely migrate in order to mitigate some of these problems simply does not exist in the Eurozone given cultural and language barriers”.

My original optimism about Greece was based on the following logic: a long-term economic development plan (at least for 10 years) would be necessary to build up domestic economic value creation (and/or repatriate it through import substitution); a shift of the necessary foreign funding from loans to direct investment by foreign private sectors in the Greek private sector; EU-incentives to facilitate that (such as guarantees for the political risk including a Grexit); possibly temporary ‘infant industry protection’ (incentivating the repatriation of monies held by Greeks abroad and/or limitations on capital outflows). This is not happening (and I no longer have the hope that it will happen) because the EU never thought in those terms and Greek leadership never showed the will or, more importantly, the capability to effect the necessary reforms.

As Prof. Galbraith argues, austerity alone is not the solution; neither is stimulus alone the solution. It would require a ‘European Initiative’ comparable to what the US government might do in a similar situation. A United States of Europe with a federal government? Who would elect that government? Would national governments appoint it or would voters Europe-wide elect it? A Finn campaigning for election in Greece? A Greek in Germany?

The present EU as a role model for a future federal government? An EU which currently seems more outside of Europe than part of it? An EU which tells us which shape cucumbers must have; what kind of light bulbs we can buy; what kind of bathroom fixtures? Since I have about 10.000 qm of grass to take care of, I am particularly interested in the latest EU regulation which will tell me what type of machinery I can use during which hours of the day/week!

In short, an EU of self-possessed overpaid winetasters who regulate what must be done at the subsidiary level but who do not have one phone number which the US President could call on defense or foreign policy matters? If that is the price to pay for the Euro, the price is far to high! Europe is not a uniform continent. On the contrary, one of Europe’s USPs is its diversity of nations, cultures, languages, mentalities, etc. etc.

But something similar to the above seems necessary if the Euro is meant to survive in its present form. Some people argue that Germany should assume more ‘continental leadership’. That, however, ignores how many Europeans would be scared by that (most of all the Germans themselves).

Dissolving the Euro in its present form would cause very significant financial losses to all. True, but are those losses which could be avoided or are those losses which are already there but not yet realized?

The South has already paid much of its bill: unemployment; economic destruction; absence of future perspectives; etc. One could argue that it can’t get much worse and that a departure from the Euro in its present form would actually be beneficial: the South would become more ‘competitive’ in financial terms and it could draw on the capital which it has sent offshore during the crisis.

The North has, as yet, hardly paid any part of its bill. However, responsible accountants would have to book that bill as an ‘account payable’ and it is just a question of time when it will have to be paid.

So it comes down to operational questions: Who will pay for what part of the bill? What is the best mechanism for facilitating an orderly payment of the bill? Etc. One ought to be able to expect that a group of smart people would find a solution to that, if the EU were only willing to form such a group and give it a mandate.

Henkel makes an important point: it is not the deficit countries which should exit the Euro. That would be adding insult to injury. Instead, it is the surplus countries which should do that! There are various ways how this could be approached. Henkel proposes that Greece, Italy, Spain, Portugal and France should keep the Euro as it is (with France assuming leadership) and that the other countries should chose a new currency for themselves (Henkel proposes a North-Euro and a South-Euro). Some countries (Bulgaria, Romania, etc.) might want to join the South-Euro and other countries (CZ, Poland, Denmark, etc.) might want to join the North-Euro. Another alternative might be to introduce parallel national currencies. As I said, there are many alternatives (Merkel’s ‘no-alternative-position’ is an inconsistency in and by itself).

I sympathize with Greeks & Co. going on the barricades for having been deprived of a future. I also sympathize with Germans & Co. who feel that they have been (and are being) taken for a ride. Is that because of the Greeks & Co. and the Germans & Co.? I severely doubt it! Before the Euro, the Greeks & Co. and the Germans & Co. had a rather good time together. It is the Euro which has put the people of the Eurozone against each other.

So, I admit defeat in my belief that ‘European policy-makers would come to grips with fundamental economics’. They seem incapable of that. All those ideas which aim at solving the Eurozone’s problems through generating aggregate demand or through a Modest Proposal (which otherwise sounds very interesting) are pipe dreams. They might work in the United States of America with a strong federal government but they are pipe dreams in a Europe of administrators, technicians and bureaucrats focusing on national interests, all speaking in different languages and different directions.

RIP Eurozone!

PS: previous posts in this series: P1P2P3P4P5P6P7P8P910.

75 thoughts on “Klaus Kastner gives up on the Eurozone (and Greece’s prospects of recovering within)

  1. More and more people get it!

    “So the reality is that the Germans have given loads of Mercedes and BMWs to Greece – although they still appear in the export figures. That doesn’t sound like very good business to me. (And the national accounting is a bit dubious as well.)

    The second sense in which the euro has not necessarily been a good thing for Germany is that man cannot live by exports alone – not even German man. This is something that is not widely understood. There is a considerable amount of export fetishism, not just in Germany but in many other countries too. Yet the ultimate objective of economic activity is consumption – if not now then at least in the future. Exports are in reality the price that we pay for imports.

    Generating consumption is what the German economy has been pretty bad at. And this is partly related to export success because one of the consequences of operating with an undervalued exchange rate is that imports are more expensive than they would be if the exchange rate were higher. Cheaper imports would have increased German consumers’ real incomes, which would have encouraged them to spend more. Furthermore, under those circumstances it is conceivable that the German government might even have been prepared to relax policy a bit, rather than thinking that it should be as tight as possible, “pour encourager les autres”.

    So the German economy would end up better balanced, with less reliance on exports and a higher share of consumption.

    This is the technical answer to all those know-alls who confidently say that Germany has been the big winner from the euro. But there is another answer which is quite simply to ask how badly Germany did under the Deutschmark. Is the answer that Germany did badly? I think not. ”

    http://www.telegraph.co.uk/finance/comment/rogerbootle/10221867/The-Germans-are-walking-tall-in-the-eurozone-but-just-how-rich-are-they.html

  2. The Euro failed because of differences in… culture? And Germany exiting while France retains the Euro? Economic Dadaism at its best.

    Klaus I got good news for you. The “Greek goverments” HAVE effected the necessary reforms. Wages are a universal 500 euros and crushing, public sector is the lowest anywhere in the world, labour rights are totaly gone, no public health burdain anymore, schools are closing and teachers are being sacked by the thousands; hell they are even confiscating the houses of the poor. So, at least, please spare them a good word.

    • You seem to confuse some of the countless promises and lip-services the Greek governments gave in exchange for money with the actions they then really took.

    • “The case for Bulgarian level wages”

      There’s a rather constant narrative among various commentators that as long as Greek minimum wages are much higher than other EU members (such as Bulgaria and Romania) or quite close to the rest of the periphery, there’s no way to attract FDI which will just head to other countries. The problem is that this line of reasoning does not take into account a couple of facts:

      1.Wages are not the only cost element in determining the target country of a new investment. Other major factors include the effective tax rate, the ease of making business, social contributions rates, access and cost of credit and capital available in the country (social capital in the form of educated labor, transportation infrastructure and so on).

      2.Wages are not what determines the cost of production but labor costs which are determined by productivity. Germany might have very high wages but also maintains significant productivity per worker/hour worked with the end result that its actual labor costs are not that different than other countries (especially after taking into account its much larger stock of physical and social capital).

      To illustrate the second point I ‘ve calculated Unit Labor Costs in PPS using data from Ameco (Compensation of employees: total economy (UWCD) / Gross domestic product at current market prices (UVGD)) for the periphery countries and Bulgaria, Romania. ULC have been indexed with Germany acting as the base (100). The results are that Greece has always been a very low cost country (taking into account its high levels of productivity) and is already (2012) much cheaper than Bulgaria or Romania (2012 figures: 63.5 for Greece vs 71.4 for Bulgaria and 70.3 for Romania). As a result, I do not believe that any further reduction in minimum wages can be productive in any way. What is needed is a reduction in other factors constraining FDI (especially access to cheap credit).

      ULC PPS since 1995 and corresponding graph:

    • @VSS
      Promises? This is the reality that the likes of you don’t want to face. This is the Greek reality and I can only promise it becomes yours as well.

    • @Dean Did you actually read my post or you only read the 1st 4 lines “There’s a rather constant narrative among various commentators that as long as Greek minimum wages are much higher than other EU members (such as Bulgaria and Romania) or quite close to the rest of the periphery, there’s no way to attract FDI which will just head to other countries. ”
      And you thought I am advocating that the Greek Economy wage structure should match that of Bulgaria?

    • That one makes a lot more sense. Mr Kastner doesn’t need any help from Henkel & friends. He is so much more convincing using his own arguments.

  3. Yianni,

    You have not reached that position on the euro, yet you support Tsipras the politician who refuses to pay the special real estate tax assessed to all property in Greece.

    You cannot have it all, you cannot have stability and a promising future in European Greece and also have a politician like Tsipras who leads a communist party that until the recent past was fighting for Greek wages to return to the levels before the crisis.

    It is time to show some maturity in Greece if what we really want is a way out of this.

    • Crises demand responses that are counter-intuitive to those who have been consumed by conventional pre-crisis thinking. Taxes like the one imposed by the Greek government on property, increases in VAT and savage cuts in minimum wages are precisely what one does if one wants the common currency to fail.

    • Yianni,

      First thanks for posting my comment.

      I still don’t understand how Greece will appear credible with a politician that does not pay (and is proud of it) the tax that the rest of us pay. Sounds surreal.

      Also how is Greece going to reform with a politician that promises the unions the good old days.

      And how is there going to be stability that is the prerequisite to growth with a politician that causes uncertainty with every speech he gives.

      Granted a brave new approach is needed but is this the one?
      It feels like a return to the early years of Socialism, only now with no ability to borrow and to print.

    • @ Konstantinos
      Even the most fanatical supporters of the memorandum measures have remained silent on the internal devaluation process. The Greek public has been presented with absolutely no reason whatsoever as to why labor laws have been dismantled and why minimum wage in Greece has been set to the unsustainable low level it is now. Not a word from anybody on this issue that is in my opinion the main reason behind all the failures of the memorandum programs. Remember it is a different thing to lower wages and pensions in the public sector. These have a positive effect at the bottom line of the government budget even though they are recessionary in nature. I do not care if someone is communist, anarchist, socialist, royalist, nationalist, whatever..If he sets to stop the madness of the internal devaluation process that is set for another round in the next installment of measures (a further reduction of 7% was quoted) he or she has my vote.

    • Here is a counter-intuitive idea for Κωνσταντίνο to think about:

      Governments have to spend first and then collect taxes, not the other way around.

    • Tasos,

      Fine with me, if Greece has to live through Syriza to wake up and see the way forward then that will be good. Pasok took 30 years of selling socialism and practicing capitalism (for the party faithful) and is still kicking, hopefully this more radical socialist experiment will not last that long.

    • @Konstantinos
      Again, nothing absolutely nothing on why private sector workers have seen their wages cut by close to 50% and labor laws practicaly abolished. What this has to do whith PASOK, Syriza, what have you, I do not know. The obsesion with ideology in Greece is hopeless.

    • No. The creditor nations 1st demand was that the Greek state collects the due taxes from every citizen and company.
      Only thanks to the complete lack of honesty and willingness of the Greek ‘elites’ to contribute their fair share to finance the society which made them rich, and the refusal of the Greek governments and public sector to force them to, the sacrifices of the average people skyrocketet.
      As explained several times: it was and is solely in the hands of the Greeks to change their fate.

  4. The euro has been a tremendous success …..its primary function is to transmit wealth to the financial centers which it has done to perfection.
    This is a tremendously inefficient process (especially on this non nation state scale) but massive monetary energy transmission loss is a acceptable downside of these global rentier structures.
    Unions are always ALWAYS a epic disaster for the common people.as they function via the centralization of POWER..
    They are both dark and absurd non organic creations.

  5. It is certainly useful to remain open minded about different opinions if one aims to conduct a meaningful discussion – especially concerning the euro-crisis.
    But, apart from the fact that I really hope I misunderstand Mr Kastner when he describes the late ’70s and early 80′ leadership in Chile as a role model, I think his praise of Mr Henkel deserves some reasoning against.

    If there is any hope of maintaining at least the idea of the European Union, not only as an oversized marketplace, but as a symbol of friendship between many diffeent countries that had been fighting each other to the death for over two thousand years up until the the end of WWII, one should really not listen to populists like Mr Henkel and his cronies who, not entirely unlike Ms Merkel, are not driven by what they claim to be rational ‘facts’ but by what they think will best resemble people’s opinions and lull the already heavily sedated masses into keeping their mouths shut and doing what they’re told.

    Hans Olaf Henkel served as the chairman of the federation of german industry (BDI) – more or less the counterpart of the german federation of trade unions – and has been holding some other high profile positions in several corporations in Germany, which should suffice to get an idea of his general tendency concerning economic policies.
    He was also one of the more publicly known figures openly defending former berlin senator Thilo Sarrazin against ‘leftist’ critizism, after the latter had written a book in which he claimed that german ingenuity was being watered down by an inferior gene-pool of imigrants from mostly islamic countries.

    Answering one of the comments to this article on his blog, Mr Kastner mentions Sarrazins Book and declares that “every ‘serious’ review of it claimed that it consisted of facts and not prejudices”.
    Just like Mr Kastner, I didn’t read the book either, but every ‘serious’ review I’ve read so far, including numerous commentaries from actual geneticists and other natural scientists, claimed that it was a poorly veiled attempt by Mr Sarrazin at disguising quite ordinary and well-known racist prejudices as scientific facts.

    Unfortunately that book really was one of the top sellers in Germany at the time. So while supporters of Sarrazins racist socio-darwinistic ramblings where regarded rather less favourably by the intellectual and cultural ‘leftist’ elites, people like Henkel and of course Sarrazin himself had a field day selling themselves as the the ones who finally dared to speak the truth, defy misguided political correctness and stand up to what they would describe as a generally left-leaning establishment whose naive notion of a multi-cultural dreamworld was preventing them from facing the facts.

    Henkel has also been one of the first public figures to point to the ‘fact’ that southern european countries were hindered from becoming competitive, hard-working powerhouses like Germany by their inherent socio-cultural shortcomings in the necessary disciplines. Actually, sharing exactly the same opinion, Mr Sarrazin has written a book about Europe not needing the Euro as well, which was also a top seller if not as successfull as his first one. What a surprise.

    Again, this point of view is not (yet) openly shared by major politicians or other mainstream media outlets – with a few exceptions like BILD – but you can frequently find it out on the streets – Unless you get driven everywhere by a chauffeur in a limousine, or if you exclusively talk to the few still relatively open-minded germans you can find on the streets of Berlin-Mitte or similar well visited or wealthy inner districts of major german Cities.

    Of course, there is a pattern here. People like Sarrazin or Henkel appear to have a knack for positioning themselves seemingly outside of the mainstream and thus being percieved as neutral observers who see the world as it is without their minds being clouded by ideologies or political reelection strategies.
    The average german, being understandably unable to verify everything any so called ‘experts’ say, mostly sees them as some kind of rebels who are to be commended for their bravery going against the lofty elites and their high-concept schemes that are so far removed from the everyday needs and difficultiues of simple folk that most people don’t even care anymore who’s in charge, as long as they can still afford to pay their bills.

    Unfortunately, Mr Henkel and his friends are anything but defenders of the people against injustice and oppression inflicted upon them by the remote elites, wether it’s the people of Germany or those of Greece. In a way they resemble the more well-known figureheads of the american Tea Party movement. They have all been members of and made their fine careers within exactly those elitists circles they claim to speak up against but unlike most politicians they have found a much better way to disguise themselves as public heroes.

    • Very informing post. It is uncanny how characters like these have surfaced nowadays, as it seems, in all countries in the euro zone. Our Henkels and Sarazins are the ones that with the big help of mainstream media try to lay the blame for Greece’s economic collapse and bankruptcy on the people instead of the ruling elites. They spread outright lies, half-truths and propaganda constantly on the masses trying to establish a feeling of collective guilt. They always, always speak on behalf of the people using the appropriate language. It’s always “We”: “We” need the loans, “We” will go bust unless “We” conform to the troika’s instructions, it’s “Our” fault, “Our” collective responsibility. It goes on and on for at least three years now in Greece. You cannot find a better example of this vulgarity than former minister and deputy PM of the Papandreu administration mr Pagkalos. He actually wrote a book entitled “We ate them together” meaning the public debt loans..Pure hubris.

    • And the Euro is goint to establish that eternal friendship between many different European countries? How so? By being an excuse to be able to install a permanent transferunion from the Nord to the eternal debtors in the south? That is exactly how the friendship of fresh new wars is always started!

    • you describe Henkel’s personal and ideological background pretty well. The problem is that some of his arguments against the Euro may be considered as factually valid even from people generally opposed to his main political-ideological tendency. The critic of the Euro from the ‘right’ may converge in some factual points with that of the ‘left’, simply because its flaws are so obvious to anyone who has dealt even on a very basic level with the matter. What divides both approaches is indeed a deep-seated feeling towards the other: A person associated with the ‘right’ generally believes there are deep genuine insurmountable cultural differences between nations which (in form of positive/negative attributes) are transferred to the respective people: The German are hardworking only because the other is lazy). Their identity is built upon the projection of such a difference, it’s deeply negatively rooted: the positive self-image is dependent on a negative projection. Of course there are real historical shaped cultural differences which frame a ‘national’ personality (called i.e. Gestalt), because the discourse which produces a person as a social being is real. But it is the political ‘right’ which exclusively constructs identity on the notion of difference in order to project the other as something inferior and to constitute oneself as superior. It’s control engineering: Social division is the main motivation and the human need for an identity is being abused.

    • @Eurosis:

      “And the Euro is goint to establish that eternal friendship between many different European countries?”

      Of course not. Henkel and his buddies are right when they point out that the Euro is flawed. That’s not an analysis exclusively shared by conservatives by the way, unless you consider our esteemed host and many like minded ‘leftist’ economists one of them, since he has already mentioned many times that the way this common currency was implemented was wrong from the beginning, since nobody in charge at the time bothered to think about the effects of permanent trade imbalances.

      Naturally, if you prefer to see things the ‘german’ way then running a constant surplus is the solution to everything.
      Of course we mean well. All everybody else has to do now is become a net exporter and we’ll all be a happy family again. Just like that. Nevermind those notorious do-gooders and their socialist fantasies who just want to ruin everything by complaining about a few million europeans who can’t stand the heat of a little structural reforming.

      “How so? By being an excuse to be able to install a permanent transferunion from the Nord to the eternal debtors in the south?”

      Now there you are just proving my point. Screaming bloody murder because someone seems to be after your money is exactly what people do when they listen to the likes of Mr Henkel and his buddies.

      The Euro is certainly not a smbol of friendship. But once it’s gone, we’ll see who would really want to stay friends with anybody and who would rather choose to become enemies again.

      What really frightens me is this unholy alliance between a total lack of imagination for anything that reaches beyond one’s own bank account, an academic elite that is religiously devoted to their belief in the eternal salvation of supply-side economics, a political elite that is either too stupid or too cynical to give a damn (propably both) and this creepy resurrection of nationalism that is fueled by the ramblings of these ignorant fools.

    • Spot on, Hubert. I’ve been indeed wading through a lot of muddy writings and speeches both of Henkel and SPD-Sarrazin, and it was horrible. Funnily enough Sarrazin enjoyed the praise of persons like film maker Volker Schlöndorff, former chancellor Helmut Schmidt (who just disliked some of his words, not his horrible ideas), and a lot of postmodern professors like Sloterdijk or Bolz, to name just a few.

      Well, there were a lot of very good articles against Sarrazin out there, while Henkel still enjoys the praisals a new market-radical majority gives him. Germany seems to be, in some political “elites”, in a kind of mental ossification, and could well need a real lot of fresh air from people like Yanis (our so-called “opposition”, SPD and green party, follow Merkel in everything after a bit of media-hype and blurb.) There is not even an idea that a “post 2008 world” exists in Germany, with the exception of a few leftist people that slowly are taken a bit more serious than from 1990 onwards until 2009. Nobody seems to look around here… Thanks again for your post, it was a real pleasure to read.

    • ” an academic elite that is religiously devoted to their belief in the eternal salvation of supply-side economics,”

      What a denial! Didn’t we have demand-side economics until almost 2010? Income increases up to 70%, artificially low interest rates and 768000 civil servants. See the consequences…!
      Loss of competitivness, loss of industries, but hey Athens is the city with the highest share of Porsche Cayenne!

      I guess you know how guys like you are called in your homeland…!

    • @MarkDR

      “I guess you know how guys like you are called in your homeland…!”

      Actually, no. I don’t. But when I was talking about what frightens me the most, I was refering to my ‘homeland’ and not to Greece.

    • @Hubert Marcks
      Apparently you forgot to mention the fanatics in the public in this unholy alliance. I can explain how the academics, politicians, industrialists, financiers came to take their place in this alliance; they have too much at stake. The public that follows them really baffle me. They are prepared to congratulate them and happily make their way to the poverty houses practically on their own. I have never seen people act against their own interest in such a way before in my life.

  6. Pingback: European Pundits Starting to Give Up on the Eurozone « naked capitalism

  7. Pingback: Klaus Kastner gives up on the Eurozone (and Greece’s prospects of recovering within) | gold is money

  8. For an excellent perspective on the debt crisis and the failure in the European programs to alleviate its social upheavals I recomment a recent book by Robert Kuttner, “Debtors Prison;The Politics of Austerity Versus Possibility. In a chapter titled “A Greek Tragedy “he shows how national politics (especially in Germany) have brought the economic and social morass and how the finance, debt and austerity policies have condemned a generation in several European countries into depression. Unfortunately he sees no reprieve from this sentence….he concludes “Markel’s conception of fiscal union means nothing more than German budget policies for all “.

  9. “Henkel proposes that Greece, Italy, Spain, Portugal and France should keep the Euro as it is (with France assuming leadership)”
    There is no point in keeping the Euro as it is if the north leaves.Sooner or later you will have say France being in the place of Germany,Italy in the place of Netherlands, Spain in the place of Austria and Greece,Ireland,Portugal etc being the periphery.

    That’s exactly why I have been arguing from the beginning of this long debate that if Greece was not the bad lazy guy it would have been someone else.The problem lies with the structure of the currency, any examination of the domestic economies out ot the context of the currency’s structure, leads to wrong conclusions.

  10. Most likely noone here knows HH Henkel personally. I do. He always says what he thinks and should be thanked for his contributions.

    • Ha, ha, ha, ha! What a fruit cake this Hans fellow is:

      “In November 2010, Henkel suggested in a focus articles that share two currencies of the euro because of the debt crisis in European countries (first Greece, then Ireland and Spain):

      to him, a “hard” Northern euro – should include countries such as the Benelux countries, Austria, Finland and Ireland also next to Germany – here, “Sticking to monetary stability and budgetary discipline” would maintain – as well as

      a “soft” Southern Euro , led by France, congruent to the “Output joy and the currency-technical talent for improvisation” of these countries.””

      Klaus+Hans = 2 fruit cakes. Shall we add Mona and make it 3 fruit cakes?

  11. I have not read Henkel’s book, and it’s the first text from Kastner I encounter, so this may be a skewed perception, but: this text throws up all kinds of red flags for me.

    First of all, that little mention of national cultures and its attendant concept of “nationally culturally acceptable currencies”…if it didn’t sound so borderline racist it would be quite silly. How can this idea even be justified? Unless of course we want to reduce whole societies to simplified, easy-to-use stereotypes, and *that* doesn’t inspire a lot of confidence in the quality of the conclusions reached that way.

    The second red flag is that there is a lot of talk about how the structure of the Euro is problematic, how it has led the EU into crisis, how it has impeded recovery from said crisis etc. Fine, and good, and not entirely inaccurate. However there is one little word that is entirely absent from this whole article: the little word “bank”. Again, the idea that it is *solely* the Euro that tanked the Eurozone economy is a dangerous oversimplification, even assuming it is an innocent one. As is the implicit idea that the breakup of the Euro by itself will be enough to reverse the situation -after considerable difficulty, of course- without drastic reform of the banking sector.

    The third red flag is the anger at the EU. Or rather, the sort of anger Herr Kastner expresses. That whole lot about cucumbers, and overpaid winetasters, and excessive regulations about trivialities. It sounds very much like what your local version of “Bild” or “Avriani” would print, and like a dishonest bid to coopt that grass-roots resentment at the EU that’s gripped many citizens throughout Europe.

    I’m going to go out on a limb here and propose a theory of sorts. It’s a guess, but hopefully an educated one, and it’s based on this article as well as general developments in the beautiful country of the BRD. And it has the added benefit it will be tested by events in the near future, so soon enough we’ll all know if I’m talking out of my…ahem…posterior or not. It goes a bit like this:

    A sizeable fraction of the German economic elite is beginning to see greater profit in leaving the Euro than staying- for whatever reason, replacing an unstable coallition with more controllable national government, an accurate prediction of the diminishing returns of lending the South money at unreal interest, avoiding even the remote possibility of a thorough audit of the German banks, etc.
    They’re setting about making this happen, and they have to prepare the ground for it, so they’re attempting to get the greater populace fired up not against the “lazy bum Southerners” (as had been the tendency up to now) but against the framework of the EU itself, intending to ride this generated wave of resentment into achieving their goals. That’s why this article contains both an academic-sounding analysis *and* beer-table emotion. It is tempting to see the new “AfD” as the vehicle to achieve that goal, but that party is probably only one element in what is a general tendency.
    I’d like to note I’m not suggesting there’s some dark sinister conspiracy at work. Just like pre-crisis banking practices were not designed by five people in a dark room but formed in a sort of semi-informal mass consensus (which did, however, find expression in organised lobbying for deregulation), this is very likely not a detailed plan but more an idea shared by increasing numbers of financial “decisionmakers”.
    We’ll see.

    Aris K.

    • If German policymakers in the near future start to use the new narrative of the “irreparably broken euro”, you will know that you are right.

    • You are right about your red flags Aris. The book is written by a pseudo-fascist economist. I could have told you this before even reading it. It’s precisely the sort of book that a false prophet, posing as a “friend” of Greece, would want to promote. The “oh, maybe your suicide would help us all and here is why” sort of Satanic verse.

    • I don’t see what was racist about the term culturally acceptable currencies. It may be awkwardly worded, but Greece, in the past when it was a sovereign country, did have some differences from Germany regarding workers’ rights and other important matters related to the economy.

    • @Maria S.,

      It is totally unclear to me how a currency can be “culturally acceptable”.

      And it smacks too much of the idea that some peoples just can’t get with the program, poor souls. That somehow the Greeks and Spaniards *intrinsically* could never be part of the currency union, while the Germans and Dutch could.

      As you say, there were differences in the structure of the european economies, but to attribute them to some sort of nebulous “national culture”…how could that stand as serious analysis?

      The Euro was a construct of the EU (EEC back in those days), and the problems countries have had with it were due to political choices at the European and National level- choices that cannot simply be attributed to “cultural differences” but were settled on after prolonged political negotiation and haggling.

      To give an example: in one of his comments on his blog, Kastner talks about franco-german relations under strain and writes “but there has got to come a time when the German population begins realizing that they are working until age 67 so that their French neighbors can retire at 62”.
      Retirement age in each country is really determined by the history of the economy, and current and future financial planning. Where does “national culture” enter into it?

      And finally, a reader above already pointed out Kastner’s spirited defense of Sarrazin and his thoroughly racist book. I’ll add that the way Kastner defends it is particularly upsetting. To say that the book is full of robust facts, when it was the scientists whose research Sarrazin was quoting who were the first to point out he was distorting their findings to make a point unsupported by their data, suggests a very selective -some would say willfully ignorant- understanding of the controversy over that publication. And I’m afraid I cannot believe that a well-educated individual would make that mistake innocently.

      Aris K.

    • No EU means that everything must be the same. In the Name of the Euro we Need to Change cultures. HEIL EURO!

  12. On a totally unrelated issue Prof Varoufaki, ive been following your diagnosis of the eurozone from Sydney with great interest. Now what coincidence to be sitting at a cafe the other day on a Greek isle, which out of courtesy i wont mention for privacy reasons, to see you walking past and then again the next day on a moped:-)
    All the best.
    Manolis

    • Well, at least Yani as an economist knows where is the main engine of the Greek economy and he is doing his part to boost it a little, moped and all.

  13. Here is what Federico Fubini says (and he is right BTW):


    Today’s northern European countries are running up record current-account surpluses, just as some southern European countries are experiencing Weimar-level unemployment. For Italy, Europe’s fourth-largest economy, the slump is deeper than 80 years ago. Meanwhile, huge savings and potential demand for consumer and capital goods remain locked up next door.

    How did this happen? The cumulative current-account surplus of the Scandinavian countries, the Netherlands, Austria, Switzerland and Germany is about $500 billion. This dwarfs China’s surplus at its mercantilist peak of the mid-2000s.

    More striking, in the now-rebalancing euro zone, many countries’ current accounts are trending towards balance (and Ireland has moved from deficit to a small surplus). One exception is Germany, whose external position strengthened last year, with the surplus rising from 6.2 to 7 per cent of gross domestic product.

    Indeed, Germany’s GDP grew by just 0.9 per cent last year, and is forecast to slow further this year, to 0.6 per cent. Slackening growth, declining private and public debt, and super-low interest rates would suggest loosening up a bit and supporting aggregate demand. Instead, a distorted view of what competitiveness really is (mis)leads politicians to consider large external surpluses an unqualified good, whatever the consequences abroad.

    The second exception is France. Over the last year, France’s external deficit deteriorated further, from 2.4 per cent to 3.5 per cent of GDP. France faces zero or negative growth in 2013, and seems to have reached the point at which it must reverse course on competitiveness.

    This, too, is reminiscent of the 1930s. To paraphrase Kindleberger, French inability and German unwillingness to stabilise the system are contributing to an ever more intractable European crisis.

    ……… Germany and its allies should accept that running high external surpluses is damaging the euro zone and themselves, and that it is time to put part of their huge excess savings to work to support growth.

    Without a pro-growth, pro-reform deal, southern Europe’s attempts at deleveraging may result in a politically destabilising depression. As Mark Twain famously observed, “History doesn’t repeat itself. At best, it sometimes rhymes.” In Europe’s case, the poetry could be very dark.”

  14. Pingback: Eurozone choices | Arjen polku

  15. Γειά σου Κε. Βαρουφάκι ! – I will write in english at the moment (I am from NYC of hellenic origins, now living permanently here in Αθήνα, and planning philosophy studies here – please resist the desire to either laugh or cry at this ‘comic/tragic’ possibility – but where there’s love, another logic rules ).. now to the main comment: firstly, though not an economist, from what I understand synoptically, economics is a study of the financial ‘behavior’ of people(s) – now, unless one is a pure deterministic materialist which reduces ‘people’s lives’ to a discreet set of will-less phenomena,, then one has to conclude that ultimately psychology, or better ‘the pscyhe’ rules over economics. Does not the psyche have ‘conscious and unconscious’ wishes?? — So then, what really is the ‘wish’ of all these European tecnocrats and beaurocrats who rule over nations like banks??
    From my short time on this Spaceship Earth, I have understood one thing: that the Self wishes – most of the time (but not necessarily always) to form the world according to it’s ’emotional gestalt’ , it’s deep and too big to grasp emotional picture of itself and it’s wishes.
    Again, επαναλαμβάνω – What do these punctilious, brown-nosing (whose ‘nose’ ? – ahh, that would take me down an unpleasant path!!) rule-following euro-crats ‘wish’ for, Κε. Βαρουφάκι?
    I draw a simple conclusion: The wish to turn us into ‘soulless banks’ – as they have been widdled down and flattened out (ala Friedman style, who lauds the ‘flattening’ of the world) – They wish to turn them into themselves. Often times, we don’t have to look to far for the answers. If they were Mozarts, or in the spirit of Mozart, they would project a different world of possibilities and answers, and not the noxious smell of the ‘arbeit’ gas.
    (please excuse the bitterness, but when I see so many talented and energetic young souls here in Ελλάδα just stressing and watching the horizon shrink, I become quite very, very, very angry at those who have the means of pushing a bright light, but having not a pittiance of imagination! .. and who was that playful and inspiring physicist, wasn’t his name Albert something, who said something about ‘imagination being more important than knowledge..’
    So, here’s to greater imagination and playfullness, and less stressed ‘arbeit’ solutions .. the answer, I am sure, is so much closer to the area of the ‘thorax’ rather then the skull..
    Γειά χαρα – Αντώνης-Διονύσιος Παππάς

  16. BTW, when a lot of crypto-Germanophiles say that they lost faith in Europe they mean this: They intuitively realize that Germany has reached the end of her rope and that the next honorable step is for Germany to leave the euro so that the rest of Europe could move forward and breath some fresh air again.

  17. “the Euro does not unite Europe but, instead, it splits it”

    That’s what I argue since years here.

    “It is futile, Henkel says, to impose a currency which doesn’t fit national cultures”

    That’s what I argue since years here.

    “it becomes unmistakably clear that even a willing Germany could never pay the price to make monetary union in the Eurozone work”

    That’s what I argue since years here.

    “A United States of Europe with a federal government? Who would elect that government?”

    Nobody. That’s what I argue since years here.

    “Before the Euro, the Greeks & Co. and the Germans & Co. had a rather good time together. It is the Euro which has put the people of the Eurozone against each other.”

    That’s what I argue since years here.

    Just a few of many of the very same points I made since I joined the discussion here. It is good to see I’m not alone anymore with my insights.

    • Henkel says exactly what I argue since years here. Funny that Klaus Kastner did not get banned or ignored as I did!

  18. Hmmmmmm……I don’t know why after reading Klaus’ monologues the phrase “crocodile tears” comes to mind as well as “make believe” and “pretend”. I guess deception has always been part of the art of war.

  19. Very good post. I applaud Klaus’s intellectual integrity. I changed my mind about the chances of the Euro zone when the PSI deal for Greece took place. That was the turning point in my opinion. The only thing that I would add to Klaus’s piece is that it is inevitable that a collapse or a slow disintegration of the euro zone will lead to similar effects in the E.U. Any country that leaves or is forced to leave the Euro zone will be forced to impose capital and border controls and possibly exit the Shengen area. When something like that happens it is only a matter of time for national governments to question the usefulness of E.U. imposed restraining and damaging policies like the Dublin treaty for Southern entry point countries. Greece in particular would also greatly benefit from a potential freedom of the restraint that the E.U. energy policy puts on the use of the vast lignite reserves the country has. In the end people will realize that the costs of preserving the E.U. far outweigh the costs and after all in our modern globalized connected world projects like the E.U. and the euro zone are relics of an obsolete past.

  20. Hans-Olaf Henkel (Bank of America, Bayer, Continental, Daimler-Benz, etc.) is such an objective, bias-free and evidence-based analyst. Everyone knows that!
    Like his comrades and friends Thilo Sarrazin and Karl Albrecht Schachtschneider (re: Bündnis Zukunft Österreich / Freiheitlichen).
    What’s not to like about them? Who would not take them seriously?
    Alternative für Deutschland is the way forward, war is peace, freedom is slavery, and ignorance is strength.

    • Seems like you no substantial arguments on that issue! Otherwise you wouldn’t rant against these people personally.

    • T. already made a most substantive argument on July 30, 2013 at 18:57, pointing out the folly of these plans:

      “You’re forgetting a little something – a little something which would probably ruin Germany (as well as everyone else) and most likely cause the EU itself to disintegrate in a singularly nasty way.

      Let’s say that the PIGS decide to leave the EU. Presume also that they can immediately impose workable capital controls so the risk of capital flight is low or nonexistent, andpart of Professor Varoufakis’ objections to such an act can be dismissed. In that scenario, an obvious problem rears its ugly head: What will happen to existing obligations of the public and private sector in the periphery?

      Our host dismissed this by saying that “Contracts governed by Greek law… [would be] converted into drachmas. This is not as easy as it sounds, due to a variety of reasons I won’t go into right now, since this post is unholy long as it is.

      However, that discussion would probably be a moot point, as in case of the periphery (or Germany) leaving the euro, no such simple rule would be implemented by any sane peripheral country (or accepted by them, if Germany were to leave). Here’s the reason: All peripheral economies experienced a massive influx of capital from the core prior to the crisis (if memory serves, their current account deficit roughly equalled Germany’s surplus). This would leave the peripheral economies which leave the currency union with debt denominated in euros, both in terms of loans (a lender’s performance is characteristic), and bonds (their denomination is listed on the bond itself).

      Why is this a problem? Because it screws with the beneficial aspects of currency devaluation. The latter is infinitely better than deflation, to simplify to a great extent, because it does not affect or even reduce indebtedness.

      Think of it this way: I generate a net income of x. I have to pay y to repay my debt, and I have purely domestic costs of z. If I export and my currency depreciates 20%, my income relative to debt (and domestic costs) increases 20%, making it easier to repay the debt or to turn turn a profit. Or, I can reduce prices to maintain the same ratio of net income to costs and debt, undercutting the competition. If I sell for the domestic market, to a first approximation nothing changes (actually, it does, since domestic demand will shift to domestic sources, but that’s not a direct effect): If x, y, and z are all priced in the new currency, it does not matter a whit what my exchange rate is.

      The problem arises if I have debt denominated in a foreign currency. For exporters, that is not a fatal problem: If they are indebted in the same currency in which they export (exporting to Russia, taking a loan in rubles, for example), a depreciation (vis-a-vis the ruble, in this case) still decreases my domestic (read: labour) costs. The depreciation is simply less effective. If, however, I am indebted in a foreign currency and generate a profit in a domestic currency, a depreciation means I will have to devote a proportionally greater share of my income to debt service, which can crimp my expansion plans or ruin me. Not unimportantly, this is the default position of states, since they are financed largely through tax revenue.

      Because of this no sane country would leave the euro without converting its obligations and the obligations of its citizens and companies to its own currency. Of course, doing that means that, unless the creditor plans to use the funds in the country which left the euro, he incurs a loss equal to the depreciation even if each debtor repays each and every drachma/peseta/lira/florint/ducat/whatever. Which, in the chaotic breakdown of demand, won’t happen. For the same reasons, no country will tolerate a conversion of the obligations to marks if Germany leaves, since the same economy-killing consequences would arise in the case of a DEM appreciation vis-a-vis the euro as in the case of a drachma devaluation vis-a-vis the euro.

      Oh, and did I mention that for the same reasons sovereign default of the peripherals would be pretty much inevitable?

      Oh. and if Germany were to leave, no country would expect a conversion into DEM for the same reasons, while keeping the obligations in euros would reduce income for any German company actually planning to spend money or invest inside Germany (hopefully that would be most of them, for your sake).

      This would have two consequences: Firstly, the official sector, which has to a large extent taken over sovereign debts of the periphery, would see its balance sheet blown up directly. Just as importantly, a default plus conversion would blow up the balance sheets of its financial institutions as well as any other company engaged in long-term contracts with peripheral entities. That would require either new bailouts or funding new companies by the state to ensure the financial market works to a minimal extent. The two basic consequences would be, of course a nasty recession at the least and an unholy political mess which would render the EU non-viable.

      TL;DR: No matter who leaves the common currency, the only way for them to avoid disasters is to thoroughly screw over the other side (pardon my French): It would be in the best interest of the core to harm the periphery by squeezing it dry and in the best interest of the periphery to harm the core by paying as little as possible”.

  21. Thank you very much for this one!
    Ignorance and self sufficiency is not enough of a skill for the EU technocrats and politicians to solve this crisis. Like I have said before, in my opinion Germany is nothing but a colony of the USA. When Geithner visited Schäuble at Sylt everything was clear. Greece could not be allowed to leave, since this would have triggered all kind of derivatives at Wall street and in the City.
    This Euro creates tentions and reawakes old resentments fed by the mainstream media.
    Nazi Germans against Lazy Greeks (Bild Zeitung). We should not allow these distractions from the real enemies residing in climated offices in New York, London and Frankfurt.
    Me, as a German, I feel great sympathy for the people of Greece, and will try my best to fight these ugly developments right here from Frankfurt. End of August an EX-Banker of UBS and Vontobel will share about the risks hidden behind the curtain. This guy already opened mx eyes big time. He was involved in the IMF business in Argentina in the nineties.
    If you are interested, I could connect both of you.
    Thanks again for your insights.

    • Are you trying to suggest that Greece and Germany are brothers-in-arms in a fight to stem the US inluence in Europe?

      I have never heard of such colossal nonsense before.

    • It is very clear that it is German elites of a neoliberal nature that are the cause of our problems, and not the German people. The superficial fact that the German electorate is being tricked or persuaded with persistent and widespread propaganda does not mean that they are the moving force.

      However, part of the global problem is the widespread promotion of neoliberal capitalism (morphing into neofeudalism ) across the developed world. Given the failure of democratic politics to provide meaningful linkage between citizens’ interests and government policies, it is not difficult to see that Samaras, Merkel and Obama (to name a few) have far more in common with each other than they have with their electorates.

      It follows, that one should not attack blame to the German people for what is going on, even if they are voting in ways that seem to imply culpability. The sort of petty 19th century nationalism that some are promoting here is not based on reality, and is highly counterproductive.

Leave a Reply

Please log in using one of these methods to post your comment:

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