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Why The Germans Will Destroy The Euro.

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Having somehow turned into an economics nurd I find myself watching a lot of You Tube videos of financial gatherings of one sort of another and as a result have noticed a very specific mental 'tic' that seems endemic in the thought process of many German economists and analysts.

The way it seems to work is like this- someone will present the argument that in order to solve the clear north/south trade imbalances within the Euro area it is not sufficient that the deficit nations of the south engage in 'internal devaluation'-AKA 'Austerity- the surplus states of the north must also play their part by allowing their own consumption/wages to rise in order to mitigate the need for such extreme austerity in places like Portugal, Spain and Italy. So along with a deflating south some degree of northern inflation is required.

What happens next is quite curious. In most cases the German party will acknowledge the argument and express familiarity with it- but will not attempt to engage with it directly. Instead a subtle code shift now takes place in which the debate is reframed not in terms of economics but terms of morality.

So instead of directly addressing the point being made an entirely different point is introduced which is that we cannot penalize the surplus countries for their success and so it is entirely the responsibility of the deficit nations (the failed nations?) to resolve the problem.

The interesting thing about this code shift is that it is entirely unconscious- the segue from a technical discussion of trade imbalances inside the Euro zone to a discussion framed in terms of punishment and guilt is totally seamless and I think mostly invisible to those making the shift.

What this makes clear is that in the minds of many German economic thinkers the economics of the Euro zone trade imbalances possess an irreducible moral dimension that-at least in their view- cannot be abstracted from the debate.

As a result it seems to me that the pragmatic solution of a joint effort by both 'sides' of the Eurozone to close the gap between them is a non starter- all of the adjustment will be forced onto the deficit nations which will in time lead to a fragmentation of the zone as the strain of internal devaluation destroys political consensus leading to an inexorable march toward exit from the single currency by the deficit nations.

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Having worked with many Germans I'd say an obsession with punishment and guilt for anyone who "breaks the rules" is part of the national psyche. That's now being played out on the European financial/political stage. The underlying fault line in the Euro project was the idea that all the countries thought the same about economics or, indeed, rules.

Edited by RentingForever

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Having worked with many Germans I'd say an obsession with punishment and guilt for anyone who "breaks the rules" is part of the national psyche.

Germans invented modern schooling, which was designed to produce Good Germans.

There's something to be said for that, in an industrial-era economy. But we no longer live in one.

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Isn't this the same as the post-war international organisation of debtor and creditor nations, the argument between Keynes and Bretton Woods?

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Doesn't this just explain politicians everywhere?

You've asked me a clear question but I'll swing it round to an angle where I know I have a repeatable, unrelated, deflecting answer. What's more, I'll do it without even thinking about it.

Same sh!t different flag.

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Isn't this the same as the post-war international organisation of debtor and creditor nations, the argument between Keynes and Bretton Woods?

The problem for "most germans" (not all ofc, but certainly those currently in power & the Bundesbank) is that Keynes was the devil's spawn.

So even if his arguments make perfect (& empirical) sense Germany will refuse to accept them because they're not "German".

Which is perfectly fine so long as they plough their own furrow, but as the lead economy in a Union of (supposed) equals it cannot work.

Hence why I have argue (from the beginning and ad nauseam) for Germany to leave (or be expelled from the EZ). Everybody will be much happier. The right wing Nordic/Baltic states can follow their German friends and the rest can persue more Keynsian (& effective) economics.

There's not much doubt in my mind within 5-10 years Germany will be out of the Euro.

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Let's remember that the Reformation started in what is now Germany.

The Lutheran emphasis on individual responsibility and the corresponding emphasis on sin and personal salvation go deep in not only the German soul but also countries with a similar faith history such as Finland and Sweden.

A further observation about the Reformation is that it originally loosely followed the boundary of the Roman Empire. Which, perhaps not coincidentally, also foreshadowed the economic and political split in the Euro area.

France is an interesting case because while Gaul was resolutely part of the Roman Empire, the French Revolution brought rationalist philosophy into this Catholic country giving the French a dualistic mindset which may help explain why France flits between the 'North' and 'South' and can't quite decide it's own identity in the economic debates.

This may seem like a crude yardstick to apply to the way nations behave but ideas have deep roots and make people and history what they are.

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Having become somewhat of a wonderpup nerd I find myself reading a lot of nonsense on the house price crash forum and as a result have noticed a vey specific 'tic' in the arguments presented.

The way it seems to work is this: wonderpup will selectively cherry pick some half-understood arguments to support whatever half-baked position s/he wants to take and then create a thread about them which is internally inconsistent to begin with.

What happens next is quite curious. After being presented with a counter argument (otherwise known as common sense) wonderpup will introduce an entirely unrelated issue in order to muddy the waters.

The interesting thing about this shift is that it appears to be entirely unconscious, meaning that wonderpup is the perfect troll.

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Having worked with many Germans I'd say an obsession with punishment and guilt for anyone who "breaks the rules" is part of the national psyche. That's now being played out on the European financial/political stage. The underlying fault line in the Euro project was the idea that all the countries thought the same about economics or, indeed, rules.

Yup i have worked with a few authoritarian comes to mind they have the stick but have not figured out what the carrot is for

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Having become somewhat of a wonderpup nerd I find myself reading a lot of nonsense on the house price crash forum and as a result have noticed a vey specific 'tic' in the arguments presented.

The way it seems to work is this: wonderpup will selectively cherry pick some half-understood arguments to support whatever half-baked position s/he wants to take and then create a thread about them which is internally inconsistent to begin with.

What happens next is quite curious. After being presented with a counter argument (otherwise known as common sense) wonderpup will introduce an entirely unrelated issue in order to muddy the waters.

The interesting thing about this shift is that it appears to be entirely unconscious, meaning that wonderpup is the perfect troll.

Ha!

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The Germans' moral stance is very useful to those who have the so called eu project at heart.

That combined with the weaker eu members/members' leaders reluctance and unwillingness to leave the eu/eurozone (recently for example Greece and Tsiparis and the latest bailout turnaround situation) is a very effective additional lever towards fiscal union and ever more political union.

It's not all just a coincidence.

Edited by billybong

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Let's remember that the Reformation started in what is now Germany.

The Lutheran emphasis on individual responsibility and the corresponding emphasis on sin and personal salvation go deep in not only the German soul but also countries with a similar faith history such as Finland and Sweden.

A further observation about the Reformation is that it originally loosely followed the boundary of the Roman Empire. Which, perhaps not coincidentally, also foreshadowed the economic and political split in the Euro area.

France is an interesting case because while Gaul was resolutely part of the Roman Empire, the French Revolution brought rationalist philosophy into this Catholic country giving the French a dualistic mindset which may help explain why France flits between the 'North' and 'South' and can't quite decide it's own identity in the economic debates.

This may seem like a crude yardstick to apply to the way nations behave but ideas have deep roots and make people and history what they are.

Crude or not that old yard stick as to whether a modern European country was a part of the old Roman Empire has a remarkably persistent impact on where they have ended up in the current EZ economic zone. The Roman Empire was built round the Mediterranean not continental Europe. The latter has never been politically unified for any long period so what the EU and EZ are attempting has not got any deep roots. Only France lives in both worlds which is why it is the key nation for holding the thing together. One of the oddities of history is that the Germans like the Russians have so often used the symbols and terms of the Roman Imperial political language yet they were never part of that entity. In fact the cross dressing that has gone on historically is fooling no one. Edited by stormymonday_2011

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Having become somewhat of a wonderpup nerd I find myself reading a lot of nonsense on the house price crash forum and as a result have noticed a vey specific 'tic' in the arguments presented.

The way it seems to work is this: wonderpup will selectively cherry pick some half-understood arguments to support whatever half-baked position s/he wants to take and then create a thread about them which is internally inconsistent to begin with.

What happens next is quite curious. After being presented with a counter argument (otherwise known as common sense) wonderpup will introduce an entirely unrelated issue in order to muddy the waters.

The interesting thing about this shift is that it appears to be entirely unconscious, meaning that wonderpup is the perfect troll.

Speaking of half baked positions I think you will find that since I created this thread that it is you who are trolling me, not the other way around.

If you actually have a counter argument or even a relevant comment then why not post it?

Or even better why not try starting a thread of your own once in a while instead of just lurking in the background taking personal pot shots at people who at least have the willingness to put stuff up for discussion.

If you have a problem with the content of my posts then great, lets have a discussion- if the the best you can do is the childish nonsense above the why not put me on ignore and have done with it?

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Having worked with many Germans I'd say an obsession with punishment and guilt for anyone who "breaks the rules" is part of the national psyche.

It's also part of the language- in German the words for 'guilt' and 'debt' are the same, and the language we speak in must surely shape our thoughts in a very profound way. So maybe by extension the notions of 'surplus' and 'deficit' have acquired a similar moral overlay which makes it far more difficult for them to take a purely pragmatic approach to issues like trade imbalances or debt forgiveness.

Paul Krugman is fond of pointing out that economics is not a morality play- but for the Germans it seems it is very much a morality play- one in which virtue= surplus and vice= deficit. So from this perspective it is the others- the deficit sinners- who must repent and mend their ways- and the pain of adjustment is not merely a functional aspect of this process but a morally justified one- which may in part explain their apparent indifference to the damage their policies have done in Greece- the Greeks deserve to suffer.

So in this world view any suggestion that German policies- like wage suppression at home- might have contributed to the situations of the deficit countries is met with genuine bafflement- after all they are in surplus- and by a wonderful circular logic they feel that being in surplus is itself a total vindication of their quasi mercantilist posture regarding their EU partners- a mercantilism they pursue not via trade barriers but by refusing to allow their economy to pay the levels of wages that it's surplus's imply.

In their view the fact that their policies are successful in creating a large surplus for Germany prove that those polices must be correct- which would be true if it were not for the non trivial fact that they are members of a currency union. Which is why that currency union will not be sustained.

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If I understand your second paragraph correctly, you are saying that, in an organisation such as the Eurozone, the living standards should be comparable throughout. This means that any nation, e.g. Germany, who is much better at creating wealth than another in said organisation, e.g. Greece, must find a mechanism for transferring such wealth as is necessary to improve the lot of the poorer nation so as to be comparable to the richer.

This ain't gonna happen. So, you're right, the Eurozone is toast.

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It is possible for one part of a currency union to be richer than another. But in order for the inequality to be sustainable in the long run, the political and legal structures must be strong enough to withstand the pressures from within, alongside provision of some redistribution of wealth.

The mission statement of a nation state in fact.

I don't want the European project to fail, being sympathetic towards the post-war rhetoric about avoiding another war. But the inexorable logic of the single currency is proving more likely to drive people apart than to bring them together.

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It is possible for one part of a currency union to be richer than another. But in order for the inequality to be sustainable in the long run, the political and legal structures must be strong enough to withstand the pressures from within, alongside provision of some redistribution of wealth.

The mission statement of a nation state in fact.

I don't want the European project to fail, being sympathetic towards the post-war rhetoric about avoiding another war. But the inexorable logic of the single currency is proving more likely to drive people apart than to bring them together.

i think we just have to accept the illustrious leaders vision of europe(ie holy roman empire 2.0 under a new caesar/pope), is not the right one for us.

They are not going to stop,they are wholly obsessed with this dream.

no need to kick up a huge stink in the process, just leave, wish them well, and go into a partnership with a culturally similar bloc...that being the US/Canada- ireland included.

bundling together of nations geographically just isn't working.james goldsmith was right, this has to be done on a cultural basis.

it also fixes the greek problem amicably.

Edited by oracle

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The strange think is that in the EU they are seeing a political and fiscal union as being the answer. But in Britain we are moving in the opposite direction.

Scotland doing its own thing,

Londoners get £23,000 in benefits rest of the country £20,000

Housing benefit at different levels depending where you live.

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It is possible for one part of a currency union to be richer than another. But in order for the inequality to be sustainable in the long run, the political and legal structures must be strong enough to withstand the pressures from within, alongside provision of some redistribution of wealth.

The mission statement of a nation state in fact.

I don't want the European project to fail, being sympathetic towards the post-war rhetoric about avoiding another war. But the inexorable logic of the single currency is proving more likely to drive people apart than to bring them together.

The countries that comprise the UK operate a currency union - within this sterling-zone there are quite considerable differences in prosperity

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Having become somewhat of a wonderpup nerd I find myself reading a lot of nonsense on the house price crash forum and as a result have noticed a vey specific 'tic' in the arguments presented.

The way it seems to work is this: wonderpup will selectively cherry pick some half-understood arguments to support whatever half-baked position s/he wants to take and then create a thread about them which is internally inconsistent to begin with.

What happens next is quite curious. After being presented with a counter argument (otherwise known as common sense) wonderpup will introduce an entirely unrelated issue in order to muddy the waters.

The interesting thing about this shift is that it appears to be entirely unconscious, meaning that wonderpup is the perfect troll.

Great summary. Plus wonderpup is quite lefting as well. Meaning people, who did right thing and therefore earned money, must be wrong and punished ... even robots ...

Edited by Damik

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It's also part of the language- in German the words for 'guilt' and 'debt' are the same, and the language we speak in must surely shape our thoughts in a very profound way. So maybe by extension the notions of 'surplus' and 'deficit' have acquired a similar moral overlay which makes it far more difficult for them to take a purely pragmatic approach to issues like trade imbalances or debt forgiveness.

Paul Krugman is fond of pointing out that economics is not a morality play- but for the Germans it seems it is very much a morality play- one in which virtue= surplus and vice= deficit. So from this perspective it is the others- the deficit sinners- who must repent and mend their ways- and the pain of adjustment is not merely a functional aspect of this process but a morally justified one- which may in part explain their apparent indifference to the damage their policies have done in Greece- the Greeks deserve to suffer.

So in this world view any suggestion that German policies- like wage suppression at home- might have contributed to the situations of the deficit countries is met with genuine bafflement- after all they are in surplus- and by a wonderful circular logic they feel that being in surplus is itself a total vindication of their quasi mercantilist posture regarding their EU partners- a mercantilism they pursue not via trade barriers but by refusing to allow their economy to pay the levels of wages that it's surplus's imply.

In their view the fact that their policies are successful in creating a large surplus for Germany prove that those polices must be correct- which would be true if it were not for the non trivial fact that they are members of a currency union. Which is why that currency union will not be sustained.

Is this an official German statement then or is it just you that attributes it to being a morality issue ?

Maybe the reason the Germans belief in the strong currency, no quantitative easing, selling products based on peoples desire for quality engineering rather than devaluing their currency etc etc is based on the fact that they believe this is the correct way to run an economy based on previous experience, and not due to any moral issue.

Certainly it seems different to the way anglo americans want to run their economies. I would hazard a guess that getting into a currency union with 100+ million people who think this way if you are only 12 million is ill advised.

I don't think there is much morality imposed on economics (especially by any critical thinkers). Surely the only ultimate judge is whether that method of economics functions well for the country(ies) that apply it.

A lot of economic policies are just accounting tricks anyway. Ultimately actions such as QE or its equivalent (increased taxation) result in the transfer of wealth from different parts of the population. The only difference is in what section of society is targetted, and how visible the policies are to the electorate, which makes them more or less palatable to different cultures.

Edit : This article is quite interesting. By all accounts the Germans never actually wanted to enter the euro in the first place, but it was a price that had to be paid to get Mitterand on side for re-unification of East and West.

https://en.wikipedia.org/wiki/History_of_the_euro

Edited by Gigantic Purple Slug

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If I understand your second paragraph correctly, you are saying that, in an organisation such as the Eurozone, the living standards should be comparable throughout. This means that any nation, e.g. Germany, who is much better at creating wealth than another in said organisation, e.g. Greece, must find a mechanism for transferring such wealth as is necessary to improve the lot of the poorer nation so as to be comparable to the richer.

This ain't gonna happen. So, you're right, the Eurozone is toast.

Imagine an island populated by two groups- one group are industrious, frugal, dislike taking on debt and choose to pay themselves low wages because they value the prosperity of the group as a whole over individual consumption.

The other group are less industrious, less frugal, more inclined to take on debt and less concerned with keeping their wages low to promote national prosperity.

Over time as the two groups trade with each other a number of things happen- group one do very well at selling things to group 2- while group 2 find it harder to sell things to group one- the reasons for this are multiple- relating both to the different levels of producitvity and the different propensities of the two groups to spend and take on debt.

Also the bankers in group one find that they can earn a better rate of return lending to group two as the demand for loans-from both the state and the public- is higher there-so as a result despite it's inability to earn a great deal in exports to group one group two can continue to buy from group one by expanding it's debts.

At first group one is delighted with this arrangement- they are doing really well- their trade surplus relative to group two is growing as they export more and more and their banks are happy at all the loans they are making- what's not to like?

But in Group two things are starting to come unstuck- the loans are getting out of hand and wage increases are limited by lack of export opportunities to the frugal low paid people of group one.

Soon defaults start to loom and the inhabitants of group one begin to get annoyed- their perfect world is being threatened by those deadbeats in group two. As things in group two go from bad to worse and the level of debt becomes dangerously unstable group one starts to demand action- they want group two to cut back on it's social programmes and to deregulate their labour markets to ensure that it can pay it's ecalating debts.

The citizens of group two are incensed by what they view as a blatant attempt from group one to tell them how to run their group- soon political splinter parties in group two start to agitate for a 'restructuring' of their debts, which they regard as odious and caused by the blatant mercantillist policies being followed by Group one.

By now group one are demanding that a third party agency be brought in and installed in the government of group two to make sure they are enacting the kinds of measures required to ensure that group two can meet it's obligations.

But the mood in group two has turned ugly- there is talk of out right debt repudiation and some more extreme factions want to break off all trade with Group one entirely.

Group one- who are dependent on this trade- regard this as an act of aggression aimed at destabalizing their Group and now extreme Group one factions are demanding retaliation if these threatened trade embargo's are put into place.

These threats from group one further inflame public opinion in group two, increasing the strength of the more extreme political factions, some of whom are now openly calling for economic war with group one.

Ok- this is a cartoon of course, but a useful thought experiment in that it describes one outcome of a scenario in which you have very different economies and very different national psychologies when it comes to spending, consumption and debt.

A highly productive nation like Germany that has a national aversion to debt and practices wage suppression at home will almost inevitably end up in surplus relative to less frugal partners- combine this with the greater willingness in those partner states to borrow from banks-including German banks- and the stage is set for a lot of friction.

If you then lock these very different countries into a currency union then that friction will be amplified by the inability of the weaker countries to devalue as an export strategy- which racks up the friction and further exacerbates the problem.

So unless some way can be found to 'recycle' some of Germany's surplus into the deficit nations it's hard to see in the long run why the thing holds together.

This does not mean that the standard of living must be homogeneous throughout the EU- but it does mean that the degree of imbalance must be limited by some kind of wealth sharing strategy- this might mean wage hikes and inflation in Germany to offset the deflationary 'austerity' regimes being imposed on the deficit nations- or it could involve the strategy suggested by Yannis Varoufakis in which the EIB is used a conduit to facilitate the surplus recycling process.

Where all these solutions run aground, however, is on the rocks of German psychology- a world view in which debt is sin and a trade surplus is a self vindicating badge of honor that proves to them that they have done no wrong.

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Is this an official German statement then or is it just you that attributes it to being a morality issue ?

Maybe the reason the Germans belief in the strong currency, no quantitative easing, selling products based on peoples desire for quality engineering rather than devaluing their currency etc etc is based on the fact that they believe this is the correct way to run an economy based on previous experience, and not due to any moral issue.

Certainly it seems different to the way anglo americans want to run their economies. I would hazard a guess that getting into a currency union with 100+ million people who think this way if you are only 12 million is ill advised.

I don't think there is much morality imposed on economics (especially by any critical thinkers). Surely the only ultimate judge is whether that method of economics functions well for the country(ies) that apply it.

A lot of economic policies are just accounting tricks anyway. Ultimately actions such as QE or its equivalent (increased taxation) result in the transfer of wealth from different parts of the population. The only difference is in what section of society is targetted, and how visible the policies are to the electorate, which makes them more or less palatable to different cultures.

As I said in my OP- what I personally have observed is a tendency of German commentators to shift seamlessly from the discussion of economics as a science to a discussion of economics as an issue of morality- and this tendency is especially marked whenever the issues of either debt forgiveness or German trade surplus's relative to other member states are raised.

Specifically in my experience any suggestion that German surplus's are part of the problem are mainly rejected not on empirical grounds but on the grounds that it would be 'unfair' to criticize surplus nations since the very fact that they have a surplus is itself proof that they have done nothing 'wrong'.

So into an empirical debate on trade surplus's we now have injected the notions of 'fairness' and 'wrong doing'- and this represents a significant alteration to the frame of reference inside which the debate is being carried on.

Once this code shift has occurred- from the empirical to the moral- further rational discussion of the issue is shut down.

Don't get me wrong here-I'm not suggesting that this is a deliberate strategy to kill the debate- but the effect is the same. As far as I can tell most German commentators are sincerely surprised that anyone might suggest that their surplus's are in any way part of the problem in the Eurozone, since for them having a surplus is the highest form of economic virtue there can be.

How- they would ask- can doing the right thing ever be wrong?

And there are many on this site who would share this view. But I suggest this view is simplistic when applied to a currency union in which grossly mismatched trading balances are a serious threat to the viability of the system- and it is the responsibility of both the deficit and the surplus nations to sort this out.

Germany has pursued a mercantilist style relationship with it's partners in which it limited it's own domestic consumption via wage suppression while maximizing it's exports- and as a result it's not really good enough to point to those surplus's in themselves as a justification of the strategy through which they came into being- this is a self referential absurdity.

Edited by wonderpup

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Thirty-six years of unregulated free market capitalism is responsible for the state we're in. The Euro is merely another point of failure within that greater crisis.

Greece was always unqualified to enter into a currency union with Germany and but for the artifices of Goldman Sachs would never have been allowed to do so. It's in the interests of all sides that this act of criminal folly is dissolved as quickly as possible.

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