Blaming the Germans

In all financial transactions there are credits and debits. For the last few years there have been a lot of debits in Greece and the other, so-called, PIIG states. The converse has been that there have been a large number of credits in Germany.

Germany is not a paragon of fiscal rectitude- indeed it was Germany that first softened- by breaking altogether- the financial criteria by which the members of the Euro-zone are judged, but which they now insist must be applied strictly to other countries. Germany has amassed its credits by benefiting from a fixed exchange rate with the weaker economies of the south of Europe. The German economy has been out competing the rest of the Eurozone, which has been unable to balance their economies by either allowing their own currencies to depreciate, thus making their goods cheaper, or by allowing a German currency to appreciate, thus making German goods more expensive. This German free ride has caused considerable economic damage to those countries that are unwilling or unable to match the German policy of greater efficiency.

Now there is a bill to be paid: German industries benefited and provided capital to the German banking system, which in turn recycled capital into more loans to precisely those countries that were the debit to the German credit. Alas the capital can not now be repaid. The result is that the German banking system is now critically exposed to the southern tier of EU states.

Either the German banking system takes a major hit, and has to be recapitalized by the German state, or the debit states need to be rescued... by the German state.

The problem is that Germany refuses to do the one thing that would alleviate the crisis: backstop the rescue fund, the EFSF, with the full faith and credit of the ECB. This touches a serious nerve in Berlin, because such a policy carries with it a significant risk of inflation.

The problem, as always, is not that Germany wants to take over the EU, but that they definitely do not want to take over the EU.

Yet it is precisely the leadership vacuum that the Eurozone and the EU itself now faces that is creating an existential crisis. If Mrs. Merkel can not take decisive action, it will be taken by the markets. Then there will be debits amongst all the EU governments, and credits on a lot of trading desks,

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Tallinn is full tonight... Big concerts on at the Song field The Weeknd and Bonnie Tyler (!). The place is buzzing and some sixty thousand concert goers have booked every bed for thirty miles around Tallinn. It should be a busy high summer, but it isn´t. Tourism is down sharply overall. Only 70 cruise ships calling this season, versus over 300 before Ukraine. Since no one goes to St Pete, demand has fallen, and of course people think that Estonia is not safe. We are tired. The economy is still under big pressure, and the fall of tourism is a significant part of that. The credit rating for Estonia has been downgraded as the government struggles with spending. The summer has been a little gloomy, and soon the long and slow autumn will drift into the dark of the year. Yesterday I met with more refugees: the usual horrible stories, the usual tears. I try to make myself immune, but I can´t. These people are wounded in spirit, carrying their grief in a terrible cradling. I try to project hop

KamiKwasi brings an end to the illusion of Tory economic competence

After a long time, Politics seems to be getting interesting again, so I thought it might be time to restart my blog. With regard to this weeks mini budget, as with all budgets, there are two aspects: the economic and the political. The economic rationale for this package is questionable at best. The problems of the UK economy are structural. Productivity and investment are weak, infrastructure is under-invested and decaying. Small businesses are going to the wall and despite entrepreneurship being relatively strong in Britain, self-employment is increasingly unattractive. Red tape since Brexit has led to a significant fall in exports and the damage has been disproportionately on small businesses. Literally none of these problems are being addressed by this package. Even if the package were to stimulate some kind of short term consumption-led growth boom, this is unlikely to be sustainable, not least because what is being added on the fiscal side will be need to be offset, to a great de

Media misdirection

In the small print of the UK budget we find that the Chancellor of the Exchequer (the British Finance Minister) has allocated a further 15 billion Pounds to the funding for the UK track and trace system. This means that the cost of the UK´s track and trace system is now 37 billion Pounds. That is approximately €43 billion or US$51 billion, which is to say that it is amount of money greater than the national GDP of over 110 countries, or if you prefer, it is roughly the same number as the combined GDP of the 34 smallest economies of the planet. As at December 2020, 70% of the contracts for the track and trace system were awarded by the Conservative government without a competitive tender being made . The program is overseen by Dido Harding , who is not only a Conservative Life Peer, but the wife of a Conservative MP, John Penrose, and a contemporary of David Cameron and Boris Johnson at Oxford. Many of these untendered contracts have been given to companies that seem to have no notewo

Sarunas Skyrius said…

--"The German economy has been out competing the rest of the Eurozone, which has been unable to balance their economies by either allowing their own currencies to depreciate, thus making their goods cheaper, or by allowing a German currency to appreciate, thus making German goods more expensive. This German free ride has caused considerable economic damage to those countries that are unwilling or unable to match the German policy of greater efficiency."

Only in the past couple of years has Germany been more efficient, as for some decades they were stuck with stagnant wages and, yes, an "internal devaluation" of sorts. And now, after a decade of relative suffering, when they were prepared to enjoy their newly-found comparative efficiency, they're suddenly the bad guys not willing to cough up the dough.

2:41 pm

Jüri Saar said…

What about the whole reunification business - i've been left with the impression that it required financing and the financing wasn't exactly fortcoming from anyone else? An exception worth making?

3:32 pm

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