Solvent? Who said solvent?

Are they also on the same page when it comes to reforms? by Oxfam

The German government remains under attack for not “taking leadership” in the Euro crisis. This rests on the assumption that a known solution is ready to be implemented, but the German government just refuses to accept it. That is wrong.

How many times have you witnessed people changing their opinion about the Euro crisis, while being very confident at the time? This is Joe Stiglitz in February 2010:

If the rest of Europe stands behind Greece, interest rates will come down and then it is easy for it to service the debt. There is a vicious circle here: if people don’t believe it will service it, interest rates go up and then there is a problem.

“A default by Greece is absurd” is what he says later. Sounds familiar? It is the argument that is used for Italy and Spain these days, countries that are “illiquid but solvent” as the popular opinion goes. Isn’t illiquidity always a sign of doubts about solvency? Never mind. Paul Krugman, pointing to Paul de Grauwe, is endorsing this argument as well as The Economist, Willem Buiter, and many others.

I am not saying that Italy and Spain are insolvent (whatever that means for a sovereign country anyway), what I am saying is that their solvency is far from certain. I recommend to take a look at Germany, a country that went through eight years of painful internal devaluation, starting from a much lower debt burden. And it had a functional political and economic governance system (in comparison to Italy) that introduced a so-called debt brake completely without outside force based on a party-wide consensus. Add on top of that the indifference of most European economists and policy makers to the contractionary monetary policy of the ECB plus the fact that Germany was (and is) a big country within Europe and thereby a decisive factor for ECB policy, and the growth prospect for the periphery is bleak.

If Spain and Italy want a backstop – that realistically only the ECB can provide – it is their burden of proof to show that German taxpayer money, that does not grow on trees either, is worth risking in this operation. Because if it turns out that Italy or Spain cannot grow out of their debt because they lack the political will and macroeconomic discipline (as they did a long time ago), this backstop will come into effect, backed by German taxpayer money. And the more it is used, the more the negotiating power shifts towards Italy and Spain, who in this scenario would have shown their lack of political will and macroeconomic discipline… You get the idea.

In fact, Italy proved right away that this scepticism is not a phantasm: after the ECB started buying Italian bonds, the Italian government decided that it was not so serious about reforms after all, forcing the ECB to stop the programme.

How can Italy and Spain show that they mean it? I don’t know. Maybe by transferring government-owned enterprises and property as collateral to the ECB? Maybe through a country-wide consensus (!) on a debt-brake or on pension reforms? Or by giving the ECB the right to approve the budget? By legislation on wage setting that ensures that the economy will be competitive in the near future? To be sure, these are all difficult questions, but this proves my point: blaming Germany or its government is an unsatisfactory explanation for the political problems we face in Europe.

In my view, the problems have to get much worse, Greek-style, so that the peripheral governments can push through the reforms that are needed. Blaming Germany, the ECB, the IMF or whoever will be a common theme during this time of reform and hardship, thereby worsening the relationship between the people of Europe further and showing once more what a tragic, devastating and silly idea the Euro really was. God, this is depressing.

PS: The German influence is really ruinous when it comes to monetary policy, the obsession with an inadequate inflation target and the idea that the ECB’s monetary policy is highly expansionary as it is. It would be great if economists from around the world would point that out!


  1. hkaspar schreibt:

    Nice post, Kantoos. I am with you. Folks who consider this primarily a liquidity crisis, to be solved exclusively by providing pots of money, are fooling themselves. It is not even primarily a crisis of excess public indebtendess, but a crisis that tests countries’ ability to adjust through internal adjustment. Countries that manage to adjust, i.e. restore competitiveness through internal devaluation and generate growth in the non-tradeables sector, have a good chance to escape the crisis – see Ireland, whose CDS spread has fallen by 400 bps since July. Those that don’t, however, can’t and won’t regain the trust of the markets, no matter how large and glittery the pot of money is that is supposed to keep them afloat. The recent disproportionate widening in risk spreads for Italy reflects markets’ intensifying concerns whether this economy is able to behave in a euro-compatible way – or whether it is stuck with an overvalued exchange rate and over-absorption funded, in case of doubt, by the ECB.

  2. Spaetroemer schreibt:

    “In my view, the problems have to get much worse, Greek-style, so that the peripheral governments can push through the reforms that are needed.”

    You mean something like that?

    Depressing indeed!

  3. jochen schreibt:

    First, I very much agree with your stance on monetary policy. It is deeply puzzling why the ECB gets away even with mistaken policy in easy to understand areas, e.g. focusing on headline instead of core inflation, let alone harder stuff focusing on mean inflation instead of focusing on a risk-weighted average.
    But, I do not fully agree with your stance on the criticism of German policy. And, I am surprised that hkasper follows you since his own arguments suggest he shouldn’t. The German government and many economists argue that the root of the crises was fiscal profligacy in the countries that are now in trouble. The main problem however, as hkasper points out, is the loss of competitiveness, i.e. the (accumulated) current account deficits
    Getting the diagnosis right is important because it shapes the treatment. I am not an expert on the adjustment programs. But, they seem to focus on getting the government budget balanced in a relatively short period of time. They all seem to target a fall in the fiscal deficit to 3% within 2-3 years.
    If the loss in competitiveness is the main problem, the adjustment programs should focus on structural reforms that improve growth perspectives. So, fiscal adjustments are part of the solution package but they should not be the main focus. And saying that other adjustments are too difficult to implement is not helpful since the problems will only grow.
    Last, there is a political economy explanation for the German position. As long as the crisis is cast in terms of fiscal profligacy, Germany is the star pupil. Who doesn’t like being in this position?
    If the problem is cast in terms of competitiveness and current account imbalances, Germany with her vast current account surpluses vis–a–vis the peripheral countries role can be perceived (Martin Wolf, Economist,…) as being part of the problem.
    Yes, some of the criticism of the German government is over the top. But criticizing its focus on fiscal deficits as excessive is justified.

    PS: This comment is already too long. But I think, Paul De Grauwe’s argument about multiple equilibria within a currency union deserves more attention. I seems, but I haven’t worked it out, that part of the beauty of Esbies is that they help in that scenario.

    • kantoos schreibt:

      @ jochen

      Thanks for your comment. A few remarks:

      1. I am not suggesting to bring the budget deficit to 3% in a short time. I am saying that unless a country can make a credible long-term committment to reforms and fiscal discipline, it is risky to bail it out. The argument “illiquid but solvent” says it’s riskless. And the German case 1998-2006 shows how difficult and painful internal devaluation is even with the institutions we have (including sensible trade unions). Maybe I should have made that clearer.

      2. Equating “loss in competitiveness” with “accumulated CA deficits” is wrong. The CA per se (!) says nothing about competitiveness. Of course, capital inflows (= a CA deficit) are often associated with losses in competitiveness. Blanchard said something in that direction in Spain in 2006 or so, and people laughed about him. But it is not necessarily so (see the US for instance).

      3. The German CA surpluses were part of the problem, I agree. But not because Germany forced it on other countries, but because Germany was uncompetitive and needed to devalue interally: a consequence of the Euro itself. We suffered for 8 years, now other countries will. The Euro is economically a bad idea for exactly this reason, but nobody seems to understand that Germany suffered for years. The CA surplus is used as “proof” that Germany was doing fine. That is not correct.

      All this said, you are right that the German discussion focuses much too much on fiscal deficits, and too little on competitiveness. And then it also makes sense that nobody is talking about the ECB… Depressing.

      PS: About the argument of multiple equilibria: you cannot change the basic mechanism, I am afraid. But everything that avoids large swings in the fiscal sustainability helps: ESBies, differentiated monetary policy and macroprudential regulation, centralizing banking authority (including deposit insurance) completely, countercyclical ECB haircuts on givernment bonds, inflation-and-growth-driven fiscal rules (3% Maastricht is nonesense: if a country grows with 4% and has inflation of 3.5%, it has to run surpluses!), and most importantly: low debt level to begin with.

  4. Ernst schreibt:

    “How can Italy and Spain show that they mean it (reforms) ?” I fear they don’t mean it. And I am quite unsure wether Germany really means it. The so-called debt brake is merely a proclamation and not more. When it comes to the proof there will be enough reasons to delay it.

    The Maastricht criteria and the Euro-Stabilitätspakt are good examples how the political financial system works. One important reason is the existing political party system. Governments and finance ministers will not change budgetary policies. Instead they will try to solve problemes with monetary instruments and therefore they will use the ECB.

    Yes one can let vanish deficits by inflation. And yes the ECB’s policy is not expansionary enough to do so. But I think this way will not solve the problems with future budgetings and it it will bring us an additional problem with the monetary system.

  5. jochen schreibt:

    Kantoos, thanks for your reply.
    I guess we more or less agree. I didn’t mean to imply that you (!) are in favor of cutting deficits within a few years. Also, on (2 &3) you are right, of course. I was imprecise here because I wanted to be concise. (my original comment was even longer than what I posted.)
    Since your blog is mainly focused on Germany, I just wanted to support your push against the narrative that dominates the German discussion that the main problems are deficits and that tight money is appropriate – always and everywhere.

  6. Benjamin schreibt:

    First of all, thanks for the “depressing” analysis. Depressing it is, indeed.
    However, I guess I find it depressing for other reasons. I think the Euro itself is a great idea (although a significant part of this greatness is of a political flavour), but the (wise) ideas of its founding fathers of a No-Exit, No-Bailout system where insolvent countries must default are perverted by the likes of Merkel, Schäuble, Juncker, Trichet, etc.
    I think the German government is to blame for a big part of this awful mess. Ms Merkel should have called Mr Papandreou a year ago and told him that the party is over and his country must default. Even now politicians are reluctant to accept the obvious. So (German) politics is not responsible for getting into the mess, but for not getting out. But let me stress that you are perfectly right pointing out, that Europe’s problems are political and not so much economical.

  7. Rien Huizer schreibt:


    Why do you look at the projections of the non-German countries with the same pessimism as the IMF? This assumes that Germany will stay on this trajectory and they too?

    As a former banker I know very well that solvency goes out the window when you become too illiquid to remain a going concern. Once illiquid and discontinuous, your cashflow generation becomes problematic, you look at the assets on a liquidation basis and then the originally positive difference between assets and liabilities (equity, a major component of solvency) combines with the cashflow slowdown to result in insolvency. With countries, the problem is that they need to provide services on an ongoing basis but that their ability to fill business cycle induced gaps in revenue by borrowing (or to raise funds for infrastructure investments) depends no longer on captive markets. The UK chancellor borrows from a largely captive market: half the banking system is nationalized and the BoE is a fan of our own market monetarist religion. It does not run credit risk by buying gilts.

    If Spain, Italy, Ireland and Portugal would have the power to let their banks treat their portfolios of local gvt paper as risk free (as the UK banks can do with sterling paper) and the EUR countries would agree that the ECB can let those banks borrow against those bonds without a haircut (but of course for limited amounts of paper), there would be no bank solvency problem in Italy, Ireland, Spain or Portugal, no contagion, etc. And the prices of those bonds would recover quickly. Banks holding large amounts of paper cross border (like the big German and French banks) shlould re treated differently, but their current holding grandfathered, on condition that they would cease a number of activities that might conflict with their role in turning the crisis around.

    Now you say, look at Italy, as soon as the ECB started to buy paper, out went the new piety. I think that halfway between the undesirable position of forced fiscal integration (towards the German or the Irish model? I like the Irish one better) and the “kicking the can down the road” by doing little, late and with too little focus, there is a pragmatic, somewhat ugly, position that freezes all those stocks of Italian etc bonds where they belong: with local savers and their banks. That is something that the EU should facilitate, if necessary at the price of making large, but clearly limited concessions to the ECB mandate. If the non EUR world does not like that sort of intervention, let them. The future flows should then be much smaller (lower interest) and the various austerity packages would leave only small amounts of net debt. No need for defaults, no haircuts and maybe in a couple of years a proper market again.

    I believe that Stiglitz would probably stand by his first comments. But with one qualification, he did not expect that no one would act in the common interest, despite that that would probably have been more beneficial; for EUR GDP development than simply let the game be dictated by speculators and propagandists who fear that EU institutions like ESMA and a Tobin tax will kill their piracy. But you cannot blame a Nobel economist for being naive in an area (politics) outside his expertise.

  8. matt_us schreibt:

    Mmh, if the issue is solvency, that just means that a country has to collect enough taxes to pay for its expenditure. Why Greece or Italy or Spain should be unable to do so, I do not understand. They do not want to, there is a lack of political will to collect taxes at the right end. ~These countries have the most unequal income and wealth distribution in Europe. So that would make sense. And why does the EU/ECB/IMF not advocate higher wealth taxes? It is purely for ideological reasons. They concentrate on balancing budgets through savings and lower expenditure. Which makes things worse and worsens the solvency of a country.

    Now, the German way has been to deflate wages over a long time frame, while increasing its borrowing. It has incidently not cut expenditure, but increased geovernment borrowing, even in a year with record economic growth (2010), it increased its government debt by around 13% of GDP, a new record!!!. So it is not true that the Germans lead less profligate lifes than the Greeks, the German per capita new government debt in 2010 exceeds the Greek one by 50%.

    What of course is the difference is that Greece, as a small country can easily be attacked by speculators.

    If countries started to tax the rich and wealthy, that would immediately signal to everybody, also to the markets, that their solvency is assured. It would dry out the speculators. It is not rocket science! A German long term plan is insufficient, once speulators attack. Taxing the speculators, by taxing CDS would of course also help.

    Or countries whose solvency is in doubt can do, what Ireland did, print their own money, through an ELA programme, which means they get (at least part of their) money for free, which immediately increases the solvency of a country.

    As long as higher taxes, free money printing, or taxing speculation are subjects which get brushed under the carpet, the solvency debate will continue.

  9. cangrande schreibt:

    @ kantoos:

    1) Danke für den Link zum Angelos-Artikel. Ich fürchte, dass er die Einstellung des deutschen Publikums zu den diversen Eurozonen-Rettungsschirmen sehr viel klarer beschreibt, als sie sonst, auch von uns selbst, gesehen wird.

    Ein Großteil des Publikums ist (im Grunde) indifferent (auch wenn sie sich bei Meinungsumfragen äußern; es gibt in unserer westlichen Kultur einen Druck, eine Meinung zu haben –
    Ein weiterer Teil möchte gewaschen, aber nicht nass werden. Die Leute haben zum Teil krause und widersprüchliche Vorstellungen, und sind zu feige, z. B. die Verantwortung für Griechenland den Griechen zu überlassen. Steuergelder wollen sie nicht runterschicken, aber wenn die sich da unten dann gegenseitig totschlagen würden und das Fernsehen ein paar Liter Blut über den Bildschirm fließen ließe, dann würden alle schreien “Da hätte man doch was tun/denen helfen müssen”.

    Dass unsere Politiker einem solchen orientierungslosen Volk die Steuergelder für Gott und die Welt aus der Tasche ziehen können, ist kein Wunder. Wer zu feige ist, seine legitimen Interessen knallhart zu verteidigen, wird zur leichten Beute für jene, die ihre Interessen rücksichtslos sogar dann vertreten, wenn sie illegitim sind (wie z. B. die Griechen!).

    2) Du schreibst auf Englisch, willst also offenbar ein anglophones Publikum erreichen. Und du argumentierst so, als ob es sich um eine rationale Debatte (unter Freunden oder vernünftigen Menschen, sozusagen Rawlsianern) handeln würde:
    “This rests on the assumption that a known solution is ready to be implemented, but the German government just refuses to accept it. That is wrong.”
    Indes bewerte ich Ausdrücke wie „taking leadership“ ganz anders: das sind nichts als Synonyme der Vertreter der Kapitalinteressen für die Forderung an Deutschland ‘to cough up the dough’! Die haben ihre Meinungs-Bazookas schon lange rausgeholt und wollen zum einen an unsere Steuergelder. Zum anderen haben sie ein objektives Interesse daran, den deutschen Staatshaushalt einerseits und den Euro andererseits genauso zerrütten, wie es der US-Haushalt und die Währungen Dollar und Pfund schon sind. Diese Schuldenkaiser haben Angst davor, dass die Finanzmärkte irgendwann ihre Nacktheit wahrnehmen – und wollen deshalb auch allen anderen die Hosen ausziehen.
    Aus diesem Grunde wirst du mit (korrekten) Argumenten braver Rationalität dort niemanden überzeugen: hier tobt ein Interessenkampf; das müssen wir durchschauen und uns wehren!

    3) Staatsschulden oder Zahlungsbilanzungleichgewichte als Problem?
    Das Handelsblatt brachte jetzt ein Interview (in zwei Teilen) mit “Mr. Dax” Gerd Müller ( + Müller sagt u. a.:
    “Unser Finanzsystem ist am Ende. In den USA beträgt die Gesamtverschuldung der Bürger, des Staates und der Industrie bereits 400 Prozent des Bruttoinlandsprodukts – das ist historisch einmalig. Das führt dazu, dass ein großer Teil dessen, was die Bürger erwirtschaften, für Zinsdienste abfließt. Diese Zinsen werden in der Regel nicht wieder in die Wirtschaft investiert, sondern stapeln sich bei denjenigen, die bereits sehr viel besitzen. Das soll nicht klassenkämpferisch klingen – ich gehöre keiner Partei an. Ich erkläre nur, wie das System funktioniert beziehungsweise dass es nicht ewig funktioniert. ….. Über die Jahrzehnte sammelt sich das Geld bei immer weniger Menschen an, während die Masse immer weniger davon hat.”
    Daraus folgert er:
    “Unser Finanzsystem ist so beschaffen, dass es alle paar Jahrzehnte neu gestartet werden muss.”
    Die Vorfrage. ob die Probleme mehr bei den Staatsschulden oder bei der Zahlungsbilanz zu verorten sind, wäre also, ob denn überhaupt “genug für alle da” ist. Geld ist vermutlich genügend “vorhanden” (schließlich vermehren, wenn ich nicht irre, die Zentralbanken die Geldmenge ja schon seit Jahrzehnten oberhalb der Wachstumsrate der Realwirtschaft). Nur eben nicht als Eigengeld, und als Kredit kann der Überschuss mangels Kreditwürdigkeit nicht mehr vergeben werden.
    Sollten diese Annahmen zutreffen, dann liegen die Probleme auf einer ganz anderen Ebene, als Fricke-Flassbecksche Ökonomenweisheit sich träumen lässt.

  10. adam.smith schreibt:

    “It would be great if economists from around the world would point that out!”
    In all fairness to the unnamed economists, people like Krugman and hobby economists like Yglesias have been harping on the ECB failures for months now and my sense is that they’re not the only ones, at least in the int’l economic blogosphere. Krugman even linked to you on this.

    • kantoos schreibt:


      Thanks for your comment. You are right, and I am following these bloggers (and I am thankful for their support). But guess what I heard just today on my blog: except bloggers “on the fringes of the international macro debate”, nobody is criticizing the ECB’s monetary policy. I hope that is wrong (my guess is: it is wrong), but we defnintely can use a little more support…

    • ketzerisch schreibt:

      @Kantoos: “except bloggers nobody is criticizing the ECB’s monetary policy”

      I’m afraid that is overly optimistic. The truth is: “The ECB is widely criticized, but for being on a too loose trajectory.”, which is simply insane.

    • kantoos schreibt:

      @ ketz

      Sad, but probably true. Christian Lindner said toady: “FDP-Generalsekretär Christian Lindner warnte, der Wunsch, dass sich der EFSF bei der Europäischen Zentralbank über Kredite zusätzliches Geld holen dürfe, berge erhebliche Gefahren wie Inflation. Diesen Hebel werde es nicht geben, sagte Lindner. „Wir haben ohnehin schon viel zu viel Geld im System. Wir können nicht zulassen, dass die Gelddruckmaschine angeworfen wird.“

      Und die FAZ befeuert das auch noch (siehe meinen anderen Eintrag).

  11. cangrande schreibt:

    Nachtrag aus einem Interview des österreichischen “Wirtschaftsblatt” mit Hans A. Bernecker (

    Frage: Könnte die Systematik nicht beschleunigt werden, wenn Deutschland eine deutliche Führungsrolle übernimmt?

    Antwort:Nein, denn wer führt, der bezahlt!

    Genau so ist es, und genau darum geht es: den Vertretern der Kapitalinteressen wie unseren europäischen ‘Brudervölkern’!

  12. Dietmar Tischer schreibt:

    @ Kantoos

    Your text contains at least two claims about German politics:

    i) The German government cannot be accused for not taking leadership in the Euro crisis.

    The reason you offer for this statement to be true is that the accusation rests on the false assumption that there exists a known solution ready to be implemented.

    It is true, that there does not exist such a solution.

    It is wrong to conclude from the false assumption (premise) that the German government cannot be accused for not taking leadership.

    It is wrong, because the German government can take leadership otherwise, first and foremost in the process to achieve a solution.

    ii) Germany (the German government) prevents a solution of the Euro crisis.

    To understand this claim one has to read your text from the bottom (“PS”) upward:

    “The German influence is really ruinous when it comes to monetary policy, the obsession with an inadequate inflation target and the idea that the ECB’s monetary policy is highly expansionary as it is”. At this point one has to add a premise that is undoubtedly yours though it is not explicitly mentioned in this text: The ECB’s monetary policy is not expansionary enough to promote growth. With this premise in mind let us continue with your argument four paragraphs above: Besides the lack of political will and macroeconomic discipline the ECB’s monetary policy is the reason why Spain and Italy cannot grow as much as is required to leave debts behind. Whether true or not, this is exactly the proof these countries have to come up with in order to justify the German risk to dedicate taxpayer’s money to the rescue of these countries. Since the proof cannot be delivered – partly because of Germany’s ruinous influence as claimed above – Germany herself sets the conditions for not risking her taxpayer’s money.

    Depending on the inherent claim that a solution must be based on the German taxpayer’s money, this means as a conclusion:

    Germany is at least partly to blame for preventing a solution for the crisis.

    From i) and ii) follows:

    Germany cannot be accused for not taking leadership tough it prevents the solution sufficient for taking leadership.

    This is a contradictory statement.

    Therefore the position you hold on Germany’s leadership is contradictory too.

  13. bill schreibt:

    The ECB should quietly buy as much shorter term Greek debt as it can at big discounts. And also buy debt of the other PIIGS. Then forgive it at face value. Then give a similar amount of money, per capita, to the other governments in the Euro. It produces the most debt relief bang for the buck. It is fair since every single country gets the same amount per capita – so it’s not a bailout for bad behavior. Depending on how much debt they buy/money they give out, it should boost NGDP a good bit which provides further debt relief. I foresee the total amount of debt purchased/money given out to be in the range of 10% to 20% of Euroland GDP. That should provide some real relief to the banks currently in trouble. This boost would allow the Europeans to then institute a massive requirement for new equity at the banks without crushing the economy. It should also convert the problem from a “European” sovereign debt and banking crisis to a Greek crisis which would allow everyone to turn to Greece and say, “do what you want. but if you default, we’ll remember.” In the end, I think the program I recommend would be enough to save everyone except Greece. And the Greek default would occur in an expanding economy and be much easier for their creditors to absorb.

  14. cangrande schreibt:

    Zur Frage der US-Finanzinteressen an einem (im Ergebnis großenteils deutschen) Bailout Europas ist auch die Analyse “Behind Europe’s Debt Crisis Lurks Another Giant Bailout Of Wall Street Banks” ( von Robert Reich sehr informativ.
    (Aber darin geht es natürlich nur um die unmittelbare Interessenkonstellation; mögliche darüber hinaus gehende US-Interessen an einer Schwächung des Euro und der europäischen Staatsfinanzen werden dort nicht berührt.)

  15. Smit schreibt:

    when you say that Germany went through painful internal devaluation you forget one major fact that it did what it did NOT during the worst financial crisis. and when you write about competitiveness you again forget to mention the fact that competitiveness and correct me if I am wrong but comes from 2 factors labour cost and productivity, you can not tackle such a loss of competitiveness by only lowering wages or other have to do something about productivity and in the end in economic growth its the only thing that matters..So what about this part of the story?
    R&D? Capital investment? University ?school? retraining? no just internal devaluation right?
    yeah don’t blame Germany for taking 2 years to take sufficient measures or don’t blame Germany for accumulating surpluses all these years from the noncompetitive south..blame Canada!!

  16. cangrande schreibt:

    Ruhmreich und ehrenvoll ist es, kantoos, wie (und vor allem: dass) Paul Krugmann dich in seinem Blog-Eintrag “I May Be Dumb, But I’m Not Stupid” ( angeht:
    “The point, however, is that Italy and Spain arguably are at risk of suffering from self-fulfilling panics. And you need open-ended credit to avert that fate.”

    Auch hier entlehne ich meine beißende Replik gegen Bazooka-Paule (“open-ended-credit”) einem seiner Leser-Kommentatoren:
    “Where will the money come from ? If the IMF, they need tap we Americans and the Brits. and we are both broke. That leaves Fritz, and I cannot believe a race and culture like Germany, is going to give their hard earned money to Club Med.”

    Nur fürchte ich im Gegensatz zu Dan Green, dass es in Deutschland schlußendlich doch genügend (Gleichgültigkeits- bzw.:) Blödmichel gibt, die ihr (unser/mein) letztes Hemd hergeben, wenn man ihnen nur lange genug einredet, dass sie es für den Frieden/das Weltfinanzsystem/unsere Exporte/Europa …. usw. tun müssen.

  17. JürgenvA. schreibt:

    “I am saying that unless a country can make a credible long-term committment to reforms and fiscal discipline, it is risky to bail it out” (Well, yes. But Italy and Spain have done alot to this end e.g. (strengthened their stability program, debt brake, etc..)
    “The argument „illiquid but solvent“ says it’s riskless.” (No, it says dynamics in sovereign debt markets can be changed by a buyer of last resort, fundamentals can not. It says that this is exactly what we need now! – beside more fiscal integration/supervision (six-pack etc..), european banking regulation, esbies, etc – to aviod a breakup of the eurozone.

    “The CA per se (!) says nothing about competitiveness” (persistently large CA imbalances in the EA do tell you that there are unsustainable developments in (price) competitiveness vis-a-vis trading partners with the same currency).

    “3% Maastricht is nonesense: if a country grows with 4% and has inflation of 3.5%, it has to run surpluses!), and most importantly: low debt level to begin with” (the 3 % is no target, the MTO (medium-term budget objective) i.e. a structurally balanced budget is)

    • kantoos schreibt:

      @ JvA

      - Italy did something under pressure, yes. But when the pressure was lowered by the ECB, they changed their mind. This in not “long-term commitment”, and that is needed. Because the backstop by the ECB would lower the pressure, that is the whole point.

      - “It says that this is exactly what we need now!” If they are illiquid, but solvent, then yes. But that was my point: we don’t know that, and there are justified doubts about that. People thought the same of Greece in 2010.

      - A persistent CA deficit could mean that a catch-up development is under way in a potentially young country with less propensity to save. No need for diverging price dynamics (unless justified by productivity increases). CA “imbalances” (what is a balance?! the word actually makes no sense by itself) might be a sign of unhealthy dynamics (and it surely was in the Eurozone), but that is not a necessity.

      - “structurally balanced budget” well… What is that? Was the Irish budget structurally balanced? Was the Spanish? The implicit guarantees for their banking sectors etc. do not show in “the budget”, but they are real. There needs to be more case-by-case judgement, more simulations containing all risk factors, etc. to determine what “the budget” really is.

  18. jubelperser schreibt:

    I’m a bit late to this discussion, so i hope this still gets read and i would like to start my post with a list of positions governments under merkel took and then abandoned:
    - this is a us crisis only!
    - every european country needs to deal with this crisis itself!
    - ireland is a onetime exception!
    - the esfs is only temporary and its funds are sufficient!
    - in the future private creditors have to always share the blame too and they need to ship in too when it comes to greece!
    - stress tests for european banks are not helpful!
    - europe needs a mechanism for a “controlled default” of single states!
    - greece won’t be allowed to default and must service it’s debt!
    - greece needs a 20% haircut, which is sufficient!
    - germany will not agree to further fiscal union and shared liability for sovereign debt!

    I’m sure there are other positions i missed in this list (and some of them are mangled together). Now, as you pointed out kantoos, people all over the place have changed their opinions in the course of this crisis in one point or another, but i think it’s fair to say that the german gov. has a pretty impressive track record and exceeds others in this field.?
    Annoying about this flip-flopping aren’t obviously the positions themself and the tactical idiocy (=taking rhetorically extreme positions in order to pander to the imagined opinion of the german voter, thus making it harder to arrive at a solution, only to swiftly abandon these positions and agreeing to measures that contradict former positions, only to take new extreme positions which contradict these measures), which is always easy to point out in hindsight, but rather a (surprisingly) constant bad understanding of economics underlying these positions and showing itself:
    1) first of all in a constant and gross misjudgment of the interconnectedness of global financial markets, or, to be more specific, of the connection between the german banking sector and global financial markets, or, to be even more specific, of the extremely shitty state of the german banking sector.
    2) in the cherished believe that what’s good for german banks is good for germany, resulting in soft-touch measures and regulations. one example for this i have to think of a lot these days: at the moment we are feverishly discussing how to recapitalize banks, but in 2008 german officials were slowing down tougher regulations on capital requirements and pounding their chests for having achieved long transition periods. you gave another example for this behaviour in your text.
    3) in the outdated and harmful believe that an expansion in the monetary base automatically results in high inflation.
    4) in the (at least incomplete) believe that we are in this mess only because naughty countries accumulated too much debt (ignoring the fact that significant large portions of this debt were a result not a cause of the crisis) and have to be punished morally by harsh austerity measures and by copying the german export model (despite the fact that this will hamper growth) and that this is enough, because the confidence fairy will step up and mystically solve all problems.

    So, is germany to blame for the political problems in in the euro zone? No – but i find it very hard to see how the german gov. helped us to get out of this crisis!?

    (this is my first post on this blog btw. (and an extremely long one too, sorry), so i would like to take the opportunity and say how much i enjoy reading it)


  1. [...] Solvent? Who said solvent? – Kantoos Economics [...]

  2. [...] – Don’t blame Germany. [...]

  3. [...] Solvent? Who said solvent? – Kantoos Economics [...]

  4. [...] May Be Dumb, But I’m Not Stupid Or something like that. The usually very insightful Kantoos seems to have missed what people like me are actually saying about the need for emergency funding in [...]

  5. [...] gegen den Vorwurf vor allem aus dem Ausland, an der Euro-Krise schuld zu sein (siehe insbesondere „Solvent? Who said solvent?“). Nun schaltet sich sogar Paul Krugman in die Diskussion ein: „I May Be Dumb, But I’m Not [...]

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