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Saturday, March 2, 2013

Why the Eurocrisis isn't over!

This has got to be one of the best, if not THE best, article about what has been happening in the Eurozone and what will happen. Just one quote:

"Two immediate solutions present themselves, Mr. Connolly says, neither appetizing. Either Germany pays 'something like 10% of German GDP a year, every year, forever' to the crisis-hit countries to keep them in the euro. Or the economy gets so bad in Greece or Spain or elsewhere that voters finally say, 'Well, we'll chuck the whole lot of you out.' Now, that's not a very pleasant prospect."

Will Germany pay 'something like 10% of its GDP a year, every year, forever'? Well, everyone is invited to guess.

What is happening in the Periphery is not too different from what has been happening within Germany in the last 20+ years. As part of the German unification, the West gave the East an exchange rate of more or less 1:1 Deutsche Marks for the Ostmark. In other words, the West gave the East a Euro.

The West thought that the East would behave economically just like the West. After all, they were Germans, too. The only trouble was that the East had had at least 2 generations who had been formed and shaped by different value structures. Most of the East had forgotten the Germanic 'achievement mentality' (and those who hadn't migrated quickly to the West because the achievement opportunties were there).

The West decided to make transfer payments to the East in the hope that the East would quickly become just like the West. Those transfer payments were about 100 MEUR per year and they were supposed to achieve the desired objective within 5 years.

The West is still making those transfer payments today, over 20 years later. By now, they have probably exceeded 2 trillion Euro. And the East is still struggling (and parts of the West are developing a resistance to those transfers because they consider themselves worse off than the East by now).

And what is the lesson of all of this?

If the North does not find ways how the South can develop its own, value-generating economies, the North/South-situation will become a copy of what is happening between the German West and East. The German West still has the willingness to support the German East; after all, they are both Germans.

Does anyone really think that the North will have similar sympathies for the South for 20 years or more (or 'forever')?

10 comments:

  1. The question of German unification is a little more subtle. The eastern provinces were always less industrial than the west, they certainly hadn't the equivalent revenue-generating ability a hundred years ago. They were dependent then in the same sorts of ways.

    The second point is that many industries were bought up and asset stripped by BRD corporations, crippling what little there was left. This was a real gift to the former DDR, and the residents of Jena and other cities still resent what happened. This occurred before formal unification and a harmonization of the labour laws.

    The Stadtsanierung* that has been undergoing in the East for the last 20 years is causing much resentment in the West; however it should be realized that this was done in the 70s and 80s in the Western areas and nobody complained. That it is the more necessary in an area so poorly managed for decades is a hint for the Germans what really is afoot in the Eurozone.

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  2. (*Broadly speaking, the renovation works in the public and private spheres).

    This is not helped by the attitude of the Honecker regime who seemed to want to squeeze as many Deutschmarks out of travellers as they could!

    I would like to look at the eurozone problems from a different perspective. That of Poland. Economically, Poles now do the hard labour in much of Germany. They also drive the lorries if the motorways are anything to go by. They are making use of the German economy in ways that other countries are not, and providing a useful service in doing so.

    Now these people were under the same sort of government as the DDR. They had the same opportunities, the same education. Yet their lorries are everywhere and the East German ones aren't. My thoughts are that the Eastern provinces have a different problem, that of not being able to compete with the West because of the regulations that cover all Germany - the laws regarding driving lorries and paying the drivers being just two. The Poles drive longer hours because their government allows them. The question of statutory minimum wages in Germany is another in this highly unionized industry.

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  3. Another thought on this: there seems to be a Greek restaurant in every German town. I wonder if this brings the sort of economic stimulus to Greece that the Polish lorry-drivers bring to Poland. Many of those Greek restaurants will be run by German Greeks, Greeks who have lived and worked in Germany for decades if not generations. The same could be said of the Italian restaurants.

    The unseen factor is how many Greeks are working in the German economy in the way individual Poles are, and how effective this is in changing Greek politics.

    (Sorry, I forgot about the 1000 characters limit).

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  4. I agree with many of your proposals for the Greek economy, however as long as nobody will admitt that it is a moral and not an economical problem it can not be solved.
    You are a great one for story telling, I will tell you one.

    Once upon a time the Greek navy wished to procure a frigate, the deputy minister for the navy decided to conduct an unofficial pre-qualification of companies who could carry out the job, he was not asking for firm prices, only ball park figures. He invited representatives for a German a french and a Greek company, all meetings were held "one on one".

    The German representative asked all sorts of questions, how big? What weapon systems? What quality? What speed? After 8 hours discussions, calculations and consultations the german representative came up with a price of EUR 1,0 Billion.

    The French told the minister that the price was EUR 2,0 Billion.To the ministers remark that it was expensive he replied that his company was busy with orders for the French navy.

    The meeting with the Greek entrepreneur was somewhat different; the minister was indiscreete and told the prices of the other 2 companies. The greek told him the price was EUR 3,0 Billion. When the minister asked him how he arrived at that figure the answer was, "one for you, one for me, and one for the German to do the job".

    This Greek entrepreneur is the hero and the role model of all Greeks. You do not change that by changing economical systems, you have to change the morals of a nation, that is called nation building and takes 30 plus years.

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  5. To answer the question - I think the North may well prop up the South for 20 years.

    But not 'forever', nothing is 'forever'.

    If nothing is done to address the demographic projections, such as those published by the German Interior Ministry in 2009, then I suspect the EU will have started to unravel by 2060 at the latest.

    Comparisons with German Reunification are interesting, but IMO largely irrelevant. Thrace and Andalusia will never become states of Germany as Brandenburg and Thuringia did. Poland retained its geo-political identity and has had to deal on its own terms with its villains and heroes etc. East Germany lost its political identity and all that went with it. In corporate terms what happened in Poland looks more like a management buyout, and East Germany looks more like a corporate takeover.

    CK

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  6. I had erroneously deleted this commentary from alien observer. Sorry.

    alien observer has left a new comment on your post "Why the Eurocrisis isn't over!":

    The article is a very cleaned up view of what really happened.

    What do the euro crisis and the reunification have in common?

    After East germany was bankrupted by idiots it was robbed naked by west german frauds and tax payers in east and west were forced to pay the price for rebuilding what the socialist idiots and the capitalist vandals left ruined.

    (See "Raubzug Ost" very well investigated Book/Documentation
    http://www.buchredaktion.de/raubzug-ost.html )

    This scheme of robbing the people naked was to be repeated all over europe, as it was so immensely succesfull in making money from stupid tax payers.

    What we learned fro reunification was that privatization and corruption are two sides of the same medal. You will never find one without the other.

    The truths to be learned from reunification for Bansters were:

    * Nothing has a better revenue than stealing from the public

    * The people, especially the germans, are docile cows ready to be milked by frauds and banksters as long as we control propaganda.

    Polititians and their puppet handlers in the financial industry betted on the stupid populace of europe shutting up and paying up, just like the stupid germans did all these years.

    What is happening in europe is a coordinated scheme of fraud, corruption and control of public opinion to make profits from tax payers. Whoever says differently is an apologist of the criminals behind this scheme.

    The "official euro crisis" is going on, because Goldman&Co still believe that there is a profit to be made with it.

    The real euro crisis is going on until the docile sheep start revolting and bring down the wolves.
    It seems, we germans still make the best cows to be milked. All the others are starting to become unruly.

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    Replies
    1. You may not have read the articles which I wrote about the subject, but even as a retired banker I share the views of those who claim that the international financial sector has turned rogue (or rather: was allowed to turn rogue) in the last 30 years or so and has become the root of many, many problems which we face today. Governments or others can decide to spend all the money they wish. If someone doesn't give them the money, those intentions will remain pipe dreams.

      I had to chuckle about your statement that "privatization and corruption are two sides of the same medal. You will never find one without the other". Following that logic, the Greek public sector should be clean as a whistle as regards corruption.

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    2. this self-pitying german habit of thinking really annoys me. It isn't that it's completely wrong: as the article says, the spectre of the "transfer union" is alive and well.

      But with the possible exception of the euroenthusiast greens, no german political party would allow it. And nor would the Constitutional Court. It's a complete fantasy construction.

      And one that ex-European Commission employees like Connolly are rather prone to.

      That's why Merkel is so popular in German Polls. She's slowly and steadily driving that fantasy construction out of Brussels.

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  7. Yes, it's a good article. Picking out just one point on it.

    "Of all the countries that have been bailed out so far, Ireland comes closest to realizing this goal. But Ireland, Mr. Connolly notes, "is a much more flexible and much more open economy than Spain, Greece, Portugal, France, Italy." "

    Ah, that's the story they like to tell, sure. And there's truth in it. Ireland is absolutely fantastic at attracting foreign (mostly american) investment to base its export-oriented european operations there. But the domestic economy is languishing under austerity, just like the other program countries.

    And foreign investment is a fickle thing, depending a lot on optimised tax-structures. Those irish booming exports are a chimera.

    More dry detail on that, here:

    http://www.finfacts.ie/irishfinancenews/article_1024185.shtml

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  8. @kleingut

    "I had to chuckle about your statement that "privatization and corruption are two sides of the same medal. You will never find one without the other". Following that logic, the Greek public sector should be clean as a whistle as regards corruption"

    You misunderstood. I am speaking of the process of privatization. And this process has been and will be currupted.

    This excerpt is from the "enquette kommission Globalisierung (2002) Leitung Ernst Ulrich v Weizsäcker.

    "Korruption ist in allen Ländern ein ernstes Problem, besonders verheerende Auswirkungen hat sie jedoch in den Entwicklungsländern“98
    (BMU und BMZ 2001b: 4).

    Entgegen der verbreiteten Auffassung, dass dies vor allem ein Problem der politischen Kultur in Entwicklungsländern sei, sind heute im Gegenteil vor allem Internationale Konzerne (TNC)
    sowohl in OECD- als auch in Entwicklungsländern in
    Korruptionsfälle verwickelt. Korruption im großen Stil hat sich zu einem globalen Phänomen entwickelt. Die Contracting- und privatisierungsprojekte werden im Zuge der Liberalisierung und Privatisierung größer und damit steigen auch die ökonomischen Anreize für Korruption."

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