Thursday, July 12, 2012

How mighty is the almighty Germany?

The German sociologist/economist Gunnar Heinsohn drafted a Speech to Europeans to be given by Angela Merkel. The bottom line of the speech is: "We are finished".

Is Germany almighty or is Germany finished?

Well, certainly not finished but even more certainly: not almighty! One way to look at an economy is to ask whether it has the capacity to employ its people. Well, for most of the time since WWII, Germany has only been able to employ its people because it had/has so many customers outside of Germany. Let some of those customers break away and German unemployment will skyrocket.

Germany is now in its 3rd year of economic boom. Also, Germany benefits from extremely low interest rates on its public debt. And, last but not least, some of Germany's interest expense doesn't even flow through the budget because the debt is placed in automous institutions (like the KfW). And yet, Germany is still far from balancing its budget. Now if one can't balance one's budget in wonderful times like this, how is it going to be when the economy turns down?

Germany has built up a welfare state whose costs cannot be sustained on a long-term basis. Without things like Agenda 2010 or the increase of the retirement age to 67, the critical point would already have been reached.

If you are not worried by now, look at Germany's demographics and you will be scared. Today, there are 43 million working people in the age group 15-64 years. By 2050, that number will have declined to 33 million people. Germany is going to be a VERY old country!

But in one aspect Germany is in the same class as everybody else: it has to take up new long term debt in order to be able to pay off maturing debt (and interest).


  1. Dear Mr. Kastner,

    NOBODY in the EU will be able to maintain in the long term the current welfare state. Because, it is not as easy as in the past to loot resources from other countries and because, globalized economy is a double-edged knife.

    In the past, the West, was occasionally pilladging Africa or the East (cannon diplomacy). The West was acquiring valuable goods at ridiculous cost, making ludicrous deals with puppet regimes or controlling energy routes. Nowdays, the players are too many and... have nuclear weapons too! You can't go now to the Chinese, bombard Peking, force them to submission and get away with profitable deal.

    From a cynical point of view, i am convinced that the european goverments are DELIBERATELY delaying the solution to the crisis, because it is a golden opportunity to REDUCE the welfare state. Take for example Mr. Monti's last batch of measures. He is shutting down 145 small hospitals. You can't do that under normal circumstances, people would rebel! But under the threat of economic apocalypse, you can do it. For me it also explains, why a country like Italy, which has currently primary budget surplus, isn't demanding a more decisive solution to the crisis. Spain isn't using much its weight either. To me, it is rather obvious that, for the politicians, it is the perfect time, to slash the welfare state... The East has learnt from the transfer of technology. And there is nowhere written that the West will forever be the rich ones, while the others will be forever happy being their low cost working hands, who smile with their bowl of rice.

    So, at the end, Germany may do a bit of the same. The Romans were saying "mal comune, mezzo gaudio" (common misery, half joy).

    On the bright side:

    - Germany dominates politically the EU. If you can do that, then you can shift the economy to your advantage. For example, if Greece could have Germany's position, now the ECB would be printing money, eurobonds would be reality and Germany would be rising its salaries.

    - Germany has NOT an age problem. Currently Germany and the rest of Europe, are unloading 90% of the illegal immigration towards Europe to their "human dumpster", Greece. With one phonecall, Greece can start shipping young illegal immigrants by train to Germany and open further the borders with Turkey, were some ten of thousands wait. UN estimates that there are more than 100 mln in Asia that are willing to emigrate to Europe.

    Even Italy unloads political asylum seekers to Greece:

    Mrs Merkel has only to pick up the phone. Greece will be more than happy to help Germany to solve her aging population problem. That's what friends are for, after all.


  2. If the Club Med EU states had followed Schroeder's lead and introduced there own equivalent of Agenda 2010 then they may not be where they are today.

    For those who may have forgotten Agenda 2010 was introduced in 2003 by then German Chancellor Hermann Schroeder of the SPD - it was a vision for 2010.

    I'm no fan of Social Democrats, but I do acknowledge that Schroeder had the courage to put his country before his own ambition. He arguably lost the next election because of it. Mind you he had a good job lined up, at Gazprom, his prize for initiating NordStream!

    The CDU Conservatives, led by Mrs Merkel blocked some Agenda 2010 reforms (for political gain) by voting with The Greens. If she hadn't done so, then today Germany may have been even further in front of the Club Med states - think of that Hedda.

    All of the EU states currently in receivership or in danger of being so, either had, or have had, Conservative governments since 2003. Only now, in the worst of times, when their backs are to the wall, are they reluctantly introducing their own Agenda 2010s.

    But Germany suffers the opprobrium of the laggards because it had the good sense to reform its economy in the best of times - where's the justice in that.

    Divergence in productivity between Germany and ALL other EZ states (including Ned & Aut) accelerated as Agenda 2010 reforms kicked in. This was no secret, its in Eurostat reports, organisations like McKinsey & BCG wrote about it in their newsletters.

    BTW the populations of South Korea & Japan also have rapidly aging populations - probably worse than Germany. Does Greece have the skills and culture to manufacture flat screen TV's, hybrid cars and games consoles - you be the judge. I'll put my money on Czeska where Foxconn makes Apple iPods.

    Here is Professor Hans-Olef Henkel advocating for a Northern Euro on the BBC today. He makes a lot of sense to me, but then he always has, along with his three mates.

    Henkel is one of those trying to block the ESM in Karlshrue court. It's at least the 3rd time he's gone to the court on Euro issues. I hope he's lucky this time and puts a stop to this nonsense.


    1. Regarding Henkels Northern Euro: Let´s put aside the question, whether its a good or bad idea.

      Let´s say there is an open discussion in Europe to change to North and South-Euro. Let´s say there will be an an agreement to do this in the forseeable future. What will happen? An immediate bank run in South Euro countries. Chaos.

      Can you provide a scenario to implement North and South Euro without chaos?

  3. Balancing the budget, balancing the budget, balancing the budget..

    Why should you balance the budget during a period of high unemployment and deflation?

    And anyway, you can only balance your budget if others unbalance their budgets, or if everyone contracts.

    Why would you want to do that?

    Not all sectors can be in surplus at the same time. It's a terrible mistake what Europe is doing, state deleveraging during a period of private sector.

    A nation that has it's own currency is never fiscally constrained. It can always borrow from it's central bank at low rates, and it can put to use idle resources that are priced in it's own currency without any problems whatsoever.

    It seems to me that the world hasn't quite grasped the changes that took place after the dissolution of the dreadful gold standard.

    Europe certainly hasn't.

    1. I need to make sure that my points are not confused. I am not talking about current accounts. Those are a zero-sum game on a world-wide basis. National budgets are not zero-sum games. There is no reason why one country's budget balancing should automatically lead to another country's unbalancing.

      Also, there is no reason that balancing the budget contracts the economy. Remember that in Bill Clinton's last years, the US was running enormous budget surpluses (close to 500 BUSD?) at a time of excellent growth. They then calculated that the US might repay all its debt by 2010 and the whole world was worried what would happen if there were no longer Treasury Bills... Well, George Bush solved that problem in a hurry.

      Back to your points. Germany (and my post is about Germany!) is NOT in a period of high unemployment and deflation. In fact, the German economy is running full speed still (almost...). So, this would be the time to follow fiscal rules and build those reserves which you may need in bad times (Keynes).

      A nation which has its own currency may not be fiscally constrained but it is more constrained than anyone else by markets. Without the Eurosystem, Greece would have had import controls, fuel and food shortages since back in 2010.

      Sometimes I wonder if we still remember what type of economic system most of the world (incl. China) is following. It's capitalism. Yes, that system which has brought unparalleled economic improvement to much of the less-than-rich countries in the world. It may hurt us "spoiled brats" in the First World a bit that those others are now allowed to compete with us. Heaven's sake! How dare they compete with us!?!

      In a capitalist system, it is the private sector which ought to be the locomotive. The state is in the role of the balancing party. If the private sector shrinks, the state ought to expand and vice versa.

      As far as I am concerned, the state could theoretically spend all the money in the world. If the state acted/behaved like Warren Buffett, we should have tax increases. Except that then the state might have to give us more of a tax rebate than we ever paid in taxes.

      Suppose you have a plastic bag which you use to transport water. It has 3 holes in it. So you say you have to fill it up all the time so that the bag doesn't remains full. It's not going to work for a long time (or at least it doesn't seem very smart).

      Countries like Austria or Germany have extremely wasteful states and bureaucracies as well. The state and public sectors of Austria are in many ways comparable to Greece's. Who knows, maybe we will be the next Greece.

      There is one huge difference, though. Austria or Germany have extremely productive private sectors. I am not referring to the Siemenses of the world. I am referring to the small to mid-size businesses and the professions. They seemingly do not ever give up producing and generating value so that the state gets all the money it wastes. If Austria still has a top rating, it's not because the government is so good. It is because one looks at the government's revenue base and one see that if push were to come to shove, you could still squeeze a lot of additional state revenue out of the poor suckers in the private sector.

      But at some point everyone's patience runs out. Austria, for example, has had to realize that Bratislava is only 1 hour from Vienna and that they have a flat tax of, I believe, 19% there and that the Slovaks as a society are still "hungry" and want to accomplish something. No danger yet but as I said, at some point patience runs out.

      Below is a post which I had written on how we undeterredly violate the rule of there not being a free lunch simply by eating the lunches of the next generation and considering them free of charge!

  4. Let's agree on something.

    A country that has it's own currency will never run out of money to spend on things which are priced on said currency. There is no fiscal constraint, no matter what markets say or do.

    That puts said country's government on the privileged position of utilizing resources that sit idle because of private sector's retrenching (the private sector does have a fiscal constraint).

    To not use these idle resources (I am thinking of unemployed workers primarily) on the grounds of some ideological axiom (that they should be used by the private sector and not by the government) is a horrible mistake and people are suffering because of it in the Eurozone.

    As for building reserves, there is no need to build reserves under a floating fiat currency. You only need reserves to defend a fixed rate. Otherwise, the currency just floats and does the adjustment for you.

    The government should retrench when private sector activity picks up for a different reason: so that the economy doesn't overheat.

    1. I sure think you and I have a talent for misunderstanding each other...

      A country with its own currency will only in one scenario never be out of money and that is the scenario where it doesn't need foreign currency. So if a country has a balanced current account and no foreign currency debt, then I could agree with you. But then that country would economically be in top shape, too!

      There can be massive fiscal constraints when you have your own currency, too. Ask the Hungarians. If Greece changed to Drachma today, all hell would break loose for a while. Greece could, of course, print the Drachma but it couldn't use the Drachma to pay for those things which it desparately needs (imports of energy, foodstuffs, etc.). Why? Because the lenders of foreign currency (which you need) will look at how responsibly you are running your fiscal situation in your own currency. If that were not so, there would never have been an IMF.

      I once lived in a country (Argentina) where even the locals lost so much confidence into their own currency that they would only accept USD (instead of the peso) as payment for local products.

      You probably think of the US. Well, the US has the unique luxury of being the only country in the world that can print the currency in which it has its foreign debt and which can pay for imports with its own currency. That's the fun part of having the world's reserve currency. No other country can have that fun.

      But I do agree with you that by joining the Eurozone, the 17 countries which did gave up a very important part of their sovereignty. That sovereignty would include things like running your fiscal policy on your own which you can't really do all that well when you use someone else's currency.

      As to reserves, you are talking about foreign currency reserves and I am not. "Fiscal reserves" would be lowering taxes or bank deposits if the country had no debt. If the country has debt, fiscal reserves means paying off some of that debt so that your borrowing capacity rises to prepare for the next recession.

      What I read into your comment is a trust in the miraculous abilitities of governments which I don't share. Show me a case where a government has retrenched voluntarily. Show me a social benefit which was supposed to be only temporary and which has indeed been taken back. Show me governments today which pursue a policy where the money is used more for investment than for spending. Greece, in fact, has reduced its investments way below the level stipulated in the memorandum just to be able to keep up some of the spending.

      Based on practical experiences with 8 different national governments (inclusing the US), I am not a believer that governments are good users of a country's idle resources. The Greek government is probably the worst of all that I know in terms of using ANY resources of the country. Their track record of wasting them is better!

      Yes, I know that in a depresson one should pay a man to dig a hole and then pay him to fill it up again. All fine and dandy, except when that country is Greece (or the US, for that matter), where the money you pay him eventually ends up in foreign accounts as payment for imports instead of stimulating domestic economic activity, then that's not very smart (but the countries which export to you will be grateful for your fiscal stimulus...).

      Whichever way you slice it, there is only one way for a country/society to have sustained economic well-being: they have to pull their own weight. If they don't, they will end up like Greece today (or like the US in some generations from now). Read Warren Buffett's tale below.

  5. Mr. Kastner,

    Thank you for your reply and for your information.

    Could you help me answer a few questions that I have?

    We know that Greece has had a large government debt ever since the late 80's.

    It peaked at around 100% of GDP in the early 90's and has remained thereabouts until the 2008 crisis.

    Pre-Euro, what part of that debt (if any) was in foreign currency?

    So, with the switch to the Euro, one could say that the government-debt transformed to foreign-currency debt (since Eurozone governments do not control Euro "printing"), correct?

    1. I find the websites of Ministry of Finance (for the entire sovereign debt) and the Bank for Greece (for the foreign portion of the sovereign debt) very useful:,fileResourceObject,arrayOfFileResourceTypeObject/topicNames/publicDebtBulletin/resourceRepresentationTemplate/contentObjectListAlternativeTemplate

      Unfortunately, they won't answer your questions because the data don't go back that long. You might, however, write to them with an inquiry.

      You might also find this post from the Greek Default Watch blog useful (is IS very informative!).

      And perhaps my own comments below might be useful.

      Sovereign debt in pre-Euro times:
      Since the Euro, Greece, of course, issued its bonds in Euros. Prior to it, the bonds could be issued either in Drachma or in a foreign currency (I don't know in which foreign currencies Greece issued its bonds then).

      Whether Drachma or foreign currency depends on where the bonds were intended to be placed. No foreigner would buy a Drachma bond so it is fair so say that all bonds which were placed offshore to raise capital there were in foreign currency. There may, however, also been bonds which aimed at the domestic savers/investors and they could have been in Drachma.

      I know that many feel that sovereign debt which was previously in Drachma was converted into Euro after joining the Euro and thus became larger. But --- larger relative to what? There was no longer a Drachma to compare it to. Also, bear in mind that not only debts were converted into Euros; all assets were, too. So that argument really goes out the window.

      The bank of Greece details the foreign debt of Greece. Under point (I), general government, you see that amount of sovereign debt which is held by foreigners. I hasten to add, however, that after late 2009, these figures become difficult to analyze. The Bank of Greeks follows IMF-guidelines to value debt "at market". So as Greece's bonds started declining in value, the published foreign debt declined. Sounds silly, but that's the way it is. I once explained that in this post:

      What you see is that total foreign debt increased from 144 BEUR at YE-2002 to 417 BEUR at YE-2009. That's a plus of 273 BEUR.

      Of that 273 BEUR increase, the general government accounted for 144 BEUR (going from 81 BEUR to 225 BEUR). So you can see that of the entire increase in foreign debt since the Euro, the general government accounted for only about half.

      I think it is important to relate indebtedness in terms of precentages to something else, like GDP. I am a bit cautious, however, when one starts to only talk in terms of "percentage of". One also has to look at absolute numbers and in terms of absolute numbers, the country's indebtedness exploded during the 2000's. In terms of "percentage of GDP", it looks like the old Papandreou assumed all the debt but this is due to the fact that the 2000s saw high growth rates. So the "percentage of GDP" debt didn't increase so fast whereas the actual indebtedness did.