Sunday, July 8, 2012

Perhaps having the cake and eating it after all?

Mr. Michael Diekmann is CEO of the Munich-based Allianz-Group, one of the world's largest financial institutions (PIMCO is a subsidiary of theirs). Mr. Diekmann was a lone voice when, early on in the crisis, he said something to the tune of "our German industry ought to re-direct its foreign investments from the Far East to the South of Europe". He remained a lone voice with that view.

Mr. Diekmann is now quoted extensively in this article. "A return to the Deutsche Mark would be irresponsible", he says. "We have analyzed such a scenario in detail. Germany would fall into a deep depression; for some time the German GDP would decline; after 4-5 years, the total GDP decline could amount to about 25%".

Now, by implication this could be interpreted as meaning that Germany owes its well-being to an important extent to the Euro. Wait, haven't I heard that argument before? Yes, I have, but it came from the South and was contested by the North. 


  1. Mr. Kastner,

    Long time ago, in a greek tv news, an economic journalist of the tv station (both the tv station and the journalist are 100% pro-memorandum and pro-euro, to the point that the tv station has been targeted by leftist terrorists more than once, the last time with 2 grenades. I say this, to show that he isn't anti-euro or anti-german, on the contrary), had presented this graph:

    Yellow line: Northern eurozone
    Red Line: Southern eurozone (France incl).

    I don't remember how it was exactly compiled, the title is "international exchanges as % of GDP", i imagine it has do to with trade balance. It's nothing "new" really", we all knew that the north was getting surplus. What is interesting, is exactly, the evolution in time, where it shows that euro-entry was disastrour for the south and that each increase of the north corresponds to an almost equal decrease to the South.

    Question is: How much austerity will the south endure, in order to keep this going forever.

    An ex PASOK minister, revelead what is probably the strategy of the current goverment. Make it up to January, where there will be important decisions for EU, in order to ask for a change in the rescue program. Believing that a greek gov will be running primary surpluses of 5% each year in order to repay the debt, is delusional.

    Mr. Diekmann is one voice. It is well known that the german industrialists are in favour of the euro at all costs, while small and medium german businessmen don't like "salvaging" the others and don't see the DM as bad neither. And they are powerful. Mrs Merkel is a politician and is caught between two fires. I imagine sooner or later she too will have to take a side.

    The problem is that time is running out. For Greece time has already ran out, but, maybe this was the german plan all along. Put it under an unrealistic plan, continue with another unrealistic, so to force it out and gain time by showing the other southerners the greek suffering, which will no doubt occur in the first 6 months-1 year after Grexit. Even better if Greece never recovers but falls into chaos/civil war. This would terrify the various Spaniards/Italians/Portuguese.

    But, even so, Germany, will have to do something about the fact that the euro and regulations don't fit so well many of the southern countries. Especially if Greece after the first hit, recovers spectacularly, other southern countries that will be stuck in a stagnation growth, will be tempted to follow Greece. It's a bit like the leftists in Greece do by showing Argentina as example to follow. How much will the other populations endure before they think of "getting out". Because, once you fix your economy, getting out of the euro becomes less painful. Maybe it won't happen, but populations change their mind after events, they may think that the euro is too tight for them and after the euro, actually exists.


  2. I think that the opinion of this guy Diekmann should be taken with some caution. It is likely that his company holds very considerable amounts of European government bonds, mainly in connection with their life insurance business, where they have to produce a certain minimum yield (they will probably have only a limited portfolio of Bundesanleihen, because their yield is very low). So Allianz would probably make big losses if the DM were to come back. It is not too surprising, then, that Diekmann prefers the taxpayers in Germany and elsewhere to continue shouldering the cost of the crisis and the risk of ever-expanding government debt.

  3. Paul Krugman: If Germany doesn't back down and accepts inflation in Germany 4-5%, while keeping inflation in Spain 0-1%, Spain will be forced to leave the euro and the euro will dissolve.


  4. The plan of Germany at this stage is clear:

    a) impose austerity (more taxes, less spending) to State X
    b) this leads to a collapse of the internal demand of said state - small companies go belly up because they cannot lower their export prices, and inner demand is flat. This is happening in Italy at the moment.
    c) now you have a all-producing Germany with all other states as indentured slaves - unable to ever repaid their debt and with no industry left, depending on the germans for both money and goods.

    Germany should have curbed internal production (raising salaries for example) so to open more opportunities for the other countries: the actual way will lead to a Euro-out disaster, or Germany-out disaster.

    1. Dear sir 11:32,

      I don't think this is the "final" plan of Germany. I think simply Germany hasn't decided on if and on what terms is willing to be 100% committed to the euro. Ideally, they could commit, after "germanifying" the sourthern europe in mentality and of course, minimizing the damage for Germany. Of course, compromises must be made. This is why for example, small Ireland was forced to recap its banks with loans that added to its debt, while big Spain, was not. The ideal scenario for Germany, would have been with Spain never asking for help and Ireland repaying all its debt.

      Anyway, as always, a crisis is always also an opportunity, not just for Germany, but other countries too. How could you otherwise convince a population to have cuts not just to salaries, but rights or pubblic services (like hospitals), if not under a threat of an economic disaster?

      Part of this becomes necessary as the BRICS rise. They rise and demand a piece of the welfare of the West. In the globalized economy the way it runs now, the welfare in the West or most of it, will have to go down. This i think, explains why Italy mainly, accepts "quietly" all this policy. Once some reforms are passed in Italy too, then Italy will raise her voice.

      Or, yes, it is a crisis, but it has some positive things too: Capital flow from the south to the german banks, qualified immigrants from the south covering needs in Germany, the borrowing cost of Germany dropping like a rock.

      And well, the best way to bring your investments from the Far East to the South of Europe, is by having the labour cost not too distant from those in the Far East, otherwise your product will become less competitive.

      You will take some damage, you may as well try to get some profit out of the whole situation. And if you see that things don't go the way that suit you, cut your losses and get out.

      Do not weep about Italy. Italian workers will see their life more difficult, but Italy as a state will be one of the beneficiaries at the end. It's states like Greece and Portugal that you should weep about, for their workers will be the real "chinese" of the EZ.