Monday, April 29, 2013

Crime & Punishment (and Guilt) in the Eurozone

Some countries in the Eurozone (notably Germany) are still holding their water and perhaps even swimming up the stream. Other countries (notably Greece) are going down the drain. Obviously a trend which cannot go on forever.

Some countries seem intent to punish the South; others seem intent on accusing the North of a crime. Guilt is being assigned all over the place.

Against this background, it is surprising that the issue of 'product liability' has not come up yet. The Eurozone was a 'product' developed and implemented by the EU. Was due diligence, or rather: were crash tests made before putting the product on the market? If not, who carries responsibility for the malfunctioning of the product? For the damages which it has caused?

Clearly, the Eurozone was implemented based on unanimous approval of all member countries. At the same time, it is clear that not all member countries had (or intended to have) a real say in it. If I recall correctly, particularly two heads of government were supremely self-confident of their supreme intelligence (Valerie Giscard d'Estaing and Helmut Schmidt) and they drove the process. Call it simply Germany and France. Did Germany and France act responsibly? Did they responsibly address all risks which were pointed out?

I am not talking about critics/warners like Milton Friedman, Ralf Dahrendorf, individual economists or journalists. No, they might have been accused of having other motives than the establishment of a potential new reserve currency; perhaps a threat to the US dollar. Instead, I am talking about the EU itself.

I am talking about the Delors Commission headed by Jacques Delors. Delors and his Commissioners are considered the 'founding fathers' of the Euro. They issued, in 1989, the Delors Report which set out the road map for creating the common currency. It was that report which stated that 'if sufficient consideration were not given to regional imbalances, the economic union would be faced with grave economic and political risks'. It was that report which prophesized all the damages which we now know and which could only have been avoided if the recommendations of the Delors Report had been fully implemented.

Why weren't they implemented? Karl-Otto Pöhl, then the President of the Bundesbank, said that 'when the report was formulated, I did not think that a monetary union would become reality in the foreseeable future. I thought perhaps sometime in the next hundred years. I thought it was improbable that other European countries would simply accept the model of the Bundesbank'.

In an interview of 2011, Jacques Delors said that 'I’m worried and I have regrets. I especially regret that when the euro became operational, during the decision-making in 1997, they rejected my idea for an Economic Policy Coordination Pact alongside the Stability and Growth Pact'.

What could such an Economic Policy Coordination Pact have achieved? Well, it could have monitored a bit more than the two principal Maastricht-criteria (maximum deficit of 3% and maximum debt of 60%). To monitor only those two criteria is based on the fallacy that an economy consists only of the fiscal sector.

An Economic Policy Coordination Pact could have monitored the cross-border flow of capital; the level of cross-border debt; the level of current account balances; the development of regional manufacturing/industrialization; etc. etc. In short, it could have monitored all those factors which, having been ignored, caused most of today's problems.

Of all people, it is now Prof. Hans-Werner Sinn who is changing his tune. In a recent interview he argued that, in order to restore competitiveness, the South must deflate AND the North must inflate (so far, I have heard him talk only about the South having to deflate). He is now saying that, relative to the average, a country like Greece must become 20-30% cheaper AND a country like Germany must become 20% more expensive. Now that is a break with his past!

Still, I would challenge Prof. Sinn to show only one period since WW2 where inflation in the South, on a sustained basis, was significantly less than in the North. If never, why should that happen now? Personally, I don't think that I will live to see that happening if it is left up to free market forces.

However, an Economic Policy Coordination Pact could still achieve progress even today. The Eurozone countries could, for example, agree to set governmental incentives so that the North/South flow of products, services, capital and investment is brought into balance, if not even turned around a bit.

Cross-border debt is the result of one-sided cross-border flows of products and services. If the cross-border flow of products and services were in balance, there would be no cross-border debt. It is just as simple as that!

Now, to bring the North/South flow of products and services in balance might well result in somewhat lesser growth in the North. Why should an egotistical/nationalistic North agree to any such damage? For one very simple reason: that damage will be next to nothing compared to the damage which will occur otherwise. Will it occur for sure? Perhaps not for sure, but in order for it not to occur, someone will first have to rewrite the rules of mathematics.

If the Eurozone were to blow up, some countries are likely to pursue the issue of product liablity. And they would have a very legitimate case for doing so!


  1. Mr Sinn have change a bit his views! If i haven't mistaken he is talking for limited period of time exit(almost consistent here) from € for Greece Cuprus and deflate plus inflate as you have written, around 50%!
    I think this exit inwardly appreciated as forever exit for mr Sinn!

    Delor packages, Lisbon agenda, gave oppurtunities but with luck of any control, in achievements in each country.
    Two irrelevant questions Herr Klaus:
    1. Bernd Lucke, and his views about europe, euro, this AfD party does not seem to be a populist, even mr Sinn find views attractive!
    2.What is your opinion about full-reserve banking, (Frank Knight- Murray Rothbard?)


  2. I would have thought that François Mitterrand and Helmut Kohl had more to do with creation if the Euro than Valéry Giscard d'Estaing and Helmut Schmidt, the latter two left office in 1981 and 1982 respectively. Unless of course, one thinks the problems the EMU/Euro faces today were inherited from ERM/ECU, that would seem to be a rather long bow, why not go back to Jean Monnet & Robert Schuman.

    From Page 28 of the Report on economic and monetary union in the Euopean Community - commonly known as the "Delors Report", released on April 17 1989.

    42 Parallelism ...monetary union without a sufficient degree of convergence of economic policies is unlikely to be durable and could be damaging to the community. Parallel advancement in economic and monetary integration would be indispensible in order to avoid imbalances which could cause economic strains and loss of political support or developing the Community further into an economic and monetary union. Perfect parallelism at each and every point of time would be impossible and could even be counter-productive. Already in the past the advancement of the Community in certain areas has place with temporary standstill on others, so that parallelism has only been partial. But bearing in mind the need to achieve substantial degree of economic union if monetary union is to be successful and given the degree of monetary coordination already achieved, it is clear that material progress on the economic policy front would be necessary for further progress on the monetary policy front. Parallelism would have to be maintained in the medium term and also before proceeding from one stage to the next.

    What more needs to be said. The imbalances were obvious from the kick-off of the Euro in 1999, not enough had been done to address them in the preceding decade. But the ‘tragedy’ is that they continued to grow, and nothing was done. Who was in charge - Chirac in France, Schroeder/Merkel in Germany, Prodi/Barosso in the Commission and Duisenberg/Trichet at the ECB. And of course the Heads of Government of the 17 member states. They cannot say they weren’t told — Mr. Euro himself told them in what I thought refreshingly plain language – maybe that’s the problem, they only know new-speak.

    I find Kai A. Konrad's recent comments in Die Welt more interesting than Professor Sinn's. He seems to give the Euro 5 more years unless there is rapid re-engineering. He's director of Max Planck Institute for Tax Law and Public Finance and Chairman of the Council of Scientific Advisors to the German Finance Ministry. One of his ideas I found intriguing is that European banks should be barred from lending to European governments - I assume he think banks and governments have a 'too cosy' relationship.

    But to my mind the biggest 'blunder' was the arrogance of all of them to think they could absorb 15 new members to create a community of 27 countries whilst at the same time implementing a monetary union across 17 of them – madness.


  3. thanks for the link to the delors report. It's actually very "joined up thinking", endlessly reiterating the point that monetary and economic union had to go hand in hand.

    In this area, Bundesbank President Pöhl may well have thought that monetary union was very far away when the report was written, but it didn't stop him successfully insisting on a "german-style" indedpendent central bank as a condition for EMU at the Intergovernmental Conference on Economic and Monetary Union.

    "With regard to the European Central Bank (ECB), the Bundesbank, a staunch opponent of the disappearance of the deutschmark, demanded that it have the same status as the Bundesbank, i.e. independent of governments. France accepted the demand, even though its Finance Minister, Pierre Bérégovoy, wanted to offset the Bank’s independence by strengthening the Council of Finance Ministers of the Union (Ecofin), in order to transform it into a type of ‘economic government’ for consultations about budgetary and fiscal policies. However, the Germans were opposed to the idea, fearful of a central control that would threaten the Bank’s independence. A decisive choice was therefore made: the single currency, under the authority of the Central Bank would complete monetary union, while economic union would merely consist of national policies, coordinated by the Council of Economic and Finance Ministers. "

    To me, it looks like one of those typical german/french disagreements on the EU. The french government (quite distinct from the Delors Commission) wanted a solution that strenthened the council of ministers. In contrast, the german government (absent german unifiction) would have preferred either a decisive move to political union, or no movement at all.

    Their position shifted, as is known, with german unification. But the Bundesbank's (and the GCC's) didn't.

    There's other ironies in that link, too.

    "In this area, France took a harsher stance than Germany. The French President, François Mitterrand, believed that the deficit of total public expenditure (State and local authority budgets and welfare expenditure) should not exceed 3% of Gross Domestic Product (GDP). He had already imposed the 3% threshold in France when he had changed tack in 1983 and opted for stricter policies. He did not accept Germany’s proposal that investment expenditure should be taken into account and opted for asimpler, stricter rule. Budgetary deficit in France was no more than 1.8% of GDP in 1992, compared to 3.5% in Germany, which had to meet the costs incurred during the reunification process."

  4. There is one thing I don't understand. We have in the post above several sayings, reports etc from various politicians that are treated as "truth".I disagree with this treatment of said sayings. I agree that considering the motives of various warners, Americans, journalists etc suspect is correct. However major politicians are always lying . There is nothing special about it. It is their job. Why is this? Machiavelli is handy:change is difficult because the ones certain to lose will oppose it and the ones to benefit are not certain of success so they are lukewarm. Hence the indierect methods ans attendant lying or "economy with the truth". Only incompetent or irrellevant politians speak their mind. The difference between good and bad politicians is the good ones try to steer things towards the common good while bad ones towards their pockets or worse.
    The simple truth is that the Euro was created to remove the power of the US dollar over the EU. (Our currency and your problem Secr. Baker or hpw Eisenhower stopped Suez by cutting funds to both countries)and to force EU integration from the back door by harnessing the colossal but invicible power of monetary policy.No sane politician will give up such power. The only battle here is who pays the serious political price of the necessary EU wide reforms. Cynical?Yes. Dangerous Yes also, although probably not as nuxh as generally believed.

  5. This comment -- "it is surprising that the issue of 'product liability' has not come up yet" -- is not precisely true. Two prior posts of mine have argued that "tort" principles, akin to product liability, appropriately lead to an understanding of the crisis as based in mutual "fault" of all participating states in the EMU, whether in the core or the periphery. Check out the posts here ( and here ( The argument is crucial when addressing those in the core who insist on the "contractual" protections in the treaty (no-bailout and the ban on monetary financing). The problem is not one of contract but of tort, that is, of the failure of all states, but most importantly Germany, to take appropriate precautions against the true risks. No "reasonable" country would/should have done taken those risks. The core countries can't now cite misplaced "contractual" protections to avoid their own share of the negligence in the flawed design of the EMU. All participating states must now bear some responsibility, whether in the form of painful adjustment in the periphery, or necessary transfer payments from the core to address legacy costs and future imbalances.

    1. 1 of 2

      Thank you for bringing legal substance to the musings of a retiree! True, I had no idea that there has already been quite a bit of substantiated discussion on the subject (including the interesting INET report).

      Where I have a bit of a problem is the undue focus on the financial side of things; the debt. The debt is the derivative of the problem; what matters, in my opinion, is the underlying, the real economies of the Eurozone. When I think of ‘burden-sharing’, I don’t immediately think of debt forgiveness because I simply don’t believe that total debt forgiveness in a country like Greece would make all that much of a difference to that country’s real economy. The principal difference it would make is that Greece could start borrowing again from scratch; not much more.

      To give a somewhat simple-minded example: it would seem best to take the entire debt (without forgiveness and without debt-sharing), put it on follow-up in 20 years from now (or more); capitalize all the interest on it --- and focus on the real economies. I think the Redemption Pact proposed by the German Council of Experts was the step in the right direction. One has to clear one’s mind of abstract debt issues and begin focusing on the ‘real thing’. Or: one has to think entrepreneurially and not technocratically.

      Thus, ‘burden-sharing’ in my mind refers to the realignment within the Eurozone of the flow of products, services, capital and investment. The present EZ-structure will not automatically lead to such realignment. That is why I argue that government incentives for such realignment are necessary. The CEO of Germany’s Allianz Group said a couple of years ago: “We will have to shift our investments towards the South”. In a nutshell, that’s it.

      Another blogger (GreekDefaultWatch) recently described it as follows: “A Keynesian stimulus in an economy with underlying ailments is akin to trying to heat a room with an open window—the heat will help, but best to close the window first”. The words I have used in the past to describe the phenomenon are: “You can’t drain water from a dried-out well unless you first dump it into it. Since that does not seem smart, you should focus on fixing the well, instead”.

      Such a North/South realignment would not need to be a zero-sum game for the Eurozone overall but it would still ‘cost’ the North quite a bit in terms of GDP growth. The North could make up for that loss by making direct investments in the South instead of sending loans.

      Obviously, it takes two to tango. The North would have to implement incentives so that private sector investments make it voluntarily to the South, but the South has to make sure that there is an investor-friendly framework for those foreign investors.

    2. 2 of 2

      How someone like George Soros could imply that Eurobonds on their own would work wonders in a country like Greece escapes my imagination. Greece is already borrowing at very low rates. To lower them by another 1-2% (or even bring them to zero) wouldn’t make much of a difference to the real economy.

      The numbers show very clearly that the Greek economy, in its present structure, cannot employ its people when internal and external accounts reach balance. Yes, the technocrats can claim success by pointing at the primary surplus and at the more or less balanced current account. But in order to employ its people, the Greek economy needs subsidies from abroad.

      It can’t be the future perspective for ANY country to always depend on subsidies from abroad. The only way for Greece to get out of that is to increase domestic value generation (a combination of import substitution and export expansion). There is absolutely no way that, with the EU freedoms of product and capital flows and with the overvalued Greek Euro – there is simply no way that Greece can accomplish that on its own and only through free market forces. There will have to be incentives.

      In short: the burden-sharing which I would like to see is that the North send investments to the South (might as well be machinery & equipment instead of money) and that those investments increase domestic value generation and, in consequence, employment. And the South, of course, has to put out welcome signs for those investments.

  6. Hmm. I was about to respond to Peter Lindseth's post about tort law and liability by making a few sniffy comments about how little english-speaking commentators seemed to be aware of the German Constitutional Court's previous rulings.

    Fortunately, I took a bit of time to browse the EUTopia blog first.

    So will instead exercise my constitutional right to avoid making a fool of myself in public.

    that's a very good blog, law-oriented while taking cognisance of economics,