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Germany’s Exports Spell Doom for the Eurozone

Posted on 10 April 2011 by Editor

Originally posted 2010-08-23 12:17:49. Republished by Blog Post Promoter

ExportsGerman export growth – the fastest in 20 years – gave recent cause for celebration. Nonetheless, the eurozone will not survive.

Remember the eurozone’s big crisis? The one that everyone thought had blown over?

Well, it isn’t over. Like a multi-act play, it’s simply been in a period of "intermission." And the next act is going to be much, much worse than the first. In due time, the eurozone will disintegrate. And Germany will be the cause.

This may seem a strange assertion, because recently we’ve heard cheery news from Europe – and from Germany in particular. Just over a week ago, Germany reported its fastest economic growth in 20 years. At 2.2% quarter over quarter, that’s a blistering annualized growth rate of almost 9%.

We are used to emerging market powerhouses like China and India growing that fast… but staid old Deutschland? Wow.

As usual, though, the headlines don’t tell the whole story. The Panglossian optimists, ever determined to look on the sunny side of everything, have as usual gotten the key elements wrong. To understand why – and to explain why the eurozone is still headed for a crack-up – let’s begin with Greece.

Greece: Still Burning

Greece Financial Crisis Strike
Image courtesy of AU Herald Sun

When the Greek debt crisis hit the front pages earlier this year, the story was encapsulated in photographs. As fiscal austerity measures descended, riots broke out in the capital. "Firebombs in the streets of Athens" told the world what it need to know.

Since then, economic conditions on the ground in Greece have not improved. In fact they have grown far worse. And some believe it is only a matter of time before the whole of Greece, not just Athens, bursts into metaphorical flames of rage.

The German publication Spiegel Online openly questions whether Greece could be "Entering a Death Spiral." With brutal frankness, Spiegel writes:

The entire country is in the grip of a depression. Everything seems to be going downhill. The spiral is continuing unabated, and there is no clear way out. The worse part, however, is the fact that hardly anyone still hopes that things will improve one day.

Menelaos Givalos, a faculty member with the University of Athens, foresees "extreme social consequences" when a new wave of Greek layoffs begins in September.

Nikos Meletis, a shipbuilder quoted by Spiegel, warns that "If you take away my family’s bread I’ll take you down – the government needs to know that."

"Things are starting to simmer here," Meletis adds. "And at some point they’re going to explode."

Implying, of course, that things haven’t exploded already… which they haven’t. At least not on the scale we could see sometime in the near future.

The economic pain in Greece compares to Great Depression levels. The IMF has forecasted 14.8% unemployment in Greece by 2012, but other forecasters see unemployment as high as 20%.

Worse still, as reported by a University of Piraeus study, Greek unemployment in some areas has risen as high as 70%. Think of that – seven out of 10 men (and women) without jobs. It is perhaps no wonder that, on walking through Athens, one can find streets where a quarter of the shops are closed.

These are the fruits of forced austerity, and the straitjacket of a rigid currency union that Greece cannot abide. At the 1896 Democratic National Convention in Chicago, William Jennings Bryan made political history in declaring "you shall not crucify mankind upon a cross of gold."

Greece is now being crucified on a cross of euros.

The Odd Silence of Schumer

Now, to pick up another thread before tying them together, let us turn back to Germany.

Until recently, Germany was known as the world’s largest exporter. The dragon wrested that crown earlier this year, on reports that Chinese exports overtook German ones in 2009.

So this begs an interesting question: Why isn’t Chuck Schumer angry with Germany?

Senator Schumer, as you likely know, is the protectionist politician from New York who loves to make sport of China bashing. The esteemed senator is one of the most strident voices in Washington, calling for China to give up its state-supported export policies so that other countries can compete… and muttering dark threats when China fails to comply.

And yet, as loudly as Senator Schumer champions the "lopsided China" cause, he says nothing about the Teutonic doppelganger.

It’s a head-scratcher because, when it comes to mercantilist export policies, China and Germany are bosom buddies. Consider the following (via stats compiled by Bloomberg):

  • Exports accounted for 41% of German GDP in 2009.
  • For Japan – a major exporter – that number was only 13%.
  • For the U.S. – also a major exporter – it was a mere 11%.
  • The IMF projects China’s 2010 GDP surplus at 6.5%.
  • Germany’s surplus is projected at 5.5%.

So, in other words, Germany is somewhere between three and four times as reliant on exports as Japan and the United States, no export slouches themselves. At the same time, Germany’s surplus – a measure of the import-export gap – is almost as big as China’s.

"Anybody who believes China is a problem has to believe Germany is a problem," says economist Joseph Stiglitz.

"Germany has got to work on its domestic demand," adds PIMCO portfolio manager Andrew Bosomworth. "Not everybody can export. Somebody has to import."

In one of life’s little ironies, Germany’s aggressive export policies serve to make neighbors like Greece poorer. This is because Greece (or whomever) has little to sell Germany in return… and so German surpluses become additional deficits for lesser eurozone trading partners.

So here is the bottom line: When it comes to mercantilist trade policies, there is very little daylight between China and Germany.

They both want to export a damn sight more than they import… both are dangerously dependent on exports for economic growth… and both arguably operate to the fiscal detriment of their counterparties, who are encouraged to spend without reciprocal goods purchased in return.

Says the defiant German Chancellor, Angela Merkel: "We won’t surrender our strengths just because our exports are purchased more than those of other countries. That would be the wrong European answer to the competitiveness of our continent."

A-ha! Competitiveness. That’s the word we were looking for. "Competitiveness" gets us closer to the heart of things – and the reason why the eurozone is still doomed.

"Not Even a Group"

Under former CEO Michael Eisner, the executive suite of the Walt Disney Company was famously dysfunctional. Upon seeking help to encourage more teamwork, one outside consultant famously reported: "the results of my research indicate that you guys are not a good team. You’re not a team at all. You’re not even a group."

That’s a fairly accurate way to assess the 16 common currency members of the eurozone. Collectively speaking, these countries are not a team. They aren’t even a group.

In one corner of the room you have Germany, fiercely cutting costs at home while pumping out exports abroad. In the opposite corner of the room you have the "Southern" European countries, who don’t export much of consequence and find themselves wallowing in debt.

Meanwhile, as the lesser members of the eurozone struggle and wheeze under the weight of an austerity regime they cannot handle, like a weak man straining under a loaded barbell, Germany is the red-faced drill instructor shouting "toughen up!"

As with overly ambitious exercise programs, severe austerity measures can be disastrous. And what could speak louder of the "separate ways" problem than Germany hitting 20-year highs of economic growth, even as the engine of that growth – unreciprocated exports – does its part in driving Greece further into depression.

The whole thing is lunacy. Currency union without political and economic union is unworkable, and the true politico-economic correlation between Germany and the PIGS is zero.

A Foolish Fantasy

The euro was always a currency built on dreams – fantasy made real, rather than an outgrowth of hard-edged objective assessment. The problems that terminally threaten the eurozone now were known well in advance, at least in theoretical terms. But it was always just "assumed" that such problems could be worked out.

The problems cannot be worked out. The euro experiment only lasted as long as it did because flush economic times allowed the weaker economies of Southern Europe to boost themselves up with cheap debt. The good vibrations lasted as long as the credit flowed freely.

But now, with tough times here again, we can see the truly irreconcilable differences between Germany and the others. The experiment will have to end.

Slovakia Says No

In a preview of what is to come, Slovakia last week voted to reject paying its allotted share of Greek bailout funds. "Slovakia’s politicians have questioned the fairness of calling on taxpayers in the euro area’s poorest state," The New York Times reported, "to aid wealthier countries that failed to control their debt."

It only makes sense, does it not? Why should dirt-poor Slovakia have to pay for richer Greece’s mistakes – especially given the bailout money will simply go down a rat hole? (Greece is still going to experience some form of default. That reality has only been delayed, not denied.)

In time, too, ordinary Germans will regain the willpower to say "nein." As George Soros has put it, Germany’s politicians may be comfortable acting as the "deep pocket" of Europe, but ordinary German citizens will not tolerate this forever – especially since German austerity measures are making life hard at home even as exports boom.

Then too there are the banks to think of – those wonderfully leveraged European banks – who only passed the joke of a "stress test" because sovereign defaults were not properly factored into the scenarios. If things get as bad as they easily could in the coming quarters, Europe’s banking system is still going to blow. When this happens, "every man for himself" will be the order of the day. And the U.S. dollar could skyrocket.

Let’s Call the Whole Thing Off

In reality, the best solution would be some kind of semi-orderly breakup of the eurozone, so that mercantilist Germany and the suffocating Southern European countries can go their separate ways. The noble idea of the euro, which never accounted for political and economic realities, should be gently consigned to the dustbin of history.

It won’t happen this way, though, because it is too late for orderly solutions, and Europe’s politicians would go through hell in such a scenario. In trying to fight the inevitable, they will get hell anyway.

The real problems of the eurozone were never actually solved, just papered over. Nor is mighty Germany’s heavy reliance on exports a sure thing in a wobbling global economy. As with China, the dangers of such a strategy could soon become clear.

Say what you will about the United States, but at least the dollar has a single country behind it (rather than 16 squabblers). As the old saying goes, "united we stand, divided we fall." The eurozone is a house divided, and the deep divisions of the 16 member countries – as made worse by Germany’s mercantilist export regime – will eventually tear it apart.

Article brought to you by Taipan Publishing Group.

Other Related Sources:

  • How Europe and U.S. Are Trying To Prevent a Global Currency Crisis
  • Germany’s Economy ‘To Grow By 3%’
  • Greek Crisis Refuses To Go Away
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    The Anatomy of a Revolution – The Slogan

    Posted on 10 April 2011 by Editor

    Originally posted 2009-08-16 22:27:20. Republished by Blog Post Promoter

    August 16, 2009

    Some revolutions are eruptive. They gestate over a relatively short period of time, from the conception of an idea, a goal, a promise or an objective, they quickly transform from intellectual concept into mass action. The shorter the gestation period, the more violent the eruption.  These are usually bloody revolutions, executed with the kind of force that dramatically changes the landscape of a society, a nation, or in the most extreme cases, the world.  From a historical perspective, the Soviet revolution of 1917, while initially having a somewhat limited national objective (the abolishment of the tsar and the Russian monarchy), few would argue its final impact as being anything less than global. These types of revolutions are remarkably akin to a volcano – while the underlying pressure may have been building up over a long time, its explosion to the surface has an unmistakable identity, objective and effect.

    And then there are the subtle revolutions, which instead of erupting, creep into existence. They are spoken about with subdued voices, introduced into circles of conversation without the participants even being aware that the revolution is in fact the topic of conversation.  These revolutions quietly introduce new words into the vocabulary, ones which once had a different meaning, but are now transformed to inject new ideals and thoughts, and a call-to-action tension. They may be silent at their birth and through most of their progressing stages of maturity, but their outcome can be just as wide-spread and impacting as their more violent cousin.

    These are the revolutions which, once they progress to an advanced stage, create a rude awakening in a society with a “how did we allow this to happen” reaction.

    For the revolutionary, language is his most powerful arsenal. And within language, the slogan is his most effective weapon.

    The revolutionary has honed the slogan to be his most potent instrument. He uses it to inject his philosophy into the dialog. He uses it to introduce new meaning sympathetic to his agenda into the language. And ultimately, once society has been “softened up” with acceptance of the new terms of the conversation, he uses it to polarize society, creating an “us” and “them” division between his supporters and opponents.

    In the early stages, subtle revolutions are almost always fought with slogans. Conversations are generally not welcome since they create a platform for a dialog where the revolutionary’s philosophy can be debated and usually defeated. However, ideology slogans are weapons to which there are few countermeasures.

    An astute citizen will spot ideology slogans easily. Depending on the level of societal “softening” to the revolutionary’s agenda, they are either transparent and direct in their presentation of the ideology (“All Power to the Soviets” – a Bolshevik slogan used in the eve of the October revolution) or quite subtle and non-committal (“Change we can believe in – Slogan used by the Barack Obama in his 2008 presidential campaign).

    Slogans usually comprise very few words, so as to appeal to all levels of literacy and intellect. The power (and at the same time treachery) which slogans present lie in their simplicity and clever obfuscation of the real objective which they promote.

    Below are a few more prominent slogans used at different stages of the respective revolutions. I urge the reader to ponder the words of each and determine the level of subtlety or directness  and from it derive the stage of advancement of each revolution from which these slogans are taken:

    Arbeit Mach Frei” – Used by Nazi Germany in 1933-45, posted over the main gates at a number of Nazi concentration camps. In English, the slogan means “work shall set you free”.

    “Ein Volk, ein Reich, ein Führer” (“One people, one country, one leader”) — Nazi Germany.

    Every Man a King – Introduced in February 1934, the wealth and income redistributionist platform slogan used by Louisiana Governor Huey Long.

    “Hasta la victoria siempre” (“There’s always a victory to be achieved”) – a Che Guevara-associated Communist slogan

    Yes We Can – 2008 U.S. presidential campaign slogan of Barack Obama.

    With the recent elections, we have unintentionally given a platform and a new spark to a revolution that has been going on in the United States for the last eight decades. It is of the subtle, slow and long-lasting kind, and is one that is no longer in its early stages, as president Obama is building on the momentum of many of his predecessors to abandon the principles of our founding and replace them with alien programs and platforms which have lead many a nation to the brink of collapse, and in some cases extinction (e.g. the U.S.S.R.).  And the slogans which accompany this stage of the revolution (or statist counter-revolution, as would probably be a more suitable term) are beginning to lose their subtlety. With “Yes we Can” Obama abandons any pretension of ambiguity and instead expresses a bold new horizon of socialist opportunity. There is no more indecision expressed in this slogan.

    But if we understand the dynamics of the statist’s actions and his true intentions beyond the cleverly worded slogans, we arm ourselves with the necessary weapons to fight back in this war of ideologies.  When exposed, most Americans will see the statist’s intentions as opposite to their own core beliefs. As the recent highly animated town halls on the subject of socialized health care can attest to, an educated electorate, armed with facts and information, can engage the statist in the kind of conversation he is most uncomfortable in having – one of truth and historical experiences.

    Below I leave the reader with a few artifacts of both past and present. Next time you see a colorful highway billboard on your way to work, a placard in the subway or backdrop on your local evening news, imagine it being replaced by one of these graphic slogans. What emotions does this evoke? More importantly, how does your intellect and value system react to these images?

    Albanian communist poster

    “Victory of Socialism over Capitalism” — still adorns many billboards in Albania

    Soviet communist-poster

    “Country and Party – Together and One”

    Chinese Communist Party Sign

    “Long live the Chinese Communist Party”

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    How To Become a ‘Citizen of the World’

    Posted on 10 April 2011 by Editor

    Originally posted 2009-11-03 22:24:33. Republished by Blog Post Promoter

    citizen-of-the-worldby Nancy Morgan
    November 3, 2009
    . . . . . . . . . . . . . . . . . . . . . . . . .

    In the summer of 2008, then presidential candidate Barack Obama delivered  a historic campaign speech in Germany. With the Berlin Wall as a back drop, Obama proudly informed the masses that he was not there as a candidate, but as “…a fellow citizen of the world.”
    The crowd went crazy and the world rejoiced. Finally, the United States was ready to join the community of man. 
    In what former U.S. ambassador to the UN John Bolton calls our first post-American President, Obama has bestowed instant cachet on the growing ranks of Americans who revel in the thought of being the first in their own social set to be considered cutting edge ‘citizens of the world.’ Especially since joining this community of global citizens confers upon them automatic (albeit, unearned) virtue, along with instant and unassailable moral stature. 
    For those of you who just aren’t with it, (like Christians, conservatives and a few Republicans) here are the latest, up to the minute, details on how to gain inclusion in this trendy and politically correct group.
    To become a ‘citizen of the world,’ you must first and foremost declare your support for the disenfranchised. Preferably in front of a camera in a very public forum. Just pick a group of victims upon whom you will bestow your empathy and support. The only caveat being that they reside in underdeveloped countries ruled by misunderstood men of good will like Uganda, or Cuba, or Somalia, or…well, you get my drift. Oh, and make sure everyone understands that these victims are only victims because of George W. Bush and/or America.

    Next, you must ardently advocate the spending of other people’s money in order to help these poor victims. If you’re one of the fortunate ‘non-rich,’ (meaning your income is under $250,000 and/or you receive a government check every month) then a straight party line vote for the Democrats, frequent letters to the editor and a catchy bumper sticker are strongly recommended. In addition, you must make yourself available for the occasional photo-op or rally, and vocalize your support for all of Obama’s policies to every-one you know. (T-shirts are a very cool way to do this)
    If you’re unfortunate enough and greedy enough to have an annual income over $250,000, your membership entrance requirements are a bit more stringent. The good news is, you can skip right over victims and concentrate on vital issues like global warming or the evils of capitalism.
    For all you rich guys out there, its recommended that you use whatever influence you have to advocate for whichever policy Obama is currently trying to foist on the American public. Bumper stickers won’t do it, guys. You need to atone big time.
    Not to worry, just contact DNC.org and they will give you a list of organizations you should  support. And since you’ve made all that money on the backs of the poor, social justice requires that you give back some of your own money, instead of merely advocating the expenditure of other people’s money.
    A list of approved recipient groups will be provided free of charge. It is recommended that you give early and often. ACORN is the most needy cause as of this writing. But whatever group you decide to donate your bucks to, rest assured, Obama is in the process of making those donations tax deductible.
    If you happen to be filthy rich and/or an elected official or head of a union, different rules apply. In order to be considered a citizen of the world, all you have to do is believe (faking belief is totally OK) in Obama’s vision of utopia. You must believe, or at least profess to believe, that world peace is possible, that the earth is melting, that diplomacy trumps war and that America is the cause of all the world’s problems. Other that that, the only real requirement is a constant and sustained effort to ensure that global governance trumps American sovereignty.
    Hat-tip: it wouldn’t hurt if you make known that yours was one of the Swiss bank accounts the Obama administration recently forced the Swiss to disclose. That alone will ensure you are recognized by the right people.
    There you have it, fellow comrades. If you have followed the above steps, we want to officially welcome you as a new ‘citizen of the world.’ Take a load off. You are now eligible to engage in global groupthink, which means that you will never again be forced to make any moral, financial or life decisions on your own. More membership perks are already in the works, and you guys will be the first to benefit! Kumbaya.

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    Nancy Morgan is a columnist and news editor for RightBias.com
    She lives in South Carolina

    Article has been published with the author’s permission


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    Germany’s Choice

    Posted on 12 February 2010 by Editor

    Graphic for Geopolitical Intelligence Report

    By Marko Papic and Peter Zeihan
    February 8, 2010  

    The situation in Europe is dire.After years of profligate spending, Greece is becoming overwhelmed. Barring some sort of large-scale bailout program, a Greek debt default at this point is highly likely. At this moment, European Central Bank liquidity efforts are probably the only thing holding back such a default. But these are a stopgap measure that can hold only until more important economies manage to find their feet. And Europe’s problems extend beyond Greece. Fundamentals are so poor across the board that any number of eurozone states quickly could follow Greece down.  

    Related Links:
    Germany: Ratings Threats and New Challenges
    Germany: The Electoral Analysis  

    And so the rest of the eurozone is watching and waiting nervously while casting occasional glances in the direction of Berlin in hopes the eurozone’s leader and economy-in-chief will do something to make it all go away. To truly understand the depth of the crisis the Europeans face, one must first understand Germany, the only country that can solve it.   

    Germany’s Trap

    The heart of Germany’s problem is that it is insecure and indefensible given its location in the middle of the North European Plain. No natural barriers separate Germany from the neighbors to its east and west, no mountains, deserts, oceans. Germany thus lacks strategic depth. The North European Plain is the Continent’s highway for commerce and conquest. Germany’s position in the center of the plain gives it plenty of commercial opportunities but also forces it to participate vigorously in conflict as both an instigator and victim.   

    Germany’s exposure and vulnerability thus make it an extremely active power. It is always under the gun, and so its policies reflect a certain desperate hyperactivity. In times of peace, Germany is competing with everyone economically, while in times of war it is fighting everyone. Its only hope for survival lies in brutal efficiencies, which it achieves in industry and warfare.   

    Pre-1945, Germany’s national goals were simple: Use diplomacy and economic heft to prevent multifront wars, and when those wars seem unavoidable, initiate them at a time and place of Berlin’s choosing.   

    “Success” for Germany proved hard to come by, because challenges to Germany’s security do not “simply” end with the conquest of both France and Poland. An overstretched Germany must then occupy countries with populations in excess of its own while searching for a way to deal with Russia on land and the United Kingdom on the sea. A secure position has always proved impossible, and no matter how efficient, Germany always has fallen ultimately.   

    During the early Cold War years, Germany’s neighbors tried a new approach. In part, the European Union and NATO are attempts by Germany’s neighbors to grant Germany security on the theory that if everyone in the immediate neighborhood is part of the same club, Germany won’t need a Wehrmacht.   

    There are catches, of course — most notably that even a demilitarized Germany still is Germany. Even after its disastrous defeats in the first half of the 20th century, Germany remains Europe’s largest state in terms of population and economic size; the frantic mindset that drove the Germans so hard before 1948 didn’t simply disappear. Instead of German energies being split between growth and defense, a demilitarized Germany could — indeed, it had to — focus all its power on economic development. The result was modern Germany — one of the richest, most technologically and industrially advanced states in human history.   

    Germany and Modern Europe

    That gives Germany an entirely different sort of power from the kind it enjoyed via a potent Wehrmacht, and this was not a power that went unnoticed or unused.   

    France under Charles de Gaulle realized it could not play at the Great Power table with the United States and Soviet Union. Even without the damage from the war and occupation, France simply lacked the population, economy and geographic placement to compete. But a divided Germany offered France an opportunity. Much of the economic dynamism of France’s rival remained, but under postwar arrangements, Germany essentially saw itself stripped of any opinion on matters of foreign policy. So de Gaulle’s plan was a simple one: use German economic strength as sort of a booster seat to enhance France’s global stature.   

    This arrangement lasted for the next 60 years. The Germans paid for EU social stability throughout the Cold War, providing the bulk of payments into the EU system and never once being a net beneficiary of EU largesse. When the Cold War ended, Germany shouldered the entire cost of German reunification while maintaining its payments to the European Union. When the time came for the monetary union to form, the deutschemark formed the euro’s bedrock. Many a deutschmark was spent defending the weaker European currencies during the early days of European exchange-rate mechanisms in the early 1990s. Berlin was repaid for its efforts by many soon-to-be eurozone states that purposely enacted policies devaluing their currencies on the eve of admission so as to lock in a competitive advantage vis-à-vis Germany.   

    But Germany is no longer a passive observer with an open checkbook.   

    In 2003, the 10-year process of post-Cold War German reunification was completed, and in 2005 Angela Merkel became the first postwar German leader to run a Germany free from the burden of its past sins. Another election in 2009 ended an awkward left-right coalition, and now Germany has a foreign policy neither shackled by internal compromise nor imposed by Germany’s European “partners.”   

    The Current Crisis

    Simply put, Europe faces a financial meltdown.   

    The crisis is rooted in Europe’s greatest success: the Maastricht Treaty and the monetary union the treaty spawned epitomized by the euro. Everyone participating in the euro won by merging their currencies. Germany received full, direct and currency-risk-free access to the markets of all its euro partners. In the years since, Germany’s brutal efficiency has permitted its exports to increase steadily both as a share of total European consumption and as a share of European exports to the wider world. Conversely, the eurozone’s smaller and/or poorer members gained access to Germany’s low interest rates and high credit rating.   

    And the last bit is what spawned the current problem.   

    Most investors assumed that all eurozone economies had the blessing — and if need be, the pocketbook — of the Bundesrepublik. It isn’t difficult to see why. Germany had written large checks for Europe repeatedly in recent memory, including directly intervening in currency markets to prop up its neighbors’ currencies before the euro’s adoption ended the need to coordinate exchange rates. Moreover, an economic union without Germany at its core would have been a pointless exercise.   

    Investors took a look at the government bonds of Club Med states (a colloquialism for the four European states with a history of relatively spendthrift policies, namely, Portugal, Spain, Italy and Greece), and decided that they liked what they saw so long as those bonds enjoyed the implicit guarantees of the euro. The term in vogue with investors to discuss European states under stress is PIIGS, short for Portugal, Italy, Ireland, Greece and Spain. While Ireland does have a high budget deficit this year, STRATFOR prefers the term Club Med, as we do not see Ireland as part of the problem group. Unlike the other four states, Ireland repeatedly has demonstrated an ability to tame spending, rationalize its budget and grow its economy without financial skullduggery. In fact, the spread between Irish and German bonds narrowed in the early 1980s before Maastricht was even a gleam in the collective European eye, unlike Club Med, whose spreads did not narrow until Maastricht’s negotiation and ratification.   

    Even though Europe’s troubled economies never actually obeyed Maastricht’s fiscal rules — Athens was even found out to have falsified statistics to qualify for euro membership — the price to these states of borrowing kept dropping. In fact, one could well argue that the reason Club Med never got its fiscal politics in order was precisely because issuing debt under the euro became cheaper. By 2002 the borrowing costs for Club Med had dropped to within a whisker of those of rock-solid Germany. Years of unmitigated credit binging followed.   

    The 2008-2009 global recession tightened credit and made investors much more sensitive to national macroeconomic indicators, first in emerging markets of Europe and then in the eurozone. Some investors decided actually to read the EU treaty, where they learned that there is in fact no German bailout at the end of the rainbow, and that Article 104 of the Maastricht Treaty (and Article 21 of the Statute establishing the European Central Bank) actually forbids one explicitly. They further discovered that Greece now boasts a budget deficit and national debt that compares unfavorably with other defaulted states of the past such as Argentina.   

    Investors now are (belatedly) applying due diligence to investment decisions, and the spread on European bonds — the difference between what German borrowers have to pay versus other borrowers — is widening for the first time since Maastricht’s ratification and doing so with a lethal rapidity. Meanwhile, the European Commission is working to reassure investors that panic is unwarranted, but Athens’ efforts to rein in spending do not inspire confidence. Strikes and other forms of political instability already are providing ample evidence that what weak austerity plans are in place may not be implemented, making additional credit downgrades a foregone conclusion.

    Chart showing Govt bond yield minus German Bund yield


    Germany’s Choice

    As the EU’s largest economy and main architect of the European Central Bank, Germany is where the proverbial buck stops. Germany has a choice to make. 

    The first option, letting the chips fall where they may, must be tempting to Berlin. After being treated as Europe’s slush fund for 60 years, the Germans must be itching simply to let Greece and others fail. Should the markets truly believe that Germany is not going to ride to the rescue, the spread on Greek debt would expand massively. Remember that despite all the problems in recent weeks, Greek debt currently trades at a spread that is only one-eighth the gap of what it was pre-Maastricht — meaning there is a lot of room for things to get worse. With Greece now facing a budget deficit of at least 9.1 percent in 2010 — and given Greek proclivity to fudge statistics the real figure is probably much worse — any sharp increase in debt servicing costs could push Athens over the brink. 

    From the perspective of German finances, letting Greece fail would be the financially prudent thing to do. The shock of a Greek default undoubtedly would motivate other European states to get their acts together, budget for steeper borrowing costs and ultimately take their futures into their own hands. But Greece would not be the only default. The rest of Club Med is not all that far behind Greece, and budget deficits have exploded across the European Union. Macroeconomic indicators for France and especially Belgium are in only marginally better shape than those of Spain and Italy. 

    At this point, one could very well say that by some measures the United States is not far behind the eurozone. The difference is the insatiable global appetite for the U.S. dollar, which despite all the conspiracy theories and conventional wisdom of recent years actually increased during the 2008-2009 global recession. Taken with the dollar’s status as the world’s reserve currency and the fact that the United States controls its own monetary policy, Washington has much more room to maneuver than Europe. 

    Berlin could at this point very well ask why it should care if Greece and Portugal go under. Greece accounts for just 2.6 percent of eurozone gross domestic product. Furthermore, the crisis is not of Berlin’s making. These states all have been coasting on German largesse for years, if not decades, and isn’t it high time that they were forced to sink or swim? 

    The problem with that logic is that this crisis also is about the future of Europe and Germany’s place in it. Germany knows that the geopolitical writing is on the wall: As powerful as it is, as an individual country (or even partnered with France), Germany does not approach the power of the United States or China and even that of Brazil or Russia further down the line. Berlin feels its relevance on the world stage slipping, something encapsulated by U.S. President Barack Obama’s recent refusal to meet for the traditional EU-U.S. summit. And it feels its economic weight burdened by the incoherence of the eurozone’s political unity and deepening demographic problems. 

    The only way for Germany to matter is if Europe as a whole matters. If Germany does the economically prudent (and emotionally satisfying) thing and lets Greece fail, it could force some of the rest of the eurozone to shape up and maybe even make the eurozone better off economically in the long run. But this would come at a cost: It would scuttle the euro as a global currency and the European Union as a global player. 

    Every state to date that has defaulted on its debt and eventually recovered has done so because it controlled its own monetary policy. These states could engage in various (often unorthodox) methods of stimulating their own recovery. Popular methods include, but are hardly limited to, currency devaluations in an attempt to boost exports and printing currency either to pay off debt or fund spending directly. But Greece and the others in the eurozone surrendered their monetary policy to the European Central Bank when they adopted the euro. Unless these states somehow can change decades of bad behavior in a day, the only way out of economic destitution would be for them to leave the eurozone. In essence, letting Greece fail risks hiving off EU states from the euro. Even if the euro — not to mention the EU — survived the shock and humiliation of monetary partition, the concept of a powerful Europe with a political center would vanish. This is especially so given that the strength of the European Union thus far has been measured by the successes of its rehabilitations — most notably of Portugal, Italy, Greece and Spain in the 1980s — where economic-basket case dictatorships and pseudo-democracies transitioned into modern economies. 

    And this leaves option two: Berlin bails out Athens. 

    There is no doubt Germany could afford such a bailout, as the Greek economy is only one-tenth of the size of the Germany’s. But the days of no-strings-attached financial assistance from Germany are over. If Germany is going to do this, there will no longer be anything “implied” or “assumed” about German control of the European Central Bank and the eurozone. The control will become reality, and that control will have consequences. For all intents and purposes, Germany will run the fiscal policies of peripheral member states that have proved they are not up to the task of doing so on their own. To accept anything less intrusive would end with Germany becoming responsible for bailing out everyone. After all, who wouldn’t want a condition-free bailout paid for by Germany? And since a euro-wide bailout is beyond Germany’s means, this scenario would end with Germany leading the EU hat-in-hand to the International Monetary Fund for an American/Chinese-funded assistance package. It is possible that the Germans could be gentle and risk such abject humiliation, but it is not likely. 

    Taking a firmer tack would allow Germany to achieve via the pocketbook what it couldn’t achieve by the sword. But this policy has its own costs. The eurozone as a whole needs to borrow around 2.2 trillion euros in 2010, with Greece needing 53 billion euros simply to make it through the year. Not far behind Greece is Italy, which needs 393 billion euros, Belgium with needs of 89 billion euros and France with needs of yet another 454 billion euros. As such, the premium on Germany is to act — if it is going to act — fast. It needs to get Greece and most likely Portugal wrapped up before crisis of confidence spreads to the really serious countries, where even mighty German’s resources would be overwhelmed. 

    That is the cost of making Europe “work.” It is also the cost to Germany of leadership that doesn’t come at the end of a gun. So if Germany wants its leadership to mean something outside of Western Europe, it will be forced to pay for that leadership — deeply, repeatedly and very, very soon. But unlike in years past, this time Berlin will want to hold the reins. 

    . . . . . . . . . . . . . . . . . . . . . . . . . . . 

    This report is republished with permission of STRATFOR 

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