Tag Archives: Euro

Maybe Germany needs to be kicked out of the Eurozone

From Foreign Policy

Last year, Germany racked up a record trade surplus of 217 billion euros ($246 billion), second only to China in global export dominance. To some, this made Germany a bright spot in an otherwise anemic eurozone economy — a “growth driver,” as the German finance minister, Wolfgang Schäuble, puts it. In fact, Germany’s chronic trade surpluses lie at the heart of Europe’s problems; far from boosting the global economy, they are dragging it down. The best way to end this perverse situation is for Germany to leave the eurozone.

Germans usually respond to such charges with a kind of hurt confusion. We run trade surpluses, they patiently explain, because we are simply much more competitive than most of our trading partners. Can you blame us, they ask, if the world prefers to buy superior German goods (and has nothing we want in return)? So goes the argument: The rest of the world just needs to up its game, get its house in order, and become a bit more like Germany. In the meantime, don’t hate us ‘cuz we’re beautiful….

Contrary to popular mythology, however, there’s absolutely no reason why being “competitive” should mean running a trade surplus. As far back as 1817, the economist David Ricardo pointed out that the optimal basis for trade is comparative, not absolute, advantage. In other words, even if a country is better at everything, it should export what it is best at and import what it is less better at. Having an across-the-board advantage does not imply that it makes good economic sense to produce everything yourself, much less to sell more than you want in return. Or, to put it a bit differently, there’s no inherent reason why earning more can’t mean spending more, on consuming both public and private goods, as well as investing in future productive capacity.

Trade surpluses take place when a country chooses to spend less than it produces — when it has excess savings, beyond its domestic need for credit. It lends that excess savings abroad, financing another country’s ability to spend more than it produces and, by running a trade deficit, purchase the lender’s excess production. It’s true that a highly productive country might have the wherewithal to conjure up excess savings, while a less productive country might be inclined to borrow rather than scrape up the savings it needs. But fundamentally, trade imbalances arise not from competitive advantage but from choices about how much to save and where that savings should be deployed — at home or abroad.

Does it ever make sense to run trade imbalances? Sure it does. In the 19th century, Britain’s Industrial Revolution enabled it to reap vast earnings from expanded output, some of which it invested in the United States. The money lent to a rapidly growing American economy generated higher returns than it would have back home, while creating a market for British-made goods. The potential productivity gains made it a win-win: It made sense for the Americans to borrow and for the British to lend. But the case also highlights something that’s easy to forget: Running a trade surplus means financing someone else’s trade deficit.

The eurozone crisis is often called a debt crisis. But, in fact, Europe as a whole did not have an external debt problem, but an internal one: German surpluses and mounting debt in Europe’s periphery were two sides of the same coin. Germans saved (a lot), and the single currency induced them — rather than save less or invest it at home — to lend it to their eurozone trading partners, which used the money to buy German goods. By 2007, Germany’s trade surplus had reached 195 billion euros, three-fifths of which came from inside the eurozone. Berlin might call this “thrift,” but it’s hard to argue that Germany’s excess savings, which its banks often struggled to put to use, were well invested. Instead, they gave Germans the illusion of prosperity, trading real work (reflected in GDP) for paper IOUs that might never be repaid.

The solution? 

So what should be done? The best solution — and the least likely to be adopted — is for Germany to leave the euro and let a reintroduced Deutsche mark appreciate.

It will never happen but it is a solution that makes sense.

The Return of the Euro-Crisis

A coalition of radical leftist parties seem poised to take power in Greece. Could the troubled country really leave the euro zone?

SYRIZA has promised to cancel the austerity measures Greece adopted as part of the bailout package and renegotiate its debt obligations. This could trigger a confrontation with Athens’ lenders in Europe and the IMF, potentially resulting in a Greek exit (or “Grexit”) from the eurozone. Prime Minister Samaras is playing up this risk. “We shed blood to take the word ‘Grexit’ away from the mouths of foreigners, and SYRIZA is bringing this word back to their mouths,” he said in a speech late last year.

It seems Samaras is getting help in this campaign from Berlin. By 2012, Merkel had decided Greece must be kept in the eurozone to mitigate the risk of a “contagion” effect that could hasten the departure of other members and threaten the common European currency. This position implied Greece had some leverage, because its exit would hurt Germany and other eurozone members, as well. Now, according to the German news magazine Der Spiegel, Merkel appears willing to accept a Greek exit, and her government is preparing for that possibility. Officially, of course, Berlin’s policy hasn’t changed: It wants to keep the eurozone intact. But it’s hard to read the unnamed “German officials” who spoke to Der Spiegel and not conclude that Germany wanted to send a message to SYRIZA that Berlin will call its bluff if Athens demands onerous concessions or scuttles austerity.

Tsipras publicly scoffs at the possibility that Greece will be forced to leave the eurozone. “We are through with the possibility of a Grexit, and there is only a Samaras-exit,” he has said—a nifty bit of sloganeering that has failed to soothe the nerves of Greeks who worry a SYRIZA victory will result in tumult between Greece and its creditors. Tsipras has tried to lessen those fears. The closer he gets to power, the softer his rhetoric has become. Only six months ago, says Economides, it looked like a SYRIZA victory would result in a Grexit. “Now they’ve talked their way out of that corner, and they’re leaving it open that they’ll do their utmost to stay in the eurozone,” he says.

The real cause of Spain and Italy’s debt problem

Paul Krugman in the New York Times.

So why is Spain — along with Italy, which has higher debt but smaller deficits — in so much trouble? The answer is that these countries are facing something very much like a bank run, except that the run is on their governments rather than, or more accurately as well as, their financial institutions.

Here’s how such a run works: Investors, for whatever reason, fear that a country will default on its debt. This makes them unwilling to buy the country’s bonds, or at least not unless offered a very high interest rate. And the fact that the country must roll its debt over at high interest rates worsens its fiscal prospects, making default more likely, so that the crisis of confidence becomes a self-fulfilling prophecy. And as it does, it becomes a banking crisis as well, since a country’s banks are normally heavily invested in government debt.

Now, a country with its own currency, like Britain, can short-circuit this process: if necessary, the Bank of England can step in to buy government debt with newly created money. This might lead to inflation (although even that is doubtful when the economy is depressed), but inflation poses a much smaller threat to investors than outright default. Spain and Italy, however, have adopted the euro and no longer have their own currencies. As a result, the threat of a self-fulfilling crisis is very real — and interest rates on Spanish and Italian debt are more than twice the rate on British debt.

Which brings us back to the impeccable E.C.B.

What Mr. Trichet and his colleagues should be doing right now is buying up Spanish and Italian debt — that is, doing what these countries would be doing for themselves if they still had their own currencies. In fact, the E.C.B. started doing just that a few weeks ago, and produced a temporary respite for those nations. But the E.C.B. immediately found itself under severe pressure from the moralizers, who hate the idea of letting countries off the hook for their alleged fiscal sins. And the perception that the moralizers will block any further rescue actions has set off a renewed market panic.

Is the end of the Euro near?

From Business Week

If the euro zone were to break up, it would make sense for member nations to regroup in more defensible configurations—ones more nearly resembling the optimal currency areas described by Columbia’s Mundell. To stop the market terror before it engulfs all of the euro zone, the fiscally strongest nations should gather behind an impregnable "cordon sanitaire," argues Simon Johnson, the former chief economist of the International Monetary Fund, who is a professor at Massachusetts Institute of Technology and a Bloomberg News columnist. As Johnson sees it, those strong nations would trust each other enough to promise one another unlimited financial support if any of them ran into trouble, which would stop the bond market vigilantes cold. In that group he puts Germany, Austria, the Netherlands, Finland, Slovakia, Slovenia, Luxembourg, and tiny Malta.

The scary thing about Johnson’s cordon sanitaire is that it would leave France, Italy, Spain, Belgium, Portugal, Ireland, Greece, and Cyprus on the outside, unshielded from market forces. At least a couple of the weaker shunned nations would be likely to default. In the long run, though, it could be a blessing for them to be spared from monetary and fiscal policies that just don’t suit them and debts that are, frankly, unpayable. Like serial defaulter Argentina, they would still find it possible to borrow money, albeit at a higher rate. And with depreciated national currencies, they would be able to match their exports to their imports.

The biggest downside of such a scenario would be the death of the dream of a united Europe. It appears, though, that Europe still isn’t ready for a full union. As in the nucleus of the elusive ununquadium atom, the forces of repulsion remain stronger than the forces of attraction. It might be wiser to acknowledge that reality than to sacrifice a generation of indebted Europeans to an impossible ideal.

Bill Clinton makes the case for bailing out Greece

He compares it to the Mexican financial crisis in 1995

The year 2010 is the 15th anniversary of the Mexican peso crisis — the financial crisis in Mexico. And Bob Rubin said, you know, Mexico’s got two hours to live and if we don’t give them a loan guarantee, they’re going to go belly-up tomorrow.

The leadership of the Republican and Democratic parties had previously promised to support me in Congress. But they came and said, we can’t deliver any votes because there had been a poll in the paper that morning which said that by 79 to 18, the American people were against — strongly against — my giving financial assistance to Mexico.

And so they came in and we had a little debate. Bob Rubin made the case. Somebody made the arguments against it. I said, this is not close. Give them the loan.

And all the younger people there in the room literally thought I should be given immediate psychiatric care. They said, look, we just lost the majority in the Congress after the mid-term elections.

You just got your brains beat out once. Now you’re doing something that 79% of the people are against. Are you out of your mind?

I said, okay, let’s not do it. Let’s tell him, sorry.

Then, a year from now when Mexico is still reeling, when people have been hurt south of Mexico, when we have another million illegal immigrants, when there are more narcotics coming across the border, when every Mexican hates our guts because they think we’re greedy and selfish and uncaring about our neighbors, people in the United States will ask me what in the daylights are you doing letting this mess develop.

And my answer is going to be, well, on the day I could have stopped it, there was a poll saying 79% of you were against it? And it quieted all the opposition.