The Germans are not yet openly angry. That would be out of character in a people who have, since the second world war, been eager to atone for the past and be good European partners. In one recent poll, 34% of Germans even said they empathised with the wrath of the southern Europeans. But the mood is shifting. The southerners may see Germany as forcing excessive austerity on them and showing insufficient solidarity, but Germans have a different view.
First, they feel they have already shown solidarity. Almost a quarter of a century after the fall of the Berlin Wall they still pay a solidarity tax to eastern Germany. Some also transfer taxes to weaker German states such as Bremen. Many conclude that, once in place, solidarity ceases being voluntary and instead becomes a yoke. They also bear much of the risk of euro bail-outs, even though a study released this week by the European Central Bank showed that the average German household has less wealth than the average Spanish, Italian and Cypriot one (though this is partly because German households tend to contain fewer adults and are more likely to be in rented accommodation).
Second, they argue that Germany recognised a decade ago that it was not competitive and undertook painful reforms that are now paying off. The crisis countries should follow suit. And third, Germans think the euro crisis was largely caused by rule-breaking (even by Germany itself), which must not be repeated. As one diplomat puts it, â€œsolidarity is important, but it should follow rules. It is not just ad hoc giving.â€
So why is Spain â€” along with Italy, which has higher debt but smaller deficits â€” 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.
Hereâ€™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 countryâ€™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 countryâ€™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 â€” 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 â€” 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.
Under questioning from opposition MPs, Flaherty said for the first time that the Conservative government would move in with another round of stimulus spending if the world economy suffers a double-dip recession.
â€œWe would obviously do what is neededâ€ if there was a â€œdramatic deteriorationâ€ in the economies of the United States and Europe, he told the committee.
But for now, Flaherty said, the government is not changing its budget plan despite the turmoil on financial markets and debt crises in the United States and Europe. The plan calls for spending cuts of $4 billion a year to eliminate the annual federal budget deficit â€” now $32-billion annually â€” in a few years.
Pressed by opposition MPs about how Ottawa would react to a renewed global slowdown, Flaherty said he would change course and develop a pro-growth spending plan as the Conservatives did during the recent recession.
Here is my problem with this problem. Do any of us think that the United States/Europe is going to fix their problems in the next recession. I am not saying Flaherty is wrong but does this look like itâ€™s going away. Jeff Rubin points out that with global demand the way it is, as we come out of a recession, prices will increase and drive the economy back into it which means, how many of these recessions will we be able to afford to ride out until we are looking at Mulroney-esqe debt loads and Devine type deficits again.
We are looking at a default or massive bailouts for Greece, Italy, Spain, Portugal, and the too big to fail banks in Germany. There is a dysfunctional governance system in the United States, and even China has some long term economic problems. Does anyone think this next recession is going to be a quick one or we wonâ€™t be experiencing a triple or quadruple dip recession before this is all said and done? No, me neither.
I know Jim Flaherty has been seeking out the advice of economic experts like former Calgary Flames captain Jim Peplinski but may the alternative might be figuring out ways to reinvent Canadaâ€™s economy to thrive in a world where recessions will be the norm, not the exception.
The Economist has an interesting article on defense spending by GDP.
ON JUNE 8th China’s top military brass confirmed that the country’s first aircraft carrier, a refurbishment of an old Russian carrier, will be ready shortly. Only a handful of nations operate carriers, which are costly to build and maintain. Indeed, Britain has recently decommissioned its sole carrier because of budget pressures. China’s defence spending has risen by nearly 200% since 2001 to reach an estimated $119 billion in 2010â€”though it has remained fairly constant in terms of its share of GDP. America’s own budget crisis is prompting tough discussions about its defence spending, which, at nearly $700 billion, is bigger than that of the next 17 countries combined.
Itâ€™s not totally accurate as the Illustrious is being converted to a helicopter carrier and England is building the Queen Elizabeth class of aircraft carriers and the reality is that the Invincible class of aircraft carriers was at the end of itâ€™s life expectancy.
It is interesting that despite the outrage of how much Canada has been spending on defense lately, we still spend less than Australia, Brazil, and Italy among the largest military spenders. I was also surprised to see Turkey so high on the list and not not see Pakistan considering how much India spends.