The Euro Crisis

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I realize it has political implications, but it seems more economic than political - moderators feel free to move to AoLS if that is more appropriate.

OK. Germany just forked over 100 billion Euros in bailout money. Again. This time to Spain. How many times has Germany (and to be fair France - but to a far lesser extent than Germany) done this in the past few years? Three? Four? I've lost count.

And I guess I have a few questions as the ignorant American here. I can only imagine that the citizens of Germany are outraged by this. Bad enough if poor economic decisions cause you to fork over billions to save YOUR economy, it must be rage-inducing to have to do so for other countries' poor decisions.

I understand that Germany is the largest economy in the Euro zone. And that if help were to come from anywhere, it is Germany. I further understand that it's not good for the entire European economy if you have nations dropping out of the Euro zone - as Greece may very well do. (I will, for a moment, refrain from any snarky comments regarding why some of these nations were included in the first place.)

My question is a simple one - if, instead of forking over hundreds of billions of Euros to save the asses of people in other countries, would Germany not be in better condition right now if they had simply invested that money to improve their own economy?

It's not like Greece, Spain, et al, is every going to, you know, pay them back! If anything, it's more likely that in the next few years their hands will be out again, asking for more. Bailouts only save ships if you can remove water faster than the ship is taking on water. It seems that time has passed.

It is also said that the definition of insanity is doing the same thing again, and expecting different results. How many times and how many billions of Euros is it going to take for Germany to realize this and say enough is enough?

 

Well, Germany is very strongly in favour of a unified Europe as they still remember what happened the last time Europe was divided and when countries were allowed to slide all the way to the bottom. They do not want a repeat of that.

As for getting the money back I reckon they still have some hope. It is basically "air money" that is being thrown about anyway. Didn't Germany themselves quite recently finish paying off their war debts? Debts rarely disappear.

 

A lot of the countries in the EU have a lot of trade and commerce between the different countries, so if one economy would fall, this would not be without repercussions for the other economies in the EU, even if they weren't part of the Euro zone to begin with.

That alone is a good reason to support other countries whose economies are in bad shape. Which is not to say that some reforms should be demanded for this support, or there will be no improvements, as you say Aldeth.

And I don't think we'll be out of this economic dip for quite a while yet. A lot of the baby-boom generation are reaching pensionable age right now and many countries (especially the southern European ones) don't have a good system to support an increasing pensioned part of their population with a decrease in the working part at the same time.

And to add to this, they generally have a lower pension age than you'll find in the northern part of Europe too. In the Netherlands, it was decided that the retirement age should be increased from 65 to 67. In contrast, France is discussing (I don't know if this was approved yet) going from 60 to 62 years. Which means that not only do they have less pension funds to use, they also have more people on a pension overall. You can see where this will go wrong.

 

Part of the problem I think, is that regardless of the particular reason countries like Greece and Spain got into problems, they are then extremely limited by the nature of the single currency as to what means they can use to get out.

Methods such as devaluing the currency, controlling interest rates and/or Quantitative Easing aren't an option due to the centrally controlled aspect of the Euro.

Ultimately Greece and Spain are in the position where they have three main options - receive extra funds from somewhere (in this case the EU funds set up), leave the single currency to gain the freedom to manipulate their own currencies, or quite simply not have the funds to pay what they need to and essentially as much as a country can, go bankrupt.

Clearly the latter two are likely to cause major issues and as far as I've read, no-one is sure as to how much damage to the EU and beyond they could cause. I've heard anything from no real effect to causing a world wide recession that'll make 2008 look like the most prosperous year in history.

Germany is therefore not bailing out per se, rather they are attempting to stabilise Greece, Spain and every other country needing funds so that Germany themselves aren't majorly damaged in the fallout.

 

Germany is not doing this to improve the economy of Spain, Portugal or Greece. Germans are doing this to protect their own banks who have considerable financial ties to the Spanish government and banks. If banks in Spain fail it will inevitably cause huge losses to German banks forcing Germany to bail out their own banks instead. No one wants hand out these bail outs, in fact the Maastricht treaty explicitly forbids the bail outs but when the alternative is the collapse of the European banking system and dissolution of the euro the bail outs easily become the less expensive choice.

Right now they are bailing out the Spanish banks and not the Spanish government which is somewhat different from Portugal or Greece. The Spanish public economy is actually not that bad but the interest rates are still high because of the weakness of their banking system which is now apparent.

On the bright side Spain and Italy are large enough to probably survive this with some adjustments but Greece is in my opinion starting to be a lost cause. The country is waaay too deep in debt to survive and the austerity measures are killing any possibility for growth. A default is a likely consequence and with a default Greece will have to exit the euro and reintroduce drachma. It will probably result in a few years of complete chaos in the country with mass demonstrations and a complete collapse of the banks and the economy but the weak currency should in the end improve their competitiveness and enable future growth.

As for the euro itself it's a flawed currency union and the flaws become apparent in a crisis such as this. It's important to note, however, that compared to the crazy 90'ies the euro have brought relative currency and inflation stability in Europe so it's not all bad. For it to work though member countries need to adapt their fiscal policy to the monetary policy of the ECB and stop complaining about the monetary policy itself being wrong.

 

I'm not disagreeing with you here, but I heard some wise economy dude (can't remember who, or where, no reference here) say that it is a European crisis and not a Euro crisis. I sometimes hear that things in England aren't a whole lot better than in The Netherlands at the moment (everything is pretty ok I guess, but "the crisis" is on the political agenda of a lot of politicians for the elections in September and they mention it on the news every morning, and the TV never lies, right?). Makes me wonder if countries like Sweden and Denmark are that much better off without it.

 

The issues over here are not really due to the Euro crisis. It gets blamed a lot for our our economy going down the pan. Before that it was the Royal Wedding, before that the bad weather..etc etc.

Unfortunately our current 'govern'ment would rather blame the Euro crisis rather than their own policies for our issues.

 

As well as promoting stability and bailing out their own banks, Germany is also benefitting from a weak Euro which is helping its exports boom. If they went back to the Deutchse Mark it would skyrocket and hit employment badly. And, of course, if Germany was bailing out its own banks directly rather than recycling the funds through the profligate Southern Europeans, German voters would likely have a dramatically different view of their leaders' performance. If one was cynical.

This is certainly true. At the moment Europe is really just kicking the can down the road again and again without making any decisions which might solve the crisis. There's a great quote from Luxembourg Prime Minister Jean-Claude Juncker: “We all know what to do, but we don’t know how to get reelected once we have done it.”

Rebalancing the Eurozone economy would ideally require Germany to have higher than average inflation for the next few years. It will be interesting to see how that would actually play out if Euro monetary policy was not to Germany's liking.

 

If I were a German citizen, I'd be right ticked off. The Greeks and Spaniards should be should be grateful as all get out. I doubt they will be, though. Human nature being what it is and all.

 

It's nothing new. Some countries have for years been contributing more, while other countries have profited more. It's just that now it's a bit more visible who is paying and who is profiting.

Although in a way all countries in the Euro zone have profited from a single currency because it made exporting a lot easier. Especially for countries like Germany that typically had a high currency.

 

So much of the world economy is a mess. I don't fully understand it all, but I still feel like there's going to be more bad news before we hear anything better.

 

Awesome quote. And the dilemma politicians face all the time.

From what I've read, Merkel is caught between a rock and a hard place - no matter what she does, she's screwed. So she defers instead, and hopes things will fix themselves.

 

I'm not expecting them to disappear. I think we can agree that given the state of the economy in these countries, there's no way they will have the ability to even start paying back these loans in the foreseeable future. While I cannot claim that they will never pay it back - never is a long time after all - it isn't a stretch to say that every person who paid taxes to contribute to this bailout won't see it paid back for decades, and perhaps not in their life time. (Which, for all practical purposes, makes it never for those people.)

I have a sincere question. Is the problem with the union itself, or with the members? I'm asking because one thing we have seen over the last several years is the adoption of the Euro in many nations that were not the charter members of the EU. (This does not explain the Spanish situation, as I believe they were among the initial members, but Greece was not.) There was a global recession in 2000-2002, but there weren't bailouts flying left, right, and center - possibly because more members of the EU had their financial house in order. What we've seen in recent years though is that additional nations have been admitted to the EU, some of which have... questionable financial histories. I think we both can agree that it would have been better if Greece were never admitted in the first place, but are there others?

Well, I'm not sure the retirement of the baby boomers is entirely bad news. Yes, it will require more funds to pay the pensions - or social security here in the states. But one thing that I think about is that the unemployment rate is still rather high right now - not just in the US but throughout Europe as well. Does it not stand to reason that with a lot of people leaving the workforce over the next decade or so, that there will be a greater demand for people to take their place? In a sense, shouldn't the removal of a large amount of people from the workforce make it easier for those still in it to find a job?

I've been harping on that for years as an easy means of fixing social security in the US. Sure, you can increase the tax, or you can make it needs based, or you can take off the cap that only requires you to pay the SS tax on the first $100K or so of income - thus the wealthiest Americans actually pay less as a percentage of income than the average person. But the easiest way to fix the system is increase the age of when you can start receiving funds.

This isn't rocket science. The fact remains that the social programs currently in place were instituted at a time when the life expectancy was considerably shorter than it is now, with minimal changes to age requirements in the time since. I don't have numbers for any European nation, so I'll stick to the US. When SS started in the 1930s, you were able to start collecting benefits at 62. But the life expectancy at the time was 66. So the typical person was on the system for 4 years. Now the life expectancy has risen in the US to 78. That quadruples the amount of time someone can be on SS. And the only change that they've made in the US is that if you decide to retire at 62, you get less money per month. You gradually get more and more the longer you work, and your benefit is at the maximum if you don't retire until you're 70.

The fact is, most people in their 60s are in good enough health to work. My parents are in their 60s, and I do not consider them "old". What's more, they don't consider themselves old, they have no plans to retire anytime soon, and they aren't particularly bummed out by that prospect either. Because they are in good health, and perfectly able-bodied enough to work. It just makes sense that if the life expectancy increases, the age at which you start receiving benefits should increase too. Making it 70 across the board just makes sense at this point.

 

It is important to never forget that the European Union despite appearances is a political project. Not one of finance and economics. All the free trade, free movement and joint currency are means to an end not the end itself. The objective of the EU is to not repeat WW2. To bring Europe together. This isn't all that often talked about but it is the clear and stated goal and why so many politicians and people who study the subject tend to be so strongly in favour of it despite all the problems. This is why former Soviet satellite states were rushed into the Union before they were ready. As long as there is separation and disparity between countries there is reason for conflict. The hope of the EU is to tie the European countries so closely together that war will be more and more unlikely. Germany and France actually learnt from history, they were the driving forces behind two world wars. They do not fancy being it again.

This is as far as I know the reason why countries might bet more strongly on the EU than what at first glance seems financially sensible.

 

Well, they did wait nearly 50 years after WW2 to do it... Just sayin'. But I understand that there are not only economic and political considerations, but social and diplomatic ones as well.

That I have a pretty hard time buying. There is no former Eastern Bloc nation that could start a war without getting the smack down laid on it. And they don't even have to go back to WW2 for a lessen - the former Yugoslavia is in pretty much everyone's living memory. Of course, the strife there was ethnic as much as anything, and so a common currency wouldn't have done any good.

The larger point though is that I don't see why the rush to bring those former Soviet satellites in. It's not like they were placed in as soon as they were out from under Soviet rule - hell, the EU wasn't even around when they were freed. If they were OK for a good 15-20 years without the EU, what was in it for the charter members to accept them? They couldn't possibly have envisioned them as military threats...

That's exactly my point. I don't have a problem that your economy got screwed up, I got a problem that I'm the one who has to pay for it.

 

The EU was created in the 50s. France and Germany started what would turn into the EU very shortly after the end of WW2. For most of its history it progressed with baby steps but in the last two decades it has been more aggressive mostly because things looked great. Countries looked at places like Ireland and Portugal which had been turned from what was basically third world countries into prosperous democracies (we see now that it might not have been lasting efforts but the fact still remains that EU membership has changed the life of millions of people in many countries). The former Soviet satellites wanted a piece of that. The member states both felt I reckon that they would be douches to reject them and that the objective of the organisation is to tie Europe together, all of Europe and why reject applicants then? There were demands that had to be met though and in theory all applicant states fulfilled them. It did take roughly a decade for them to join and some like Serbia are still not in.

 

The European Coal and Steel community, which was the predecessor of the European Union, was founded in 1951, six years after the war ended. It was founded with the logic that the main economic resources leading to war at this point in time were steel and coal, so if they are shared between the major European nations then the chance of war would be less likely.

A general argument I've heard a few times before is that from 1951, further integration became necessary - you regulate the sharing of coal and steel, and next you need to regulate the trains to transport them, as an example - and with every further step it became harder and harder for any one country to pull back. The cost of any one country pulling out of the Union, or letting it fall apart, would be massive, so they have to do what they can to keep it running. This often has involved giving up a bit more sovereignty in the process - we're seeing talks pop up fairly often, since the Greek problem came to light, about fiscal budget checks and restrictions.

Imagine, Aldeth, if a state in the USA were to run the risk of defaulting and suggest pulling out of the USD and forming their own currency. Other states (and the federal body) would fight tooth and nail to keep the USA together. While not a perfect comparison, it does serve nicely to show the importance of keeping the Eurozone together, even if it means a temporary cost to the stronger states (such as Germany).

My prediction is that this crisis will continue for a fair while, but will be solved through greater unification and a further cementing of the Two Track EU idea.

 

It was one of three predecessors, the others being the European Atomic Energy Community and the European Economic Community - all of which were founded with the Treaties of Rome in 1957. These three form the basic pillars from which the EU developed. Except for that, no objections.

Temporary? Germany has been a net donor for 30+ years.

Greeces problem is not German avarice but Greek malpractice in government. I have very little sympathy for a country that cheated itself into the Eurozone by faking the books, with the avid help of the Wizards of Goldmann-Sachs, and that is barely capable to organise effective tax collection, resulting in tax evasion and book cooking apparently becoming something of a national sport. Greek doesn't need German money as much as a good dose of getting their act together for some good governance.

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That said, with good governance I do not mean neo-liberal so-called austerity measures. I mean setting sensible taxes and to collect and administer them effectively.