The future of European stabilty?

[Fuchs]

P.S: I do think that the big three rating agencies are partly upkeeping the top rating for the US due to massive political pressure. While in theory it would be not too difficult to balance the budget especially due to higher taxes it seems almost impossible to do so due the polical dead-lock...

In Germany the executive/gubernative has permission to deviate by 20% from the budget given by the legislative by shifting money and they have permission to not spend money altogether unless there's some juristic/natural person entitled to it.

The German minister of defence, for example, could as far as I know stop all 'his' new procurement with a simple sheet of paper and some ink within minutes as far as I know.

So we could basically balance our budget (about a tenth not paid for by revenues) today if we wanted to. It only takes eradication of thousands of small pet projects* and few big ticket projects.



Instead, our government has just decided that having more revenues means you can spend more and increased the planned budget deficit. Part of this increase is due to one-time expenditures that shall make it easier to stay within the new constitutional limits for the budget once they're in force. Another part is due to new nonsense such as paying parents for not sending their child to a Kindergarten.


With Adenauer as chancellor we had a foreign policy grand strategy that mastered what failed during the 20's.
With Ludwig Erhard as his minister of the economy we had an economic and fiscal grand strategy rivalling the grand strategies of von Bismarck.
Later (and shortly) with Brandt as chancellor we had a reform movement towards more democracy and more liberties in the society.

Ever since, our governments were quite crappy:

70's: Schmidt government fails to react properly and forcefully to the structural economic changes and both oil crisis. Unemployment and public debt grow.

80's: Little progress if any in politics. Kohl's chancellorship survives well into the 90's only because of the reunification. Introduction of Deutsche Mark in East Germany with a wrong exchange rate destroys East German industry's liquidity and thus even many potentially profitable businesses.

Early and Mid-90's: A tired Kohl preserves power, mismanages the economic development of East Germany.

Late 90's: A supposedly social-democrat-green yuppie-mentality government partially dismantles the welfare state to boost 'competitiveness' (a common fearmongering of the industry lobbies at the time) and yields a terrible trade balance deficit (for the competitiveness was OK, and was raised to unhealthy). The supposed pacifists of the green party went to war asap ('99). Some other nonsensical reform such as subsidies for private retirement plans were enacted as well (made zero sense macroeconomically).

2000's: Merkel as chancellor has mastered politics (especially the destruction of party-internal opposition) and displays an increasingly astonishing ability to throw 'conservative' key political positions overboard at will.


It's so totally no surprise that the political Germany of our time is not capable of doing much right in this economic and European crisis.



*: Best medium-term savings measure is to fire ministerial bureaucrats. I've learned at work that even low-level ministerial bureaucrats are causing excessive costs with pet projects. A bureaucrat known to me (ranking so low that he really only had one guy as subordinate) had a 60 million Euro pet project (spread over six years) that was about 40-70% waste of money. His retirement couldn't possibly be more expensive than keeping him on the job.

Less bureaucrats in ministries = less advocates for new pet "pilot" projects and wasteful spending in general. A 1/3 personnel cut in all ministries would be a wise move. At the same time, outsourcing of ministry tasks (from kitchen to program offices) should be reduced by 1/3 as well.

[Uboat509]

It is impossible to know for sure what would happen but there is no doubt that a disorderly Greek default and exit from the Euro will have big consequences both in Greece and around the rich world. In Greece, many businesses will find that they still owe external debts in Euro that they have little hope of repaying causing many failures. The cost of European imports will become prohibitive for many businesses as well with similar results. Outside of Greece, a good many banks have at least some exposure to Greek debt although those that can unload it are doing so but more harmful than that is risk of spreading contagion. Italian and Spanish bonds are already trading at near unsustainable levels. A disorderly Greek default followed by its exit from the Euro may throw the bond market into chaos and leave Italy and Spain as well as possibly others unable to service their debts, which could lead to defaults or even a collapse of the Euro. The contagion could be contained but only by swift and decisive action by Europe's politicians, which we have not seen thus far.

[Fuchs]

In Greece, many businesses will find that they still owe external debts in Euro that they have little hope of repaying causing many failures.

That's no issue this time. Remember, the old currency (Euro) would not lose value as in other monetary reforms. They would still be able to do business in Euro.
A new indigenous currency would rather be introduced through requiring payment of taxes in it and through paying public servants as well as contractors with it.

The Greek industry would not have substantially greater difficulties paying Euro bills then than now.
Besides; bankruptcy laws can be written to national advantage.

[Uboat509]

That's no issue this time. Remember, the old currency (Euro) would not lose value as in other monetary reforms. They would still be able to do business in Euro.
A new indigenous currency would rather be introduced through requiring payment of taxes in it and through paying public servants as well as contractors with it.

The Greek industry would not have substantially greater difficulties paying Euro bills then than now.
Besides; bankruptcy laws can be written to national advantage.

How would Greek industry not have significantly greater difficulties repaying Euro bills? The Drachma will still be worth much less than the Euro and Greek monetary policy can only go so far to alleviate that. Ultimately Greek industry will be required to pay a much larger percentage of their available capital to purchase Euro than many of them can afford.
As for the Greek government re-writing bankruptcy policy, I am not sure how making bankruptcy easier to declare is going to help.

[Fuchs]

How would Greek industry not have significantly greater difficulties repaying Euro bills? The Drachma will still be worth much less than the Euro and Greek monetary policy can only go so far to alleviate that. Ultimately Greek industry will be required to pay a much larger percentage of their available capital to purchase Euro than many of them can afford.
As for the Greek government re-writing bankruptcy policy, I am not sure how making bankruptcy easier to declare is going to help.

Right now Greek industry is in peril because it has a fixed currency exchange rate, while with Drachma it would have a flexible one. That's a much better situation and will yield greater exports. Those exports plus the cash available right now needs to suffice for paying imports and foreign debt. It may not be easy, but what counts is the change.
Right now they're proved their inability to compete on large scale on foreign markets simply because they'd need a different exchange rate than 1:1. Their ability to gain Euros domestically doesn't appear to help enough, for the macro picture shows that this ain't enough. Greece has a major trade balance deficit.
The value of the Drachme would be of no concern, actually. I don't know why people are so interested in the value of foreign money. All you need to know is whether you can exchange it easily into another currency. There's no economic substance between the difference of printing a 10 or a 100000 on a piece of paper.
Besides; the Drachme might even grow stronger in regards to the exchange rate if the Euro : Drachme exchange ratio is being set to too weak initially.

Besides; all domestic debt could be converted by law into Drachme.


There were a couple examples for introduction of a new currency for leaving a currency that continues to exist. All the break-away state on the Balkan and in East Europe and Caucasus region did it. Sadly, none mirrors the Greek case very well.


About bankruptcy laws; it's possible to write a bankruptcy laws in which all outside capital simply turns into equity capital during a bankruptcy, without termination of the business. No company would ever need to die just because it cannot pay bills. That's simply a matter of will of the legislative.

[Compost]

Stratfor has published another of George Friedman’s masterly sitreps: this one on Germany’s current and largely self-generated problems relating to Ukraine and Greece.

https://www.stratfor.com/weekly/germ...eid=5da0feb2eb

[davidbfpo]

Compost,

An interesting article thank you. Germany certainly has issues and concerns over the potential decisions by the new Greek government - they are not alone.

There was a tweet yesterday showing the minimum wage level in four EU countries, Greece had the highest by a good margin. The other three were all small Northern European nations, who are IMHO in effect being asked to pay Greece. I cannot now locate that Tweet.

This morning on BBC Radio Four a Finnish person commented that the budget support requested by Greece meant a 5% GDP transfer, something he appeared to doubt any Finn would support.

Supporting Greece could easily become a unpopular political issue, which I am sure affects such Euro-enthusiasts as Chancellor Merkel.

Incidentally the cited author refers to few nations wanting to join the EU now. That is simply wrong. Seven nations are waiting, all but one small: Albania, Bosnia, Iceland, Kosovo, Macedonia, Montenegro, Serbia and rather hesitantly nowadays Turkey. See:http://www.bbc.co.uk/news/world-europe-11283616

Latvia even started to use the Euro January 1st 2015.