German bankruptcy? When will Germany default?

Moody’s threatens Germany downgrade. According to "Die Welt" there are 4 faults that doom the Euro. No heroic attempts will save the Euro. Rather will doom Germany, too. Germany is giving loans and guarantees assuming a Trillion Euro in guarantees for doomed countries. Several times its yearly budget of just over 300 Billion Euro. And this is before the unlimited rescue packages for the bigger countries like Italy and Spain. 

german-bankrupt-euroMistake 1: All people are equal. Germany developed solar and wind energy, while Greece, Spain and Portugal have much twice as much wind and sun. The latters simply lack the inventiveness and energy of the Germans.

Mistake 2: Lower interest (in Southern Europe) decrease cost of government debt and create growth. Changing from Drachma, Escudo, Lira to Euro decreased interest rates from 10% to 2%. Instead of using the gains to pay back government debt, these countries went on a spending spree. High government expenses please voters. Greek government salaries doubled in 10 years. Note that Germany, Sweden manage austerity measures (see Mistake 1). Spending and growth were based on borrowing, while the economy was destroyed by cheaper and more efficient German production.

Mistake 3: one same interest 2% level levels differences Germany’s support payments caused a boom in Spain. 2% interest loans with 3.5% inflation really invites overspending. Germany should have lower interest rates of 1% (and thus more growth and consumption. Southern countries should have had 6%-7%. interest rates.

Mistake 4: One currency leads to same wages. The lower quality of French cars was offset by lower prices due to currency devaluation of the Franc. Now Peugeot is closing factories because they cannot decrease their cost to compete against better German products. (source "Die Welt")


.Target 2 debt owed by the South to the North accumulated to about 1 Trillion Euro of unpaid (and unpayable) debt. The signs of doom were visible for a decade, but were swept under the rug until the problems became huge and unmanageable. The unavoidable doom of Greek, Spanish and other countries finances will be delayed by Germany taking unmanageable unlimited risk. Thus Germany might sink together with these countries. The iron-clad "no bailout clause" was simply violated, just as debt limits. So there is no reason to believe that any new agreement will be kept, in the long run.

Human-Stupidity Analysis

The Euro was doomed from the start. The idea that a common currency can join Europe into a unity has proven to be flawed. It is destroying European countries and create serious irreparable hostilities between nations.

False dogma and political correctness cause suffering.

Germany is guaranteeing several years of its federal budget to other countries.
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The Euro destroys Europe. Euro breakup necessary to save Europe.

Inflation and production cost differences cause irreparable financial desequilibrium and  cause havoc in Euro zone

Countries with different inflation rates are are bound together into the common Euro currency. No more corrective currency devaluations !  Production cost differences create serious permanent economical and financial imbalances and fan hostility between nations. Germany resents paying and guaranteeing crippling amounts of money, worth several years of federal government budget. Greece resents forced austerity, wage reductions and severe recession. The Euro causes suffering, injustice and resentment among European nations. The Euro should have never been introduced as common currency for economically diverse nations.

Euro breakup scenarios

A breakup would be painful. Germany has guaranteed and loaned too much. Loans are too. The European central bank bought lots of potential default papers, in order to transfer losses from banks to the tax payer.

But every year these loans increase further.  Greece, Italy, Spain have become too uncompetitive and indebted. `Germany’s currency is under-valued, salaries are too low, leading to enormous export surpluses. 

Coins and bills of Greek, or German currencies would need to be minted, causing serious logistic problems. .

Finland leads the way

Finland could leave the Eurozone rather than pay other nations’ debts, says Jutta Urpilainen

The finance minister stressed that Finland, one of only a few EU countries to still enjoy a triple-A credit rating, would not agree to an integration model in which countries were collectively responsible for member states’ debts and risks.

She also insisted that a proposed banking union would not work if it were based on joint liability.

 

"We need A Europe of sovereign nations", said General DeGaulle’s

DeGaulle, French hero, general, and ex-president,  had the right vision. He wanted collaboration of sovereign nations, not forced equalization of European nations.

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Different cultures, differing inflation, same currency. The Euro aggresses cultural identities, thus creates animosity.

Over the year, Northern and Southern European nations moved further and further apart, in prices, productivity, production cost. German exports became cheaper, because German workers get paid too little in a currency that is undervalued in Holland and Germany, and overvalued in Greece and Italy.

Cultural diversity, the obstacle to Euro’s functioning

Northern and Southern European countries always had different attitudes towards work, savings, inflation, leisure, strikes, and thus very different inflation rates.

Inflation rates always were differentHistorical Inflation Rates before and after Euro
Production cost (Unit Labor Cost) and accumulated inflation drifted apart further and further, year after year. Target 2 debt owed by the South to the North accumulated to about 1 Trillion Euro of unpaid (and unpayable) debt. The signs of doom were visible for a decade, but were swept under the rug until the problems became huge and unmanageable.
The Euro will only work if European diversity gets destroyed: Let Greek and Italians work harder then the Dutch, and Germans, And Germans need to spend more then Southern Europe. Equal attitudes would not suffice. It is not enough if Italian and Greek productivity and inflation move in unison with Germany, Holland and Austria. 13 years of divergence have to be undone.

Germany’s production cost increased 8% over 13 years, and Southern European cost increased 33%. This obviously causes a permanent and lasting trade imbalance.

Production Cost becomes more divergent over time

Unit Labor Cost (determines production cost and thus competitiveness) differ more and more over time, turning Southern European products too expensive to compete, German products relatively cheap

All proposed solutions involve European central government interference to force nations to change their traditional ways. Government interference in wages, prices, borrowing habits. The  Greeks need to get forced to work and save like the Dutch, and the Germans enticed to increase wages and spend like the Italians. 

Rules and agreements have been broken before (debt ceiling, no-bailout-clause, ..). There is no reason that new rules will finally be kept. Nor is it clear that such discipline is desirable and useful for the offending Southern European nations. Not only is the population fiercely protesting against austerity. They are right, austerityis strangling these nations and leads to recession.

Currency devaluation and revaluation due to market forces have been eliminated with the advent of the common European currency. Devaluation was the old and tried solution that maintained trade and debt equilibrium and needed no government interference.

Relative value of Euro against national currency has always moved in opposite directions
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Diversity of European Cultures dooms the Euro. Greeks need to work like Germans, Dutch to spend like Italians for the Euro to function.

Train strikes in Italy

I was about to leave Italy, by train, when I was surprised by a country-wide railroad strike . Luckily I was near the France border and made it out on next day’s only train. That train happened to pass through a short stretch of French mountain villages and allowed me to continue the trip in France.

My European train trip prevented me from posting last month. And this strike made it clear to me why the common currency, the Euro, can not work.

This strike clearly showed to me what is wrong in Europe. Italians (Greeks,Spaniards, Portuguese) strike to prevent austerity even in the face of imminent bankruptcy. Germans (Austrians, Durch) traditionally accept austerity measures and voluntary restraint, just for stability’s and employment’s sake. German labor unions accept wage cuts, increased retirement age, while their southern counterparts fight teeth and nails for every possible advantage. It has always been this way.

The Italians don’t understand the Germans, and vice versa. In the Euro debt crisis, century-old incompatible cultures clash. Italy defines itself as connection to a person. Not the structure is relevant, but a personal relationship. The Italians know how to take advantage of the Germans (Anton Börner)

Europe’s amazing diversity of cultures and life styles is being threatened

Europe’s amazing diversity of cultures and life styles is being threatened by the Euro. Countries have vastly differing attitudes in hard working vs. relaxed life, ,workers unions’ strikes vs. self worker’s self restraint, sacrifice for the common good vs. self-interest.

Southern European countries’ inflationary tendencies, relaxed attitude towards work, punctuality, price stability were corrected by frequent devaluation of their currency. High interest rates (in their native currency) restrained tendencies to happy-go-lucky overspending.

Germany on the other hand has a hard working,population, willing to forego pay raises,and a very disciplined central bank. Historically, the German Mark regularly appreciated in value. Like the Swiss Franc, which is still appreciating against Euro and Dollar.

This has always been like this, and will not change drastically.

The Euro is an example of human stupidity. Politically correct thinking can not fathom that cultures have totally different life styles and attitudes which can not be tied to one single currency. Argentinia failed catastrophically afther they tied their currency to the dollar.

Germans need to spend more then the Italians and Spanish,. Greeks need to sacrifice and work more then the Germans.

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Germany’s Central Bank against the World of unlimited money printing

jens-weidmann-bundesbankGermany has, tacitly and automatically, already loaned € 547 Billions to Southern European countries.  Add to this the hundreds of Billions in bonds the European Central Bank already bought, in violation of their charter. Germany is responsible for 27% of all these. For more if other guarantors fail to pay. In addition to Germany being a net payer for the EC budget, year by year, to aid moneys to weaker countries. Plus German  guarantees for Greek and other bonds that probably will never be paid.back. 

    Most significantly for German public opinion, Weidmann’s message spoke about possible losses for the Eurosystem of member-country central banks caused by growing internal imbalances among European central banks generated by capital flight from southern EMU members. Weidmann’s letter, which found its way into the columns of the conservative Frankfurter Allgemeine Zeitung newspaper, appeared to suggest more secure collateralization for the overall ECB credits to weaker EMU central banks, which now amount to more than €800 billion under the ECB’s Target-2 electronic payment system.

    The latest Bundesbank figures show that the Bundesbank’s share of these credits rose from €498 billion to €547 billion in February, pointing to continued capital flight from the southern to the northern members of EMU. Weidmann reawakens debate on Bundesbank’s power

The German Bundesbank is owed  € 547 Billion in target claims the European Central Bank. This is € 13,000 Euro per employed German.

Our life insurance policies and savings accounts now are owed more than 13,000 € per German worker from open target claims against the other central banks in the euro zone. These demands can not be made due, get an interest rate below inflation, and will prove to be wholly or partially worthless, if the Euro breaks or if Euro countries go bankrupt. 2

Germany is still haunted by the memory of the hyperinflation of the 1920s. That's one reason why many Germans are so opposed to printing money to solve the euro crisis.The world blames Germany for attaching conditions to loaning or rather giving away money they legally should never give in the first place. The world wants Germany to bail out all of Europe, to give enormous guarantees that some day might become due as true financial liabilities for Germany. Risk Germany’s bankruptcy to bail out Europe.

Saving the Euro

Germany’s Central Bank against the World

Jens Weidmann, the new president of Germany’s Bundesbank, is strongly opposed to making the European Central Bank the lender of last resort in efforts to prop up the common currency. It’s a lonely fight, however, and the pressure from Germany’s European partners is intense. Some warn that Weidmann’s course could end up destroying the euro. By SPIEGEL Staff.

Hasn’t the Euro already been destroyed by insane spending and borrowing?  World wide, governments borrow money with no intent to ever pay it back. Rather they pay it with the next loan.

And then they are unable to afford the new loan because the interest increased. This is not unexpected, it has caused insolvency in Latin America 20 years ago.

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