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.
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
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
The Euro can only succeed if Southern and Northern European cultural differences become destroyed and all countries become alike.
The Euro leads to growing resentment, breach of contracts (like debt limits and the "no bailout clause") and disastrous economic consequences.
The European transfer Union will enslave Germans forever to work to send large parts to the Greek, Spanish and Italians who will resent having foreign nations enforcing discipline in their labor union’s affairs, and in government and private spending. Civil war is not far away.
Before the Euro, every nation was free to pursue their own policies, and market forces would correct inequalities through exchange rates.
Alternative: permanent large scale Transfer Union of Germany sending cash to the South
The other option is to vastly increase the already existing constant Transfer Union where Germans work hard just to be forced to forever keep paying Southern European countries. And Southern European countries will forever have Berlin or Brussels force them to restrain their life style and expenses and enforce wage discipline no matter how much strike and rioting ensues.
"A Greek, an Irishman and a Portuguese go into a bar and order a drink. Who picks up the bill? ……… A German." 6
While China raked in Billions of dollars in currency reserves, Germany got € 800 billion target 2 claims, mainly against the potential default countries in the South. This huge credit and other loans and guarantees would make defaults extremely expensive for Germany.
Compare these loans and guarantees with the German federal Government budget of 312,7 Billion Euro in 2012 out of a GDP of 2.498,8 Billion. Euro. Germany is guaranteeing many years of its federal budget, on top of regular transfer payments. "In 2009, Germany transferred €6.4 billion ($9.22 billion) more to Brussels than it received from it." S1 It is estimated that German yearly transfers of 25 to 74 Billion or more per year would be needed to solve the Southern countries’ problem. S1 Germany supports the South first with budgeted money, and then with un-budgeted and unapproved loans.
As long as Southern Europe does not produce enough goods at competitive prices to pay with merchandise, they have to pay with debt and vapor money. Recessive austerity only exacerbates the problems that were created by inflation differences. Currency devaluation would be the answer. As long as Germany produces too efficiently and too cheaply, and consumes too little, Germans will have to loan money to their insolvent buyers.
Other relevant issues we do not focus on
3 reasons for the crisis –
- different culture, monetary discipline and economic prowess, the topic of this post
- the banking and finance industry with their gambling, greedy leveraged risk taking, fake AAA rating for junk, and their need to be saved when they screwed up. Caused, of course, by flawed laws that allow such abuse to happen.
- government debt, lending with no intent to ever pay it back.
Germany 2,1 Trillion €
Eurozone 8,7 Trillion €
Japan 9,7 Trillion €
USA 13 Trillion € s
High debt does not imply high interest
It seems that indebtedness does not strongly relate to interest rate. The country with the lowest debt (Bulgaria) has the highest interest rate. The country with the highest debt percentage (Japan) has the lowest interest. I can only fathom what would happen if Japan’s interest were to increase substantially.
Also note that Germany’s wage and inflation restrained is geared towards competition with China. A voluntary increase of inflation and unit labor costs (to adapt to Greece and Italy) might reduce competitiveness with China.
Decades of mismanagement
Mistakes have been made for many years or even decades. Government debts have accumulated debt, stimulus packages have put off collapses at the cost of further increasing debt. Euro imbalances were visible from the start but ignored. Now the imbalances have accumulated and increased over 13 years and become catastrophic and unmanageable
Sources for this post:
Illustrations, Graphics taken from this German speech "Europa im Abgrund" Die Eurokrise – Prof. Dr. H. Flassbeck 07.03.2012 and discussion.