Just a short post on one point about the recent Cyprus business. (It looks like Cyprus will impose a "one-time tax" on bank deposits rather than honour its deposit insurance.)
Governments usually provide deposit insurance to prevent bank runs.
If the banking system is too big, and the banks' losses are too big, relative to the government's capacity to pay that insurance claim, that's a problem.
But the problem is very different if the government (unlike Cyprus) can print currency to pay bank deposits that are liabilities in that same currency. If worse comes to worst, the government just prints as much currency as is needed to pay the depositors what they are owed. If that means is has to print "too much" currency, that's a problem, because it means inflation will be "too high". But that inflation will adversely affect the real value of currency and bank deposits equally. So even if people expect it might happen again, this doesn't cause a bank run, where people try to get out of bank deposits into currency.
It's a very different sort of problem in a country like Cyprus where the government cannot print money. If people see a "one-time tax" on bank deposits happen once, they might expect it to happen again. And if they expect it to happen again they will try to get out of bank deposits into currency. Which is a bank run.
The difference is that inflation from printing too much money is a tax on currency too. Cyprus cannot tax currency; it can only tax bank deposits.
If the banking sector is too big, and if bank losses are too big, relative to the country's ability to pay, deposit insurance as a way to prevent bank runs is not credible and won't work in a country that cannot print.
Next week is going to be interesting. And not just in Cyprus. People have seen it has happened once, in Cyprus. Will they expect it to happen again? In other Eurozone countries?
Update; since I can't read Greek, this article and comments in Cyprus Mail is the nearest I could find for judging local reaction. Or maybe this is better.
Worthwhile Canadian Initiative 
Another update:
Maybe the government will be able to reduce the required cash contribution by 3.6 billion euros, after all – by offloading all problem loans on the bad bank and making sure that the new Laiki does not need new cash infusion.
To get the remaining 2.2 billion euros, the government plans to impose a 5-7% haircut on deposits above 100 thousand euros.
Thanks, Dr. Why!
How any of these moves would reduce the net debt position, relevant to the IMF 120% criteria, remains a mystery to me.
Sources here say that Cyprus does not even talk with the Eurogroup /Troika anymore.
http://ftalphaville.ft.com/2013/03/22/1435062/cyprus-just-pop-the-red-pill-please/
Re Banque Nationale:
It’s probably not to big to fail, but big enough to be a headache if it does. However its medium size means its is a viable takeover target in a “bailout merger”, the classic Canadian way of dealing with an insolvent bank (see Bank of Hamilton, Bank of British Columbia, etc). BN is small enough that it can be taken over by one of the Big 5, or a few of them, without impairing their own businesses.
BN and its predecessors did get into trouble in the 1920’s and the Government of Quebec did provide support to a provincially significant institution.
Determinant:
Yes, it could probably be taken over by one or more of the Big 5, particularly if they had Federal blessing. But that just means that the only obstacles are political. Would they be able to get provincial blessing? Would it matter?
I would be very happy never to find out.
Provincial blessing would be immaterial legally. The National Bank is a Chartered Bank under the Bank Act. It is therefore under the Federal Goverment’s exclusive authority under Section 91(15). Ottawa is the paramount authority. The National Bank has no charter relationship with the Province of Quebec.
Politically it would be nice, but I cannot see Quebec making a fuss about bailing out an insolvent National Bank when the alternative is the failure of the largest bank in Quebec. Maybe the Caisse to the rescue, but that would require Ottawa’s OK.
“I would be very happy never to find out.” is a very good statement.
1. Cyprus
I think that your friend Orphanides made a very good move to get away as far as possible.
Unfortunately we now know that some folks in Greece and Cyprus pushed certain buttons. That we knew that the buttons were not wired, doesn’t change the fact that they were pushed.
A few years ago, after repeated insufficent gas supply from Russia, through the Ukraine and Belarus, a new pipeline proposal came up, the shortest, cheapest way would have been through Poland. Or through the Baltic Sea. Some folks, like a Polish politician Sikorski made noises, that building the pipeline around them, without their hand on a lever, would be a strategic threat of Russia-Germany.
It was then of course build completely around Poland, with a former German Chancellor on the board. A polish FM Sikorski is now singing the praise of Germany as the “indispensable nation”, and implores his Oxford friends to stay within the European Union.
That Russia would waste serious money on irritating 100 times larger agreements and challenging openly the US / UK mare nostrum, that people actually believe and discuss this, was interesting for me.
2 days ago, I thought we could here discuss “If my explorative interpretation is correct, they just killed some 25% of their GDP, possibly 50%, resulting in, according to IMF 120 % GDP debt numbers rules, to wipe out 30 – 100 % of the cash assets there, roughly. And not just some 10% fee.” on a kind of neutral ground. Silly me.
“A Modest Cyprus Proposal”
http://online.wsj.com/article/SB10001424127887324103504578372411352205582.html?mod=googlenews_wsj
seems to go today a lot into that direction.
2. Ireland / Karl Whelan
On a related issue we also wondered for a while about the Irish IDEAS/Repec nr 1, who said some silly things like Target 2 accounts possibly just being wiped out.
He now tries to make constructive proposals how to balance those accounts, and starts his assessment with
“Now before people go getting too excited about this, I suspect Cyprus would continue honoring its TARGET2 obligations even after an exit [ out of Europe]”.
http://www.forbes.com/sites/karlwhelan/2013/03/21/revised-target2-paper-implications-for-ecb-of-cyprus-exit/
Interesting paper. A positive development.
3. Weather
Is it just me, here, or is this the longest / coldest Winter I can remember?
Btw, Google scholar told me that I exceeded 1000 citations over Xmas : – )
As to the comments about National Bank. Conceivably any of the clearing members of the Canadian Payments Association are TBTF. This includes not just National but Desjardins(a provincially regulated institution), HSBC Canada, AB Treasury Branches(guaranteed by AB government), Laurentian, and the Toronto branches of two of the US banks. Now having said that the CPA rules are specifically designed to allow for the default of two clearing members so it is hard to say being a CPA clearer makes you TBTF. Where the Big 5 standout from the others is their OTC derivatives business and their level of international interconnectedness. National Bank has a big domestic cash equities business but very little OTC deriv activity.
The dirty secret of National(and perhaps it is not that dirty from a strictly Canadian standpoint) is that National doesn’t have a US Branch and handles a lot of the trade financing between Canada and Cuba(something that I doubt the US Treasury department likes but of which as long as National doesn’t have a NY Branch they can’t do much about). National I believe is the only Canadian bank to have a representative office in Havana. The other side of this though is without a NY branch you aren’t really considered a heavy hitter in the world of TBTF banking.
FYI, I have been working on extraterritorial banking issues myself a lot lately(limiting my commenting time at WCI) so I am pretty immersed right now in the politics and personalities of the US Treasury(which I have previously mentioned I have little use for as an institution. In fact I think the US Deputy Treasury Secretary Neil Wolin is a complete loser compared to our staff at the Canadian Department of Finance)
Cyprus Update
Looks like the government may not be able to write the bank restructuring law in such a way that it would apply only to Laiki. So at this point there are two options:
1) Restructuring both Laiki and the Bank of Cyprus, imposing heavy losses on uninsured depositors (up to 40%). This approach is probably cleaner, but it will shift the cost onto foreign depositors and effectively kill the offshore business.
2) Returning to the idea of a general haircut/conversion to equity (structured as a tax), applied most likely only to uninsured deposits.
Determinant: Yes, the legalities are obvious and no one is suggesting otherwise. Similarly, I don’t think anyone is suggesting that politicians in Québec could resist making an issue out of it. No doubt some in Montreal and Québec City would prefer a “made in Québec” solution. And the notion that this would require Ottawa’s approval could also quickly become a point of controversy on this side of the Ottawa (not legal controversy, just to clear….political controversy.)
And a personal rant:
Though I usually call myself Dr Who or Dr Why in reference to one of my favorite TV characters, I’m not an academic economist, but a high-tech entrepreneur with a lot of free time on my hands. However, in my previous professional career (more than a decade ago), I spent about four years working in commercial banking (as a management accountant) and investment banking (in M&A); and I also have an M.S in International Economics (as well as an M.S. in Theoretical Physics) — so I guess I’m a kind of person who could be fully expected to see what was coming.
But I didn’t, not really.
First of all, from a macroeconomic perspective, all periphery countries walk on a knife’s edge because of the strict budget deficit targets and positive real interest rates. However, for a small country like Cyprus – whose economy depends on financial services, real estate, tourism, and shipping – macroeconomic and budget forecasting is not just difficult, but virtually impossible.
Second, banking in a low interest rate environment is scary. At low discount rates, asset prices (including collateral) become highly volatile, while at the same time low yields on safe assets force banks to increase leverage and look for high-yield investments. Even if Cyprus banking system had concentrated on its domestic market, it would still be incredibly vulnerable (maybe even more vulnerable) to small adverse changes in the global macroeconomic environment.
So without access to inside information, all I knew was that things could turn very bad very quickly. However, if you live in Cyprus, keeping money elsewhere is not practical, especially if you are a small depositor – so I had to rely on the government guarantee. It was never clear how this guarantee would work in practice, but since insured deposits are typically equal to about 50% of assets, I thought it should theoretically always be possible to restructure banks in such a way that small depositors would not take any losses.
But then I underestimated the creativity of the Eurocrats. I would never have thought that the Eurogroup would try to restructure the banking system through the back door by introducing a special tax on deposits. I mean, some countries tax wealth (e.g. France has ISF), but a tax on bank accounts, including insured deposits? Seriously? In retrospect, of course, this arrangement makes perfect sense – you tax what you can, but it creates so many dangerous precedents that I still wonder what they were thinking when they came up with this wonderful idea.
Anyway, this whole affair made me think once again about the idea of “a black swan” and how it is fundamentally wrong. In reality, the future is unpredictable. Of course you can build a model, and fit it to some historical data. But if the time series is too short, you miss some rare events, and if it is too long then the model ignores important changes in the underlying economic reality, and there seems to be no useful middle ground between those two extremes.
So there is no truly rational approach to risk management in banking and economics. No matter how you design the financial system some events will always break it – there are not just black swans, but also red swans and green swans and striped swans; and then things will always come down to frantic negotiations and public protests and an eleventh-hour deal (or sometimes no deal), so let’s just get over it move on with our lives.
Nick,
I’ve tried to post a long comment (twice), but I can’t see it. Should I try again, or did it simply get stuck in your anti-spam filter?
Doc Why: They got stuck in spam, sorry. I fished them out, then unpublished one copy.
In defence of our spam filter, there is a lot of spam coming in, and the spambots are getting smarter (there was one that I had to check carefully to see that it was spam). So it does make a few type 1 and type 2 errors.
Nick,
Thank you.
Patrick, Bob Smith
I would like to draw your attention to page 5 of http://www.parisschoolofeconomics.eu/docs/zucman-gabriel/pikettyzucman2012slidesoctober.pdf
And the numbers for Spain and Italy in there.
In the moment the left / Green in Germany demand a 10 – 15% tax on ALL property beyond 1 million, to bring down our national debt to the 60% target, which was agreed on at the founding of the Euro.
If Spain and Italy would do the same, they could easily bring down their national debt to this 60% debt / GDP number, too. And they would still be on average substantially richer than us.
There is presently a substantial, then official study ongoing at the ECB on this, which some there try to suppress, certainly not the Bundesbank. And this will come into the open very soon.
There are similar numbers from the OECD too http://www.oecd.org/eco/outlook/economicoutlookannextables.htm
This is not just a leftie Piketty saying this.
Dr_why, thanks a lot for your “personal rant” here.
It makes a lot of things more clear. Many physicists are currently focusing their attention more on the real world again: economics, politics, “risk management”.
Emanuel Derman, Angela Merkel, myself …
Getting back to Patrick / Bob for a moment:
2. A year ago, I tried here, to describe what we follow here as “Ordnungspolitik”, in my own, somewhat limited words. A more recent description, from a much better source is here:
http://blog.openeuropeberlin.de/2013/02/jens-weidmann-on-european.html
When you wrote things like “they seem to hold many of their neighbors in utter contempt”, I tried to ignore it, and when you repeated with thing, most people here would consider as even more slanderous.
I thought Nick Rowe’s pretty reasonable analysis, of what would happen, if we would have our deutschmark back, would leave some impression with you, and did not want to fuel emotions any more.
When people in the north, and not only Germans, but Scandinavians, Dutch, Poland, Czech, etc. as well, look at the presently ruling corrupt elites in the South, who have lined their pockets in the last 15 years very thoroughly, we have contempt for those, who are apparently willing to bring their own country within days of insolvency, like Berlusconi, unwilling to give just a little bit back to their own nation.
We had this recently here, that Germany takes a lot more care of the poor, and not just the middle class, with the Canadian social minimum at just 43% of the German level, which I think is roughly equivalent to many of the other countries I mentioned above.
There was the project of an EU constitution, which would have enshrined similar rules. This was stopped by UK, Ireland, and France ruling classes. Cui bono, to whose benefit?
‘Kniell why is this even a problem. It’s not that we did not know.
I did a seminar about the future developments in finance, when I studied economics under the supervision of the then special advisor to the Delors-comittee and when the question whether a failing foreign bank in Denmark would be bailed out by the authorities was raised the silence was telling.
Then some mumblings about that this would be sorted out in the future..
Guess not.
jb: very interesting comment. But it needs a date. When did you give that seminar? (What year?)
Nick,
do you want jb to blow his cover?
Dr Why: “But if the time series is too short, you miss some rare events, and if it is too long then the model ignores important changes in the underlying economic reality, and there seems to be no useful middle ground between those two extremes.”
I really like that.
genauer: suppose I put forward a (really stupid and really false) conspiracy theory: “The introduction of the Euro, and the monetary policy of the ECB, was all a dastardly German plot to destroy the economies of all EU countries except Germany, and make them all utterly dependent on the whims of the German chancellor.”
I repeat: I know that is a stupidly false theory. Just for starters, the Germans were rather reluctant to leave the DM and join the Euro. But in some respects, that stupid and false theory gives predictions that fit the facts. That has been what has happened, even though it was certainly not intended by Germany.
If you can see the world from that perspective, it might help you understand where others are coming from.
France too seems to be sliding back into recession, judging by the Markit PMI numbers.
Germany is just the biggest and strongest cat in a bag full of fighting cats. The other cats will end up hating Germany, even though it was not Germany who put all the cats in the bag. The only hope is for Germany to leave the bag, and return to the DM. The EU is being destroyed, by the Euro.
genauer: “do you want jb to blow his cover?”
Ooops! I never thought of that!
LOL,
I got this explained to me some 10 years ago, that while one is often very interested in certain knowledge, in negotiations,
it is actually often poisonous, if that happens in public.
The Cyprus events now actually look a little bit like that, when the citizens get aware of what their rulers are discussing. Defaulting on the 100k deposit insurance, raiding the pension funds … : – )
Nick,
As you said for yourself, the problem with your story is just that it is not true.
I too was inspired earlier this week for some other conspiracy saga, with Angela and Vladimir, and how Brother and Sister can not come together, enough for a whole book. Merkel speaks Russian, Putin German, and both family stories are a little murky. Another day : – )
The true story is, Germany was reluctant to give up the DM, but the others said, things should be run to the European average, and we gave in, with 2 clear conditions:
a) No money printing, inflation only targeting (<=2.0%), but now not to Germany only, but European average, fair enough
b) No bail out, and the TFEU treaty is extremely clear on this. We knew that a lot of our neighbors had this habit of happy living until theire was this urgent need for lots of fresh money. And even IF NGDP would be the right policy for one nation, buying bonds from some country, and then historically never paying it down, would just create one truly gigantic moral hazard
With these rules, and that the ECB is in Frankfurt, with some jurisdiction implications, we felt safe to try it, without seing a possibility to lose our shirts. And there were those 60% debt and 3% deficit targets, actually some punishments associated with them. And we were anyways busy with ourselves and the reunification problems.
Agenda 2010, we overstepped the 3% limit a fourth time, slightly, and we felt bad about ourselves, not many of us looked at the Current Account surplus, and at the 4th time it was also clear, that the turn around measures, with cuts for our own people, were working, actually a little too good, as we know now. We realized, such things just take a little longer, than 20 years ago.
Then the crisis hit, our GDP went down by 5% too, but then we came up back to normal, but not others. And everybody looked at what is happening, why this is not just business cycle for them, and it turned out, they had collected a lot of structural problems, all sorts of debt, running wages and pension ahead of the 2% target, Greece with mumbo jumbo for statistic data.
And they started with some bail out programs, drawn up by the IMF, financed to a larger degree by the EFSF, and then the Greek just took the money and laughed about their part of the agreements.
I could fill here pages with increasingly irritating behavior of a number of our neighbors, which also got the financial markets more and more nervous.
And then one after the other came with demands to break the Maastricht treaty, not just bend it a little here and there. Berlusconi took money and didn’t keep his promise, we established the ESM, Rajoy and the Irish wanted to push their bad mortgages on the rest. France tried to overturn the financial limits on the ESM even before it became active.
And Germany was very popular in the World, beating even you Canadians in the BBC World Opinion polls http://www.bbc.co.uk/news/world-18038304 , but to be fair, we have a little size advantage.
And Merkel was pretty popular all around, with the Exception of Greece, LOL
Click to access Pew-Global-Attitudes-Project-European-Crisis-Report-FINAL-FOR-PRINT-May-29-2012.pdf
more popular than their own leaders, please see page 41
And I think that got some folks a little nervous, and the systematic nationalist hate mongering against Germany was turned up to full force.
Did some entry of mine just disappear ?
Nick,
As you said for yourself, the problem with your story is just that it is not true.
I too was inspired earlier this week for some other conspiracy saga, with Angela and Vladimir, and how Brother and Sister can not come together, enough for a whole book. Merkel speaks Russian, Putin German, and both family stories are a little murky. Another day : – )
The true story is, Germany was very reluctant to give up the DM, but the others said, things should be run to the European average, and we gave in, with 2 clear conditions:
a) No money printing, inflation only targeting (<=2.0%), but now not to Germany only, but European average, fair enough
b) No bail out, and the TFEU treaty is extremely clear on this. We knew that a lot of our neighbors had this habit of happy living until theire was this urgent need for lots of fresh money. And even IF NGDP would be the right policy for one nation, buying bonds from some country, and then historically never paying it down, would just create one truly gigantic moral hazard.
With these rules, and that the ECB is in Frankfurt, with some jurisdiction implications, we felt safe to try it, without seing a possibility to lose our shirts. And there were those 60% debt and 3% deficit targets, actually some punishments associated with them. And we were anyways busy with ourselves and the reunification problems.
Agenda 2010, we overstepped the 3% limit a fourth time, slightly, and we felt bad about ourselves, not many of us looked at the Current Account surplus, and at the 4th time it was also clear, that the turn around measures, with cuts for our own people, were working, actually a little too good, as we know now. We realized, such things just take a little longer, than 20 years ago.
Then the crisis hit, our GDP went down by 5% too, but then we came up back to normal, but not others. And everybody looked at what is happening, why this is not just business cycle for them, and it turned out, they had collected a lot of structural problems, all sorts of debt, running wages and pension ahead of the 2% target, Greece with mumbo jumbo for statistic data.
And they started with some bail out programs, drawn up by the IMF, financed to a larger degree by the EFSF, and then the Greek just took the money and laughed about the agreements.
I could fill here pages with increasingly irritating behavior of a number of our neighbors, which got the financial markets more and more nervous.
And then one after the other came with demands to break the Maastricht treaty, not just bend it a little here and there. Berlusconi took money and didn’t keep his promise, we established the ESM, Rajoy and the Irish wanted to push their bad mortgages on the rest. France tried to overturn the financial limits on the ESM even before it became active.
And Germany was very popular in the World, beating even you Canadians in the BBC World Opinion polls http://www.bbc.co.uk/news/world-18038304 but to be fair, we have a little size advantage.
And Merkel was pretty popular all around, with the Exception of Greece, LOL
Click to access Pew-Global-Attitudes-Project-European-Crisis-Report-FINAL-FOR-PRINT-May-29-2012.pdf
more popular than their own leaders, please see page 41
And I think that got some folks a little nervous, and what we see as systematic nationalist hate mongering against Germany was turned up to full force.
Agenda 2010, we overstepped the 3% limit a fourth time, slightly, and we felt bad about ourselves, not many of us looked at the Current Account surplus, and at the 4th time it was also clear, that the turn around measures, with cuts for our own people, were working, actually a little too good, as we know now. We realized, such things just take a little longer, than 20 years ago.
Then the crisis hit, our GDP went down by 5% too, but then we came up back to normal, but not others. And everybody looked at what is happening, why this is not just business cycle for them, and it turned out, they had collected a lot of structural problems, all sorts of debt, running wages and pension ahead of the 2% target, Greece with mumbo jumbo for statistic data.
And they started with some bail out programs, drawn up by the IMF, financed to a larger degree by the EFSF, and then the Greek just took the money and laughed about the agreements.
I could fill here pages with increasingly irritating behavior of a number of our neighbors, which got the financial markets more and more nervous.
And then one after the other came with demands to break the Maastricht treaty, not just bend it a little here and there. Berlusconi took money and didn’t keep his promise, we established the ESM, Rajoy and the Irish wanted to push their bad mortgages on the rest. France tried to overturn the financial limits on the ESM even before it became active.
trying to figure out , what the spam filter doesnt like:
And then one after the other came with demands to break the Maastricht treaty, not just bend it a little here and there. Berlusconi took money and didn’t keep his promise, we established the ESM, Rajoy and the Irish wanted to push their bad mortgages on the rest. France tried to overturn the financial limits on the ESM even before it became active.
And Germany was very popular in the World, beating even you Canadians in the BBC World Opinion polls http://www.bbc.co.uk/news/world-18038304 but to be fair, we have a little size advantage.
And Merkel was pretty popular all around, with the Exception of Greece, LOL
Click to access Pew-Global-Attitudes-Project-European-Crisis-Report-FINAL-FOR-PRINT-May-29-2012.pdf
more popular than their own leaders, please see page 41
But it wasn’t a habit of happy living. Turned out it was a kind of social/political equilibrium, that money printing was being used to sustain. The Berlusconis of the world insisted that they be paid anyway and have the means to back it up.
The end result is to push these societies into a period of dangerous instability. It is a really terrible social experiment that the very narrow view of the world apparently held by German intelligentsia simply didn’t conceive of.
A “working” Eurozone would look something a little more like Italy than it does now.
Mandos,
nobody was forced to join the Euro. Denmark didnt, Sweden, UK.
When you sign a treaty, a contract, you are expected to keep it.
That is if we are talking about individuals. Countries are not individuals, and when they are representative democracies, pacta cannot always be servanda. People and their suffering matter more. Italy should start monetizing its debt and let the Bundesverfassungsgericht figure out what it wants to do.
Also, treaties and international contracts are broken so often it is so funny to hear genauer talk about the Maastricht treaty as though it is like some sort of automotive financing agreement for a consumer car! When people suffer it is time to break the treaty. That is what Italy voted for and that is what Cyprus voted for, but that is not what Cyprus is now not going to get. The legitimacy of the institutions and the treaties—their only true legitimacy, serving the needs of the people—sinks ever further.
In re Quebec and equalization, Quebec is compensating for the social deficits in the ROC, so to me the equalization payment works the other way.
For what those things are worth. Still…
National Bank ranked fifth strongest bank worldwide
Montreal, 3 May 2012 –
National Bank has been named one of the strongest banks in the world, clinching fifth spot worldwide and third in North America according to the internationally renowned Bloomberg Markets magazine.
http://www.nbc.ca/bnc/cda/newsdetail/0,2714,articleCode-17220_divId-2_langId-1_navCode-6100_viewFilter-2012,00.html
Nick,
if I produce goods, and sell them on credit, I do benefit, provided I get paid back. If I produce goods, sell them on credit, and then have to forgive the loan, I lose.
You are assuming that recessions are impossible and that the natural rate is never negative. if the natural rate is negative, you get back less than what you paid.
But if you are not willing to lend at negative rates (as you can hold cash), output declines unless you end up taking the negative rate ex-post if not ex-ante.
This could be with a land bubble that subsequently deflates, or government deficit spending whose interest income is subsequently taxed away, or via exports — the path chosen by Germany as its internal politics limits the ability of the other two mechanisms to deliver negative returns to maniacal savers. That is all that is unique about Germany — it’s reliance on one of the three mechanisms whereas other nations might favor land bubbles or deficit spending.
What we should be talking about is why every nation seems to be saddled with a private sector that is unable to generate sufficient productive investment at the going interest rates to keep everyone employed. Is the natural rate permanently negative or are the models just wrong in this regard?
Germany has already been paid in full in the most precious commodity that exists — demand. A “real” repayment, that is, Germany swinging to be a chronic net importer until it held no net claims on the foreign sector — would be devasting for German industry and employment.
So let’s stop pretending that Germans “want” to repaid.
They want everyone else to keep being a net importer, but to conduct their affairs with similar prejudice against housing bubbles and deficit spending as the Germans have, meaning that everyone else has no outlet to satisfy their demand shortfalls. Obviously this is logically impossible. Being impossible, the Germans will never be satisfied with their trading partners, as what they want violates basic arithmetic.
What Germany needs to do, but seems unable to do, is honestly address the internal imbalances within its own economy. To be fair this is not limited purely to Germany. I have a popcorn bag ready to open when Canada’s land price bubble bursts.
“nobody was forced to join the Euro. Denmark didnt, Sweden, UK.
When you sign a treaty, a contract, you are expected to keep it.”
What does that say about France and Germany violating the Growth and Stability Pact), then invalidating the enforcement mechanism? over the strenuous objections of the ECB?
genauer,
The European macroeconomic stability framework was designed for the 1990s, it is simply not appropriate for the current global economic environment. This point can be argued in many different ways, but I’ll give you the simplest argument I can think of.
Let’s take Germany, for example. Obviously, other countries have different demographic and economic parameters, but since Germany accounts for a quarter of the Eurozone’s GDP, it makes sense to use it, in a first approximation, as a benchmark for Eurozone-wide policies.
Germany is at full employment with a 2% inflation, zero short-term interest rates, a balanced budget and a current account surplus of 8% of GDP. Since normally the current account should be balanced, all you have to do to get the new macroeconomic stability conditions, is to replace the CA surplus with a budget deficit of 8% of GDP.
Then, if you want to give some flexibility to monetary policy, you also have to increase the inflation target – probably to about 5%.
So here’s what the new macroeconomic stability framework should look like:
1) a 5% inflation target,
2) an 8% budget deficit,
3) a 120% debt-to-GDP ratio (assuming a 6-7% NGDP growth rate)
And, please, pass this message to Frau Merkel.
BTW, that’s exactly what I was ranting about – you build a model using an old time series, then the underlying economic condition change, but you are still trying to apply the model as if it were universally valid.
In chronological order:
Nick,
The French Markit PMI will get worse, before they get better, they will touch 40. This is completely as expected. If you take foreign managers hostage, try to micro manage an Indian Tata owned steel plant, try 75 % marginal tax rate, what do you expect?.
The French socialist tried the same under Mitterand, nothing new under the sun.
Please also compare to the German data, before we did 2003 our Agenda 2010.
Simon,
I addressed the 4 times scratching the 3% deficit buoy already. I don’t know what to add, it looks complete to me. The turn around plans now drawn up for others have a 10 year time frame. Take a look at in what debt numbers this resulted and compare to the relevant suspects here. I am not repeated the same Imbalance Procedure links here, to avoid more spamming with postings repeated due to hold up in the spam filter, because of too many links.
Scratching a buoy is not an excuse for others to rampage through the whole harbor.
Mandos,
your complete disregard for treaties,
Rsj,
your “So let’s stop pretending that Germans “want” to repaid.” Our accumulated net current account position was 0.4% GDP in 1998. You live in a parallel universe (PU), if your think we will not insist to get paid fully.
Recent event:
Schäuble in
http://www.spiegel.de/politik/ausland/euro-krise-schaeuble-kuendigt-haerte-gegen-zypern-an-a-890623.html
translation of key sentences:
“An insolvency of Cyprus should be avoided, if possible.”
“I am a well known Europhile, but we will be not blackmailed, by nobody and nothing.”
Dr_who,
The rules are as follows, as drawn up and signed in 2012:
The IMF insists on a 120% debt in 2020 / ten years plan in place and is now admanant about the plan to be realistic.
The ESM will not give without the IMF nod.
Beyond that, it insists on what is described in wiki European_Fiscal_Compact
Target 60%, 3%, and the new glide path rule to reduce excess debt by relative 5% each year. Those who signed should be a safe bet to stay in the Euro.
For the rules with regard to what the ECB does, please take a look at what grumpy tells his fellow Irishmen, repeating what he learned from me in FT discussions (saves me one link here : – ):
http://www.irisheconomy.ie/index.php/2013/03/23/whatever-it-takes-to-save-the-euro/#comment-401163
Please take the temperature of Irish thought, not only those who agree with your current sentiment. The Irish and Canadian blogs are somewhat unique for their high level of “serious / senior” people engaging there. I wish we would have anything similar in Germany.
You either live by those rules, or you live outside the EU.
Geographically / mentally Cyprus is part of Turkey / Minor Asia anyways.
For playing the “Russian Card”, wiki Stalin_Note 1952
We did not pick up the Card, Russia has placed in front of us.
Please Google “Schäuble 1994 paper” as well, especially the Webber piece
Mainly editorial remarks:
1. I am very aware, that I come across to many of you as arrogant. But I think, a lot of the problems currently come from, that most people do not get what is said in more diplomatic terms.
2. I present a lot of stuff / links which takes some significant time to digest. But I do not longer believe that endless sermons, excerpts of “standard references” really helps those, who can not read, patiently and systematically, on their own.
3. I am not telling any “state secrets” here. This is all well known to the relevant players across the Globe, for a long time.
4. I am confident, that I represent here a broad German consensus, often even including our communists.
5. I don’t believe that my numerous typo and grammatical errors harm the understanding significantly, but I welcome feedback.
6. If somebody says, that he really can’t find a link I am referring to, please tell me. I am just trying to make the best of the spam filter procedures in place, which have good reasons, and I don’t ask for personal exceptions.
genauer,
I’ve just tried to explain to you – using simple macroeconomic accounting arguments – why the current budget targets are not feasible, and the inflation target not optimal.
And what exactly is your reply? Germany and the ESM may demand whatever they want, but if their position contradicts the basic principles of macroeconomic accounting, it is not going to end well.
And I’m not talking about Cyprus – I told you it’s just a storm in a teacup – I’m talking about the Eurozone and the European Union.
Cypriots may have political delusions, but Germans seem to have accounting delusions, which is an even more fundamental problem.
Picking 1998 was cute.
http://www.indexmundi.com/facts/germany/net-capital-account
But unless Germany is planning on absorbing and reconstructing additional countries (Greece?), then it has some tough choices ahead if it wants to be “paid” — either have its own land bubble or its own deficits. In short, germany can switch places with Greece, but the EU cannot have two germanys. This is why rational people see the futility of Germany lecturing Greece to become more like it, because then who would Germany export to? And who would Greece export to? You had better hope, Genauer, that Germany is not repaid.
rsj,
your link looks like you dont understand the difference between stock and flow.
D_W, you accounting and time series expert, would you like to explain it to him?
Maybe along “Net international investment position” in http://epp.eurostat.ec.europa.eu/portal/page/portal/excessive_imbalance_procedure/imbalance_scoreboard
together with “dark matter” and all the discussions around it?
genauer,
Let me I ask you once again.
Germany’s 2012 current account surplus is likely to be close to 8% of GDP, which means that Germany receives a huge external economic stimulus, and only this external stimulus, combined with zero interest rates, allows Germany to stay at full employment with a balanced budget.
In your opinion, how are other Eurozone countries supposed to reach full employment, if they can’t run similar current account surpluses a the same time as Germany, their structural budget deficit should stay below 0.5%, and they have to borrow at higher rates?
It’s a simple question, isn’t it?
Destroying Cyprus in order to save it by Philip Ammerman.
Genauer, I am well aware of what Schäuble said. It was unbelievably arrogant. “Cyprus has hard times ahead of it.” Uhhh. What a helpful observation.
A treaty cannot be allowed to contradict reality and drive people into penury. So far, the outcomes have not followed the pronouncements of the Commission or the German establishment, but they pay no price for it. At some point, the reckoning will be very bad, unless there is a major change of course. That change of course will likely involve a great deal of inflation in Germany, imposed on it from outside, or a revaluation of a separate currency far upward. There is a kind of “inflation deficit” being racked up here.
How wise William Jennings Bryan was in this one thing. “You shall not crucify mankind upon a cross of gold.”
rsj: if the Germans had wanted to build BMWs, sink them in the Med, and get little bits of paper in exchange for them, they didn’t need any help from the Greeks. The Germans were quite capable of printing little bits of paper and stamping “DM” on them. Better yet, they could have printed those little bits of paper, stamping DM on them, and kept the BMWs for themselves. Or printed the little bits of paper, and taken a long holiday instead of working to build BMWs.
genauer: if monetary policy is too tight, so that Aggregate Demand is too low, then one person’s success is another person’s failure. They can’t all succeed in selling. There is a fallacy of composition in your reasoning. Let’s put it this way: even if every other country became exactly like Germany, but aggregate demand is too low, then Germany would become more like Greece, or France, or Spain, or Ireland. If there aren’t enough chairs for everybody to sit, it doesn’t make sense to blame the person without a seat for being too slow to grab one.