April 27, 2010

And Germany made the Greek crisis much, much worse

“Anything that can go wrong will go wrong.” This piece of wisdom is known as Murphy’s Law, and I absolutely hate it, but Prof. Gustav A. Horn, the director of the Macroeconomic Policy Institute (IMK) at Germany’s Hans-Böckler Foundation, says it currently applies extraordinarily well to economic policy in the euro zone. He gets angry with “the German government’s submissiveness to the financial markets and its cowardice towards the tabloid press (the mass circulation daily Bild, for example, wrote in a headline: ‘You Greeks Aren’t Getting a Thing from Us’).” A cowardice which could get very expensive for German taxpayers.

On the one side there are the Greeks, who clearly still do not have their financial statistics under control and who produce one false report after another about the country's budget deficit. On the other side are the Germans, who delight in hindering a rapid and unambiguous European response to the Greek crisis -- in the process driving the cost of a solution through the roof.
Both Greece's calculation errors and the diva-like reluctance of the German government to help Athens are nothing more than an invitation to speculators to bet on the demise of the southern European country. This also explains why risk premiums on Greek government bonds have shot up to previously unimagined heights in recent days. The Greek government must now pay such high interest rates to refinance its debts that it can no longer get by without foreign assistance, despite recent tax increases and massive wage cuts.

But Murphy’s Law isn’t the only piece of wisdom here. As Italy’s Finance Minister Giulio Tremonti told reporters in Washington last Friday, “If your neighbor’s house catches fire, it’s not to your advantage to sit back and do nothing.” To put it quite simply, he argued, if you don’t step in, “you cannot fool yourself into thinking that just because your house is bigger and more beautiful, that it won’t be at risk. In case you are wondering, I am speaking about Germany.” Others may think differently, but this is the piece of wisdom I would suggest here.


  1. It’s strange: German Chancellor Angela Merkel said a few days ago that expelling debt-wracked Greece from the eurozone was “not an option”, warning that such talk added to uncertainty in the markets. Asked whether it was conceivable that Greece could leave the euro, she replied: “No. I say very clearly no. What we need is a quick reaction for the stability of the eurozone as a whole and everything that takes us away from this central goal is at the moment not an option ... we do not need uncertainty, but certainty”.
    I don’t understand: is it me who doesn’t understand?

  2. Here is an interesting comment to this piece on Reddit.com, where I submitted the post by Rob:

    This is actually a very interesting situation because of Greece's place in the Eurozone. If Greece had its own currency the market response wouldn't just be to ramp up government bond rates but also to dump the currency.
    This time around the market isn't "dumping" the currency but rather Euro-denominated bonds. This has had the effect of reducing the value of the Euro as a whole, but there is also a lot of inter-euro bond trading going on - investors are dumping Greek Euro bonds and buying up German and French Euro bonds.
    I'm someone who supports the concept of a monetary union and the Eurozone is a very interesting experiment. This crisis will certainly test the bounds of people's assumptions (from both Euro supporters and Euro skeptics).
    The advantage that Greece has over, say, Iceland, is that this capital flight away from Greece has not resulted in a plummeting currency and the inflation that it brings. Those in Greece who have been responsible and paid off debt and saved would usually be punished unjustly in a currency crash (the value of their savings drops in relation to the rest of the world), but this time around they have retained their savings.
    In many ways Greece's economic woes have been transferred onto the Eurozone as a whole, allowing the larger economies of France and Germany to help dampen the market unhappiness with Greece.
    Ultimately Greece's economic future is linked with the success of the entire Eurozone: the recovery of France and Germany and other main Eurozone players will act to bring Greece out of its woes... eventually.

  3. ...and here are the other comments to this very post on Reddit.com:

  4. Maybe I'm wrong and over simplifying, but it appears to me that the sufferers of the ECB economic policy, which seems to boil down to the classic Bundesbank policy, therefore a strong euro, are the southern European countries who, previously had comparatively low costs of living. Ever since the radical change to the euro they have been swimming against the current (cy) trying to adjust to a situation that doesn't suit them. In order of damage this would apply amongst others to Greece, Portugal, Spain, Italy, and France.

    If the euro zone is the last 'zone' to come out of the crisis, one can also thank Monsieur Trichet and his entourage for giving priority to the value of the euro and the continual cost of credit, to the detriment of all euro nations, especially those of the south and their exporting potential.

    Every euro country (except perhaps Germany) has sacrificed its right of interest rate control. The ECB is untouchable. One has no choice but to put one's faith in its capacity to make the right decision at the right time.

    So far one has the impression that this has never been the case. When interest rates should have remained stable they were raised. When they should have been radically lowered, they were left unchanged. When they were finally lowered, it was too late to be effective, and they weren't lowered enough in any case. If the euro zone is an entity, we are all suffering from the results. If Greece isn't helped soon, the situation will worsen.

    In spite of Obama, America will be the first Western nation to come out of the crisis, not only because of the sharp and effective action of the Federal Reserve System, but because it stands to reason that America is benefiting from the ECB's short sighted policy. The USA is not likely to criticise an overvalued euro if their exports are up as a result.

    Ironically, despite the ECB die-hard tactics, the present circumstances are devaluing the euro to it's proper level. If the trend continues, it won't be bad for Europe, providing that the euro zone is cured of a contagious, economic disease.

    Monsieur Trichet has never inspired a great deal of confidence, and it's not simply because of the sound of his name. Ideally, like any bank , rather than look after its own interests and pursue fateful ambitions, the ECB should first represent its clients, the euro nations, taking into close account their individual requirements and then acting accordingly. The results seem to indicate that this has never been the case.

  5. Mirino, you forgot Ireland ("PIGS"=Portugal, Ireland, Greece, Spain). Someone prefer PIIGS, that is Portugal, Ireland, Italy, Greece, Spain.

  6. @ale
    Thank you, you're quite right, I did. Ireland was doing very well, up until the crisis. Naturally Ireland also relies on it's export market.