Much Ado About (Some Of) The Wrong Things

German Finance Minister Wolfgang Schaeuble told reporters in Brussels today (Monday) that getting their deficits down was “the only task that everyone has to fulfill for himself and for the common good.” Meanwhile, over in New York, Paul Krugman was busy writing on his blog that “the most startling and frustrating thing about the debate over the fate of the euro is the way almost everyone avoids confronting the core issue” – which is, according to Krugman, that “wages in Greece/Spain/Portugal/Latvia/Estonia etc. need to fall something like 20-30 percent relative to wages in Germany”. So at one extreme the Eurozone’s problems are seen as being almost exclusively fiscal ones, while at the other the principal problem is thought to be one of restoring lost competitiveness.

The difference in perceptions couldn’t be clearer at this point, now could it?

And if all of this is causing so much confusion among reasonably well informed economic observers, then what chance is the layperson likely to have? As it happens, reading through this piece by PIMCO’s Mohamed El-Erian this morning a number of thoughts started to come together in my head. Essentially what we have on our hands are a number of distinct (yet inter-related) problems, but few studies seem to go to the trouble to differentiate these analytically, and the end result is often a hotch-potch, which given the seriousness of the European situation is an outcome which is a long long way from being satisfactory.

One point that is often not stressed hard enough and long enough is that the backdrop to this whole debt issue is the underlying problem of rapidly rising elderly-dependency ratios (and increasing population median ages) across the entire developed-economy world. Normally this implies the imminent arrival of a wave of heavily underaccounted-for-liabilities which will simply increase the pressure on the underlying structural (rather than cyclical) deficits in the worst affected economies. The strange thing is that this development had in principle been long foreseen, and indeed formed part of the underlying raison d’être for drawing the 3% deficit/60% debt Maastricht line-in-the-sand. The other part was, of course, an attempt to stop spendthrift governments being spendthrift. As is now abundantly clear, in neither case can the Maastricht package be said to have worked, but the unfortunate historical accident is that we have come to realise this in the midst of the worst global economic crisis in over half a century (indeed arguably the second worst one ever, and – disturbingly – it is still far from being over).

So one part of the sovereign debt concerns which are currently so preoccupying the financial markets is associated with the containability of state debt in the context of ageing societies, and this issue is further complicated by the fact that different developed societies are ageing at different rates. This underlying uneveness is leading some people to draw some surprising conclusions. For example, according to a Financial Times/Harris opinion poll published this morning, the French turn out to be the most nervous of developed economy citizens when it comes to thinking about the sustainability of their country’s public finances.

Some 53 per cent of those polled in France thought it was likely that their government would be unable to meet its financial commitments within 10 years, while only 27 per cent thought this outcome was unlikely. Americans were only slightly less worried, with 46 per cent saying default was likely, against 33 per cent who saw it as unlikely. Curiously, only a third of the British people polled thought a government default was likely in the next 10 years, and I say curiously since on many counts the UK economic position is far more critical than the French one is. In fact, I am inclined to think that the British here are being reasonably realistic, while the French and the Americans are not, and I say this for one simple reason: all these countries have had substantial immigration in recent years, while the fertility levels in each case are quite near population replacement level. And this means that their population pyramids are much more stable, and if what is worrying you is rising elderly dependency ratios, then this is important. Let’s put it this way, if you assume (a big assumption I know) that underlying GDP growth rates are similar, and that the level of pension entitlement is the same, then the more rapidly the elderly dependency ratio rises the greater the pressure on deficits and accumulated debt.

On the other hand, the Spanish respondents were remarkably more positive about their situation, with only about 35 per cent of Spaniards questioned saying they considered default to be a likely eventuality over the next decade. Which is strange, not because I have any special insight into whether or not Spain will default, but Spain’s problems are clearly worse than any of the other three aforementioned countries (in part, as Krugman stresses because they lack some key economic policy tools which could help them correct the distortions in their economy) and, even more to the point, Spain’s citizens are showing very little appetite at this point for making the changes which will be needed to stave off the worst case scenario.

Without reform in the labour market, and in the health and pension systems, France’s finances are just as capable as going careering off a cliff as anyone else’s, but the French do have a little more time, and this, at the end of the day, could be critical. Also the French (like the Swedes) have done their homework in one department – the demographic one – so their population pyramid is inherently much more stable than the Spanish one. Indeed the Spanish government clearly indicated last week just how little they understand the importance of this question, since rather than facing up to the wrath of the Spanish pensioners (who of course vote) by cutting back on pension payments, they took the easy route (since babies don’t vote, and those who never get to be born even less so) and slashed the so called “baby cheque” (which may well not be the best of pro natality policy tools, but still). Basically cutting the baby cheque instead of cutting back on pensions has to be the next best thing to slitting your own throat, just to see what happens. Societies need to invest in their future, not in their past, and having children is an investment, indeed in the age of the predominance of human capital it is one of the most important ones there is.

Basically this whole area (of the impact of ageing populations on GDP growth performance and with this the consequent debt dynamics) remains largely underexplored by most mainstream analysts, but for now I will simply state that those “doctors” who wish to offer cures for our collective ills yet fail to mention the underlying dynamics of the demographic transition all our societies are passing through (even in a footnote) have missed one very important dimension of the overall picture, and their analyses and remedies are likely to be correspondingly deficient as a result. The musings of Mohamed El-Erian, interesting as they are, would fall into this category, since I fear he is missing the biggest part of the big picture.

Secondly, there is the issue of the financial rescue which has been carried out during the crisis itself. Something strange seems to have happened to the discourse over the last three years, since a problem which originated in the financial sector has now metamorphised into a fiscal crisis for almost all modern democratic states. Indeed, such is the sense of panic being generated out there on this issue that I am already starting to see articles from investor circles asking whether or not democracy is compatible with fiscal rectitude. This is rather putting the cart before the horse, I feel.

So having identified an underlying structural issue with government spending in the previous (demographic) argument, we should not fail to notice the fact that another significant part of rising state indebtedness comes from having recently bailed out a significant chunk of the private sector. Look at Latvia for example, and the Parex bank bailout, as the extreme case, since government debt to GDP was something like 12% before the crisis, while it is now heading up to near 80%, or Ireland, where debt was around 35% of GDP before the crisis but will probably rise above 70% this year.

In fact, a rather weird circle has been created. The private sector (possibly as a result of the absence of adequate public vigilance) got itself into a huge mess of its own making. Governments all over the globe (understandably and correctly) rushed in to put the fire out, and in the process transferred the problem over to their own balance sheets. But what is most interesting to note about what happened next is how, given that the crisis itself means there are few positive investment outlets in the first world, the money generated by the bailouts is increasingly being used to encircle those very governments who initially made them. Basically a massive moral hazard conundrum has been created, as markets leverage a discourse which pressures governments for fiscal rectitude (which is contractionary – given the depth of the crisis – as far as aggregate demand is concerned), in the process creating the need for yet more bailouts, and so on (the possibility of ultimate Greek default being perhaps the clearest example here).

Actually, while the initial “fire prevention” intervention was evidently necessary, people may have been mislead into thinking that action, in and of itself, would do the trick (see Bernanke’s speech on Milton Friedman’s 90th birthday – with its this time we got it right theme – also see note at the foot of this post) due to a slightly faulty diagnosis of what happened during the great crash. There was, of course, a bank run: but this was by no means the whole picture, and in any event doesn’t explain why the whole global economic system took so long to recover, even back then in the 1930s.

So something decisive needs to be done to break the circle which currently binds us, although at this point I am not exactly sure what. If we could agree that Mohamed El-Erian’s most striking insight is that: “Industrial countries are running out of balance sheets that can be levered safely in order to minimize the disruptive impact of past excesses. … The balance sheets that are left -which reside essentially in central banks – are not made (and, I would argue, should not be forced) to assume permanent ownership of dubious assets.” then the logic would seem to be that the dubious assets need to be put back where they belong – on the balance sheets of the private sector in general (including households) and the likes of AIG, Goldman Sachs, UBS, and naturally PIMCO.

But we should be clear: any such move to do this would also be significantly growth “unfriendly” across the first world.

And thirdly, and certainly not least importantly, as Paul Krugman is constantly pointing out, here in Europe we have an additional complicating factor: the euro experiment. Whatever the pros and cons of all the various arguments here, one thing seems evident: under the existing set-up the 16 economies are not converging. Exactly why this is would take us into areas which lie far beyond the objectives of this short post, but I would say that, personally, I feel the different demographic trajectories of the countries concerned must form part of the picture. As Angela Merkel is stressing, even in the best of cases (the euro holds) the bailouts which are being prepared can only buy time in which to carry out the much needed adjustments, which in countries like Spain/Portugal/Ireland are as much to do with restoring competitiveness to an extremely distorted private sector as they are to do with applying fiscal correction measures.

As far as I can see, measures like collectively financing state debt via EU bonds and bilateral loans – plus operating some variant of Quantitative Easing at the ECB (if this can all credibly be made to stick, and the vicious circle meltdown mentioned in the second point be avoided) – could temporarily stabilise the patient while the much needed surgical intervention is carried out. But my guess is that one by-product of doing things this way would be that a lot of the toxic stuff would then work its way onto the ECB balance sheet. Thus, instead of recapitalising Spanish Cajas, what we would then be collectively into would be recapitalising the central bank, which would be just another form of fiscal sharing through the back door (with the result that, following a good Brussels tradition, what you can’t explain to people directly and from centre stage, you explain to them in footnotes and in the small print). The latest data from the ECB (see this useful post from FT Alphaville), suggest that the bank is not only busy buying peripheral bonds, it is also buying private paper from countries like Spain and Portugal (although there is no breakdown available on this point).

The measures which need to be applied on Europe’s periphery are all more or less obvious at the micro level – labour market reform, pension reform, reform of the public administration – but (and assuming we have at most three years to see all this though before the respective populations get very, very restless), on the macro economic side it is very doubtful such measures will have the impact which is expected for them in terms of restoring competitiveness and growth, and fiscal order can only be restored by restoring competitiveness and growth.

Given this I can see only two plausible alternatives:

a) Either the peripheral economies undertake a sizeable internal devaluation (say 20%, but this is just a rule of thumb estimate). The snag here is that at the present time most EU policymakers remain unconvinced that we need a shift of this magnitude. Yet there is surprisingly little detailed study of how the economies concerned are going to get back to growth without this price correction. Indeed the EU Commission itself has strongly pointed out that the rates of domestic private consumption growth being assumed for these economies by the respective national governments in their Stability Programme estimates are highly optimistic. What would be nice would be for someone to set up a small model to try to examine just how much ongoing growth in the combined goods and services trade surplus countries like Spain now need to achieve to get positive growth in headline GDP under a variety of different assumptions, including low or negative inflation, stagnant domestic consumption and reduced fiscal spending.

This should enable people to calculate just how much of a drop in unit costs (from a combination of productivity growth and price adjustment) you need to have to get the kind of surplus you need given the relevant elasticities (etc). In particular one of the problems I see in basing too much hope on using productivity improvements to do the heavy lifting in the correction is that while you can surely get significant efficiencies at the micro level (though not by a long way enough to do the whole job), you can in fact only achieve the result in the short term by slowing a recovery in the labour market (since you will be going for more output with less people), which means aggregate productivity (say GDP per capita as a proxy) doesn’t improve that much, given that there is a huge fiscal burden and continuing stress on the financial sector as a result of all those long term unemployed. Alternatively we have another possibility;

b) Germany (and possibly one or two other smaller economies) temporarily leaves the eurozone and revalues.

Now, since option (a) looks very, very difficult to implement (especially since virtually no one apart from people like me and Krugman apparently wants to even hear of it),to which problem we could add the fact that German politicians are having increasing difficulties convincing their citizens that the “qualitative transformation” of the ECB is what is really in their best interests, then on a purely pragmatic level (b) may well end up being what happens in the end (and we had better just hope any eventual German exit is only temporary).

Having Germany temporarily separate from the Eurozone would, in fact, have a number of evident advantages. The first of these would be that citizens in the South would not need to see their wages slashed, while those in Germany would not be asked to pay for bailouts via their tax bill, or lead to blame Greeks or Spaniards for having their hospitals closed or their pensions reduced: ie it would all be politically much easier to handle at this point.

Evidentally German banks would have to swallow a write-down, as loans paid back in Euros would not be worth the same in (new)marks, but 70% of something (say) is better than zero or 20%, and the big plus would be that as the Euro devalued sharply the peripheral economies could rapidly return to growth, and government finances could be quickly turned round as exports grew, tourists returned, and (in addition) many of those coastal properties that currently stand empty could be sold. At the end of the day, what would be left would be a private sector, and not a public sector, problem, and it was (in part) the private sector who got us all into this mess (wasn’t it?).

Indeed this solution does to some extent coincide with what could be termed the new economic reality, since economic growth in emerging markets mean that these are fast becoming key trading targets for German industry, as consumption in Southern and Eastern Europe looks to be increasingly “maxed out”. In fact, according to the recent March trade report from the German Federal Statistics Office, the rate of interannual growth in exports to ex-EU “third” countries (34.7%, as compared with 15.1% for the euro area) was significant, while the volume of trade (34.2 billion euros as opposed to 35.2 billion euros for the Euro Area) is roughly comparable, and indeed at this rate countries outside the EU will soon replace the Eurozone group as destinations for German exports.

I say I hope this move (if undertaken) would be temporary, since I think in the mid term the German economy is neither so strong, nor the peripheral countries so weak, as many commentators assume. But being out of the zone would give the Germans the opportunity to see this for themselves.

The important point to emphasise, I feel, is what we now need is an orderly and credible solution to our problems. Simply standing back and watching things deteriorate, and keeping our fingers crossed that what won’t work will, is not going to produce an orderly outcome. Au contraire! Even those precious exports we are winning as a result of the falling Euro are being put in doubt, try these headlines from Bloomberg: Mexico’s Peso Falls Third Day on European Fiscal Deficits, Yuan Appreciation Unlikely This Year Due to Europe Debt Crisis, Emerging-Market Stocks Drop Most in Six Days, Russian Stocks Slide Most in Week on Oil, Europe Debt Concern. And this is just a quick selection.

The problem is that any gain to exports outside the EU can be offset by falling risk sentiment as the currency slide continues, and markets which were previously being funded lose the ability to attract money. What we need are some serious measures which can turn the tide, and restore confidence that we are applying measures which will work.

Actually, the argument I am presenting here was first put to me by a young Barcelona IT engineer – David González – and you can find his argument in this blog post (below the Spanish introduction). As David says:

In conclusion, at the moment the EMU lacks the necessary economic long term policies to become a stable monetary zone. Obviously, we lack the free currency exchange rate needed in any free trade zone, which would work as an automatic stabilizer between different countries. But we also don’t have enough automatic stabilizers (only the exception of cohesion funds) needed in any monetary zone. First we need to recover the balance, and then we have to make sure it is a stable balance implementing measures that keep it. Otherwise the EU construction process will fail, and the hopes it has bring to so many people and countries will be forgotten. The implications this failure would have for democracy and peace in Europe should not be underestimated.

Or as Krugman puts it: “If the euro isn’t workable without highly flexible nominal wages, well, it isn’t workable”. It’s a sad conclusion, but that would seem to be where we are at this point. Basically, it is obvious that any road forward is now fraught with difficulty, but a situation where non other than the head of Deutsche Bank is saying that in all probability Greece will not be able to pay, and where an ECB which badly needs to operate a policy of Quantitative Easing but is at desperate pains to try to show that it isn’t, is evidently not sustainable for long. Money has been put on offer, and the financial markets are now chafing at the bit to try to force it up and onto the table as quickly as possible. July promises to be another sweltering month here in Spain. Maybe it’s time for a rethink.


Note: At the end of his “On Milton Friedman’s Ninetieth Birthday” speech Ben Bernanke arrived at what now looks like a rather hasty conclusion: – “Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again”. In fact, what is at issue here is a question of causality, whether the real economy problems are ultimately caused by the absence of a “stable monetary background”, or whether in fact, the demand shock unleashed by the unwinding of a highly leveraged economic boom may not be the main factor in preventing the recovery of a “stable monetary background”, as we have already seen in the Japanese case. The critical question facing all developed economies in addressing their fiscal sustainability problems is where the aggregate demand is going to come from to make the adjustment both viable and socially palatable.

This entry was posted in A Fistful Of Euros, Economics and demography, Economics: Country briefings, Economics: Currencies by Edward Hugh. Bookmark the permalink.

About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

43 thoughts on “Much Ado About (Some Of) The Wrong Things

  1. Pingback: Twitter Trackbacks for Much Ado About (Some Of) The Wrong Things | afoe | A Fistful of Euros | European Opinion [] on

  2. I really liked your analysis, especially what potential solutions are concerned.
    Obviously there would be drawbacks to Germany quitting the Euro. You mention some “Evidentally German banks would have to swallow a write-down, as loans paid back in Euros would not be worth the same in (new)marks, but 70% of something is…” facing Germany, as well as mentioning the benfits to Spain,…
    But I do believe you are missing one crucial point that would greatly benefit Germany under such a scenario: German government debt(~€1.7trn) currently also is denominated in Euros, any losses to the financial sector would likely be more than compensated for by reduction in the public debt. Assuming your prediction of a 30% revaluation comes to pass, this would be equivalent to a reduction of German debt equivalent to ~€500bn.
    The option of Germany leaving the Euro(temporarily) seems like a win-win scenario all around.

  3. To me it looks as if the problems in Spain were caused by a bubble and debt explosion, so why do some economists claim it has something to do with not being able to compete and having to lower salaries? And can someone proof to me that lowering wages would even work and solve the trade deficit in Spain? I don’t belief this.
    Economists have also been claiming the devaluation of the pound sterling would get the economy of the UK growing and close the trade deficit gap. Hasn’t happened sofar.

  4. @Eric,

    Because they are paid for they say, in $.

    The pound will follow down the euro, and the carry trade will go back to USA, and then the chinese will buy treasuries and USAmericans will go on expending and sucking every else’s savings without paying to anybody. That’s the plan until everything blows up.

    They want become us Latvia , just to leech us.

    But don’t worry they will discover Irving Fisher debt deflation for next year or so.

  5. Their mind is so complex than the can’t tell it, but this way:

    You can’t depreciate your currency, ergo, slash your salary!

    But that way, they get some money from expansion or WSJ.

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  7. Germany could leave the Euro and revalue, as you suggest, but that would be an incredibly disruptive move. On the other hand, Germany could raise its payroll taxes fairly easily. That would increase the cost of German goods and services relative to those of other EU countries and could (depending on how the revenue is used) have much the same effects as a revaluation.

    Nominal wages are not flexible, true, but nominal labour costs can be a bit more so.

  8. You don’t really think that it is that simple, do you? A German exit will not be temporary as no political party will dare to reintroduce the Euro once the Germans got rid of it. You underestimate how unpopular the Euro always was and is now. Adding to that, Germany would need to carry the the biggest junk of the costs through the writedowns, end up in recession while the Southern economies could just carry on as usual, as growth returns automatically, tourists come back and government finances get better by just doing nothing. A few years later, Germany would be asked to come back. After all, it’s German financial credibility that keeps interest rates on government debt low. Who would not want to capitalise on that? So the German people would be asked, after they were fucked over by this arrangement, to come back and continue their role as Europe’s paymaster. That is the proposal? Really??? What Krugman lacks is a basic understanding of how politics work.

  9. That will be killing Germany, because prices on German goods will skyrocket immediately. Don’t forget that the big surpluses arising from German exports are made not anymore on cars, but on cookies and dry milk.

    In fact, there is not a single good where there will be not an immediate replacement on European market if Germany and eventually Netherlands will leave the EUR.

    As a result bond prices will increase extremely as well for Germany – because it will lose all its competitivness.

    Germans have their own priorities – Sparbuchs and low inflation. These priorities are killing any competitiviness, unless that all happens in a monetary union.

  10. Yes nominal wages again. Take a closer look at the german wages in the last 10 years. Germany has by now the biggest low wage sector in the EU.
    In western neighbor countries workers from Poland, Czech Republic, Balkans… where replaced with cheaper Germans. It even became attractive for Germans to seek work in Spain and Greece.

    This Development was started in 2001 with the Hartz legislation. It not only reduced unemployment benefits, it also underminde collectiv wage bargaining.

    Germanies domestic demand sufferd a great deal from this policy.

  11. I don’t believe the idea that Germany could simply ‘exit’ from the Eurozone as is implied in this article, at least not without a major break-up of the EU itself.

    First of all, how would you differentiate between the euros to be converted to the ‘new Deutschmark’ and those that would stay euros? Everyone would of course claim that their assets are in ‘new DMs’ and their debts in euros. The problem is that one person’s asset is another one’s debt…

    Secondly, merely the planning for a German exit from the euro would trigger massive bank runs in all other eurozone countries, even ‘stronger’ ones such as France or the Netherlands. A German secession from the euro would be seen as an economic act of war by these countries. Surely the EU could not survive such an event.

    A Greek exit from the eurozone would be a major calamity for the EU, but at least the EU and the euro could survive it. That is not the case with a German eurozone exit. As long as it wishes to stay in the EU, Germany is stuck with the euro – whether it likes it or not.

  12. I have to agree with MM.

    There appears to be kind of a competition between economists on who can “demand” the largest cuts in wages for Greece, Spain, etc.

    Why is the only solution ever discussed with regards to wages a “race to the bottom”? Why not increase wages in Germany, or have even a combination of both? What am I missing here?

  13. It is not discussed because economists are ideologically against uttering the words “Whats really needed here is a good round of wage hikes”
    The structural problem afflicting Europe is that the germans are not paid enough. No. Really.
    Their productivity has been going up and up without any consumerate rise in real wages, and that is distorting everything because they are creating more and more wealth without actually consuming any of the additional value created – Which is completely bonkers. Increase German wages until German demand and supply start to match up, and employment goes way up, in the rest of europe and in germany too, and overall this entire economic crisis goes away… Anyone in a good position to explain this to the german unions? because I kind of fear the german government doesnt want to hear it.

  14. “the backdrop to this whole debt issue is the underlying problem of rapidly rising elderly-dependency ratios (and increasing population median ages) across the entire developed-economy world.”
    Hardly: The whole idea of pushing debt to someone else(i.e. one generation to the next) is the problem. It would make much more sense that each generation pays for its own retirement, not the previous one’s. And since the states are unwilling/incapable of doing that, it should be left to the individual, perhaps anything above a minimum level, unions or any sort of organization to do that.

    Plus, the second problem is that today’s economists failed to understand what Moses understood 3000 years ago: That there ae good times and bad times and predictions based on good times lasting forever are bound to crash.

  15. There are interesting similarities between Spain and the USA:
    Housing bubble
    High debt
    high unemployment
    trade deficit
    no control over exchange rate (in particular with main trading partner China)

    No worries, Mr. Krugman has a solution for his country:

  16. The biggest absurd thing are the Schäuble proposals for the fiscal discipline: cutting cohesion funds for countries with excess deficit. Aka cutting the development funds for underdeveloped, cutting money for technology development and infrastructure for the uncompetitive. Typical divergent EU policy. Prescribing hot baths for those already having body temperature of 42C.

  17. If joblessness in the south stays very high and benefits run out something will have to be done. Everybody but Germany leaving or Germany only leaving may be a de jure difference, but not a practical difference.

    Secondly, leaving the Euro would hurt exports, but pushing the south back into recession will also hurt exports and energy imports also hurt.

    Lastly, how would Germany raise purchasing power? There’s too much joblessness for pressure on wages and taxes cannot be reduced because among other things, aging means greater spending.

  18. Oliver,

    Germany could at least try to reduce the Sparbuchs. Because German mentality is extremely irrational. The Sparbuchs ueber alles is very dangereous for Europe, and it is a bad strategy for Germans itself.

  19. To which extent would lowering the savings ratio raise wages? And secondly how do you tell people not to save while you also have to tell them that the pension system will have to be supplemented with private savings?

    Raising capital gains taxation is unlikely to help and due to the budget deficit lowering VAT is also not an option.

  20. Every country that have a credit bubble have too big wages/employment. Credit always hike salaries and employment.

  21. That will not raise wages, but that will increase consumption. Because all the talks in Germany about pensions have already driven the nation to paranoia and chidlesness.

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  23. “That will not raise wages, but that will increase consumption.”

    !? think about it again. If i buy a new house, car, eat outside more often whatever with credit will those people that are seeling me that services/products will not get better wages and jobs? Do you think debt economy stops at first step? No it extends to everyone and everywhere. Many jobs only existed because of debt, specially those in state, in Britain almost 60% of new jobs in last decade were in Government.

    Now we get the necessary cuts because there wasn’t enough growth for the absurd levels of debt.
    The cuts everyone is talking about don’t even approach 50% necessaries…

  24. Savings paranoia, Lohnzuerueckhaltung (abstaining from wages), childlessness is much more unsustainable circulus vitiousus as the debt and inflation. And you can inflate away a large part of debt, but you can never get back your unborn children when you were 30.

  25. I don’t understand: one of the things I learned from following this site and its demographic oriented links was that you have elderly dependency ratio, and then you have dependency ratio.
    The less known fact being that one child is more of a drag to the active population than one elderly. Mitigating the alarmist discourse of fearmongering financial companies wishing to do away with pay-go systems.

    And now this article which only speaks of elderly dependency ratio?

  26. It seems to me that increasing consumption in Germany would first and foremost decrease unemployment and only then drive up wages.

  27. Hugh, what we are seeing (or not seeing) these days is a massive transfer of toxic assets (Greek, Portuguese and Spanish public and private debt) to the balance sheet of the BCE. Once the big European banks are done with the dumping, all three countries will

    – Restructure their debt with 30-70% haircuts.

    – Leave the euro zone and devalue (thus solving the competitiveness problem)

    – Put their finances in order (hopefully) and apply for reentry in a few years at a significantly lower exchange rate.

    The process would obviously involve some kind of corralito, with internal transfers of private debt to governments (and from these to the BCE). Then the BCE absorbs all those losses by printing a few trillion euros.

    As a result:

    1) The EU is slightly weakened, but safe after the amputation.

    2) The big European banks do not have to be saved.

    3) There is no political fallout for German and French politicians since they can blame everything on those lazy southerners. They do not have to bail out banks or loan money to other countries.

    4) Greece, Portugal and Spain can easily recover their competitiveness without going through terrible social upheaval.

    That solves all the outstanding problems for the Big Boys and they don’t have to pay for it: the bill is footed by average EU citizen through inflation…

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  32. Thomas is right. Trying to fix this problem purely from the deficit side is foolish. The Great Depression followed a massive credit boom in an environment of stagnant real wages. If you’re going to have permanent, enforced saving (aka intensified exploitation) in one part of the eurozone, the only way you can have sufficient demand to buy the surplus is for some other part of the eurozone to dis-save. What, after all, are those sparbücher invested in?

    That’s right – the German trade surplus was recycled through the Great Banks of Frankfurt into loans to the europeriphery (and the subprime mess if you’re DEPFA or IKB:-0), who spent it on German exports. It’s around about this point I start wondering if the economy actually spends more time in pathological equilibrium than it does in normal…

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  34. Great post.

    Could you say a bit more about this, though:

    … given that the crisis itself means there are few positive investment outlets in the first world, the money generated by the bailouts is increasingly being used to encircle those very governments who initially made them.

    Basically, what do you mean by ‘encircle’? What’s the process / mechanism you’re thinking of?

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