Category Archives: Germany

Flight of Fancy

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If there are, famously and waggishly, only two places in France — Paris and the provinces — what of other European countries? In the common imagination, the literary tradition, in culture as a whole, and of course for a fanciful exercise like this, in gross stereotype. For the UK, which I do not know very well, maybe there’s London, England, Wales, Scotland and Northern Ireland? Germany seems much trickier to me, perhaps because I do know it well. Berlin of course, and Bavaria, and then? German Suburbia? In the case of Germany, The Past, and specifically that part of the past from 1933 to 1945, looms largest in the world’s imagination. But I am not sure whether that fits with this scheme. Russia, fittingly, has more: Moscow, St Petersburg, the Caucasus, Siberia, the Gulag, the Provincial City, the Rural Provinces and maybe the Far East. Smaller countries, I will rashly opine, waver between one and two: the Capital City and Everywhere Else or just the Capital. What do you think?

A question that will probably not be answered

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Via Nick Pearce at the IPPR, a fascinating chart of where the recovery ended up.

Germany's recovery: fuelled by sunshine

There’s clearly a fair amount of sunshine in the chart for Germany, although it’s very hard to be optimistic about the UK. But will anyone present anything like this chart for the Portuguese economy? And when people like Volker Wissing talk about imposing their adjustment, what is their estimate for the reduction in the German trade surplus? Take it away, Herr Bofinger:

Anyone who sees this as a virtue must ask themselves whether Germany’s export successes would have been possible if other countries had behaved as “virtuously” as we have. It says a lot about the level of the debate that such simple and fundamental insights are apparently difficult to get across in Berlin.

See also J. Random Weblog.

Die Debatte heute ist für mich an Scheinheiligkeit, Zufriedenheit, und schlichte Verlogenheit kaum zu überbieten.

Panning back to Egypt…

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A couple of weeks ago, the big question had ceased to be “Will there be a revolution in Egypt?” and had become “Will it matter?” The revolutionaries had demonstrated that they could endure, could divide the Army from the government and the security state, and had eventually succeeded in chasing the president out of power. But would this mean lasting change? Wouldn’t it just imply the creation of a new ruling elite, or a permanently-temporary military junta? The grey lineup detailed here were in charge, issuing statements about going back to work. This piece from David Wessel of the Wall Street Journal sketches it out, and reveals far more than it means to.

It’s easy to sketch the scenario in which Egypt blows it. The army could maintain control behind a façade of democracy and protect elites who benefited from the growth produced by significant economic reforms that Mr. Mubarak blessed. Four things have to go right for Egypt to seize the moment.

First, the young protesters of Tahrir Square have to keep the pressure on the military. A lot depends on which way they go. If they’ve been soured by privatization that engorged the cronies, will they demand the security and subsidies of the state over the risks, competition and dynamism that comes with a vibrant private sector? In short, do they want government jobs? Or a shot at being hired—and maybe fired—by an entrepreneurial company?

Of course, the policies those elites benefited from are precisely the ones he goes on to advocate, and the ones that the IMF recommended and Mubarak implemented. Wessel alludes to this further down the piece but never quite manages to say that the Egyptians hated them so much they overthrew the state. Also, although he compares Egypt with Poland after communism, he doesn’t seem to be aware that a major factor in Poland’s revolutions (1981 and 1989) was that the state got huge international loans it couldn’t pay back.

Anyway, so that was one scenario – the military guarantees some constitutional change but keeps the political economy and the power-structure Mubarak left.

It doesn’t seem to be working. Mohammed Fadel has a good rundown of the Army’s (and the Muslim Brothers’, and the 2005-era middle class dissidents’) efforts to put pressure on strikers, their eventual failure, and some of the economic ideas circulating among the revolutionaries. Apparently, the military has eventually been induced to open talks with the real trade union movement as opposed to the yellow unions that were part of Mubarak’s system. You can read their negotiating position at guess who’s.

But perhaps the best news of all isn’t economic. Here’s some incredible reportage of an incredible and very significant event – the crowds take over the headquarters of Central Security in Alexandria, and start salvaging the secret files the spooks were trying to destroy.

I wouldn’t bet on the holy-of-holies in Cairo lasting much longer – Hossam el-Hamalawy has already been down to his local station with his Canon EOS 5D and his angry mob. Guess what, that’s full of files as well.

In 1989, something similar happened – when it looked like the post-Wall East German government might be stabilising, and that it felt confident enough to tell the public that it was going to retain the Stasi although under a new name, people invaded the organisation’s offices to secure the key assets of any secret police force, the files. It was the end, really; there could be no more hoping for some sort of patched-up afterlife for the basic structure of the DDR. This time there was much more violence, and the spook toys included a sinisterly large stash of Viagra – the Stasi did a fair amount of drug dealing as part of its efforts to raise hard currency, but nothing with those implications.

There probably weren’t many documents like this one in the files at the Normannenstraße either.

The upshot includes the resignation of Mubarak’s last prime minister. In an almost uncanny echo of East Germany, he went on TV not long before the crowds moved into the secret police stations, to defend the institution of Central Security. Just like Hans Modrow did, and with exactly the same effect. His exit was announced via the Egyptian Army’s facebook profile.

His replacement is profiled here – Essam Sharaf, significantly, is both a candidate endorsed by the revolutionaries and a participant in the revolution himself, as well as apparently enjoying a good reputation with the workers’ movement as far back as 2006.

Who’s Next?

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Karl-Theodor zu Guttenberg resigns as Germany’s defense minister, regrets heeding career advice from Nikolai Ivanovich Lobachevsky

Helen Pidd of the Guardian writes that the now ex-minister was widely tipped as a future chancellor, but I can’t imagine who was doing the tipping. Bavarians don’t get elected chancellor in Germany: a career at the federal level in Berlin (and previously in Bonn ) takes them too far away from the maneuvering needed to put or keep them atop the CSU, while a stint as Minister-President of Bavaria takes them too far away from Germany’s mainstream to get elected chancellor.

Sunshine: at the IMF, of all places

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So, here we are, after a 2010 of economic horrors. There is extensive debate as to whether the standard tools of economics are even valid – as Daniel Davies points out, even Paul Krugman now self-identifies as a heterodox economist – while on the other side, the discipline is coping with the financial crisis experience by clapping louder and imposing ideological censorship. But is anyone at least trying to do something original with the standard toolkit? The DSGE model may be one of John Quiggin’s zombies (buy now for Christmas and support Australian professors’ lifestyles – what’s not to love?), but zombies are notoriously resilient. (Head shots! as a well-known advocate of conservative austerity once said.)

The answer on this occasion is yes, at least as far as Michael Kumhof and Romain Ranciére, go. In a new paper, they present a DSGE model with the following parameters: the top 5% of the income distribution value wealth more than everyone else, for whatever reason, and specifically, they want AAA-rated assets. Further, these are intermediated through the financial sector. Then, they run a simulation of the macro-economy assuming that there is a negative shock to the bargaining power of labour resulting in a shift in the income distribution.

The simulation results were that the financial sector balloons in size, that total private debt in the economy expands hugely, and that credit acts as a substitute for rising average wages in the short run. Eventually, the model produced a massive financial crisis and a brutal recession, followed by a blow-out of the government budget.

Your keen and agile minds will not have missed that flat real wages, an increased share of national income going to the top 5%, enormous growth in the financial sector, and a credit-financed consumer boom are exactly what happened to the macroeconomy in the last 30 years. Also, it would appear that the economic situation has developed not necessarily to our advantage, to borrow the Emperor Hirohito’s remark on Japan’s surrender to the Allies.

So, what should we do about it? Kumhof and Ranciére have something to say about that as well. Specifically, they ran the model for several different scenarios representing different paths out of the crisis. They considered a scenario in which the government took the pain, accepting a large government deficit in order to minimise the impact of the crisis on the real economy. This had the advantage of reducing the fall in GDP, and therefore allowing growth to reduce households’ leverage. They also considered the option of just suffering, which actually increased leverage as incomes fell and the stock of debt remained.

Then they considered two more positive responses to the crisis. One was a debt restructuring, or to be brutal about it, widespread default and bankruptcy. This had the advantage that it does, indeed, reduce the leverage burden and does so cheaply. It also implies the end of the big banks, as they point out that a bank rescue doesn’t constitute a restructuring, just a transfer of debt from the private sector to the public sector. In a policy context, we could caricature this option as “stimulus plus cramdown”.

The other was to shift the labour share of income upwards. They found that this achieved a faster, bigger, and more lasting reduction in leverage and a reduced probability of crises. In their own words:

The main difference to Figure 14 however is observed following period 30, where under a loan restructuring leverage and default probability resume an upward trajectory for several additional decades, while under the bargaining power solution both immediately go onto a declining path. By year 50 leverage is around 20 percentage points lower under the bargaining power solution than under the loan restructuring solution. For long-run sustainability a permanent flow adjustment, giving workers the means to repay their obligations over time, is therefore much more successful than a stock adjustment, unless the latter is extremely large….But without the prospect of a recovery in the incomes of poor and middle income households over a reasonable time horizon, the inevitable result is that loans keep growing, and therefore so does leverage and the probability of a major crisis that, in the real world, typically also has severe implications for the real economy.

They also argue that the inequality-finance-lending transmission mechanism might also explain the global imbalances, with the emergence of a globalised rich elite driving the demand for AAA-rated assets, the growth of the financial sector, and the emergence of persistent large capital account surpluses and trade deficits. (We already know that imbalances in the balance of payments are intermediated through the financial sector.) However, they haven’t extended the model to include the international dimension yet, although it’s on their agenda for further research.

I’ve waited for this moment, 752 words on, to mention the key detail: this cell of dangerous subversive Bolsheviks is embedded in the International Monetary Fund, and their poisonous hate-writings were published as an IMF Working Paper. Perhaps DSK really has had an influence on the institution? In other optimistic news, both IFO and the German Chambers of Commerce expect significantly stronger internal demand next year and a smaller trade surplus, while Daimler Benz’s CEO is promising that this year’s profit share payments will be “attractive”.

It better be…

An End to Conscription in Germany

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Germany’s Defense Minister, Karl-Theodor zu Guttenberg, announced on Monday that conscription for the country’s armed forces will come to an end in the summer of 2011. The all-volunteer Bundeswehr will have approximately 185,000 persons, down from the current 240,000. That is roughly in line with the current number of volunteers serving.

I wonder whether anyone will say that the change has come too soon, or that preparations have been rushed. That’s because I flagged it as on its way, oh, more than six and a half years ago. Embarrassingly enough, I used the phrase “sooner rather than later” in the previous post, and this qualifies as “sooner” only by the very generous standard usually reserved for EU institutions. Nevertheless, it is a welcome and necessary change, for all the reasons I outlined in January 2004.

…In Fact, It Has Never Been Tried

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Everyone’s het up about Angela Merkel’s speech in which she said that multiculturalism had failed in Germany. Here’s the King’s College London War Studies blog, for example, being overheated. Here’s respected correspondent Tom Ricks being even more overheated.

There is one problem with this whole festival of Terribly Serious People stroking their beards about The Problems Of Integration. It is this: Multiculturalism is not German policy and never has been. It is true that Germany doesn’t have a policy of deliberate official racism. But the word “multiculturalism” doesn’t mean very much if you define it as the absence of apartheid, in much the same way that “peace” isn’t just the absence of war.

In fact, official Germany pretended for years that there were no immigrants in Germany, which is about as far from multiculturalism as you can get while remaining a liberal democracy. And it’s not as if it was hard for journalists and others to find this out:

“We kidded ourselves for a while that they wouldn’t stay, but that’s not the reality,” she told members of the youth group of her Christian Democratic Union party, referring to the influx of workers, known as guest workers, who helped fuel the country’s postwar economic boom. “Of course the tendency had been to say, ‘let’s adopt the multicultural concept and live happily side by side, and be happy to be living with each other’. But this concept has failed, and failed utterly,” she said.

Yes, she referred to it two sentences before the bit everyone freaked out about.

Of course, you could go on to ask in what way this concept has failed utterly – Germany had not, when I last checked, descended into race war – but that would be to lend the whole affair a dignity it does not deserve. Banging on about “christliche Leitkultur” is an utterly routine and tedious habit of right-wing German politicians. It’s depressing that Angela Merkel of all people should descend to this, but it’s of a piece with the generally crappy performance of the CDU-FDP government – her version of the special tax break for hoteliers.

Veteran journalist Michael Spreng‘s excellent blog has reasons why this has come up just now – basically, the coalition has lost its way and there is trouble in the ranks. Important people in the CDU (and even more so in the CSU) have become keen on the idea of Karl Theodor zu Guttenberg, the aristocratic defence minister, as an alternative chancellor. You have to remember that large chunks of the party, and especially the Bavarians, have never been reconciled with Merkel to begin with – she has usually been significantly more liberal, more northern, more Protestant, and more female than the party.

So this should really be considered a bit of cynical fan service, intended to queer the rivals’ pitch. Now can you all calm down?

sunshinewatch

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More sunshine. Bloomberg:

So-called warning strikes by steelworkers at ThyssenKrupp AG and Salzgitter AG that began yesterday will “definitely” continue unless employers meet demands for 6 percent more pay, Helga Schwitzer, an IG Metall board member responsible for wage negotiations said in a Sept. 21 interview in Frankfurt.

While exports give Germany a “very strong leg to stand on,” increases are justified because the recovery is at risk without consumer spending, Schwitzer said. “If you’re only standing on one leg, you start to limp,” she said. “The second leg, domestic spending, has to be strengthened.” ..

“We could use a level of redistribution in this wage round, but we shouldn’t overdo it,” Andreas Scheuerle, an economist at Dekabank in Frankfurt, said by phone. “Pay increases would mean a win for the domestic economy, but it would come at the cost of exports.” ..

The government should use its trade surplus, the European Union’s biggest, to “foster domestic demand and ease reliance on exports that are contributing a huge trade imbalance on the euro-zone’s periphery,” said Juergen Kroeger, a director in the EU Commission’s Economic and Financial Affairs department.

“Why aren’t we paying people higher wages in this country?” he said Sept. 13 in Berlin. “That might be a start.”