8 November 2011

Unfair for one, unfair for all

The world is in trouble. The Greek parliament is vacant; its members are vacant. Superhuman efforts do nothing. The crisis rolls on. It's out of balance, steering out of control. We need  ....

Pumping more air into the tyres isn't going to help get the tandem moving

The German flaw and why Germans should not be happy.

Just as the European Money Union' was being formulated, structural labour reforms were being agreed upon in Germany that would prevent real wages of workers from rising.  Increases in productivity were not rewarded by increases in wages.

This gave German firms a competitive edge over the Eurozone periphery.  German exports exceeded their imports from the Eurozone periphery producing an intra-trade surplus and corresponding trading deficits in the eurozone's periphery's. Trading surpluses from the north fed easy credit and bubbles in the south.
'Germany lost the advantage of low interest rates after the introduction and in part because of the euro. This led capital to pour into the countries of the periphery, while investment stagnated in Germany or even declined, leading to low growth, low inflation and persistently high unemployment. What Mr Pettis calls “excessively low interest rates” were actually too high for Germany in this monetary union' The Economist (Germany suffered from its surpluses):
But how was this 'capital' used in the periphery? Capital that poured into the periphery did not spur direct real investment. An increase in German wages could have restored the relative competitiveness of periphery and even encouraged more direct investment.  Instead, the surpluses that repressed German wages helped to create fed bubbles in Spain and Ireland and fiscal mismanagement. These bubbles and practices were popped and laid to wastes by the 2007-8 global financial crisis. (see also Minsky’s financial instability hypothesis)

The periphery was in desperate need for direct investment to improve competitiveness and catch up with the core.  Instead it got debt financing geared to consumption, providing credit facilities and the means to buy exports, corruption, suspicious deals and debt servicing.

The focus on debt refinancing, instead of direct productive investment in the periphery persists. Trading deficits that had accumulated, now increasingly replaced by debt servicing, continues to damage the periphery long term growth prospects.  Instead of allowing German wages to rise, internal devaluation and wage suppression is now being imposed on the periphery.  The cost of financing debts has increased, the ability to pay them back is shrinking, and the periphery economies move towards insolvency.

So the initial benefits to German economy may have had may well turn into long term losses. This is not just due falling eurozone demand for its products from the periphery, but mainly due the eventual bill that is left behind by insolvent countries.

Europe is actually a rich net capital exporter, and yet the peripheral Euro members cannot get finance due questions concerning solvency.

The unfairness to the German worker, in terms of being not rewarded their gains in productivity, translates as an unfairness to those in the periphery trying to compete against an unfair German export advantage.  Would German workers wouldn't mind having some extra money on a sinful holiday in Greece? Is an 'internal revaluation' any less crazier than internal devaluation?

The result of the first 10 years of the Euro, is an Eurozone split into two, moving in opposite directions covered by a veneer of financial arrangements. The 2007-8 global financial crisis (an asymmetric shock) exposed this and destabilized Europe. It has not recovered or found the means to re-balance. In the absence of a mechanism to maintain the relative competitiveness of euro economies, EC governments and institutions have stepped deeper and deeper into the murky world of weird toxic financing arrangements. One cannot fix or institutionalize macroeconomic disequilibria by pronouncing laws forbidding them to exist.

Two Greeks Phd. holders. One is has a job and the other doesn't have work.  They meet. The one without the job asks the one with the job: "Can I have a hamburger without ketchup. please


Incidentally, in case you are wondering where all that "Greek" Bailout money is going here is a diagram I 'lifted' from Zerohedge blog
"The bulk of the money that Greece is "getting" comes right back to the rest of the EU. Whatever posturing is going on, Greece will get away without meeting any of its stated goals, or at least it will until the EU decides it has written down enough principal and that the ECB can handle the shock."

There is still time to order the  new collectible edition of the Euro

Hurry as the offer in not indefinite

Further reading:

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