"The Germans make everything difficult, both for themselves and everyone else" - Goethe
The German economic machine has many admirers. They seem to operate in a beautiful fusion of capitalism and socialism resulting in a cohesive and productive society. Their European counterparts run unsustainable budget deficits, while Germany registers a capital surplus (greater than even China's). The southern periphery struggles with a rigid labor system; Germany's dynamism and highly touted apprenticeship programs churn out productive workers. Unemployment in Germany is under 4%, while in Greece it is over 23%. In the United States, the problem is not so much the lack of jobs but the lack of worker skills to fill open jobs. Many look to German training programs as a future model. In an age of blustering politicians who accomplish little, Angela Merkel is commended for holding the fabric of Europe together while taking tactical risks. She has navigated bailing out insolvent European debtors while still maintaining the support of the thrifty German people. There is much to be admired about Germany, but this is not the entire narrative. To their southern European counterparts - Germany is an oppressive overlord, wielding undue influence in domestic affairs while taking advantage of peripheral weakness at the same time.
The Euro has been an unequivocal failure for Greece. Goldman Sachs helped the government hide debts while applying for European Union membership; Greece shouldn't have been included in the first place. The German prescription for Greece after years of deep recession is more austerity, and forced budget surpluses. Thousands of government workers have been laid off, state assets sold at bargain prices, and pensions cut over a dozen times since 2010. John Maynard Keynes is rolling over in his grave! Many Greece followers have noted that there is a brain drain happening. It is not hard to see why, since youth unemployment is over 50% - an incredible figure.
This week Greece returned to the capital markets, after a deal was reached with the troika, the three party team overseeing Greek bailout programs: the IMF, ECB and the European Commission. The new Greek bonds will simply be used to pay back old bonds from a prior bailout. There is no way for Greece to claw its way out, absent principal forgiveness. It's a ponzi scheme with only three players. In exchange for this "kindness" the troika gets to influence domestic fiscal policy. All at a time when citizens in the western world are demanding more sovereignty and less central planning from unelected technocrats. When the ECB started its quantitative easing program, purchasing government bonds and lowering borrowing costs for most EU nations including Germany - Greece was excluded from the capital key. In 2013 Greece was moved from the developed market MSCI index and into the "Emerging" market index - which is sadly ironic.
Aside from the political headaches Greek bailouts cause for Germany, they seem to benefit from peripheral weakness via the currency channel. The southern periphery's inherent weakness keeps the value of the Euro low, which makes German exports cheaper. Because there is no currency adjustment mechanism between European countries anymore, Greece is unable to naturally gain competitiveness through a lower exchange rate. Per the latest IMF report, Germany's Real Effective Exchange Rate is between 10-20% undervalued. As the strongest economy in Europe, holding a sizable budget surplus - Germany is in the perfect situation to provide liquidity and investment into southern Europe. Instead they prescribe tax hikes and spending cuts for the Greeks.
Think about how you would feel as a 25 year old Greek? You have no job, nor any real hopes of getting one. Each year your taxes go up and government services go down. You have little chance of the life your parents lived. You're dictated to by a combination of foreign powers and technocratic institutions. If you thought it would matter that your country bears a far higher refugee burden than its self-righteous neighbors, or that it actually pays its fair share into the NATO budget - you would be wrong. You hear plans of how these bailout plans will put your nation on a "sustainable" path within 30 years. Who has 30 years? It feels like modern day economic slavery. It is not hard to see why you see Guy Fawkes mask wearing rioters outside troika meetings, and Molotov cocktails in Athens.
This obviously isn't the whole story either. To some extent, Greece has to be held accountable for years of reckless government spending. Over 50% of Greeks pay no income taxes, something that is common place in Greek culture but not with the rest of Europe. Creditors are sick of having to constantly deal with new Greek concession requests after deals have already been agreed to. Germany must consider the second derivative effects of how it treats Greece, for Italy and Spain are watching closely. However, at some point German orthodoxy has to give way for practicality. Have the Greeks not suffered enough the past decade? Continuously extending debt maturity terms, and rolling over troika funded bonds with new troika money will not stand with tax payers in either Germany or Greece for long. Before the collapse of the price of oil during the 2014 Greek bailout talks, some speculated Vladimir Putin, ever the opportunist, could bailout Greece instead - striking a crippling blow to his enemies. Russia and Greece share an Orthodox tradition, and the Russian military could benefit from access to the Black Sea, couldn't it? Does China dare push their global infrastructure projects all the way to European shores? The point is Europe has done little for Greece, and years of austerity have deteriorated its human capital. For Greece to start looking at alternatives to the troika would be understandable.
During prior bailouts it was argued that it would be suicide for any politician in Greece to actually leave the Euro and default on it's debts. The future Greek currency would plummet, and hyperinflation would destroy the economy. However it is intriguing to picture Greece back in 2012 taking this risky course. Perhaps now, years later they would have weathered the short term economic pain and started on a path to true recovery. Better the quick knife than slow bleeding. For Greece to leave the Euro now would be to sacrifice its hard fought progress thus far, but without a true solution in sight it is still possible. This would render all German efforts so far a failure. Perhaps they should heed Abe Lincoln's advice: "I've always found mercy bears greater fruit than strict justice."
I assume throughout that given Germany's relative economic strength they have considerable influence in the "troika."
The German economic machine has many admirers. They seem to operate in a beautiful fusion of capitalism and socialism resulting in a cohesive and productive society. Their European counterparts run unsustainable budget deficits, while Germany registers a capital surplus (greater than even China's). The southern periphery struggles with a rigid labor system; Germany's dynamism and highly touted apprenticeship programs churn out productive workers. Unemployment in Germany is under 4%, while in Greece it is over 23%. In the United States, the problem is not so much the lack of jobs but the lack of worker skills to fill open jobs. Many look to German training programs as a future model. In an age of blustering politicians who accomplish little, Angela Merkel is commended for holding the fabric of Europe together while taking tactical risks. She has navigated bailing out insolvent European debtors while still maintaining the support of the thrifty German people. There is much to be admired about Germany, but this is not the entire narrative. To their southern European counterparts - Germany is an oppressive overlord, wielding undue influence in domestic affairs while taking advantage of peripheral weakness at the same time.
The Euro has been an unequivocal failure for Greece. Goldman Sachs helped the government hide debts while applying for European Union membership; Greece shouldn't have been included in the first place. The German prescription for Greece after years of deep recession is more austerity, and forced budget surpluses. Thousands of government workers have been laid off, state assets sold at bargain prices, and pensions cut over a dozen times since 2010. John Maynard Keynes is rolling over in his grave! Many Greece followers have noted that there is a brain drain happening. It is not hard to see why, since youth unemployment is over 50% - an incredible figure.
This week Greece returned to the capital markets, after a deal was reached with the troika, the three party team overseeing Greek bailout programs: the IMF, ECB and the European Commission. The new Greek bonds will simply be used to pay back old bonds from a prior bailout. There is no way for Greece to claw its way out, absent principal forgiveness. It's a ponzi scheme with only three players. In exchange for this "kindness" the troika gets to influence domestic fiscal policy. All at a time when citizens in the western world are demanding more sovereignty and less central planning from unelected technocrats. When the ECB started its quantitative easing program, purchasing government bonds and lowering borrowing costs for most EU nations including Germany - Greece was excluded from the capital key. In 2013 Greece was moved from the developed market MSCI index and into the "Emerging" market index - which is sadly ironic.
Aside from the political headaches Greek bailouts cause for Germany, they seem to benefit from peripheral weakness via the currency channel. The southern periphery's inherent weakness keeps the value of the Euro low, which makes German exports cheaper. Because there is no currency adjustment mechanism between European countries anymore, Greece is unable to naturally gain competitiveness through a lower exchange rate. Per the latest IMF report, Germany's Real Effective Exchange Rate is between 10-20% undervalued. As the strongest economy in Europe, holding a sizable budget surplus - Germany is in the perfect situation to provide liquidity and investment into southern Europe. Instead they prescribe tax hikes and spending cuts for the Greeks.
Think about how you would feel as a 25 year old Greek? You have no job, nor any real hopes of getting one. Each year your taxes go up and government services go down. You have little chance of the life your parents lived. You're dictated to by a combination of foreign powers and technocratic institutions. If you thought it would matter that your country bears a far higher refugee burden than its self-righteous neighbors, or that it actually pays its fair share into the NATO budget - you would be wrong. You hear plans of how these bailout plans will put your nation on a "sustainable" path within 30 years. Who has 30 years? It feels like modern day economic slavery. It is not hard to see why you see Guy Fawkes mask wearing rioters outside troika meetings, and Molotov cocktails in Athens.
This obviously isn't the whole story either. To some extent, Greece has to be held accountable for years of reckless government spending. Over 50% of Greeks pay no income taxes, something that is common place in Greek culture but not with the rest of Europe. Creditors are sick of having to constantly deal with new Greek concession requests after deals have already been agreed to. Germany must consider the second derivative effects of how it treats Greece, for Italy and Spain are watching closely. However, at some point German orthodoxy has to give way for practicality. Have the Greeks not suffered enough the past decade? Continuously extending debt maturity terms, and rolling over troika funded bonds with new troika money will not stand with tax payers in either Germany or Greece for long. Before the collapse of the price of oil during the 2014 Greek bailout talks, some speculated Vladimir Putin, ever the opportunist, could bailout Greece instead - striking a crippling blow to his enemies. Russia and Greece share an Orthodox tradition, and the Russian military could benefit from access to the Black Sea, couldn't it? Does China dare push their global infrastructure projects all the way to European shores? The point is Europe has done little for Greece, and years of austerity have deteriorated its human capital. For Greece to start looking at alternatives to the troika would be understandable.
During prior bailouts it was argued that it would be suicide for any politician in Greece to actually leave the Euro and default on it's debts. The future Greek currency would plummet, and hyperinflation would destroy the economy. However it is intriguing to picture Greece back in 2012 taking this risky course. Perhaps now, years later they would have weathered the short term economic pain and started on a path to true recovery. Better the quick knife than slow bleeding. For Greece to leave the Euro now would be to sacrifice its hard fought progress thus far, but without a true solution in sight it is still possible. This would render all German efforts so far a failure. Perhaps they should heed Abe Lincoln's advice: "I've always found mercy bears greater fruit than strict justice."
I assume throughout that given Germany's relative economic strength they have considerable influence in the "troika."
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