Sarkozy and Merkel call for 'true economic government' to save eurozone

[Iormlund]

The government sector isn't the only one that buys stuff.

All the others stopped buying stuff 3 years ago, when the money supply vanished.

[Iormlund]

Completely true. Curiously enough, every politician in Europe is actually trying their very best to make them insolvent. And that goes for our dear Chancellor in Berlin, as well. I wonder if the Führer of the Axis of Austerity is only now realizing what happens when her most important trade partners cut investments to nothing and stop buying stuff.

She is way too preoccupied with domestic politics to really care. Germans can (and it looks like they will) vote her out of office. Spaniards can't. It doesn't matter to her if hundreds of thousands protest on the big squares in Spain.

Oh I know what she thinks she is doing. I'm just shocked she doesn't realize Germany won't survive the Eurozone meltdown she seems so intent on bringing into existence.
My employer is a small business, around 25 employees total. We bought millions in German high tech equipment every year before the crisis. After the crisis started, we survived mostly with infrastructure projects. And now come the cuts ...

[Admiral Yi]

The UK is insolvent? 

I exaggerated for the sake of effect. 

The UK recently went through a round of austerity out of fears that the bond market would punish it if it didn't.  Spain is a peculiar case: relatively low debt/GDP, but investors don't seem to have confidence in their ability to sustain belt-tightening, and I think there are worries about government exposure to the regional banks.  That leaves France and Germany.  How much leeway does France have?  France's banks have a lot of exposure to Greek debt and there was talk of a French downgrade during Scary Week.

That leaves Germany.

[viper37]

Uhm, that's the only way having a common currency makes sense.

There's no way the member states are going to give up their sovereignty on taxation and spending.  You would end up with another useless title holder in Brussels giving speeches that no one listens to.

Europe has two problems.  A number of countries with unsustainable debt levels and various countries that are at different stages of the business cycle.  Centralized budgeting doesn't fix the second problem and it's about 10 years too late for it too fix the first problem.  The only helpful thing they could do is compel Germany to run large deficits to crank up demand, but then you end up destroying the fiscal position of essentially the last major solvent country in Europe.

I agree with this.  As can be seen with Canada on a smaller scale, a large country with economice differences between member states is very hard to govern efficiently.  That's why large empires eventually crumble on their own weight.

[Valmy]

I agree with this.  As can be seen with Canada on a smaller scale, a large country with economice differences between member states is very hard to govern efficiently.  That's why large empires eventually crumble on their own weight.

I am not sure what you are getting at here.  I have a hard time imagining a political entity of any significant size in the US which does not have significant economic differences between different areas.  Are you implying Missouri is hard to govern efficiently and if it were to split up so each of its counties were independent nations it would operate at peak efficiency?  Of course even then I have a hard time imagining a community where everybody's economic interests are the same.

[Richard Hakluyt]

The Economist had an interesting article about where federal taxes are raised and spent in the USA a few weeks back :

http://www.economist.com/blogs/dailychart/2011/08/americas-fiscal-union

As one can see there are huge imbalances, as one would expect in a continent-sized country. It works because being an American is so much more important than being from NM or NY.

In the Eurozone though it is the other way around, Germany and Greece (etc etc) are much more important to people than the eurozone. No way would the Germans or Dutch tolerate the sort of fiscal flows that are routine in the US.

[Zanza]

Oh I know what she thinks she is doing. I'm just shocked she doesn't realize Germany won't survive the Eurozone meltdown she seems so intent on bringing into existence.

Why would she want an Eurozone meltdown? I mean, I can get those conspiracy theories that suggest all this is a plan to establish German hegemony over Europe, but what interest would Germany have in crashing the Euro?

My employer is a small business, around 25 employees total. We bought millions in German high tech equipment every year before the crisis. After the crisis started, we survived mostly with infrastructure projects. And now come the cuts ...

I agree, but the situation doesn't look that dire from this side. Most of our EU trading partners are close to or back at the level of pre-crisis exports, Spain is rather the exception there. Of course, Spain's dimishing relevance as an export market is overcompensated by the BRICs stellar growth.

[Zanza]

In the Eurozone though it is the other way around, Germany and Greece (etc etc) are much more important to people than the eurozone. No way would the Germans or Dutch tolerate the sort of fiscal flows that are routine in the US.

Germany has a system like that too to transfer money from the richer to the poorer states to guarantee a similar level of government services everywhere. What we learned in the last fifty years or so is that it does not create an incentive to change for the recipients. And it's not particularly successful in leveling the differences either. Most states have been either recipients or donors for the entire duration of the Federal Republic. The other big transfer happened after reunification when the Western states transferred something like 1.5 trillion Euro (much more than is currently spent on the bailouts!) to East Germany, which is roughly the size of Greece and Ireland combined. The result was mixed, there was success in raising East German living standards, but they still rely on these transfer payments twenty years later. The tentative end date for these payments is now being pushed to 2019.

[Iormlund]

Oh I know what she thinks she is doing. I'm just shocked she doesn't realize Germany won't survive the Eurozone meltdown she seems so intent on bringing into existence.

Why would she want an Eurozone meltdown? I mean, I can get those conspiracy theories that suggest all this is a plan to establish German hegemony over Europe, but what interest would Germany have in crashing the Euro?

She might not want it, but her less than stellar approach to this crisis only contributes to the sense of insecurity.

My employer is a small business, around 25 employees total. We bought millions in German high tech equipment every year before the crisis. After the crisis started, we survived mostly with infrastructure projects. And now come the cuts ...

I agree, but the situation doesn't look that dire from this side. Most of our EU trading partners are close to or back at the level of pre-crisis exports, Spain is rather the exception there. Of course, Spain's dimishing relevance as an export market is overcompensated by the BRICs stellar growth.

It's not just Spain. The whole Eurozone grew at a whopping 0.2% this last trimester. With the US and UK on austerity programs that only leaves the BRICs. That's what, 15-20% tops?

[Richard Hakluyt]

In the Eurozone though it is the other way around, Germany and Greece (etc etc) are much more important to people than the eurozone. No way would the Germans or Dutch tolerate the sort of fiscal flows that are routine in the US.

Germany has a system like that too to transfer money from the richer to the poorer states to guarantee a similar level of government services everywhere. What we learned in the last fifty years or so is that it does not create an incentive to change for the recipients. And it's not particularly successful in leveling the differences either. Most states have been either recipients or donors for the entire duration of the Federal Republic. The other big transfer happened after reunification when the Western states transferred something like 1.5 trillion Euro (much more than is currently spent on the bailouts!) to East Germany, which is roughly the size of Greece and Ireland combined. The result was mixed, there was success in raising East German living standards, but they still rely on these transfer payments twenty years later. The tentative end date for these payments is now being pushed to 2019.

Yes, I think such payments soften the pain of change but also reduce the speed of transition. Here in the UK we have a more or less national pay scale for public sector jobs, this makes such jobs very desirable in depressed areas. So the depressed areas remain depressed as all the more skilled people go into public service there. Ok, it is much more complicated than that  , but the very existence of such regional aid helps to perpetuate the problem.

[Crazy_Ivan80]

In the Eurozone though it is the other way around, Germany and Greece (etc etc) are much more important to people than the eurozone. No way would the Germans or Dutch tolerate the sort of fiscal flows that are routine in the US.

Germany has a system like that too to transfer money from the richer to the poorer states to guarantee a similar level of government services everywhere. What we learned in the last fifty years or so is that it does not create an incentive to change for the recipients. And it's not particularly successful in leveling the differences either. Most states have been either recipients or donors for the entire duration of the Federal Republic. The other big transfer happened after reunification when the Western states transferred something like 1.5 trillion Euro (much more than is currently spent on the bailouts!) to East Germany, which is roughly the size of Greece and Ireland combined. The result was mixed, there was success in raising East German living standards, but they still rely on these transfer payments twenty years later. The tentative end date for these payments is now being pushed to 2019.

Could you ask the german goverment to spell that shit out to our francophone "countrymen"! We're tired of paying between 6 and 12 billion euro's per annum with nothing to show for it except disdain -of not pure racism-, attemtps of territorial annexations and a constitution that is nothing but apartheid disguised as democracy.

[viper37]

I agree with this.  As can be seen with Canada on a smaller scale, a large country with economice differences between member states is very hard to govern efficiently.  That's why large empires eventually crumble on their own weight.

I am not sure what you are getting at here.  I have a hard time imagining a political entity of any significant size in the US which does not have significant economic differences between different areas.  Are you implying Missouri is hard to govern efficiently and if it were to split up so each of its counties were independent nations it would operate at peak efficiency?  Of course even then I have a hard time imagining a community where everybody's economic interests are the same.

Well, I don't know much about US internal governance, but I seem to recall some differences, like, well, helping GM&Chrysler to save some States while being detrimental to others.  I can also point to the American Civil War given that the interest of the North and South were conflicting due to difference in economies.

But in the case of Canada, essentially, you will see stuff like the monetary policiy and the interest rate policy affecting different regions of Canada positively or negatively.
A strong dollar will be detrimental to Ontario and Quebec because our economy is mostly based on industries, not natural resources.  Alberta has no problem exporting oil, and it's even more beneficial for them, because for Canadian companies, importing the tech they need to drill for oil&gaz will cost less.

However, with economic growth comes inflation. The western part of the country has been hit hard inflation over the last few years (less so with the recession, but still) and Alberta and BC would have needed an increase in the interest rates to reduce the pressure on their commodities prices, in particular on the real estate sector.
Raising interest rates was impossible, since doing so would have screwed Ontario, Quebec and the Maritimes wich did not have inflation problem like the west.  A Canadian government may screw with any given province to preserve that "canadian integrity", but they will never screw with Ontario.

More recently, the creation of a centralized financial authority in Canada is beneficial to Ontario but detrimental to other provinces.  Quebec and Alberta will see their financial sector shrinking over times, good jobs move to Toronto because of this policy.

These are just minor examples.  In Canada, only Alberta is without debt, so it's not as bad as Europe where many states are nearing bankrupt and require different economic remedies than countries like France or Germany.

It's possible we see a situation where Germany is in economic growth and Poland in recession.  What will the central authority do?  Raise interest rates to avoid inflation in Germany and screw Poland's chance of recovery?
I just don't see how they will work this out. 

They were supposed to enforce a 3% GDP deficit rule, wich they never did, and we see the result of overspending today.  How will that change with a new central authority?  Who will tell Germany what to do if they don't behave 20 years from now?

If you have equalization payments between countries, and systematically one state keeps receiving the money while one other keeps giving the money, this will generate serious tension, especially among different ethnic groups.

[MadImmortalMan]

The other big transfer happened after reunification when the Western states transferred something like 1.5 trillion Euro (much more than is currently spent on the bailouts!) to East Germany, which is roughly the size of Greece and Ireland combined. The result was mixed, there was success in raising East German living standards, but they still rely on these transfer payments twenty years later. The tentative end date for these payments is now being pushed to 2019.

I had no idea that was still going on. 

[Iormlund]

It's possible we see a situation where Germany is in economic growth and Poland in recession.  What will the central authority do?  Raise interest rates to avoid inflation in Germany and screw Poland's chance of recovery?

You don't have to wonder about that question. We already know the answer.

What the ECB did when France and Germany were showing anemic growth was to keep interest rates low while others like Ireland and Spain massively overheated, feeding the current crisis.

[The Brain]

The other big transfer happened after reunification when the Western states transferred something like 1.5 trillion Euro (much more than is currently spent on the bailouts!) to East Germany, which is roughly the size of Greece and Ireland combined. The result was mixed, there was success in raising East German living standards, but they still rely on these transfer payments twenty years later. The tentative end date for these payments is now being pushed to 2019.

I had no idea that was still going on. 

You want to be the politician who takes away free money?