The European Financial Crisis revisited: the Germanification of Southern Europe.

It has been an interesting few months in Europe. The Greeks have just had their first round of parliamentary elections and need at least another round before a government can be formed. The French have just elected a new president on an anti-austerity platform, making it a clean sweep around Europe: in every country populations have punished their government for the recession following the GFC. Meanwhile the Germans are being their obstinate selves, clinging to a fiscal treaty no-one else has any intention of sticking to.

The main mistake being made by European politicians, and in particular the German ones, has been to prevent countries going bankrupt that have no hope of balancing their books without radical reforms. The temporary bailouts allow those countries to avoid truly reforming, completely paralysing those countries and exasperating underlying problems (As the ECB bank-president said just yesterday!).

The mistake of getting involved in bailouts was made early on, but reached its crescendo with the 130 billion euro gift to Greece in March 2012. It was an act of gross folly but there simply was no mechanism at the time to avoid agreeing to the bailout; the Greek politicians were signing every insane promise asked of them and Germany ran out of excuses not to agree to the bailout. That generosity helped the Greek politicians to keep buying off their domestic supporters but is proving the old adage that there is little people resent more than charity, and it will in the medium run achieve the opposite to the financial stability some hoped to gain from it.

To start with the ingratitude, Germany is now depicted once again as the evil man of Europe in popular media in Greece, Ireland, Spain, and Portugal. Rioting protesters in Athens burned German flags and newspapers carried pictures of Angela Merkel wearing  a Nazi uniform. Cartoons in Greek newspapers depicted Merkel and the Finance Minister Schaeuble as running concentration camps for Greeks.

This despite the fact that the Germans not just directly sent huge amounts of money to the governments of these countries, but even allowed the European Central Bank to send more money to their troubled banks in the order of a trillion euros in total, which in effect is printed money and thus a form of tax on the whole of Europe. These populations should be thanking the Germans on their bare knees, but the reality is the opposite. Why and where is this going to?

For one, opportunistic politicians in all these countries have caught onto the trick of blaming the Germans and other European countries for the problems of their own making. They make ludicrous public demands for the rest of Europe to bail them out, or even blame them for the housing booms that preceded and worsened the financial crisis. And populations, with their exceptionally limited understanding of how financial matters go, lap it up and increasingly vote for anti-European political parties.

So far, German politicians seem to be oblivious of the damage that their generosity is doing. Instead of realising that they are setting themselves up for trouble, they insist other countries abide by Stability Pacts and austerity measures. They send financial experts to come and check the books, of course finding one discrepancy after the other. This makes it simpler for politicians elsewhere to pretend that the Germans are to blame for their problems and thus allows them to shirk their own responsibility.

A good example of irresponsible posturing in France is all the talk of using the European Structural Funds to give the European economy a boost. It sounds reasonable to call for the freeing up of money that is being idle, but a quick look at what these funds actually do and their size is sobering. For one, there are few funds in the world which do more useless and corruption-inviting projects than the ESF (see here for a nice discussion): lots of tunnels and roads that have only sheep as regular users. The idea that building some more concrete goat tracks will save France is fanciful, to say the least. More importantly, there is just not all that much money being idle in these funds. The European Social fund has no more than about 15 billion to spend per year and the European Regional Development Funds have a budget of about 35 billion a year. You thus need 3 years of their total just to cover the Greek deficit for 2012 and it’s not even a whole percent of European GDP. Add to that the dry realisation that the money ultimately of course comes from tax-payers and it should be clear that the call from some Southern European politicians and economists to raid these funds in a Keynesian gesture is a rent-seeking distraction from the main game.

Why do national politicians not get much more serious about internal reforms and instead blame others for their problems? Because it would cost them the next election and probably the one after that. It is in this regard handy to remind ourselves that the Germans themselves punished the last German leader who instigated serious reforms (the Hartz reforms, politically pushed through by Schroeder). It costs the German social democratic party ten years of being out of power, a clear deterrent for any other politician in Europe to be serious about reform.  So the governments of the countries in trouble don’t reform. Even a technocratic government, like that led by Mario Monti in Italy, has found it too hard to push the unpopular reforms necessary and has instead opted for symbolic tinkering, like handing out 500 taxi permits or allowing shops to open on Sundays. As if 500 taxis are going to make much of a dent on the millions out of work!

Which brings us to the nub of why the financial crisis will not go away in Europe: because there is no serious reform in Southern Europe, growth there will remain negative and non-existent for quite a while. That in turn appears to be leading its smart young people to go to the North of Europe or emigrate outside of Europe. So the future hope and tax-base of these countries is being eroded as we speak which further aggravates the paralysis inside these countries and strengthens the interest groups that prevent real reforms. Only in the North of Europe are real reforms on the table, such as the UK where real banking reform and health service reform is being instigated.

I have in the past prophesised that the ECB would bail out the weaker countries in return for a weak financial stability pact. That political deal has indeed been made and is being implemented, complete with the immediate realisation amongst the big players that the stability pact is not worth the paper it is written on. However, the ECB bailout cannot solve the underlying problems of a Southern Europe that is in political and economic paralysis, with politicians who cannot afford to instigate real reforms and are instead merely posturing. As a result, the countries will keep coming back for bailouts from either the Northern European governments or from the ECB. Only very slowly are the leaders in Northern Europe starting to wizen up to the fact that their generosity will not keep the place together but will tear the European Union apart.

Hence the European financial crisis is on hold until several countries are allowed to go bankrupt: Greece, Ireland, Portugal, and maybe even Spain and Italy. Once these countries go bankrupt there will be a much greater internal political will to push through real reforms, simply because the governments won’t have the means to pay off the interest groups and will thus have to offend most of them anyway. And those who fear some kind of fascist resurgence or extremely xenophobic nationalism to arise in these countries are mistaken: these are relatively small countries kept afloat by international trade and wealthy foreigners who can leave in a heartbeat, so there is basically no-one rich and foreign they can lay their hands on and threaten. Yes, nationalism will rise as populations try to regain some sense of self-worth, but the only hope for these countries is to remain integrated in the European and world economy and that reality limits the degree of fascism and xenophobia these countries can slide into.

Who will lose out in the end? It will be the politically weak inside the Southern European countries, including pensioners, welfare recipients, minorities, migrants, the unhealthy, and the unskilled. And who will be amongst the surprise winners? The Northern Europeans because they will be the beneficiaries of a large brain gain from the South and it will be their companies that are best poised to take advantage of the eventual resurrection of the Southern European economies.

As to the long-run, the Portuguese, Spanish, Greek, and Italian scholars I talk to all agree: the way out for their countrymen is to become German, either by moving to Germany or by adopting similar institutions and policies inside their own countries. But current institutions and attitudes cannot change so quickly. It is a fascinating question of societal transformation whether the road of least resistance actually does indeed lead to a slow Germanification of Southern Europe or whether it leads somewhere else. I am inclined to trust greed and ambition and thus would put my money on slow Germanification.

Author: paulfrijters

Professor of Wellbeing and Economics at the London School of Economics, Centre for Economic Performance

33 thoughts on “The European Financial Crisis revisited: the Germanification of Southern Europe.”

  1. Nope. Germany has, in large part, built their strength on the back of an artificially low currency. The Euro represents an average of the currencies in the Euro zone, so the strong benefit from an averaged down currency whilst the weak must deal with an artificially high currency.

    German living conditions have been funded by exports that are thus artificially cheapened. The time has come for the GERMANS to pay for the benefits they have obtained from the Euro, a hundred billion is small change, the Germans have benefited by trillions over the last few decades. They now cannot afford the Euro to collapse or their living conditions will become like those of the countries they have exploited. As such the Germans should pay the price, for they have had the benefits. And they have something to lose whereas the poorer nations do not. Make them pay for their standard of living rather than sucking life from the weaker nations.


  2. Pretty cheap call for you to canonise the germans now.

    But hey, I’m sure we should all be grateful for the benevolence of giving back less than a tenth of what they’ve extracted in the last decade.


  3. I agree with Rob – it takes two to tango, and Germany, with its export led manufacturing economy, has benefited greatly form the Euro.

    Of course better institutions are required in many southern European countries. But these institutions are cultural, and from my understanding, these cultures often pride themselves of being the opposite of German.

    Whatever solution arises, it will be another political fix, and the only workable one will be one that enough citizens of Europe can be convinced to believe in.


  4. Andreas – here’s a link to a McKinsey report

    Click to access the_future_of_the_euro_McKinsey_report.pdf

    Makes it very clear who has really benefitted form the Euro. 33% of German growth since 1999, 113bn Euros in trade due to increased competetiveness (read artificially lowered currency) and 30bn Euros in export trade.

    Figure that out across the life of the Euro colonisation and you see why Germany has been such a massive Euro supporter.


  5. Two points to make here. First, it is actually a non-standard economy in which it is an advantage to have an under-priced currency because of both the distortion in prices and the fact that you can then buy less than you should be able to. To call artificial poverty an advantage makes short-run sense, but not long-run sense. What is fundamentally key is that the Germans are less negatively affected by the availability of cheap capital than some of the others were, including Ireland and Spain. That is much less a matter of currency.
    Second, there really is not much point playing the blame game or counting previous winners: continued bailouts are proving politically disastrous and the paralysis of much of Southern Europe is now such that not even Germany can keep them afloat. That paralysis has to stop one way or another and any form of continued cheap loans simply deepens the current crisis.

    I do find it somewhat irresponsible for people to want to blame the Germans for the current problems and somehow still make them in charge for helping everyone out. Its bad enough that many Germans push that kind of story. Its a kind of willful ignorance that is just making things worse. It wont help the Greeks, the Spanish or anyone else. Sentimentalism at the expense of the future.


  6. Paul, an underpriced currency allows you to buy LESS imports than a high currency does whilst also making your own exports cheaper and thus more competitive.

    It actively promotes home industry right across the board and boosts employment accordingly. You can still buy as much, it just has to be home grown and with 80M of them Germany has the population to support all levels of the economy.

    My point is not to blame Germany for the problems but to point out that when they are asked to pay to support the Euro it is not some altruistic undertaking, it is merely giving back a fraction of the benefit they have received and as such is entirely appropriate.

    The cheap capital was certainly spent better by Germany, no question about that.


  7. rob,

    yes, an underpriced currency means you can buy less imports: you are poorer. And yes, that stimulates exports. And no, that is not a good thing in the long run in normal models.

    Take the usual long-perspective of macro-economics (production functions: you eat what you produce). Then all you really do if your currency is underpriced for a long time is that you have a distorted internal price for goods that can be exported versus goods that cannot. You are unambiguously poorer than with proper pricing.

    Now, if you want a non-standard model in which this is a good thing, then you can note that with undervaluation more of your economy is oriented towards producing for others and less towards domestic production. In return you get back some of the production of other countries though if it is truly undervalued then you are getting less back than you could get back. You are effectively using some of your productive capacity for no return. This kind of thing can makes long-run sense if there is some innate benefit to exporting that is not there for producing for an internal market. Other stories you can run are the difficulties of reducing prices in the case of over-valuation. You thus need things like very sticky nominal prices or some unpriced innovation benefit to exporting.


  8. “You are unambiguously poorer than with proper pricing”

    What’s proper pricing? Really? Isn’t it all ultimately the result of interacting policy decisions? I reject the notion that there is some natural or proper price for anything.

    Back to the point. Think about it. Keeping your currency artificially low is China’s recipe for growth, as well as Germany’s.

    It promotes domestic capital investment relative to other countries, ultimately leading towards becoming a net exporter. In the long it is not a trade-off between producing goods for a domestic market and goods for export. It is about producing all goods cheaper, and improving the external position.

    Pushing up current account surpluses results in growth of ownership of foreign assets, and the repatriation of profits and interest.

    If a low currency is bad, surely a high currency is good? So what the hell is wrong with those wacky Swiss, those zany Chinese, those foolish Germans, and those nutty Americans – all in a global battle to deflate their currency. And why did the Mediterranean countries get into such strife with their relatively overvalued Euro?


  9. Cameron,
    Ok, sell me your house for one dollar if you really believe it is in your best interest to have a lower currency! I for one dont want the Aus dollar to drop because it lowers the value of my pension. Interestingly, it is precisely because people do not normally realise what a currency devaluation means that it politically is easier than a drop in all prices even though the two are the same.


  10. Paul,

    an underpriced currency does not mean you are poorer, it means your currency is worth less OUTSIDE of your own country. Wealth is determined by assets, not money, because money is a tool, a means of exchange, and nothing more. Wealth depends on what backs up the currency of your nation. If you have no assets then your currency is worthless, if you have incredibly strong assets prodcing great wads of revenue then you have a strong currency.

    Yes you get distorted internal pricing with an undervalued currency. It also helps prop up your own industries because it reduces your costs on a global level. Thus it helps employment levels or alternatively it lets you spend more on each employee in terms of wages and conditions than if you had a high currency i.e. your overall labour cost is lowered by the high currency no matter what it is composed of.

    So you are not poorer at all, you are simply less likely to buy imported products because they are relatively expensive compared to those produced at home. That is not poorer, that is lesser international purchasing power. But that is offset by greater levels of employment, and thus a greater tax colelction to spend on social services etc. You start exporting more because you are cheaper which also feeds back into your local economy.

    In short – you get great economic benefit if you have a strong economy that can produce goods and services but which has a restrained currency to promote the international trade of those goods and services rather than the natural competitive advantage of a weaker economy being allowed to flow to those weaker economies.


  11. Paul – your comment re selling your house for $1 is an internal comparison. If I can buy twice as much house for $2 then that’s fine, it represents the value of the market. It has NOTHING to do with the strength of a nation’s currency.

    The dollar dropping does not of itself reduce teh value of your pension. It means you can buy less imported goods, but what of those do pensioners buy on a regular basis? In the meantime you have to live in an Australian economy that is becoming less productive, unemployment rises which creates a demand for unproductive but necessary social welfare payments and ultimately Australia becomes a weaker economy leading to a greater devaluation of the dollar because it is backed by a weak economy which then means all those social security benefits you enjoy come under pressure to be removed.


  12. rob,

    as I keep saying, what you say makes sense in the short-run but is odd in the long-run. What you are implicitly relying on is some benefit of poverty.

    For instance, why dont all the employees of the country of ‘rob’ (i.e. you) agree to be my slave for 1 dollar per day? You are then employed and available to send tax revenue elsewhere, which are these great benefits of having ‘low external purchasing power’ you are talking about. So, come on, think the next step: what do you need to believe in for it to be a long-term benefit to have an ‘undervalued currency’? Under which circumstances is it good for you to be my slave for 1 dollar for a while?


  13. Actually, if my currency was low, I would get 2x Cam$ for each Paul$, and hence I would get twice as much for my house if I sold it in the ‘Paul’ market, rather than domestically.

    Let’s replace houses with a more realistic a tradable consumable, shoes. Given the massive advantage I know have in making shoes to all external (an internal markets), I attract all the investment – my domestic companies get an edge for investing in ‘Cam land’, and as my capital accumulates, I improve productivity, and I increase the rate of adoption of new production techniques.

    ‘Paul land’ simply can’t compete, and all his shoemakers go bust. In fact, ‘Paul land’ can’t really compete on anything except for a few non-tradable goods in his own domestic market. His productive base narrows to just these few industries (and, say, some resources – which are the main reason his currency can stay high).

    ‘Cam land’ gets so good at making shoes and many other products that the consumers of ‘Paul land’ keep buying them, but they have little to exchange. As the wealthy capital owners in ‘Cam land’ realise the easy money to be made by lending to ‘Paul land, they begin to do that. They also buy up resources in ‘Paul land’ to secure the inputs to their massive shoe production operations.

    ‘Paul land’ sells its assets and borrows from ‘Cam land’ to maintain a levee of consumption the people are used to. Paul tells his people they should be happy about all the shoes they can buy from ‘Cam land’ with their strong dollar.
    Eventually, ‘Cam land’ realises that ‘Paul land’ has lots of resources, and not enough productive capacity to sustain an army. Cam invades.

    Back to your points. For a diverse economy that easily satisfies its domestic demand for a wide variety of goods, to the point they are a net exporter, a lower currency cannot be the same as a drop in all prices. Because there are no changes to domestic costs – it simply improves the external position and increases capital investment in export industries. Many imported goods are now more expensive, but this diverse economy will now attract more investment in these sectors.


  14. Cam,

    you are beginning to see the light. Lets take your example of a natural resource curse as a reason for a high currency (which patently does not hold for Greece, Spain, Italy, Ireland, Portugal, etc.). In simple models, that high resource means ‘Paul land’ (lets switch labels and henceforth call it Norland) attains a lot of Cam dollars, allowing it to buy up Cam productive capacity. Norland’s future fund own Cam and the Nors live happily and wealthily ever after as Cam works to pay back the Nors.

    Then lets take your example a bit more seriously and really imagine that Norland has decided for some bizarre reason to increase all its prices relative to Cam land. In principle this means it cannot sell much to Cam land but sends it dollars to Cam land for Cam products since the Cams are happy enough to accept the nor currency. The Nors are getting something for nothing! Without working for it, they get Cam products. Anxious that the Nors will keep doing this for time immemorial, the Cams keep giving loans to the Nors so that the export to Norland can keep going. Which land is full of fools?
    Then think of what happens inside Norland. Why would getting something for nothing mean they no longer innovate or specialise in what they are best at? What mechanisms do you need to believe in for Cam’s free gift to be to Norlands disadvantage? Why dont the Norland prices readjust? Etc.


  15. Paul, you like to keep relying on the emotive terms at the extreme end of the sepctrum. Poverty is not what we’re talking about but it is a term that conjures strong emotions. We’re talking about a German currency that is probably about 20-30% undervalued. We’re not talking about poverty.

    Equally, if you insist on doing so then poverty stricken countries absolutely must have a weak currency in order to allow them to build export markets to earn the funds to help them overcome poverty.

    This is a key part of floating exchange rate mechanisms, my weakness feeds into lower costs feeds into greater competitiveness.

    Take India for instance. For a long time they had a very low level of personal income. Call centres were established there based on low wages and low international costs. As that industry grew and brought in revenue that led to more industrial growth which led to greater stabndards of living an levels of employment and costs rose. The Indian economy earned income and the country as a whole benefitted. Education standards improved, health standrads have improved etc. Now costs are such that for low value adding activities India is no longer optimal, those industries are moving to Bangladesh and Cambodia (as examples) and will create the same type of growth there. India has grown to undertake higher value adding activities where they are not as expensive as Australian labour but they can deliver outputs which Bangladesh and Cambodia cannot.

    But if the Indian Rupee was kept artificially low then Bangladesh and Cambodia would miss out on those opportunities as the industry would keep flowing to India at the same time as India moves further up the value adding chain, thus obtaining all the benefits of the foreign income, expanding into higher value adding activities and preventing otehrs from benefitting as they have done.

    And that is exactly the German position. They have an artificially low currency allowing them to compete against what should be lower cost nations in areas they should not be able to do so.

    That’s the problem.

    As for your $1 per day slave question you are again relying on emotive language such as the word “slave”. If the question you are trying to ask is “under which circumstances is it good for you to work for me for $1 per day” then answer is “whenever my alternative is to earn $0.99c per day at best, all other things being equal”.

    Note that this is effectively what happens when you buy goods from China or books from Amazon. You get the benefit of people earning a much lower rate than they would here in Australia feeding into a lower cost product. They can afford to do so because in their home country their cost of living is less than the comparative Australian. In China’s case teh massive manufacturing base created by such labour cost advantages is leading to teh industrialisation of their economy as they move away from low value add rural production into value adding manufacturing. As long as they are cheaper than equivalent quality Australian goods they win the work. But as their costs rise, and Chinese costs are certainly rising, they start to lose the price comparative advantage and must engage in greater value adding in order to meet the increased costs they incur.


  16. rob,

    no emotion intended, just going to strong labels to make my point.
    If you want the same question in other terms: would you like Australia to have the same external purchasing power as India? You can be assured that we’d export a lot and probably have full employment too!
    Think deeper about what is actually underlying your arguments: there are plenty of low-export countries that are quite rich (the US used to be the prime example), high currency countries doing well (Australia!), and low currency countries doing terrible (India in the 1980s).


  17. Paul,

    If you take the expectation of perpetual peace and continually increasing international trade, perfect adjustments and a perfect ability to find niche industries no matter how hight eh currency, then perhaps you are right.

    But under what situation is it logical for a country to expect the arteries of global trade and finance to remain perfectly clean for all time? Really, what’s the longest period the world has gone without a large scale war or economic depression, or major political revolution?

    So, if you add in a very high impact, but low probability (increasing to certainty in the long run) risk of being unable to import goods from anywhere in the global market place, and a similar risk to foreign funding for domestic capital investment, what is the logical thing to do? Attract physical capital domestically to accumulate productive capacity. It’s an insurance policy for global uncertainty.

    Your examples of low and high currency countries need context – like even if the currency is low, is it relatively higher than justified by productivity?

    Even without the global trade risk, we can take another example. Two countries operate a fixed exchange rate for some decades (so, roughly, the same currency). Then, they decide to float the exchange rate – let the market optimise! Would you rather have your currency go up or down relative to the other country?

    You appear to be arguing that in the long run the country whose currency immediately rises wins in the long run. But I would argue they win only in the short run.

    I’ll have my currency go down for a bit of short-term pain (can’t import so cheaply), and a long run gain of attracting all the investment away from the other country. Eventually I can let my currency may rise as I become the monopoly producer of many necessities, and have such a huge lead in capital stock.

    It seems so obvious that a lower currency is a long term pay off for short term pain – not the reverse.


  18. Cameron,

    you say “Two countries operate a fixed exchange rate for some decades (so, roughly, the same currency). Then, they decide to float the exchange rate – let the market optimise! Would you rather have your currency go up or down relative to the other country?”

    This has an easy answer: I would want my currency to go up to infinity, allowing me to buy up all the productive capacity of the other country so that till perpetuity the people in the other country are working for me!!

    You are thus still not thinking through what you need to assume about the country with the too-high exchange rate for it to be a bad thing to be richer. You need to think about what they do with the money (consume or invest: in a Ricardian world the temporarily rich know the party will come to an end and will indeed buy up the productive capacity of others). You need to think of endogenous discount rates, endogenous leisure choices, political lock-in effects, nominal rigidities, etc. At the moment you are still not arguing actual mechanisms but are just giving the usual platitudes one finds in finance magazines, which ultimately don’t really help in understanding these things. A model with any of the elements above though would be really cool.


  19. ” allowing me to buy up all the productive capacity of the other country so that till perpetuity the people in the other country are working for me”

    Actually, no. To do that you would need to sell to the other country more than they sell to you. You have only one side of the coin – consumption. You must think about production, the net trading position, and the accumulation of debts that correspond to the differences in trade each period.

    Say high currency Paul land does start trying to buy up assets in low currency Cam land. Each Paul$ can buy 2 x Cam$ worth of buildings, farms, business etc so he thinks he’s getting a great deal there. But for Cam land to accept his dodgy Paul$ they would want to have the payment in the form of goods, not currency. Cam land banks wouldn’t want to be left with all these Paul$ so they would spend it in Paul land (which doesn’t make any sense, because the prices are so high), lend it back to Paul-landers, or buy Paul land assets. Thus he can’t accumulate Cam land assets unless he sells more goods to Cam land each period.

    For these asset purchases to happen (in net terms), Paul would need to run a current account surplus – meaning trading more goods to Cam land than Cam land trades with him. The accounts must balance. He will find this extremely difficult with his high currency, thus he will be stuck importing from Cam land, and allowing Cam land to buy up his own assets.

    You can’t run a current account surplus and a capital account surplus. It is impossible.

    Think about Norway. They have a current account surplus and a high currency – an exception really. But this is possible only because they have a natural resource monopoly, a gift of nature that will run out. And indeed they are trying their best to keep their currency under control with their sovereign wealth fund.

    Without the oil, they would not be in a position, as you argue, to buy up anyone’s assets with their high currency.

    I’m pretty sure none of the following matter “… endogenous discount rates, endogenous leisure choices, political lock-in effects, nominal rigidities, etc.”

    I’m serious. This is real life. It’s not some theory, some abstract model, it just is. You can’t buy up the word because of a high currency – you can only buy up the rest of the world if you sell them lots of goods either on your own credit, or by taking payments from their asset base (they give assets in exchange for goods).


  20. And it is a very important point win pointing fingers in Europe.

    Your logical outcome would be that the PIIGS, with their overvalued currency, would be buying up German asset, because Germany is stuck with an undervalued Euro. But exactly the opposite happened.


  21. Cameron,

    actually: yes. In your thought experiment, Norland was artificially given a higher exchange rate which indeed entails the possibility of being able to get something for nothing, i.e. to buy up productive capacity in Cam land without sending any goods. Much like the Dutch bought up Manhattan for a nickle and a dime from the Native Americans.

    Now, if you ask the question how a high exchange rate can be maintained without real productivity and mutual trade flows to back it up, then one is indeed in a situation of explaining the limits to borrowing. Still, if Cam land essentially gives Norland cheap loans then Norland can buy up Camland at higher levels of return, effectively buying up Camland with its own loans! The fact that this doesnt happen tells you something about what is really going on in Norland.

    You seem to want to reject macro-models as a means of learning something about what underlies macro-phenomena. Sheer intuition and a regurgitating of sentiments off finance magazines wont get you very far though: even verbal models have their function. By creating an artificial world that has some of the main characteristics of the real one, it becomes easier to see where to look, what to measure, and what to do.

    One doesnt have to start from the mainstream models, but good luck trying to understand the macro-real world without any models!


  22. Paul, your argument fails on the fallacy of “corruptus in extremis”. You keep talking about infinity level valuations and other extreme events such as slavery and poverty. That is simply not going to happen barring a complete breakdown of society to a level seen only in certain African coutnries where subsistence living is a result.

    The use of “strong labels” to “make your point” is another of the fallacies of argument, appeal to emotion. Again, that has no place in rational debate.

    The low export US? When would you ever consider the US to be a low exporting country? US mercantile power is the very basis of their economy, both domestic and itnernational. As the value of the USD has come to represent teh de facto world standard they have moved up the value chain and have exported higher worth items such as cars, aircraft etc as they became a secondary manufacturing economy and then they have led the way in teh export of services such as financial, software etc along with high value add manufacturing such as computers etc as they have moved to be a tertiary economy so they have become a mixed economy – both services and manufacturing. As computers have been commoditised they have lost that export market to coutnries who can make them more cheaply but with the same level of quality. The USA now exports a huge volume of research based cservices as well. And despite the growth of China teh USA is still the largest manufacturing economy in the world by $ value because of teh high value nature of its manufacturing. The USA has been the largest world economy since the end of WW1, hence the impact when anything goes wrong.

    Australia will not and should not have the same external purchasing power as India, they are fundamentally different economies. India is an emerging superpower but still has a long way to go in terms of value adding and political and fiscal responsibility. Note also that the rupee is not a fully floated currency. The Aus$ should be stronger than the Rupee because we are a stronger economy – note that stronger does not necessarily mean larger.

    Your claim that Australia is a high currenecy successful exporter is another fallacy of argument – the point there is that teh Aus$ has BECOME strong BECAUSE we are a major exporter, the strong $ was not present when the exports were started. Note that teh strong $ has led to the collapse of Australian vehicle exports (Mitsubishi have left entirely having been unable to produce cars at competitive prices, Toyota is scaling back because they cannot get exports, Holden and Ford regularly need federal funding because they cannot sell enough cars locally to compensate for low volume exports (compared to Korea or India etc). So your argument is illogical from that viewpoint.


  23. “being able to get something for nothing” Surprising words from an economist!

    “Still, if Cam land essentially gives Norland cheap loans then Norland can buy up Camland at higher levels of return, effectively buying up Camland with its own loans!”

    No it can’t. It can only buy Cam land assets with Cam$. Every time it exchanges Paul$ for Cam$, Cam land banks go back and buy Paul land assets, or lend it back to Paul land to buy PAUL LAND THINGS. Paul can’t buy Cam assets with Paul$. What on earth would Cam land do with Paul$ except buy Paul land things? And they wouldn’t want your goods, because they are relatively expensive. So they will lend you the money back (to buy things domestically), or buy your assets.

    I am really not joking here. I have no idea which macro-models assume you can buy foreign assets in a different currency, but it is easy enough to just call someone at the RBA or a major international bank and ask whether what you say is possible.

    Also, if what you say is true, wouldn’t every country be in the business of keeping their currency artificially high?


  24. rob,

    taking things to limits is merely an ex-positional tool: if you say a 10% devaluation is a good thing, why not an extra 10% devaluation and another 10% devaluation and another 10%, etc.? So if you want to argue ‘lower currencies are better’ than I indeed can argue that point of view to its logical conclusion. You want to argue 5% devaluation is good, but 6% is not then you must have competing forces in mind at which point a more meaningful debate is possible. I keep providing hints what those counter-balancing forces might be but you seem to want your cake and eat it (devaluation is always good but it is unfair to take that to the extreme). That is not emotional, it is pointing out the current weakness in your logic.

    I think this is the last reply I will give to you and Cameron on this. I have a day job I must attend to.


  25. If it within the power of a central bank to maintain a exchange rate celling, surely it is within their power to maintain an exchange rate floor. So basically, you could take over the world by having our central bank manipulate the value of your currency upwards?

    Sniff test?


  26. Merijn,

    I hope you mean the Hartz reforms of 2003.

    I used to be on the fence about this, but the differential experience of Spain and Germany has convinced me that strong employment protection and extreme disincentives to get a job soon after becoming unemployed (before Hartz IV you lost a lot of entitlements when accepting a job) matter for the dynamism of your economy.


  27. Of course, thanks, 1992 should be 2002 and 1993 should be 2003. By the way – Spanish exports increased faster than German exports, between 2000 and 2010 (these years are right).


  28. [Removed because of abusive language and slander]
    But one more point [more slander]. 150 billions of public Greek debt, prior to the second rescue, was spent in weapons imports. Greece was the third main weapon importer in the world, after China and India. And it was the main buyer of German weapons. Third buyer of French weapons. My source is the blog creditwritedons, a decent blog with decent bloggers [more slander]. I love Germany, I go three times a year, I love Berlin, I want to live there. But their policies are responsible for everything that happened to Europe since the fall of the Wall.


  29. Pablo,

    normally I would just delete your slanderous remarks but in this case you provide a perfect illustration of my central argument, which is the ingratitude for extending cheap loans to Southern Europe. Your emotional outburst blinds you to the fact that no-one forced cheap loans onto Greece and others and that they are responsible for their own actions, but yet you insist of the Germans that “their policies are responsible for everything that happened to Europe since the fall of the Wall”. You provide the perfect illustration for the dangers of extending loans to people who cant pay back: they make up conspiracies and cock-and-bull stories to demonise those who help them.
    As to the conspiracy theorists who see arms trading, you wont find that on this blog because there is no evidence for it. Greece the third arms importer of the world? Ha! These things have been subjects to lots of inquiries in Europe and the evidence is yet to be found for those rumours, but hej, why let such trivialities get in the way?


  30. and for those interested in chasing such things up, have a look here ( The same SIPRI report that underlies that article (Swedish Institute for Peace Research) has also been doing the rounds in the European media. It makes clear that Greece has drastically cut back its arms imports in recent years, making a mockery of the claim that it is getting bailouts to buy new arms.

    That Greece has being buying so many arms in the past though tells you even more about Greece. But, typically, you can always blame the seller rather than the buyer. Those nasty nasty Germans and French selling arms to Greece in the early 2000s!


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