'More Europe!': Germany's battle-cry for the eurozone

Miscellaneous Current Events
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The Future Group
A picture of the German conception of Europe’s future is emerging from the utterances of the German foreign minister, Guido Westerwelle, and through the newly published interim report of what is known as the Future Group, which he set up.

The proposals are:

• More European power to determine the economic and tax policies of the member states. There should be a “transfer of sovereignty” to the European centre

• A strengthening of the EU’s “foreign office”, with a common European foreign and security policy

• A smaller European Commission able to make decisions faster

• A bigger role for the European Parliament to make “stronger democratic legitimacy”

• A directly elected President of Europe

• A European army

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Think you might create an actual title for the thread instead of just using a URL?

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Sort of creepy. Just a little.

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It’s not like I called this

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thought i did. There, fixed it.

I’d thought that Germany was regretting being in the EU. Hmmm

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You have to consider Germany’s economic mini-boom of 2002-2008 was built on increased exports to such countries as France and Italy. We discussed a lot about how Germany benefited from the euro, both at economic and political level (getting rid of the conservative Bundesbank allowed the German political class to increase its power). Bagus’ book explains it all: you can download it for free from the main site.

Of course if you ask the man on the street in Stuttgart or Munich he will tell you he misses the old Deutsche mark and hates the teuro (you’ll get the joke if you speak German). But in the end his opinion doesn’t matter. His vote doesn’t matter: the German political system is geared towards “stability”, meaning the Bundestag committee on poltical activities gets to decide who can get into politics and who not. It’s a little gift from the Allied occupation, especially FDR’s and Churchill’s decision to allow defeated France and her megalomaniac, resentful self-proclaimed leader, Charles de Gaulle, to sit at the winners’ table. It means the hapless German voter gets to choose between a pro-euro party, a very pro-euro party and rabid environmentalists. Before you ask Angela Merkel’s party (CDU) belongs to the former category, making it the best choice available. It’s like being given the choice to be shot in the head, tortured and beheaded or brutally tortured and burnt at the stake: you choose the lesser evil. There’s no chance for “no-euro” parties like the ones springing up in Finland, The Netherlands or even Italy. So far the eurocrats have been able to contain the contagion… but for how long? Next year Italy will hold general elections and polls indicate the “no-euro” party will be a close second behind the ex-communists, though their numbers are growing so steadily a victory cannot be ruled out.

Please not the “no-euro” parties are populists. Their promises are patently absurd and impossible to keep. But if they help the Evil Empire 2.0 go burst why not?

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Kakugo,

What are your thoughts on DeSoto’s article in today’s Mises Daily? His main point, as I understand it, is that the Euro has actually forced European govts to be responsible, the very opposite why it was created.

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Not really surprising. Their end-goal has been a united-states-of-europe since the end of WWII. There’s always some new crisis around the corner to justify advancing X agenda.

But it’s going to mean tyranny and little more.

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I read it and understood his points. However there are two problems with it.
First of all the charter of the ECB made very clear the bank’s first and foremost objective was to keep prices stable. On that point it failed and national statistics institutes had to resort to cheap tricks to keep the official CPI in check. The CPI is composed less and less of “essentials” (meaning stuff people has to buy, like bread, fresh vegetables, milk etc) which have been hit by a two pronged assault, one made up of old fashioned inflation and the other by endless regulation, culminating with the infamous Common Agricultural Policy (CAP), which is nothing more than old fashioned central planning Uncle Joe would be proud of.
Second is the so called austerity measures Prof Huerta de Soto quotes are not being enacted as part of a larger plan towards “fiscal responsability”. They are enacted to scrape enough money to service the debt and, much more critically, to try and save welfare spending at all costs. Despite these measures the Italian and Greek debts are growing by the minute because welfare spending is really not being touched and both countries are becoming poorer by the minute. To make matter worse Club Med economies have actually grown dependent on government spending for a variety of services the private sector cannot provide (because of government sanctioned monopoly, lack of capitals, excessive legislation et). Austerity measures are actually hitting this area hard while leaving welfare spending more or less untouched. Worse yet, it usually means higher taxes which are eroding the capital available and more stringent legislation, meaning the promised “foreign investors” are less willing to take their capitals there and domestic investors are seriously considering packing up and leaving the country. In short wealth consumers are winning the battle against wealth producers.

Having said that I kind understand Prof Huerta de Soto point a single central banks which has to cater to a variety of countries (from inflation-happy Italy to conservative Finland) is to be prefered over a succession of inflation-happy banks. However let’s not forget Italy, Spain and France are all pushing for a strong devaluation of the euro and the so called “euro-bonds” (what is an “euro-bond”? It’s this: either the EU or the ECB buys bonds from Spain or Italy and issue in their place bonds guaranteed by the EU as a whole. It means Finnish and Dutch taxpayers would have to pay their own government’s bonds, plus Italian and Spanish ones). Angela Merkel and her finance minister, Herr Schauble, have to do a precarious balancing act: while the German industrial and political system is more or less ready to accept this proposal, the electorate isn’t. The Bundestag committee for political activities and the judicial system cannot keep euro-skeptics down forever.

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Kakugo,

Your reply helped me round out the picture. Here is my guess as to what is happening and what lies in store:

It seems DeSoto is correct in his description of right now, because the inventors of the Euro did not forsee that the money printing would have to be so extensive so quickly. The PIIGS figured out how to game the system, and thus upset the plans of the big boys. They were taken by surprise, and unable to get it done at the drop of a hat, and in fact are reluctant to do so.

So for now they are doing what DeSoto says, which looks like responsibility, but we know better. It’s a strategic retreat, taking a step back to ready for two steps forward later.

In fact, they would prefer to keep the printing at its current pace, which they probably calculated years ago to be the max possible without collapsing the value of the Euro and turn it into Zimbabwe money. That’s why they are looking to have German tax payers foot the bill for the PIIGS spending spree, thus not having to print more than planned.

Where will this lead? Very simple. Either the Germans stand up for themselves, or they won’t. Since they have been spineless so far, we can assume they will remain so and will pay all the PIIGS expenses from now on. Since the PIIGS clearly have no qualms about letting others pay their bills, and now see that they got away with it, their next step will be to improve their lot in life and spend even more, with the Germans once again footing the bill.

This happy cycle will go on until one of three things happen.

  1. The higher ups insist on central planning each country’s budget. The PIIGS will not accept this. Why should they?

  2. The Germans finally revolt and kick the PIIGs out of the Euro, or the Germans leave. This requires backbone on the part of the German masses, or responsibility on the part of their politicians. In other words, it ain’t happening. Besides, as long as there are two countries with a common currency, one will figure out how to live at the expense of the other. It’s not rocket science. So even if the Eurozone shrinks, the problem will remain, ever increasing.

  3. The powers that be turn on the printing presses at a faster and faster rate to keep up with the PIIGS high living, and the Euro collapses into worthlessness. It’s happened many times before. Wikipedia lists 32 times, 29 of them in the twentieth century.

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The European Monetary Union (EMU) was built on a simple assumption: the good times would roll forever and ever. There was no provision for allowing a country to exit the currency, no “Plan B”, no worst case scenario. Remember nobody apart from the Austrians and a few “gloom and doom” analysts saw the present banking/fiat money system crisis coming, nobody. To use a popular expression they were caught pants down.

Now there’s a big problem. The “inflationistas” are very short sighted. They fail to see the connection between money printing and increasing prices leading to declining standards of living in Club Med countries despite having been warned by the central bankers themselves. Inflating the currency will give short term relief to debtors but will drive prices higher and higher. With unemployment on the rise, saving rates in free fall and plenty of people living near the poverty line that’s going to cause an explosion, especially in countries with very high “social expectations” like Italy. Moreover the German, Dutch, Finnish etc electorates aren’t going to accept higher inflation as an answer.

In my opinion we’ll see such a strategy:

1)The feared TobinTax will come into being. It will cause problems but will give short term cash to be handed to Club Med countries for “development projects” which more often than not means hiring people to do nothing useful and building cathedrals in the desert but it will be useful to cook GDP growth figures. Please note this may mean both the UK and Luxembourg, the leading European financial centers, and perhaps The Netherlands will start crash plans to “abandon ship” as their economies are largely dependent on huge financial transactions.

2)Euro-bonds will come into being, with Italy being the major beneficiary. This will cause political problems at the perifery, meaning a strengthening of “no-euro” movements at the perifery. There’s a good chance these movements will become the target for “disruption”. Pym Fortuyn and Joerg Haider, two euro-sceptical populist leaders, were both murdered because they had become too popular. I’d like to hope no more blood will be shed but we are confronting downright sociopaths here.

3)To appease the German electorate and prevent a meltdown of the local political system, a system of “spending review” will be initiated for Club Med countries. This will mean “service” spending will take a back seat to welfare and debt servicing, dooming these economies to a neverending depression as their private sector won’t be able to make up the difference and capital will either flee these countries, be eroded or end up in such improductive ventures as government bonds.

All of this will effectively turn Club Med countries into beggars living on welfare but will avert a short term meltdown. Remember: politicians are incapable of long term thinking. Germany will slowly sink into stagnation (remember this economic crisis is starting to bite the BRICS too) and probably into recession.

Finally remember one thing: don’t overestimate the European electorate. Old fashioned collectivism runs deep into its DNA and personally I haven’t seen as many red flags (as in Communist Party flags) as in this period. The elections in France are a fire alarm and it will only gt worse from here.

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You guys bring up some interesting points…

I think Desoto’s article misses the mark. The Euro may have “solved” monetary nationalism and floating exchange rates, but they were simply substituted out for, at first a compression, and then a blowing out of sovereign bond yields. The European problem - and really the global problem - is current account deficits and surpluses festering to the point of unsustainability. The Gold Standard solves this problem naturally through inflation and deflation of currency, it is a real and visible check on government largesse for the general public. The Euro did no such thing, by the time the malinvestments had been realized it was way beyond the point of salvage.

The Euro may currently be an effective restraint on spending ( not precisely correct, but for the sake of argument, let’s at least agree that it is severely hampering the PIIGS budgets.) but it still gave birth to the boom. The Euro monetary regime is now nothing more than a straight jacket to unwinding a massive trade imbalance across an entire continent. It is much like the Gold exchange standard acted in 1920’s. As Austrians, we can’t have our cake and it too. The Euro might be acting as a restraint to public finance - which is a good thing - but it is also restraining the liquidation/unwinding of a massive trade imbalance.

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But the inevitable political result of the debt crisis in Europe is the establishment of european-wide financial controls. Which will allow the Europeans to make much bigger, coordinated movements, much like the US Fed does, and the result of that will eventually be a financial crash, much as it will here, and will anywhere with a fiat currency eventually.

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That’s the end game, federalize or break-up. Personally I see a break up, federalization is just too dificult when you consider the entrenched nationalistic sentiment across Europe. Without a German/French coalition the Euro’s days are numbered.

The situation is exteremely fluid at this point, but my prediction is that we see Germany leave the Euro and reinstate the Duetschmark( along with a handful of other Northern European countries). France takes the lead over the ECB and EMU and the remaining countries in the EMU inflate. EUR/USD settles around .80 and the Duetschmark USD cross around 1.60.

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Germany won’t leave the Euro because that’s the means by which they gain so much power over the other member nations.

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Perhaps, It’s all just a guessing a game at this point. The only thing I know for sure, is that the current situation is untenable. Germany will either agree to inflate(Eurobonds or some sort of other transfer/devaluation mechanism) or be forced out. National politics and the political dynamics of the EMU(France has more power and when you add in Italy and Spain, Zee Germans become the odd man out) assure that what can’t last, won’t last.

Unless, of course, armed conflict comes into play…

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Well, last night we had the first taste of what’s coming.

An “anti-spread” deal was worked out among the four dominating powers in Europe. What’s that? To make up for the rating agencies’ unreliability a system has been worked out to measure how good EU bonds are relative to German Federal Treasuries. The higher the default risk, the higher the spread in base points, the higher the yield that has to be offered to potential buyers. Right now the spread for Italian and Spanish bonds is well over 400 base points, meaning a serious risk of default in a matter of a few years.

How this deal will work out? The ECB will set up two funds that will buy bonds issued by countries “under markets’ attacks” (that was the exact wording, we’ll be back to it later) to keep the spread low. Details are still murky but it seems clear the ECB will buy the bonds with freshly printed money. In short the central bank will not only bankroll spending sprees but will also do the utmost to make sure irresponsible countries pay less interest on their IOU’s.

The whole meeting was presented by the press as an heroic stand by brave political leaders against the evil and unbrindled free market. Markets do not demand higher yields from debtors because they are less likely to repay their dues, but because they are just made up by a bunch of speculators. In short everything will be fine as soon as we put these speculators out of business. Will they succeed? No.

The reason is very simple. European leaders can bully and cajole European banks into compliance. They can institute tighter financial controls on their own people (and they will do it). But they cannot control American and Asian markets. They have to compete with the US government for scarcer capitals to devour worldwide. They can only delay the inevitable.

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I think you guys are forgetting one thing. Ordinary citizens (voters) are getting less tolerant of being part of the EU. While leaders want to continue centralizing power, the common people are becoming more dissatisfied with this central body. When times were good, these leaders pretty much got what they wanted. Now, it’s becoming more polarized. Nowadays, candidates promising sovereignty and independence are the ones gaining rapid popularlity. I think this is a natural phenomena with long waves of boom and bust cycles. Nationalism wanes when times are good and gains when times turn bad.

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Al,

I totally agree. My question is, when was the last time the little guy had a say about anything Euro related? According to Bagus in his book, the short answer is: never.

Meanwhile, Merkel just caved again. You don’t have to be a Norman Einstein to go with Smiling Dave’s linear approximation, that we will have the same ole same ole for quite some time.

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And does it really matter? Yes, there are a few anti-EU movements and parties but they are either made up by populists who have no idea how to get out of this mess or by bookish types with zero chances to impress the ignorant public who wants simple slogans and simple solutions.
In the meantime the Italian and Spanish governments are playing their electorates like a fiddle by portaying their own politicians as heroes out to fight the evil Germans who aim at conquering Europe once again. It doesn’t matter German politicians are so weak and ineffective they are effectively rubberstamping every decision taken elsewhere without even attempting to resist: a visibly embarassed Angela Merkel had to go on TV and try to spin the latest political and economical defeat for Germany as a victory. Luckily for her the electorate knows the left-wing SPD party would be even more ineffective and there are no alternatives: the German political system, an inheritance of the Allied occupation, doesn’t allow that. It was designed to be subservient to foreign powers, especially France, the supreme political power in Europe.
France is the big winner once again: they are rabidly anti-free markets (Say, Bastiat and the others must be rolling in their graves) and for them this is a great opportunity to deliver yet another crushing blow.