John Bruton

Opinions & Ideas

Category: Germany (Page 2 of 2)


The long running crisis in the euro area is caused, at least in part, by the fact that the participants in the bond markets have little understanding of, and for a long time had little interest in, how the  eurozone makes its decisions at political level.

In the past, these bond market participants assumed, without much enquiry as to why, that Greek  government bonds were no more risky than German Government bonds, simply because Germany  and Greece had  the same currency.

At that time, they took no interest in the internal politics, or  relative  competitiveness, of Greece and Germany. This misunderstanding often also encompassed economic commentators, especially in the English language media, who, then and now, are unduly influential in the mind of  bond market participants.

Then, in the wake of the shock of the Lehman collapse, everything changed.
The slightest political ripple now sends  amplified shock waves through the  bond markets, and the interest rates charged to lend to different  countries  within the euro zone  vary greatly. Long ignored indices are now scrutinized obsessively.

Both bond buyers and economists, having blithely ignored the EU political system for years, now  crave complete and definitive answers from it, and they want those answers  yesterday!
Of course, the markets worry about the viability of the public finances of individual countries or of their banks, but an even greater concern is to know whether a particular country will stay in the euro in all circumstances.  A country leaving the euro could impose an immediate and shocking loss on lenders to that country, and to its banks.

So the first priority for the markets is convincing them that, no matter what happens, nobody is going to leave the euro. That is a matter of political conviction, not macroeconomic analysis. After that, everything else can be negotiated.

But the political leaders of the euro zone come at things from a very different angle to that of the  commentators and bond buyers. While the political leaders understand the bond buyers  craving for  certainty, they are  engaged in a complex multidimensional political negotiation, in which they have to balance the interests of  17 different sets of national taxpayers, some of whom want to shift liabilities to someone else, and others of whom  who want to  take on  as little  liability as possible, for the debts of others.

 The political negotiation is further complicated by the fact that the EU does not  yet have the  legal power to do some of the things it needs to do, and  some of its members  want to withhold  agreement to giving it those powers, in pursuit of national concessions . Britain is the most outstanding example of this, but more recently Italy played that game. In Ireland, one political party wanted to veto the ESM, which is beneficial to Ireland, simply to get concessions on something else. This sort of silly thing goes on often in EU negotiations, because EU negotiations are conducted by humans, not  by angels.

While there is a European Union, the people who make the final decisions for the Union are national politicians, elected by national electorates, and the national electorates frequently do not understand one another very well, or choose not to do so.

The cheap caricaturing of Germany in some other EU countries has been matched by equally  juvenile caricatures in parts of the German press of other countries, like Greece.  Sometimes the critics have a point, as when Germans complain about the possibility of  extending  their credit to countries ,like France, which  are reducing their  retirement  age to  60, while Germany  feels it has to raise its retirement  age to  70 to maintain German creditworthiness.

As well as making decisions, leaders have to bring their parliaments, which reflect these very diverse electorates, along. Sometimes they need a two thirds majority, as in Germany, or a referendum, as in Ireland.

To use a construction analogy, the markets want the EU to produce a fully constructed and furnished building in time for next week’s bond auction.  But the politicians are trying  to  build the  foundations without having  finalised the architectural drawings,  while  simultaneously arguing about the height of the building, investigating whether  they can buy some units prefabricated, and deciding  how much  bricklayers are paid  per hour by comparison with carpenters.

That’s politics, and this is a political negotiation. It is the way it has to be. No one is going to show their full hand until the moment they are satisfied that everyone else is going to show their hand too.

But commentators criticise the outcome of individual meetings as if it was not a political negotiation, but an academic exercise, and the 17 euro zone leaders were  “Platonic guardians” unconstrained by anything except the requirement to produce a theoretically symmetrical outcome.

For example, one notable commentator (Wolfgang Munchau in the Financial Times) announced recently that the crisis was going to last 20 years, just because Angela Merkel had not accepted that there would be joint euro zone insurance of deposits in euro zone banks, before she had seen the details of exactly what level of central scrutiny of their banks, the other countries would accept, so as to ensure that they would not take a free ride on the backs of German depositors.

What did he really expect? Mrs Merkel will not show her hand until she absolutely has to, any more than Enda Kenny or Francois Hollande will.

Likewise, it is unrealistic of people, like Nouriel Roubini, to  demand that the size of the  ESM fund be doubled  or trebled at this stage, before anyone knows for sure whether the  intended beneficiaries of an enlarged ESM will do all that is required of them, to deserve the money.  Uncertainty about the size of the fund, and doubt about whether it will be big enough in all circumstances, is essential as an incentive to get debtor Governments to do the things they need to do, to be sure they do qualify for the fund, if they need it. 

The Euro area Summit statement of 29 June said it was “ imperative to break the  vicious circle between banks and sovereigns.”.

But it also said that, for EU funds to be directly invested in banks,  an “effective (European) supervisory mechanism” would have first have  to be established, and that any injection of funds would have to be accompanied by conditions that would be  “institution specific, sector specific, and economy wide”.   So a deal will have to be negotiated in respect of each individual bank, each national banking sector, and each country.
According to a paper published recently by the highly regarded  Brussels based think tank, the Breugel Institute,  a  European Banking Union  would require decisions on at least 8 big questions

  1. whether to include countries not yet in the euro
  2. whether  to bring all banks under direct EU supervision, or just the big ones
  3. the scope of an EU wide deposit  guarantee, as to the  amount covered and whether there would have to a local contribution, without which the system might be abused
  4. an EU wide system for closing banks  down and distributing the losses between  shareholders, different classes of creditors, taxpayers and other banks in the  country in question and elsewhere. Associated with this is the question of requiring all banks to draw up “living wills” to say what would happen if they go out of business
  5. Some form of limited  euro zone wide taxing capacity to act as a back stop if  the deposit guarantee fund proves insufficient.
  6. how to  distinguish between past, and potential  future liabilities
  7. the proper focus of euro zone bank  supervision. Should it be on capital ratios, liquidity ratios, business models, diversification or other variables? Should different  types of banking be separated from  one another, or  does a  mixed system make it easier to get over  short term  difficulties?
  8. what to do about Britain, which wants nothing to do with the euro or a a European Banking Union, but still  wants unfettered access to euro zone financial markets  on the same terms as everyone else.

These are difficult political issues and they will need to be resolved in a way that is BOTH theoretically sound, AND politically balanced, between all the 27 countries in the EU. Patience  will be required.


We read that there is a severe outbreak of anti German feeling in Greece.Under the second EU/IMF bailout, Greece is being lent extra money  at interest rates  far below those at which it could borrow commercially, and in the meantime a portion of its existing debts are being written off. 
But  Germany is being blamed for the  unwillingness of the EU and the IMF  to sign off on this  second bailout , without , what some Greeks see as,  humiliatingly detailed assurances that
  • the money will be used properly ,
  • Greece will adopt specified policies to cut back state spending and raise taxes and that it will
  •  liberalise its economy, so that it can grow fast enough to be able to repay the extra money it is now to be lent.

The trouble is that Greece has a poor record in presenting honest accounts, and in implementing in practice, changes it has agreed to in principle. The extra assurances are being sought so that more good money is not poured down a black hole along with the debts that are now being partially written off.
Without this loan, Greece would default and it would leave the euro.
In fact, what Germany is really doing is defending the interests of savers, including Greek savers, from what would happen, if Greece defaulted and left the euro. If Greece left the euro, its banks would collapse, and Greeks would see their savings, whether   in the form of bank deposit accounts, life assurance policies, or claims on pension funds, disappear.


Some argue that “austerity” is a mistake, because the cuts in spending and tax increases dampen confidence so much that the economy stops growing. In the short term, this is true.  But those who criticise on that basis,  have no realistic alternatives to offer.
Where can Greece get the money on better terms than it is getting from the EU/IMF?  
There really is no Keynesian alternative for Greece.   The Greek economy is too elderly, too inward looking and too riddled with restrictive practices, to benefit from a Keynesian stimulus, even if someone could be found to finance it. Greece must modernise first. The EU/IMF programme gives it some breathing space (perhaps too little) in which to do that.
Keynesian economics might have been relevant in the  1930s, when the European  population was much younger and could respond to an economic stimulus.  Europeans today are much older, many are retired, and their priority is saving for their old age, rather than going out shopping in response to a boost in government spending. It is not going to get easier. The age dependency ratio in the EU in 2007 was  25%, by 2050 it will be 50% !   What people are looking for now, is stability.

 Greece faces an alternative of two forms of austerity
  • austerity through  planned  cuts and tax increases under the EU/IMF programme or
  • austerity through indiscriminate inflation, of the kind that would  occur, if Greece  left the euro and devalued.
One of Greece’s problems is that it finds it very difficult to reduce wages, which is one of the many things it needs to do if it is to make its exports more competitive. Wage setting is highly regulated in Greece. That is why some favour Greece leaving the euro and allowing devaluation and inflation to cut the real value of Greek wages, and thus  regain competitiveness.  Inflation is the politically easy way to impose wage cuts, but the effect on living standards is at least as bad as cutting the wage rate, and much harder to control.
 But the price of this inflation/devaluation option would be high.  If Greece left the euro, its banks would collapse and the savings of ordinary Greeks, who were patriotic enough to leave their money in Greek banks, would disappear.  Inflation is hard to keep in check once it starts, and Greece also lacks big export industries ready to boost exports quickly on the back of a devaluation.

It is true that current EU policies are favouring savers over borrowers.    This is so because the ECB, unlike the US Federal Reserve and the Bank of England, is not willing to engage in “quantitative easing” ,printing money indiscriminately, to revive the economy temporarily.
ECB refuses to print euros without limit, and refuses to use them to buy Greek bonds without conditions. It refuses to do so because that would lead to inflation, and to a devaluation of euro. The more euros that are printed the less the euro will be worth.  That, of course, might suit borrowers, because the euros they would using to pay back their debts at the end of their loan, would then be worth less,  than the euros they borrowed in the first place.
But that approach would be bad for savers, who would see the purchasing power of their savings disappear.
The real political divide in our societies today, is not between Greeks and Germans, or between the profligate Mediterranean nations and the thrifty northerners.
It is between savers, who do not want their savings devalued or confiscated, and borrowers, who would like to be allowed to pay back less than they owe.


But if borrowers pay back less than they owe, someone somewhere else has to take the hit.
If  borrowers are helped by having  their debts being  written off, or having  their debts  are  devalued by inflation, someone else will lose.
Who would lose? 

  1. The losers would include taxpayers, who now own  many of the banks, and who would  see the value of those banks go down
  2. Other losers would be pension funds and insurance companies who own bank shares, and the people who rely on these pension funds and insurance companies to pay their pensions, or insure them against risk.
  3. Yet other losers would be   the people who have deposits in banks, who would see the value of those deposits reduced by inflation, and who could even lose those deposits if the bank collapsed. 
The challenge we face is that of devising an economic policy that acknowledges that there are ”ordinary” decent  people on both sides of this divide.
We also need to acknowledge that no one will be willing to lend any European Governments money any more unless they face up to realities about the cost of ageing societies that will  grow steadily everywhere over the next twenty years.
Greeks bashing Germans, or all of us bashing bankers, may give emotional satisfaction, but it will not pay our bills.
We need to think things through , rather than emote. We  need to strike a balance between debt relief, and protecting the savings we need to prepare ourselves for  a time when, instead of four,  there   will only two people at work,   for every one  that is  one too old to work


(updated version) The euro is playing the starring role this week in a global loss of confidence in bonds issued by Governments, although the average Government deficit and debt situation of euro area countries is actually is no worse than that in the United States, the United Kingdom, and Japan. The euro area is the target because it is easier for speculators to pick off euro area countries one by one. But this is not the root problem. Even if the euro was somehow broken up, the underlying problem of the credibility of sovereign debt would still be there.
 The real problem of almost all developed countries, except Germany, is that we have used Government and/or private borrowing, to smother the symptoms of a deeper loss of earning capacity.
The sovereign debt crisis is a symptom. The disease is a profound loss of competitiveness.
Since about 2000, the developed world, except Germany, has lost ground in the competition to produce goods and services at prices the rest of the world is willing to pay.   China, India, Brazil and others are now competing for markets that the developed world previously monopolised. They are doing this with technologies developed in the West, but at costs much less than those applying in the West.
This loss of markets over the last ten years should have meant a relative fall in relative living standards over the same period. But almost all developed countries avoided this, and kept their standards up by borrowing more, either directly as households, or indirectly through their Governments.  In Ireland during the boom the number employed in the traded sector actually fell, while the number employed in services ballooned. This was all too easy because the countries, like China, who were winning markets, lent their profits back to us at cheap interest rates.
In essence, the cause of today’s debt problems  is that developed countries awarded themselves a living standard they had not earned. That could not go on forever. Now we must tackle the disease as well as its symptoms.
Any short term fix for the euro area finances must be accompanied by a long term plan to rebuild up our capacity to produce goods and services that the rest of the world will want to buy on a greater scale than they are doing today.
 Europe must abandon its culture of entitlement.
For example, there must be reform of educational systems.  Third level education in Europe must be changed from being an undemanding and free rite of passage for young people , into an innovative and flexible system to help people of all ages, who have lost their jobs,  to readapt themselves for a world which has changed utterly.
Getting our costs down will also require an end to restrictive practices, and padded  costs,  in the Government sector, in schools, in the labour market, and in the professions.  However indirectly, all these reduce Europe’s ability to reduce its export prices enough to win back markets abroad. This is particularly necessary in countries like Italy and Greece, but also in Ireland.
It will all mean postponing increases in living standards, paying more tax, and getting less benefits from the Government. Germany did this in the 1990s when it dealt with the huge cost of reunification. Since 1990, living standards in Germany increased by only 20%, whereas they increased by over 100% in Ireland.  Germany kept its costs down, shared the burden of adjustment by short time working rather than unemployment, and focussed on exports.
Some will argue that what worked for Germany will not work for Europe as a whole. They will say that if the rest of Europe adopts  an austerity and export model, there will be no market for the exports because of the austerity. Their preference would be for Germany to start inflating its economy, so as to buy the exports of the rest of Europe.
 That will not work for a number of reasons. If Germany did inflate its demand, the imports would come from the rest of the world, not from the rest of Europe (unless, of course,  the rest of Europe becomes competitive). Furthermore, Germany has an ageing population and needs to save now to support its future retirees.
This is also a problem with proposals for the issue of Eurobonds to meet the funding needs of euro area countries, like Ireland, who are too weak to borrow commercially on their  own account. Until the rest of Europe becomes competitive, these bonds will essentially be issued against the credit of Germany.  Given its ageing problem, even German credit has limits.
The ECB can give out more credit as a way of getting through our present short term difficulties. That is what it is doing by buying bonds of countries like Ireland, Italy and Spain. It could also extend a credit line to the European Stability Fund to allow it to buy bonds too.  To the extent that such activity increases money supply faster than present or future economic activity justifies, it builds up future inflation.  
 And who does inflation hit hardest? Elderly people with fixed incomes, and those with savings.
 And what European country has the biggest number of people who will soon be in that category? Germany.
 Germany increased the money supply to pay for the cost of the First World War, and that led to the inflation of the 1920’s, which wiped out the German middle class. That is part of German folk memory and explains why Germany insisted that the ECBs mandate be concerned solely with keeping inflation in check.
What is needed now for Europe, as a whole, is a convincing overall plan, a plan that links short term relief for those with financial difficulties, with long term plans to permanently lift productive capacity.  Only in that way can Germany be convinced that  short term relief now will not lead to more inflation later.
It is not reasonable to expect Chancellor Merkel to produce such a plan on her own.  Every euro area Government must contribute. We have all got to start thinking as Europeans, and devise a plan that is based on realism and modesty in what we ask of our neighbours, and strict honesty in  what we  ask of ourselves.  None of us can solve our problems on the back of someone else’s sacrifice.

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