What The Hell Is Wrong With Us?

Front Page of the german Newspaper Süddeutsche...
Front Page of the german Newspaper Süddeutsche Zeitung 2009/05/20 (Photo credit: Wikipedia)

If you care – or are just curious – about what’s happening in Ireland now, economically and politically, you could do a lot worse than ask a German. Not any German of course, certainly not Angela Merkel, but one Christian Zaschke, who wrote an article for the Süddeutsche Zeitung aptly titled “Conned“. (Translated and republished here by the Irish Times.)

In it he makes a clear connection between Ireland’s erstwhile banking and future oil wealth. One has the potential to provide a solution to the problems created by the other, but it’s likely to be stolen from us just as the first was, and by the same route: Corruption. More precisely, our strange pervading acceptance of that corruption.

Is this over-simplistic? No, it’s just refreshingly direct. We may wish to say in reply that it’s more complicated. We may be deeply intellectually concerned here with the reasons behind why we are so supine in the face of corruption: colonialism, Catholicism, conformity, clientelism, Celticness, corporate capitalism – that’s just the Cs – but it really doesn’t matter what the cause is. The important thing is that we are being supine in the face of corruption. We need to stop.

George Soros: Blame Merkel

DAVOS/SWITZERLAND, 27JAN10 - George Soros, Cha...

George Soros knows money. A student of the great philosopher Karl Popper, he has become one of the most vocal critics of modern economics and capitalism. But he doesn’t just talk about the failings of the financial markets. He uses his insight to make a quite seriously incredible amount of cash from them. Out of this, he gives billions to worthy causes. A guy with an opinion worth hearing then.

So when, speaking at the Economics Festival in Trento, he lays responsibility for the Eurozone crisis squarely at Chancellor Merkel‘s feet, you sit up and take notice.

In a nutshell:

The first step was taken by Germany when, after the bankruptcy of Lehman Brothers, Angela Merkel declared that the virtual guarantee extended to other financial institutions should come from each country acting separately, not by Europe acting jointly. […] It took some time for the financial markets to discover that government bonds which had been considered riskless are subject to speculative attack and may actually default; but when they did, risk premiums rose dramatically. This rendered commercial banks whose balance sheets were loaded with those bonds potentially insolvent. And that constituted the two main components of the problem confronting us today: a sovereign debt crisis and a banking crisis which are closely interlinked.

In other words, people lent cheaply to Eurozone banks and governments because they believed that there was zero risk of a Eurozone country being allowed to default. But after Lehman, Merkel – unilaterally – declared that Eurozone countries would have to support their own banks. Markets eventually realised this implied that Eurozone countries might have to default, and so lending costs to them shot up – just when we needed to borrow in order to support our banks! It was a single, immensely short-sighted decision of Merkel’s administration that precipitated our current situation.

And their continuing failure to respond adequately is turning a crisis into a disaster for the EU:

Just as in the 1980’s [Third World debt crisis] all the blame and burden is falling on the “periphery” and the responsibility of the “center” has never been properly acknowledged.  Yet in the euro crisis the responsibility of the center is even greater than it was in 1982. The “center” is responsible for designing a flawed system, enacting flawed treaties, pursuing flawed policies and always doing too little too late. In the 1980’s Latin America suffered a lost decade; a similar fate now awaits Europe.

He does more than just lay blame of course. The power to save the situation, he argues, is also in the hands of the creditor nations. But it won’t be easy:

The German public cannot understand why a policy of structural reforms and fiscal austerity that worked for Germany a decade ago will not work Europe today. Germany then could enjoy an export led recovery but the eurozone today is caught in a deflationary debt trap. The German public does not see any deflation at home; on the contrary, wages are rising and there are vacancies for skilled jobs which are eagerly snapped up by immigrants from other European countries. Reluctance to invest abroad and the influx of flight capital are fueling a real estate boom. Exports may be slowing but employment is still rising. In these circumstances it would require an extraordinary effort by the German government to convince the German public to embrace the extraordinary measures that would be necessary to reverse the current trend. And they have only a three months’ window in which to do it.

We need to do whatever we can to convince Germany to show leadership and preserve the European Union as the fantastic object that it used to be. The future of Europe depends on it.

Three months, to get the EU back on the track of being a positive, voluntary association of nations. If we can’t do that, then the choice we’re faced with is basically between effective German control of an impoverished continent, or the sudden and messy disintegration of the Euro. So… We’d better find a solution to this thing. Stat.

I urge everyone to read the speech in its entirety, though if you’re in a rush The Journal.ie has a good summary.

The Company Store

What is the strange hold she has over Enda Kenny?

One reason a lot of people will vote for the upcoming “austerity amendment” is that they assume it must, when it all comes down to it, be good for us. Sure it’s going to hurt, but in the long run it will help us have a stronger, better economy – right? It’s a natural assumption. And it would be dead wrong. The wholesale destruction of government spending if we succeed in making its insane deficit-slashing timetable – or the fines if we fail – will shrink the economy precipitously. Disastrously.

But why would the EU want to do that to us? It’s puzzling, but it’s not out of any personal animosity. We are but a small cog in this, and we don’t squeak half enough. It’s just that it’s a one-size-fits-no-one set of strictures that would burden even the healthiest European economy.

The Fiscal Compact has two main objectives. The more obvious one is to outlaw the sort of behaviour that got Greece into trouble – essentially, excessive public borrowing and spending. But note that that’s absolutely not what we did. We were good. We paid back debts when we had the money, we ran a surplus. And though our public spending rose, the highest it ever went was still only the Eurozone average. Very arguably we should have been spending well above that, our public services were still grossly underdeveloped even at the height of the boom. Yet this referendum will have the effect of cutting public spending more drastically than ever. And aside from hurting our most vulnerable, that will of course crush the economy even further. As I said a few days ago, it is the cure for the opposite disease to the one we have.

The second and more covert purpose of the compact though is, putting it as crudely as it deserves, to save Angela Merkel’s political future. In order to win her next election – she has about a year and a half left to go – she needs to convince the German people… Not that the Euro is good for them, no. That’s not enough. That the Euro is the Deutsche Mark. A currency run to Germany’s peculiar rules, for Germany’s peculiar circumstances.

Which are peculiarly set against Keynesian economics, the (well-proven) theory that the best thing a government can do in times of economic depression is borrow and spend to promote recovery. This technique lost favour in Germany essentially because it was employed by Hitler. In the Post-War era a new orthodoxy was needed, and they found it in “Ordoliberalism“, a system in which government must play only the most minimal role. It has worked for Germany so far, but Germany has been in almost continuous growth since it started. That might seem a recommendation, but ordoliberalism is a theory for the good times, utterly lost when facing a crisis of these proportions.

It seems likely that only the introduction of the Euro averted the failure of the German system. From being overburdened by the costs of Reunification with the post-Communist East, Germany went rapidly back to being the richest and most productive economy in Europe. Essentially, by selling more goods than ever before to the rest of Eurozone – while simultaneously lending us the money to buy them.

Germany had become Europe’s company store.

It is worth noting that Merkel’s approval rating is at an all-time high back home. She’s getting to project herself as tough by beating us up. So why is Enda Kenny agreeing to this? Is there some secret backroom agreement where he gets to be her bitch now in return for favours down the line? It’s the only way you can make sense of his apparently acting against the country’s interests. But we can’t depend on the existence of covert deal. Even if it exists, it can so easily be repudiated. And in return we are being asked to write vows of poverty into our own Constitution.

If this referendum passes, the best thing you could do would be to get out of the country as soon as you can. And be sure to bring your more vulnerable relatives with you.

Address To The Nation

Enda Kenny making a speech in the Burlington H...
The Taoiseach, saying things. For some reason

The country stood by today as our leader Enda Kenny addressed the nation – only the sixth time in history that a Taoiseach has done such a thing. His speech left but one question on lips across the country.

What the hell was that for?

The speech contained much that would have been bad news, if it had been news. It was depressing, sure, but confusingly it did not contain the really awful tidings that would have justified its existence. So it’s pretty much as we expected.

No mention of any welfare rates being further cut, but no mention of them not being cut either. So expect that.

Direct taxes will not be raised, but indirect will. In other words, money will be extracted not just from those who have it, but rich and poor alike. Or as Enda put it:

“I wish I could tell you budget won’t impact on citizens in need, but it will.”

It seems the poor and sick aren’t actually going to be rounded up and shot though. Presumably they’re dying off at a rate sufficient to give markets confidence in our government’s international-finance-friendly ruthlessness.

The highlight I think was when he told us that the economic collapse was not our fault, even if we were all going to have to pay for it. Nice of him to mention that I suppose. We did know though.

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German Oversight

Reichstag building seen from the west, before ...
Head Office

Whatever the exact mechanism, it seems beyond dispute that the German parliament knew details of our budget before ours did. It may not have been the whole budget of course, but it still doesn’t look good.

Particularly in this context. What Merkel has proposed for the Eurozone is EU oversight of members’ budgets. Critics will say that that amounts to German oversight. So this is embarrassing even more for Germany than it is for Ireland.