There are three options for Germany to deal with Greece’s debts:

1)let them default

2)make the bond holders take a haircut, meaning they will get less

3)guarantee the loans to persuade banks to rollover the old Greek bonds and buy new ones

The outgoing Bundesbank Chief, Axel Weber, recommends that Germany take the third option. It is the only one that makes sense from the economic point-of-view. He understands that it will be difficult for Merkel. The “push-back” effect, the popular resistance, in places like Germany and the Northern Tier of Europe is extreme. To make sure that the same situation doesn’t reoccur in the future, Weber suggests that bonds of the future should have clauses that if a country needs a bailout, the bond holder will be willing to take losses.

What I say is that if Germany is serious about the euro, it must step up to the plate and take responsibility for its currency union.

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In the Wall Street Journal article of Saturday, June 25, ‘2011, “Swiss Renew Push For Bomb Shelters”, the American reporter criticizes the Swiss government for being paranoid and building way too many bomb shelters.They claim that Switzerland, which is of course mostly German, is home to more nuclear bunkers per capita than any other nation. After all there are 300,000 bunkers for only 7.6 million Swiss with 1 million places to spare. It is the home of the 1978 law that requires every new building to have a bomb shelter.

The reporter goes on to expostulate with the Swiss government that the Cold War is now 2 decades in the past. Why are they afraid? This is naive. Germans were shaken to the core by the events of the last century, not just the Cold War when Germany was divided into two parts, but World War I and World War II with the hyper-inflation of the 1920’s between those cataclysms. They can be excused for thinking that the bombs are still falling. Of course the nuclear incident in Japan in March didn’t help either and caused both Merkel and the Swiss government to close down nuclear reactors for good. But the real bugaboo is the defeat of all things German in the last century’s wars, an event that Germany is trying to cope with by burying itself in economics.

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Germans have a tradition of saving that goes back at least to World War I, World War II, and the hyper-inflation of the 1920’s. It also harkens back to the nineteenth century. Apparently Germans were just as frugal back then. Somehow saving money and rarely spending more than what you have in the bank is inculcated in them from their early years. They routinely saving 10% of what they earn on average.

Imagine a people like that suddenly being confronted with the Greeks who on average spend 12% more than what they earn, which is considered a negative savings rate.

Germany has chosen to ally itself with Greece in its noble attempt at a common European currency called the euro. As a result these thrifty German taxpayers are confronted with the spectacle of more indebted European countries with low savings rates forcing a reliance on foreign investors (read Germans) to finance their deficits. Germany must bail the others out or their vision of being the United States of Europe will vanish in the next economic downturn. Then all those Germans who are nostalgic about the Deutsche mark can have it back again.

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Greece yesterday and today at the summit of European leaders and finance ministers asked to get out of some of the proposed austerity measures. They met wit a resounding no. Merkel addressed the Greeks personally, telling them they would have to make sacrifices as she and Sarkozy neared an approval on the new bailout for Greece to last through 2014.

There is a certain cultural appeal to austerity in Northern Europe. It comes from the Protestant tradition and the belief in sin and redemption. Southern Europe derives from the Catholic tradition. In the case of Greece, we have the far more foreign Orthodox background. Neither Catholics or Orthodox Greeks are Puritans. So don’t expect them to want to sacrifice for the abstract goal of the greater good of Europe.

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Germany should know better, but then it is playing politics. It’s going along with a farce invented by Jean-Claude Trichet to pretend that Europe’s best banks are not losing money on Greece’s bonds when they are. Everyone now acts as if they can sneak it past the press and the public that the interest rate on Greek bonds is being kept artificially low when it should be much higher to attract private investors. Private talks are even being held with bank chiefs to try to arrange a deal, or a “gentlemen’s agreement”, under the table.

One wonders what is really going on behind closed doors. No bank worth its salt is going to willingly accept a loss on Greece’s debt and then continue to buy the country’s bonds just to please Germany and France but mostly Germany, which is the economic leader of Europe. One bank chief was even caught on record suggesting that he had no objection to buying such bonds IF — and this is the point — Germany is willing to co-sign the loan and agree to pay for Greece if Greece defaults.

All bankers know that Germany would never default on a loan. They’d rather be split up into pieces again. They learned the lesson the hard way in the last century after the Weimar Republic went bad in the 20’s and hyper-inflation ruled. But Greece is a Balkan country and politically disuniied in a way that Germany never was. They are not only willing to default, they are about to do so.

The German taxpayers are going to have to clean up the mess sooner or later. It might as well be sooner. And they should do it before July 3. All this shadow boxing won’t do any good. As Fitch Ratings Agency warns in the Wall Street Journal article of Thursday, June 23, 2011, “Bailout Needs Banks’ Help”, “Even a voluntary rollover (gentlemen’s agreement) could be called a default.”

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Though Greek protestors were dogging him, Greek Prime Minister Papandreou survived a no confidence vote on Tuesday. He had 155 votes in a 300-seat Parliament. which everyone says now means that his government is going to pass the austerity measures before July 3 when the next meeting of the Euro Zone finance ministers will occur. So Germany is beginning to get Greece to dance its dance using the carrot and stick approach. The Greeks will not get the final segment of last year’s aid package unless they pass the austerity measures.

German voters have no mercy. They insist on 28 billion euros worth of budget cuts.and probably more than that to shape the next aid package after this one is ended.Finland even has suggested that they want the Greek government to put down collateral to get new loans.

Papandreou says he will “continue the national struggle for salvation and change of our country.” Really he is contining the struggle to please his new masters — Germany.

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Germany is talking out of two side of its mouth. Juncker’s group of European finance ministers met Sunday and Monday and announced that Greece will get its next quarterly installment of money, 12 billion euros, only if the Greek Parliament passes austerity measures on June 30. This comes after Angela Merkel’s Friday announcement that the gentlemen’s agreement, modeled on the Vienna Initiatives, was OK and that Greek debt didn’t have to be restructured. Merkel pretends to give, and then she comes up with another objection. We are seeing a political game, folks.

The next meeting of the European finance ministers occurs July 3. They are to make a decision on the final payment to Greece. By then they will know about Greece’s vote on the austerity program.

The EU should just give Greece the money and not put conditions on it. Do they want Greece to drop out of the European Union? Do they want it to join Russia? Not that the Balkan country likes or trusts Russia. But they might make noises in that direction just to annoy Germany.

Germany, wake up to your new responsibilities. If you want to create the United States of Europe, you have to learn to give money American style — just to pay the country to be part of your group on the block.

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Mass confusion reigns in Europe’s latest attempt at a balancing act over the Greek debt crisis. On Friday Merkel backed off her insistence on Greek debt restructuring for the greater good of the euro. But still we have a grand balancing act afoot with Greek mobs on TV defying angry German voters who have to pay for the whole mess. German voters who still want to restructure the debt despite Merkel don’t like the nervous investors from all over the world who react to every small piece of bad news and refuse to shoulder their fair share of the burden. The IMF gets in there somewhere telling the Europeans to hurry up and settle the crisis so they can give Greece the money they were promised last year under the original bailout plan, which of course makes the investors react more and angers the German voters and the Greek mobs.

Somewhere in there the other pigs — Spain, Portugal, and Ireland — fit in and contribute to the daily melodrama over the Greek debt crisis wringing their hands and insisting that they will be next.

And not only is there one Greek debt crisis but two. It’s hard to remember if the talking heads are discussing the first loan from 2010 which is still being paid out or the ever increasingly large second loan of 100 billion euros which is still being negotiated. It will probably be negotiated until the sun burns out and the earth becomes an empty globe.

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Before the ink is dry on the agreement about the Greek bailout, Germany faces a new challenge to its fiscal union with the rest of Europe. In a Saturday, June 18, 2011 article in the Wall Street Journal, “Moody’s Warns Italy On Economy”, the rating company announces that it is about to downgrade the Italian credit rating from Aa2, its third highest score, to an unspecified number. It cites a weak economy and rising interest rates. Moodys says that investors don’t want to invest in highly indebted countries that aren’t growing.

But Italy, unlike Greece, is not a Balkan country. It’s not on the fringe of Europe. It isn’t threatening to leave the Euro Zone and quit the euro as its currency, the way many in Greece are. Italy’s at the very heart of Europe. It’s the origin of modern Europe, the seat of the former Roman Empire and the present seat of the Vatican. It wouldn’t drop out of the EU no matter what. And unlike hotheads in Greece, Italians are used to German jokes about them. If they could survive World War II as the only major country to be on both sides, they certainly aren’t going to be concerned about a mere fiscal crisis.

Italy presents the risk to the Germans of seeing their own currency degraded by default. But Italy would probably be their last partner in the fiscal union even if every other country fled. After all, Hitler depended upon Mussolini.





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Merkel engaged in an act of statesmanship on Friday when she decided that she would set aside objections on the part of German voters and try to preserve the euro as the currency for all of Europe. She would back the ECB-French initiative to hammer out an gentlemen’s agreement for Greek debt financing modeled after the 2009 Vienna Accords when banks agreed to continue loans in Eastern Europe during the financial crisis. It will be a hard sell back home, but she is popular and can probably pull it off. After all, Germany had a very prosperous year last year and continues prosperous this year. They just have to spread it around all over the continent. This has been reported in the Saturday edition of the Wall Street Journal, “Greek Crisis Eases For Now” with a dateline both in Berlin and Athens and a picture of Merkel and Sarkozy.

Merkel is probably looking to build a legacy for herself when she is out of office. Maybe it will make her slightly unpopular this year, but she is making decisions for the ages and the history books. After all, didn’t she say earlier this year that the euro was “Germany’s destiny”?

But how successful Merkel is depends on the execution. On Sunday and Monday the European Finance ministers must meet in a group in Luxembourg. Jean-Claude Juncker’s group must hammer out the exact language of what is being agreed to. Because then on June 24 Merkel and Sarkozy must sign it into law. Maybe they will even take another walk. Anything that would look good in a history book! Drama will probably help voters accept it, too.


Merkel and Sarkozy

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