France and Germany to withhold aid, Greece to be ejected?

From El Pais:

German Chancellor Angela Merkel and French President Nicolas Sarkozy announced just moments ago in a joint press conference that the European Union has suspended aid of 8 billion euros, which was scheduled in order to try to rescue the drowning Greece economy.

"We need a strong euro, with or without Greece," said Merkel.

My take: This move is a declaration of economic war. It puts a whole train of future moves in motion, in my view.

The Greek people will be apoplectic at this tactic. They will reject the bailout in a referendum out of spite. Greece will then default with perhaps as much as a 90% haircut. Greece and its banks will be insolvent. A sharp depression will ensue. Germany has now said it doesn’t care if Greece stays in the euro area. Greece will be ejected from the euro zone, relieving it from the sharpness of the depression.

Meanwhile, the run on other European countries will pick up steam as speculation about further defaults will be emboldened by this turn of events. Portugal will eventually default. Ireland will default on its bank debt. And Italy’s yield will shoot the roof. The question about bank solvency will be a crucial issue driving the move toward an ECB liquidity train. If the ECB backstops Italy, the euro will be saved. Otherwise, it is done. At a minimum, Greece will leave.

The rump euro or the new German currency will strengthen considerably. Germany’s export machine will collapse as the weakness of the German domestic economy and strength of Germany’s future currency arrangement will be a millstone around the neck of future German leaders.

It is all falling apart now.

Please identify the weaknesses in this train of events that could point to upside for one or all parties. I’d be interested to get some convincing pushback.

Source: Merkel y Sarkozy confirman el bloqueo de la ayuda de 8.000 millones Grecia

  1. Nicholas Mycroft says

    no, that’s right. the only hope is that Merkozy are bluffing.

    1. Edward Harrison says

      The big problem with this statement “We need a strong euro, with or without Greece” is that it must now be defended. No backtracking now. Even if they were bluffing, they would have some serious explaining to do with their domestic constituencies. In Germany, the bailouts are unpopular and Merkel is seen as someone who has flip flopped on this score. She simply cannot afford to backtrack on this sentiment.

  2. anon says

    Can Greece actually be kicked out, against its will? It would veto any such move.

    1. David Lazarus says

      That is a bluff. The rules do not allow for an ejection. Though they are now demanding that the referendum question is whether to stay in the Eurozone. If I would Greece I would add an extra question. Should we seize German and French owned homes in Greece as reparations?

      In the UK the BBC Newsnight program had a very interesting flashback to the gold standard and the Depression. It highlights the parallels with the 30’s, the moment the streets erupt in riots is the start of the end. We have that in Greece and the currency manipulation, Next Trade wars and then actual wars. It does seem like we are following the route to armageddon with our leaders determined to defend the euro or gold standard.

      My thoughts are with the Greek people not the banks or politicians.

      1. Edward Harrison says

        I think France and Germany are done with Greece. I have always said they would cut Greece loose if they create problems for the larger periphery economies of Spain and Italy. They want to use them as an example pour encourager les autres and worry about fixing the banks and Italy. The ECB is the real question mark here. EZ banks are now applying pressure, saying bank liquidity and credit is gone without ECB monetising debt. I will see if I can get a link.

        1. David Lazarus says

          Yes but as I said they might want them out but the rules do not allow it. They may want a referendum on whether it stays in the EU as well. A devastated Greek economy will shot to the top of the pile for EU regeneration funding, so they will still have to deal with Greece. Then there will be millions of Greek migrants who might move into the rest of the EU for work. That will create more problems within the rest of the EU. Leaving the EZ but staying within the EU might be the only solution but it creates a number of other problems. If Greece starts to recover fast outside the EZ then expect the rest of the periphery to look to jump a sinking EZ ship. That could mean repudiation of billions of debts across Europe. Germany I fear will collapse with bank losses and a vastly stronger euro. Then Merkel will get the war that she mentioned recently.

          1. Edward Harrison says

            You mentioned something important when you said “Leaving the EZ but staying within the EU might be the only solution but it creates a number of other problems. If Greece starts to recover fast outside the EZ then expect the rest of the periphery to look to jump a sinking EZ ship.” That is the real issue here, namely that Greece is not alone. The Irish have already been talking about the bank debt millstone. Italy has just rejected Berlusconi’s austerity plans, by the way. So I think that makes it official: the Brussels deal is already a smoldering pile. Reviving it will be very hard.

            It’s not looking good.

          2. David Lazarus says

            Yes Ireland is not happy. The two main parties were ignored when it came to the recent presidential election there. Not a good sign.

            If Ireland had refused to backstop the banks then it would be in a much better situation now. They could still repudiate the guarantees.

            On the BBC tonight they are thinking that this might be the end of the euro comparing it to the gold standard and its demise.

            I can understand why Italy rejected the austerity plans. It has appalling levels of poverty in the south of the country and would not take well to further cuts to living standards. The Northern League want to break up the country and that will create more problems.

            When I first started following your blog about the need for credit write-downs I wondered how bad the problem was. Over time it has been clearer. I have said months ago that the Greeks needed a near total default just to cope. The Troika were greedy to demand every drop of blood out of Greece and if this results in civil war then the self interest of the French and Germans could spark a new european war. I doubt that it will be long before the rest of the Balkans erupts if Greece falls.

            History can warn us about many things especially if you learn from the past. I am stunned that our leaders fail to learn the lessons from the past or learn the wrong lessons.

          3. TC says

            “That could mean repudiation of billions of debts across Europe. Germany I fear will collapse with bank losses and a vastly stronger euro. ”

            100% correct. EURUSD @1.80

            I’ve been surprised at the silence of Ireland. They are taking notes.

            The sad thing is the write down amount will be approximately the same no matter what happens.

            It’s not like these actions (besides the austerity measures, of course) make the number bigger or smaller. It just changes the due date.

            Biggest unforced economic error in human history? It’s possible…

          4. ChrisBern says

            I’m no currency expert but I was surprised by the mention of several commenters here of a stronger euro given a Greek ejection scenario.

            I believe I understand the basics of the argument–Greece is an uncompetitive albatross weighing down the euro and thus its removal from the EZ will allow the euro to rise. However, this ignores the remainder of the dominoes that Edward so rightfully pointed out. F

            or starters, the sheer chaos and political/economic volatility in the eurozone would surely drive people to move their euros into a more stable currency, no? Then consider how a currency functions in the context of what would essentially be a depressionary economic environment. Finally to add some icing on to the cake, the inevitable leveraging up of the ECB printing press–which will be necessary for not only the EZ’s survival but by extension the ECB itself–will only water down the euro even more.

            Someone please point out the flaws in my thinking but I could see the euro going to par with USD before I could see the 1.80 EURUSD that one commenter suggested.

          5. David Lazarus says

            I am pleased that you agree with my analysis. As for austerity it can have two impacts. It could either bring forward the date of collapse or push the date of recovery to a position similar to pre crisis conditions back a number of years, possibly many years. It is a policy that is written by banks for banks benefits, but not domestic banks. German banks are the epicentre of the european banking crisis. They were the ones that lent most extensively around Europe and so have the most to lose from any crisis.

  3. geerussell says

    Is there an existing process for involuntary ejection from the EZ or should I read that as “Greece will then choose to exit the eurozone, relieving it from the sharpness of the depression.”

    1. Edward Harrison says

      Yes, it will be a mutual decision. One reason Greece will leave is that the Germans and the French will want them to leave. Now that they have effectively said so publicly, they must defend that public statement. Moreover, when Greek banks collapse post-default, the question will be about bank runs and recapitailsation. Greece will need to affect capital controls and devalue in order to revive the economy and recapitalise the banks. Leaving the euro allows them to do so.

      1. anon says

        Now, can Greece default and remain in the Eurozone – making use of ECB bond buying by issuing new debt?

        The ECB is legally barred from discriminating between member states – if it bails out Italy it will have to buy new Greek bonds too…

        1. David Lazarus says

          They can default but what happens next is uncertain. The write off of most of the debt was inevitable. Greece actually helps the EZ by making it appear weaker than it is. Conversely when it exits it will push the euro up quite a bit. That might hurt Ireland and the Baltics who are stable right now but with higher exchange rate they might become less able to cope, renewing pressure on them. Ireland could become a hot spot again even if the speculators are targeting Italy.

  4. depps says

    No legal mechanism for ejecting a state from Euro or EU. It can be done voluntarily by Greece, either (legally) through negotiations with the EU or (illegally) simply unilaterally repudiating the treaties. Both those options also entail exit from EU as all of the European treaties would have to be repudiated.

    1. David Lazarus says

      Exiting the EU would also lose them access to EU funding which is separate from the ECB. So I would not want them to exit for that reason. Leaving the EZ is another matter.

  5. Tim Coldwell says

    Dawn Holland, an economist at the National Institute of Economic and Social Research, believes Greece’s financial backers – the EU and the IMF – would seek to renegotiate the debt deal rather than allow a disorderly default. “The answer is to try to avoid a disorderly default in Greece that would lead to a banking crisis,” she told Channel 4 News.

  6. Nic says

    I don’t think that legally the ECB can backstop Italy. There would have to be another expansion of the EFSF or something else which so far they have not been prepared to do so I don’t see that scenario happening.

    1. Edward Harrison says

      First, the ECB is already buying Italian bonds right now. The question is at what price and how much they can. Then there is Sarkozy’s offer to make the EFSF a bank. If Italy implodes (and it will) they will discover newfound flexibility I am sure – just as they did with the original bailout.

      1. David Lazarus says

        The rules do not allow for an ejection and to change that would require unanimous vote on the change including Greece to achieve.

        Making the EFSF a bank would mean that Germany has to accept it and right now they would find that political suicide. So only when things start collapsing will I suspect that Germany change attitude over that. Though if the Euro looks like imploding then they might actually back away. Either way I do agree with your assessment that the German economy will slump as it faces life with a new much stronger currency.

      2. anon says

        The ECB is a central bank that issues new currency at will with no risk of default – there is no limit to their ability to enter computer commands that create new Euros out of Italian bonds.

        The only limit is self-imposed policy and the (not overly credible) threat by Germany to return to the D.M.

        1. David Lazarus says

          Yes as a currency issuer it is not at risk of default. Its debts overall are less than the US as a share of GDP. It is local politics that are running the show now. Germans, Finns and Dutch against levering the EFSF and the French unwilling to put their government behind any bank rescue. Not a good start to a resolution.

          1. anon says

            Well, the ECB has two main options: ruffling the feathers of the Germans by entering a few computer commands or being a central bank of a war-torn, smoking crater, once called Europe, economically speaking.

            I think it’s clear which direction the ECB will go.

          2. David Lazarus says

            Yes the solutions were out there. Fiscal union with transfers but no one was willing to take the step. I do agree with you but you can never forget national interest. Germans are big savers and hate the idea of bailing out profligate nations. The Finns have the same attitude. I think before long we will see the first cracks in the EZ and within a couple of years it will be consigned to the dustbin of history. We will still have a spectacular banking crisis to deal with.

            With a total default by Greece the EZ banks will take direct hits. The UK and US banks could be swamped by indirect exposure via CDS write downs. The collapse of the Greek and Cypriot banks will not be the last. As the Greek banks close watch out for Romanian banks collapsing. Few will expect that. That might considered the black swan event. South eastern Europe will struggle and then eventually Hungary triggering problems in Austria.

          3. TC says

            The Germans lent to these spenders in bigger quantities than everyone else. They have to pay no matter what.

            And lets note most of this debt money was probably soaked up by the German export machine over a few years…

            Every German landesbank will need funds.

  7. esb says

    Oh these politicians.

    First they hold a press conference (or emit a leak) with absolutisms enunciated.

    Then, a week later, a day later, an emergency meeting later, an hour later or a nanosecond later they fully reverse the absolutism with forceful total certainty.

    Then they reverse the reversal.

    Then they appear in their legislatures and lie to the representatives.

    Then they reverse the lies.

    They they reverse the reversals and embrace the lies.

    Frankly, I view Sarkozy to be a horsesass. Telling the PM of Greece when the Greek nation must schedule a referendum is the action of a fool.

    Next, perhaps he will inform our Super-Committee when it must report.

  8. esb says

    My point is that you have absolutely no idea whatsoever what any one of these buffoons will say tomorrow.

    They will either fully embrace what they said today, fully repudiate what they said today or perhaps say something entirely different.

    There is no predictability at all from one day to the next.

    Only lies.

    Because what must be done for economic survival cannot be done politically.

    So depression it is.

    1. David Lazarus says

      To be honest we have been in a depression for three years but the government stimulus of 2007/8 has kept us out of trouble till now. Now we will see what happens as the house of cards called financial services collapses. Has anyone been watching insurance companies because the current policies are not helping them?

  9. Nervous Rex says

    Dear Edward,

    We would like nothing better than to find the precise point at which your logic is flawed, at which the dependencies are not accurate, or where you’ve misunderstood the situation.

    Unfortunately, you understand it all too well. We now get to see which of several immovable systems gets moved, how fast and far.

    There are some interesting details: what sort of propaganda will play out in Greece regarding the referendum, what sort of morality plays are foisted by the injured parties, and what sort of stick-saves the Fed and its buddies will be complicit in.

    The general, immediate risk elsewhere is the fear of counter-party involvement, and of bank runs.

    The risk of all of this is not that the bond-holders take a bath. The compounded risk of all of this foolish instability is war.


  10. Stefan Sidahmed says

    Referring to:
    “Germany’s export machine will collapse as the weakness of the German domestic economy and strength of Germany’s future currency arrangement will be a millstone around the neck of future German leaders.”


    “The big problem with this statement “We need a strong euro, with or without Greece” is that it must now be defended. No backtracking now. Even if they were bluffing, they would have some serious explaining to do with their domestic constituencies. In Germany, the bailouts are unpopular and Merkel is seen as someone who has flip flopped on this score. She simply cannot afford to backtrack on this sentiment.”

    This is a damned if you do and damned if you don’t situation for Germany and France. They can sit high on their principles and watch the EZ collapse, in which case they are damned by history and damned locally.

    The alternative is to allow the ECB to monitize the debt via the ESFS, save the EZ and be hated for now, but history will be kinder to them.

    In the future, regulations should be put in place to prevent EZ banks from buying the debt of countries in violation of the Maastricht Treaty. Of course, if you are a Keynesian, there will have to be methods for dealing with recessions.

    In the end, I think that either a fiscal unity or a break-up would be required, but at a minimum, print money and wait till the the break-up can be a controlled wreck.

    1. Edward Harrison says

      Stefan, that seems about right. The least painful solution for Germany and France is to say publicly that they support Greece but prepare for their default and leaving the eurozone. In the meantime, they can prepare for bank recapitalisation and debt monetisation in Italy, Belgium and Spain. The comment about “with or without” Greece and the ultimatum to drop the vote are two unwise decisions. That’s done now, though.

      Ultimately, if Italy or Spain defaulted it would be curtains because the banks would be insolvent and you would have to nationalise them and print money or suffer a depression. Nationalisation would mean debt downgrades and rising debt costs in Germany and France, making the political situation untenable. Every scenario I run through ends in the ECB pushing out the keystrokes or a deep Depression.

      1. Jim says

        There might be one more scenario that’s possible, too. That scenario is Germany saying the hell with it and leaving the Euro on their own, re-introducing the DMark.

        While I agree it’s an unlikely scenario, I do think that it has moved from the realm of the “impossible” to the “possible” now.

        There’s no doubts that a large segment of the German population wants to cut loose from not just Greece, but from many of the other southern European countries as well. Ultimately, the Germans (and other northern European countries like the Finns) may well determine that if they can’t expel these countries from the European Union, and if this broken marriage will seem only to lead to endless money printing and a massive transfer union, then perhaps Germany might just conclude it is in their own best interest to leave on their own.

        One thing I’ve learned to appreciate from your blog is to never under-estimate the power of Nationalism! We are now seeing Nationalism rise to the forefront in Greece. But there is nothing preventing German Nationalism from rising too. If events conspire to put Germany in a “box,” where there’s simply no palatable options left, Germany may very well decide that it is in its best interests to “swallow” the high short-term costs of leaving the Euro in order to reap the “benefits” of being out of it – mainly, being free of Greece, Portugal, Spain, Italy, the ECB, and the whole mess seen in Brussels – among other reasons.

        The combination of bailout fatigue, the stresses of this bad marriage, the German Constitutional Court (that seems to be doing its job), and the German history with inflation and money printing all have the potential to cause Germany to say “the heck with it.”

        This scenario will definitely not happen with the present Germany leadership. But who is to say what Germany will be like a year from now? Once Merkel and her party are removed from power during the next election cycle (which now seems likely), what will come on stage?

        There’s a lot of uncertainties in Europe right now. Everyone is watching the Southern European countries. Yet what’s the old saying – the watched pot is never the one to boil over? Sometime in 2012, the world just might be greeted by a “German Surprise.”

        1. Jim says

          Also, here’s another thought.

          If Germany said goodbye to the Euro and reintroduced the Dmark BEFORE Italy/Spain/Portugal/Ireland defaulted on their debt, it seems to me that bank recapitalization of German banks might not be as catastrophic as some might think.

          If Germany rolls out the Dmark and the value of the Dmark vaults sky high in comparison to the Euro, all the Euro denominated debt on the balance sheets of German banks (not to mention the government debt and private debt) will suddenly be a LOT easier to deal with.

          While its true a new Dmark that rises sky-high in value would crimp the German export machine, the other side of the coin is that everything Germany imports (from food to Russian gas) will be that much cheaper. So while the export economy would suffer, that suffering might be outweighed by the benefit of cheaper imports.

          Anyways, just an interesting thought to chew on.

          1. Edward Harrison says

            If only it were that easy! The banks would still take a hit from currency depreciation and have to run that through their balance sheet. If you invest in Icelandic kronor assets and the currency depreciates 35% before the debtor defaults for example, you still have already seen a 35% loss that shows up as a loss of capital on the balance sheet before default.

          2. David Lazarus says

            It also takes a number of months to get sufficient replacement currency to do so. The coin presses were running for some time to meet the needs for the euro switchover.

          3. anon says

            Not to mention that Germany has lent out trillions of Euros for fixed interest and broad segments of the German economy depend on those future payments and depend on the return of the principal amount.

  11. YesMaybe says

    Clearly, you’re overlooking “the resilience and the determination of the European partners,” and the unprecedented levels of “determination and decisiveness to act in a coordinated fashion.”

    j/k, lolz.

  12. Glenn Prince says

    Great stuff Edward.


    “”They will reject the bailout in a referendum out of spite. Greece will then default with perhaps as much as a 90% haircut. “”

    Beyond spite, will it be in the Greeks best interest to default and pay the 10%? We are where we are with a slow motion train wreck baked in the cake. This isn’t the early 00’s new EZ hope springing eternal, with early 00’s debt levels and demographics.

    “”Greece and its banks will be insolvent. A sharp depression will ensue. Germany has now said it doesn’t care if Greece stays in the euro area. Greece will be ejected from the euro zone, relieving it from the sharpness of the depression.””

    I think this is key. With Germany choosing to draw the line with its purse doesn’t its strategy then become to make Greece miserable enough to leave. Then in turn becomes in Greece’s interest to leave, reseting its financial system and marginally improving its economic position?

    “” If the ECB backstops Italy, the euro will be saved. Otherwise, it is done. At a minimum, Greece will leave.

    The rump euro or the new German currency will strengthen considerably. Germany’s export machine will collapse as the weakness of the German domestic economy and strength of Germany’s future currency arrangement will be a millstone around the neck of future German leaders.””

    At what point is it in Germany’s interest to use its own nuclear option? If they pull the drain plug, Greece flushes out dragging others with them to the drain which Germany will still guard. Leading to the currency strength/export collapse you mentioned. If all this is on the charted course, when does it look better for Germany to get out of the tub rather than pull the plug?

    Starting to feel Lehman-like to me.

    1. David Lazarus says

      If Germany exits then they have the additional problem that the new DM will be even stronger than the € initially at least plus that creates problems for the German banks in terms of most of its lending will be in € so how do they convert. If the rate is too high they will impose further losses on the German banks. Too low and the loans become impossible for borrowers to repay. That holds more problems for Germany than a simple Greek exit.

      1. anon says

        Yes, we can ignore the political posturing, Germany needs the rest of Europe more than the rest of Europe needs Germany: the rest can only get more competitive and Germany can only get less competitive.

        Especially if they default.

  13. john haskell says

    The upside is as follows: hold on to your USD, buy equities in various former EZ countries 6 months after each is ejected.

  14. fredw says

    Ed , isn’t the key question presently whether the Greek government wins the confidence vote on Friday ? If the government falls , the referendum goes by the boards , right ?

  15. quantifier says

    One weakness in the argument is the assumption: “The Greek people will be apoplectic at this tactic. They will reject the bailout in a referendum out of spite.”

    In my experience, Greeks are even more apoplectic about their own politicians. If the referendum is presented as a choice “in/out of the EZ”, perhaps implicitly “in/out EU”, it is likely to become a vote of no confidence in the Greek political system, and so will pass.

    In any case, with no export sector to speak of, and a primary deficit which will worse on a euro exit, what choice does Greece really have ? Most voters do understand this.

    I’m convinced that Greece will prefer to toe the line from France and Germany, at least for now.

  16. The_Invisible_Hand says

    Its too early to tell what is going to happen in Greece. There may be no referendum at all unless the Papandreou government can survive a confidence vote later this week.

    If the government falls, there will more than likely be no referendum; but new elections instead.

    The real danger here is that no government in Greece, elected or no, will be able to govern. Or be able to enforce any “deal” with the EZ. Which is the same problem we have in Italy, Spain, Portugal, etc. In that case, it just drags on and on. With no near term solution in sight.

  17. El Bufon says

    Pushback? On what?

    1. “There are no bailouts for EZ members” is as valid as “there is no exit from the Euro” – everything is now negotiable.
    2. Cleanest is for Germany to leave (alone or plus NL FIN). The new CUR will apprieciate, but not as everybody fears – there are too many overlooked problems in Germany, apart from the toast banking system. Germany did well with a hard currency – it will do so again.

    The best for Angie – she will be celebrated in Germany. Removes all bargaining chips from Greece, Italy and most importantly France.

    One unknown – is she bold enough? Will depend how desperately she wants to win elections in 2013.

    Any pushback?

    1. anon says

      You are underestimating the problems currency appreciation causes for heavily export oriented economies like Germany.

      The reason why Germany did so well under the Euro is that the periphery could not depreciate against Germany anymore.

      With that barrier removed and freed from debt the periphery will be a lot more competitive, and not just via tourism and cheap food.

      1. David Lazarus says

        Any such gains for Germany will be well out into the future. They would have to take losses on all the bank debts around the rest of Europe.

        I am listening to the BBC world business report and find out that the anger is growing in Ireland over the threats from the ECB against the Irish to destroy the Irish economy unless they pay back in full. Ireland could very easily find that the public protests get as violent as Greece and then the EZ is toast. The German losses on Ireland would be more than €100 billion. A break up of the EZ will impose huge losses on the banks as losses will become unrecoverable. This crisis would have been avoided if there had been capital controls within the EZ to stop the surplus nations exporting the surpluses.

      2. El Bufon says

        I beg to differ. Germany exported well with a hard currency, about the same percentage to the periphery, interestingly enough.

        Germany has no natural resources, they import everything.

        So with a hard currency they pay little for imports, and need to export less to get the same net capital export – right? And the difference in between will be much bigger in real terms. What everybody is underestimating, the big time wage deflation for 10 years and consequently depression of German consumption – the craftsmen, people in dependent labour are very much worse off (no riots though ;-)))

        Any pushback on that?

        Germany has structural problems en masse, the internal transfer system (only 3 of the 16 federal state finance themselves and the remaining 13), the rotten banking system and more.

        And do not forget – they love a strong currency ….

        The day the bullying and fleecing goes one step too far (G-Pap might just done the trick), and all carefully applied WWII post traumatic guild complexes will vanish, and they will stand up (at least I hope they will, happless …..)

        1. David Lazarus says

          Yes Germany had its stagnant decade where wages were frozen, but so were real estate. So everything was reasonably stable. In the US they had stagnant wages but property inflation which squeezed the incomes of workers.

          Yes Germany could still export with a new DM but it will be tougher in an era of currency wars. My point about capital controls would have stopped Greece and the periphery getting out of control. Ireland had a surge of property development which means that they have more homes that were funded partly by the surge in German funds.

          I am not criticising Germany for its lack of consumption but you need to understand why they have the frugal nature that results in big savings balances as well. They have scapegoated the Greeks and others for problems which are far closer to home. ie its banks.

          1. El Bufon says

            Don’t get me started on the German banking system…:-) I agree it is one of the bigger stumbling blocks.

            You say Germany did not have a property bubble – they will never have: they have stringent consumer laws, and if a bank is stupid enough to do subrprime, the contract will be void – no money back. (As RBS found out when they tried to introduce UK style banking….)
            A German retail banker once told me that he was beating targets on the investment side, whilst miserably failing his “credit” targets – Germans will not consume on credit.

            However, what good did the credit-fulled boon everywhere else do – other than waking up with a headache?

            It is a vastly spread misbelief that Germany was advantaged by the Euro – it was not. All statistics are flawed, because they “increased” Germany by 20% in the 90′ and the East was is very very bad shape – consequences are still felt. Did you know that the West transferred something like 12 trillion EUR till 2003 (and more since) to the East?

            Renunification diguised how much Germany suffered…

          2. David Lazarus says

            The reunification of Germany was problematic. The exchange of the old east german Marks at a high rate was political.

            Germany has benefited from the euro in that its currency is weaker than it would have had to face because of the presence of the Greeks and the periphery lowering the value of the euro. It also eliminated the chance of exchange losses on trading within the eurozone and costs of such transactions.

            The german banks lending abroad was their way of boosting credit while germans would not borrow. If there had been some form of credit control within Europe to stop such cross border expansion the contagion would be minimal. That is the lesson that has not been learnt yet by the leaders.

          3. Edward Harrison says

            That’s it exactly. German retail banking is a low margin business and credit growth is weak so the German banks loaded up on foreign assets, making loans abroad.

            We should also remember that Germany did have a monster property bubble in Eastern Germany and that many Western German banks (and companies) loaded up on inflated Eastern German property after reunification. I worked in German banking when all of this went bust. I saw it as it transpired and I have seen the balance sheets too.

            Bottom line: Having a balkanized and weak regulatory environment for financial institutions in Europe has made this crisis possible. german banks have been particularly aggressive in seeking returns abroad and now the chickens are coming home to roost.

          4. David Lazarus says

            I also think that West Germany had a property bubble prior to the reunification as well.

  18. Anon says

    I believe many are underestimating Germany’s situation in all of this. If they ever intended to save the euro, give in to eurobonds, they would not have driven up the costs so much over the last year. This problem could have been nipped in the bud. That requires foresight, you say? Well, if you haven’t noticed, Germany has received help from the IMF and other European nations in recapitalizing its banks. According to the latest BIS, German banks have only 10 billion exposure to Greece. In other words, why NOT extend and pretend.

    Germany’s motivations are based in its experience with reunification: look at the dismantling of unproductive industry in Eastern Germany during the 1990s. The program to cut those companies up and sell their assets yielded much less than the 2 or 3 trillion estimate in asset sales. In fact, the program was in the red. The amount of the yield (10% of the original estimate) was eaten up by the effort and the process of selling assets.

    So, then, what filled the void of unproductivity? You had massive unemployment, 3 million East Germans lost their jobs because of those asset sales. What is the unemployment rate in East Germany two decades later? 10-11%.

    You have to believe that the German decision makers are VERY pessimistic about turning economies around in the periphery given their experiences with the liquidation of Eastern Germany.

    A couple more years.

  19. Edward Harrison says

    I have left a new post with an update of the situation, the most relevant events being the potential resignation of the PM (and the PM in Italy – confidence vote in two weeks) plus the opposition to referendum by the FinMin

    See here:

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