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Interesting debate vis-a-vis Greece, the EU, Varoufakis, Germany, and the banks

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Interesting debate vis-a-vis Greece, the EU, Varoufakis, Germany, and the banks


I've picked out some of the more interesting posts of commentators, and have tried to provide both views on the issue. It's quite the divide...

Yanis replies, of course, differently. But he fails to understand that his thought experiment requires the imaginary German public to believe that such a magic button exists. Otherwise, it is not a fair test: if our thought-experiment Germans don’t believe that such a magic button exists, they cannot make the choice that Yanis has in mind. Obviously. Since it is hard to imagine a German public that believes in a such a magic fix, the whole thought experiment is not very helpful.
Nevertheless, Yanis repeats his, in my view, stunning claim:
"In all honesty, I think that the mood is Germany toward the Greeks is such that the majority would be prepared to suffer a positive cost in order to see that the average Greek suffers a greater cost."
Yanis, I am sorry, but that is very offensive, and it is fuelling the mutual disdain in Europe. What is more, it misunderstands the concerns of the German public and its attitude towards Europe, but that is common in the international press.

Nicolai Hähnle
Yanis says that the Germans are prepared to suffer a positive cost in order to see the average Greek suffer a greater cost.
I would argue that this has already happened, though perhaps not consciously. After all, the Germans have been prepared to suffer stagnant wages, which is a very significant contributing factor to the suffering of the average Greek.
So in that sense, Yanis is absolutely correct, if perhaps not in the way that he thinks he is.

Very Serious Sam
“This could be easily solved by the ECB intervening”
And who would then later on pay the bill about some trillion euro? The SPD?

Sozialdemokraten gegen den Fiskalpakt
@ Very Serious Sam
LOOOOL! Ever heard of anybody paying a bill for the Central Bank? Are you sure you get what Central Banks are all about?
Btw: Who is paying the bill for the FED, the BoE?

@ SgF
The joke is on you, because losses by the central bank will be covered by the taxpayer — one way (inflation) or the other (loss in seignorage). And I would appreciate if you would respect other commentators, and not “LOL” at anybody, particularly not VSS who is a respected commentator on this blog, and freely admits that he does not know everything about economics.

Althought i am Greek, Varoufakis general assessment is dissfunctional in huge parts, because he can’t understand the mechanics of real economy, his antilipsis is based in theoritical backround only and with emphasis at the political admin of crisis avoiding to underline huge stuctural reforms should have made in Greece in every almost activity.
The major difficulty however is that under a recession of -7% many things are difficult to implement properly.
1. An effective recap of european banks under specific viable terms is a must. Emergency Economic Stabilization Act (EESA), in USA had three main pillars plus Capital Purchase Program CPP under TARP. Those 3 pillars were not ready to use in EU 17. However using copy paste mechanism created under this specific structure and using all tools created might be effective boosting recipient institutions regulatory capital ratios.
2. Leverage should also take care especially in countries like Germany -France where banking still operating pretty good.
3.How banks perform is one other issue.
Greek banks for 3 years were unable to perform independently. The MRO, LTRO, liquidity was for recycling balance sheets and stay almost unchanged. But is like being in a gypsum.
Why? Because the nature of banking is associated with maturation. Deposits of customers can be available for commitment but banks lend to businesses -households and are committed for many years.The result is that banks often face significant liquidity risks.
The Greek banks during this crisis lost more than 70 b € in deposits.
The ratio L/D per € in most was around 0.8-1.2 which was from the best ratios.
We witnessed a massive rescheduling in loans with cost for banks, a great increase in NPL but also the inability to finance companies, new business schemes and i m talking even for export based companies.
The banks policy was to restructure loans in order to make many customers able to pay but to new loans, we say NO.
Because if they contract new loans more to those eg of 2010-11 the CAR would be in huge deterioration. So less loans than 2010 a not so substantially worst CAR for 2011 even after huge losses with PSI +!
The problem here? By reducing corporations funding especially those many thousands small family led companies -in case of Greece- we made them dissfunctional.
The most important is that a reduction in loans at 10% practically has a huge impact in GDP and reduce it at least 3-4%.
4.We should take the losses at no time, this late very much.
5. Reforms implemented some partially some others not at all. Better banking functioning will change climate and reduce reccession as the economy might funded more effectivelly with better quality loans.
6.Targeted financing as stimulus (like Lisbon Agenda- Varoufakis never talk about what we haven’t made from 2000) in construction, tourism info and improving bussiness environment would bring positive development rates.

Very Serious Sam
“An effective recap of european banks”
1st, failed banks must be allowed to go bankrupt, as any other company.
2nd, the taxpayers are the last to foot the bill. The banks did not distribute their profits during the good years to the public, so no reason at all to socialize losses in hard times.
3rd, the banks could help themselves if they just wanted to. An example. In 2011, Credit Suisse had 49.700 employees. Their average income was 221.000€. If this would be reduced to what is normal in the real economy, say, 50.000€, this would free up 8.5 billion euro per year. A good start to pump up the tier 1 capital with, and no need to steal taxpayer’s money. At Deutsche Bank, it would be about 7 billion euro. And so on. Same principle, lower numbers, with the troubled banks in the GIPSIFs.

I think Yanis’s comment is reasonable. It’s not just Germans, however, who are prone to this sort of thinking:

“Behavioral economists have shown that a sizable percentage of people are willing to pay real money to punish people who are taking from a common pot but not contributing to it. Just to insure that shirkers get what they deserve, we are prepared to make ourselves poorer.”

Good example, but the thing is: the Greeks didn’t take anything from Germany. The moment that Germany needed to take on risks was the point when Germans started comlaining. If the magic button exists (that doesn’t cost Germans ANYTHING and the Germans believe that!), there is not a shred of doubt that Germans would press it.

Alessandro Carraro
I can understand it can sound offensive, but you must look at your own behaviour as well.
After calling for a different monetary policy for a long time, you seemed to have switched to saying that there is anything anyone can do. We are forced in this monetary regime and it cannot be changed. That’s easier to say when you have 5% unemployment than 25%…
It was not long ago you had many German economists arguing that any proposal to lessen the monetary contraction in south Europe was too risky for Germany (and I am happy another 100 economist rejected that). The banking jog has to be balanced by the authorities. No banking system can survive at stress of that kind (even if it was fine to start with).
You started this blog condemning ECB’s madness. When did you last complain about them? Do you think they did all they could/should? Europe is in recession again… Do you really believe central banks have no duty to control demand?

Varoufakis probably read some recent comments from populist ankle biters like Dobrindt or Kauder and got the impression that these are the right counterparts for heating up an already polarised and resentment loaded debate.
I would not contradict to his self-assessment. It looks like he finally found the right niche.

Sozialdemokraten gegen den Fiskalpakt
German PR is horrible? No, German propaganda works very well with German voters and the German public. Everybody buys the “calvinist morality tale” that Merkel uses to justify her wrongheaded policies.
Today we found out that Germany will finally let Greece go bankrupt. That funnily enough proves Yannis’ argument. Germans actually paid to make Greeks suffer. The paid some 40 to 80 billion EUR that they won’t get back once Greece goes bankrupt. So Greeks suffered while Germans paid. All the money and all the pain was there for nothing. It’s an absolute disaster. But don’t expect Germans to punish Merkel for that. They will stick to her. Until the final collapse of the Euro Zone. After which she will tell her people: it’s not our fault. It’s the Greeks (Italians, Spaniards, etc..) fault: They didn’t do enough.

@ sgF
What you are missing, in my view, is that this “punishinhg Greece” is not a concious choice, but a believe that it is inevitable. I think most Germans would argue that Germany is HELPING Greece, but enough is enough. That is completely different from Yanis’ statement.

Sozialdemokraten gegen den Fiskalpakt
Indeed, they would! What a perversion of the sense of “helping someone”. There you see to what an extent the German public and the German media is being ideologically poisoned by the German government. And you argue, German PR is horrible. It’s not. It’s the smartest propaganda out there I know.

I’m a social democrat leaning voter who’s thinking about joining that party, but your progaganda turns me off, SgdF. I don’t see any result oriented proposals in your comments here, only constant complaining about everything and distortions of very clear cut issues (like, do you seriously think the Greeks would have been better off without German support?). That’s not exactly the way to convince voters that the SPD has better ideas, sorry.

What’s puzzling is that across the economics blogosphere, these debates about morality and moral hazard keep going.. just like the debates on ECB policy, political union, downward wage rigidity, etc.
However, economists seem to avoid the question what exactly happens when certain countries quit the Euro. That Greece is going to leave should be apparent by now, and I can’t really see how countries like Spain can politcally or economically survive this crisis while remaining in the Euro Zone.
The “exit” debate has been pretty shallow so far. Many economists assert that “everything will unravel” or that we’re gonna face “the mother of all financial crises”. But what exactly is going to happen? What are the mechanisms? What are the likely results? What’s the impact on the single member states, on the EU or on the global economy? Shouldn’t that be the most important debate right now, since a political solution for all current Euro members seems absolutely out of reach?

@ Sozialdemokrat
Isn’t “simply changing the ECB goals” exactly the kind of policy prescription that won’t be implemented? When there is a strong voter preference for low inflation (targets) in the Northern Euro countries, then their leaders have little incentive to change the central bank’s mandate. What makes these kind of policies even more unlikely are the strong path dependencies they create. Politicians and voters know that, once the ECB made a commitment to reduce employment (or target NDGP, or..), the policy is basically locked in. You don’t change your central bank’s goals every 4 years, more like once in a generation (if at all). Finally, such a shift is a leap of faith for policy-makers, since there are economists who claim it’s a quick fix while there are other economists who say that “thou shalt never mess with your inflation rate”.
So, I don’t see how the Euro Zone leaders could quickly and unanimously agree on such a step.

Sozialdemokraten gegen den Fiskalpakt
@ PS
I agree with you that this change won’t come. Because it goes completely against the ruling ideology. Nonetheless, this situation is exceptional. It’s not about changing your central bank’s mandate every four years because change is fun. It’s about whether the Euro will survive or not. In the end there might be a trade-off: either implementing radical change or collapse.
After all, the change would not be that radical. It would just represent an alignment of the ECB mandate with the mandates of other central banks. The American, British, Japanese examples aren’t too scary. There is a Euro crisis, but there is no Dollar, Sterling, or Yen crisis. Why? It might have to do something will central bank design. More than with indebtedness (debts are very high and even higher than in the Euro Zone, including the PIIGS) in any case.

I still do think that nobody should feel hurt because of an hypothesis about what a mass of people feels or thinks, as long as nobody is implying that you are part of that mass.

Well I am German and I do not feel offended because I see no reason to equate myself with the German majority opinion.
I think this thought experiment thing has to separated into three categories rather than two:
1.) Those would push the Yanis button so Greeks don’t suffer.
2a.) Those who would not push the button because they want punishment for the past (or for what they perceive as past actions) per se.
2b.) Those who would not push the button because they fear moral hazard and that there would not be a button next time.

Markus Wichmann
At Yanis blog, I cited his “stunning claim” (Kantoos) and then said:
“This is plain wrong among other things because of the reason that the average german learned by an extensive media coverage that – cf. Yanis principle 1 – on the one hand there is a greek “elite” which benefited from the greek style to run the government and shape the malfunctioning state (maybe 5 – 10 %) and on the other hand the broad majority of greek people who is not responsible for the mess at all but is now suffering badly.
The broad majority of germans knows this very well. Do you really think, Yanis, the average german is as stone-hearted and sadistic to be pleased to watch the average greek suffer from a state of affairs he is not respnsible for? And some now having to take their children to “SOS-Kinderdörfer”?”
Yanis answered “I truly hope you are right. And that I am wrong.” So maybe he starts to reconsider his claim…
What surprises and worries me is watching the phantasies and feelings of a lot of intelligent debaters filled with bitterness and resentfulness, which in my view first and foremost leads to their nasty imputations against the germans. An indication that the crisis is invading the mind and psyche of people.

“Then again, the German PR is horrible.”
That is true, Kantoos, and it is obviously beside the point when SgdF contradicts, saying that German propaganda works very well with German (!) voters and the German (!) public.
Of course there is what may be perceived to be a moral argument in German rhetorics. Olaf Henkel, in a contribution to the Financial Times (reprinted in my blog – has analyzed this correctly by stating:
“By lecturing all of Europe, she [Merkel] in reality addresses the people at home. The more the Germans see her being tough with politicians from the South, the less they realize that it is them who are to pay for her euromantic policies.”
On the other hand, structural reforms are obviously needed in the problem countries. Neither do we want, nor can we afford to squander our money.
But of course you could be content with sending that message through the ‘Troika’-chanel only. But eventually, Merkel, Schäuble and “the Germans” would get the blame for it anyway. Understandably, peoples like to believe in quick fixes: not just abroad, but also in Germany (for proof read the above comments of the “Sozialdemokraten gegen den Fiskalpakt”). And if you impose changes upon them, be it even by “withholding” money from them, which they aren’t even entitled to, they won’t like it.
So the deeper problem is that the Greeks (other peoples too, but, it seems, to a lesser extent) are taking it for granted that Germany is obliged to help them. (And of course the vested interest particularly in Greece is fostering this attitude of “the others’ fault, the others have to help us”.)
So the first thing our Government should have told them is: This is not an earthquake, that has overcome you, this is a disaster of your own making.
My personal stance would have been not to help at all.
But if you do, you should make it quite clear to those peoples (and, for that matter, to the hords of anglo-saxon moneyprinting-missionaries coming across the ocean to save Europe – not, of course, their own interest – and redeem our pockets from the evil money) that it is OUR money that is being spent, that it is OUR decision as to how much WE are willing to spend and that the German budget is not other peoples’ feeding bowl to dig into ad libitum. And if you don’t like it: Leave the euro zone and print your own money!
This is what the German government has failed to communicate from the very beginning. Of course people may feel offended when confronted with a blunt statement like that, but eventually they will accept it, because mutatis mutandis they themselves would argue along the same lines.
Besides: This very debate that Kantoos is having with Mr. Varoufakis in my view is also poor PR.
For Mr. Varoufakis (as for Barry Eichengreen, George Soros, Paul Krugman et al.), accusing the Germans (of whatever) is not an academic exercise. Eventually it’s all about extolling money from them/us. When you do not adress that aspect, and maybe even fail to see it, you are allowing the whole debate to be played in your own penalty area.
And that is not a terribly good idea: neither in football/soccer, nor in economics.

Sozialdemokraten gegen den Fiskalpakt
“He believes that Germans would conciously punish Greeks even at a cost to the Germans. That is absurd.”
I don’t see it as that absurd. People that harbour resentments are prone to punishing others even if it comes at a certain cost. Why would that be absurd? You pay to see others suffer. And from seeing them suffering you get some kind of satisfaction. That works very well, even economically.
“You mean the wages that were increased by x% from 1998 until now without much gains in productivity?”
Which might not be the fault of individual Greeks but rather the consequence of the design of monetary union. I don’t see that the ECB concentrated its policy much on the state the Greek economy was in all those years. It could have reacted. But it didn’t because it aligned its policies with the state the German economy was in. So, in the end, these developments were not the Greek people’s fault.
Furthermore, even if we say that wages are too high in Greece in comparison to Germany, and with regard to productivity. What we mainly heard was that Greece has a debt problem. And how the heck should Greece fix its debt problem while devaluating wages by 30% and thus crashing its own economy. That’s exactly what happened – even though TROIKA explicitly did not foresee that nor wanted it to happen. Fixing your debt or aligning wages with productivity and within monetary union – there is a target conflict! You cannot get both.
“If Germany’s economy is booming, there is every reason to cut spending.”
Sure. But a projected growth rate of 0.7% in 2012 is not quite “booming”. Hope, you agree on that. And I didn’t say austerity was under way now. I just said that Germany will have to implement austerity quite soon to cover the 40 to 80 billion of losses that come along with Greek bankruptcy. 80 billion – that’s over a quarter of the federal household. If Germany lives up to its own principles that it has enforced on countries such as Greece and Spain – and if it respects the Fiskalpakt – it will have to implement austerity pretty soon. With all the consequences that come along. Recession’s coming home, coming home… But, quite frankly, I doubt that Merkel would dare to do that. It’s an easy political game to force mad policies upon others. It might be a different story to force it upon your own voters, especially in an election year.
“Germany has committed billions and if it has to mark-to-market these claims, it has made losses already.”
Of course, I always opposed those mad “Rettungspakete” because they were senseless bullshit. 80 billion to Greece to bail out all the private creditors. That amounts to a crime against German tax payers. However, this is the first loss that materializes because Germany is not a bank that has to fill out its balance sheet with market prices. I mean giving credit to others might be smart if the money will be returned eventually. But how idiotic is it to give credit to someone while at the same time forcing an economic policy upon him that amounts to economic suicide (Greek example)? It’s very dumb. Germany deserves a better government than that. And also a better opposition that presents alternatives instead of supporting madness.

Burkhardt Brinkmann
“The best argument against democracy is a five-minute conversation with the average voter.”
The best argument against voting for the German Social Democrats is to read a comment from Sozialdemokraten gegen den Fiskalpakt.
Not only because they they are clearly anti-democratic, but also because they are eager to distribute the taxes from their hard-working German voters all over the world.
“most of average people are macroeconomically illiterate”
Luckily, disguised by names like Charles Ponzi or Sozialdemokraten gegen den Fiskalpakt, a host of economic geniuses have descended upon earth, to inform the average people that printing money is a free lunch.
And while Mr. Gabriel is bashing the banks for their daring speculations, SgdF tell us that as long as we keep Ponzi financing the Greek budget, our money is absolutely safe.
And of course we are not helping Greece by rolling forward their credits: no, it’s the most normal thing that a state doesn’t pay it’s debts back.
So we should have given the Greek government whatever money they feel they need – and saved our banks into the bargain, right?
“Germany was NOT helping Greeks, but bailed out Greek creditors, be they Greek bankers, billionaires, French and German banks.”
Well, economic geniusses like SgdF are exempt from looking at the facts. While it is true that most of the money has gone to banks, and even to foreign banks, part of it went into financing the Greek budget deficit, and, insofar as they were holding Greek bonds, into bailing out Greek banks and pension funds. You could hardly say that this has not been a help for Greece.
Plus there is another chanel through which Greece has been supplied with European money: “Target 2″. But economic geniusses like SgdF are, of course, above taking trifling sums like 100 Billion € into consideration.
“Since the start of the Troika policy a.k.a.”the help Germany provided to Greece”, the average Greek people have suffered greatly seeing their wages reduced by some 30%, seeing unemployment escalating”.
Problem is: The Greek politicians have only implemented tax hikes and spending cuts, but next to none of the structural reforms that were part of the deal with the Troika and were supposed to (and would have) helped economic recovery in Greece.
But of course economic geniusses like SgdF know better and happily support rich Greek tax evaders with tax money from German workers, and stubborn Greek politicians holding on to their clientelist hold over Greece.
“seeing their country in ruins”
You mean: Having ruined their country?
“and the whole of Northern Europe holding resentments against them.”
Small wonder, when the Greeks cry for foreign funding, but at the same time don’t implement structural reforms, don’t stick to agreements and don’t want to sell their state-owned companies.
A reading suggestion for Sgdf (or, for that matter, Yanis Varoufakis):

This post was last modified: 09.12.2012 09:39 by Helsworth.

09.12.2012 09:35
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Post: #2
RE: Interesting debate vis-a-vis Greece, the EU, Varoufakis, Germany, and the banks

I remember that discussion.I personally agree with Yanis but i cant blame German citizens for that.Merkel's and Schaeuble propaganda did a good job and personally if i was a German i might have been thinking likewise.
After all the Germans had to go through austerity ever since they entered the eurozone in order to weaken domestic demand and live off exports in the eurozone periphery.So an average economicly illiterate person would naturally think "Ive been having my wages frozen for the last 10 years while they were having a party now its time for them to go through the same thing and i even have to bail them out".

Ofcourse the truth is far different from that.Official Germany only cared about saving its banks.Since banks are hated everywhere though it had to happen on the low or the citizens would protest and Merkel's popularity would go straight to the sewer.And for that, a scapegoat was needed.
Furthermore, even if we assume that the periphery indeed needs all this austerity, the main difference with the austerity that Germans had to go through is that THEY went through austerity at a time of global economic boom.Its a lot more easier to cut spending while its replaced from the others who are booming.

My fear is that it will be too late when they will realise that Merkel is actually hurting their own economy.

-In sharp contrast, economic phenomena are not just hard to predict. Their prediction is impossible. Why? Because human economies (quite unlike those populated by automata) are subject to something worse than the worst non-linearities: infinite regress.
09.12.2012 17:05
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