Greek spending has actually been rising

[Gustaf]

I just read the astonishing fact that Greek primary spending -- excluding interest payments -- has been rising this year. We have been told that Greece has been undergoing austerity. But it turns out that "subsidies to pensions" and unemployment insurance payments have caused a 4.5 increase in primary spending.

This obviously raises a question of how the IMF expects Greece to get out of its deficit, but it also raises a question of why the Greek economy is even shrinking. We are told Greece is in recession because austerity has cut government money out of the economy-- but the government is actually injecting more money into the economy. So why is Greece even in recession at all?

So not only is primary spending rising, but the inflation rate has been higher than Germany's, meaning Greek costs are not falling relative to Germany. I thought this entire bailout was supposed to be a gambit on internal devaluation?

Regardless of whether Greece restructures its debt, it should go into primary budget surplus immediately, operating as if it were on a balanced budget amendment. This means cutting whatever is needed to be cut.

Failing that, the other two options are for Greece's lenders to stop lending to it altogether, and force Greece to go int primary surplus immediately, or for them to lend to Greece like there is no tomorrow using printed money, in a bid to get Greek growth going again. Either option would work, but the present situation is untenable. Internal devaluation might have worked, but apparently that is not what is happening.

What is going on at the IMF? They have a legion of PhD economists there.

This is not about economics but about politics. Stupid politics at that.

Given the size of the Greek deficit I'm not sure the primary surplus even matters anymore. Especially since they won't reach it in the next couple of years anyway. If they're paying, say, 5% on a debt that is 200% of GDP that's 10% of GDP right there. That's a key reason why I don't see them getting out of their hole.

[Gustaf]

2) institute the Euro-bond solution for future borrowing.

So that we Germans can pay even more?

I think that would be the general idea, yes.

[Gustaf]

2) institute the Euro-bond solution for future borrowing.

So that we Germans can pay even more?

While it is a bit wrongheaded to call it 'paying', and after all in the world of Greeks and Germans it is the Germans who are the privileged, relatively speaking, the obvious point to you, Franzl, is what the devil are you Germans doing in the Euro if you don't want to deal with this sort of thing?

The Germans were forced into the Euro in exchange for French support for unification. The German people has never wanted the Euro.

[Gustaf]

Sorry but I didn't see this topic earlier.

1)The spending rising is a combination of a deeper recession that forces increased safety net spending and the unwillingness of certain parts of the administration to tighten their belts.
It's disappointing and frustrating but somewhat expected. Going cold turkey after decades of profligacy was never going to be easy, especially when large parts of the society and the political world refuse to accept reality and demagogue like it's the 90's (even the conservative parties).
Also the fact that our constitution says that civil servants are permanent employees that can't be fired makes our choices even more limited when it comes to scaling down our public sector.

2)Ousting Greece out of the Eurozone will only make matters worse as it will show to other EU countries that the concept of European Solidarity is just empty words and that if they fall in difficult times, the great powers will have no qualms to do the same to them. Needless to say that will mean the end of EU as a legitimate organization that can influence world policy (even though I understand that many people here don't see anything wrong with that).

3)Cutting military expenditures is an excellent solution. There is only one problem with that: Germany and France vehemently oppose such a measure. The reason? We are one of the best clients of their military/industrial complexes.
When our prime minister visited Merkel and Sarkozy, it was really hilarious seeing them advising a strict austerity plan and at the same time lobbying for even more german and french weapon purchases by our army.

4)If the Eurobond means Germany paying more, then so be it. You can't pretend to be the boss and when time comes to fulfill your responsibilities to start whining about how hard is your job. Germany didn't have a problem when greek banks borrowed money which Greeks used to buy German goods or when the adoption of Euro led to skyrocketing exports and its commercial surplus. 
And the idea that Germany didn't want the Euro is about as credible as the conspiracy theories about Obama's birth certificate.

You're unaware that Germany has never been keen on the Euro? I don't see it as a conspiracy theory, to be honest.

And adoption of the Euro did not lead to skyrocketing exports in Germany. Maybe you should check German growth figures during the first years of the Euro. They weren't good. Germany took painful measures during the early years of this decade to increase competitiveness and they are now reaping the benefits of that.

[Gustaf]

Obviously. It's always good policy to punish success.

I guess Californians and New Yorkers could say the same seeing how their money go to welfare states like Alaska and Mississippi.

Californians and New Yorkers can, at least in theory, outvote Alaska and Mississippi.

I think your approach, saying that "if Germany wants to be the boss they have to pay for us" is wrongheaded. It's more that "if Germany is to pay for Greece, they'll want to be the boss"

Right now, they're paying without control. But control over decisions has to be aligned with carrying the risks. Otherwise, you have a recipe for disaster.

[Gustaf]

Obviously. It's always good policy to punish success.

I guess Californians and New Yorkers could say the same seeing how their money go to welfare states like Alaska and Mississippi.

Californians and New Yorkers can, at least in theory, outvote Alaska and Mississippi.

I think your approach, saying that "if Germany wants to be the boss they have to pay for us" is wrongheaded. It's more that "if Germany is to pay for Greece, they'll want to be the boss"

Right now, they're paying without control. But control over decisions has to be aligned with carrying the risks. Otherwise, you have a recipe for disaster.

California and New York outvoted Alaska and Mississippi back in 2000. The rest as they say is History.

And maybe you haven't noticed, but nothing gets done in EU until Germany approves. Germany's unwillingness to act, due to internal politics, is after all the reason why this crisis dragged on for months the first half of 2010, exacerbating the problem.
And it was Germany who insisted the IMF be a part of the rescue package and then put in place punitive conditions as to make an example out of us, despite vocal opposition by France and the IMF.

...


So, here is the chain of events, again.

Greece goes bankrupt.

Greece asks Germany for money.

Germany puts in place certain demands to give that money.


It isn't as if Germany first put these demands out and now you can ask for money in exchange for following those demands.

And the introduction of the euro, as I noted, is a prime example of something being pushed through without Germany wanting it. France has been calling the shots in EU development up to quite recently. Are you not aware of that?

[Gustaf]

Obviously. It's always good policy to punish success.

I guess Californians and New Yorkers could say the same seeing how their money go to welfare states like Alaska and Mississippi.

To an extent. Yes, I agree. I don't think their money should go to MS and AK, at least the way it's done now.

But at least....despite everything....it is one country consisting of Americans. As much as I support decentralization, it's still true.

I like you, px...but Greece isn't my country and Greeks aren't entitled to (one of my) country's money I think we made a massive mistake getting so deep into this union so quickly. No offense, but if you're going to do somethink like the Euro, it needs to be done among countries that are somewhat comparable in economic power and wealth. I'm afraid Greece never really qualified...admitting countries like crazy was the feel-good pro-Europe position. It just had to be done!

Unlike some of my compatriots, I never asked for charity. I understand the harsh conditions (but not the punitive ones) and if I were in your shoes I'd probably feel the same.
But it wasn't feel-good sentiments that put Greece and Portugal into the Eurozone. It was Germany's calculation that thanks to the wage-restraint policy that followed it would dominate financially over these countries (and the massive trade surplus shows they were right).

And adoption of the Euro did not lead to skyrocketing exports in Germany.

While you are basically right about that, if the Euro would go down now, a reintroduced D-Mark (or what ever a German currency would be called) would be revalued and go through the roof and hurt our exports badly.

Which, in the long run, wouldn't even be such a bad thing imho, as Germans were forced to give up the policy of wage restraint we practiced in the last 20 years.

But it would still be very painful. So instead, we pay some money to avoid that. Look at it as a charge we pay, in exchange for the privilege of cheap exports.

If we bailout Greece every 10 years or so, it should still be a net surplus for Germany.
Not that this is a healthy way of interacting between the Euro nations, but well, the whole Euro wasn't a healthy idea in the first place.

Thank you, you put it better than I ever would.
And I'm sure that if Germany concludes that the costs of bailing out the PIGS are greater than the profits, it will have little problem abandoning the Euro and returning to the Mark. The whole notion that some people propagate about Germans being dragged into the Euro against their will, is laughable. 

So...you think I have a conspiracy theory and your idea is that Germany created the Euro to be allowed to dominate financially over Greece and Portugal? Why would they even want that? Germany has never favoured a fiscal union for Europe.

The only reason Germany is gaining from the Euro NOW is the fact that the other countries ed up. Had they acted like Germany that gain wouldn't have been there.

Why do you think Germany demanded the stability pact to be introduced as a prerequisite for having the euro? Was it because they really, really wanted the euro and wanted the other euro countries to screw up their public finances so they could take over Europe (sane theory)?

Or was it because they were worried about ending up having to pay for those other countries and not really wanting the euro in the first place? (craaaaazy conspiracy theory)?

Germany has tied themselves emotionally to the European project as a way of dealing with the Nazi past. That's why they've been unable to say no to stuff (until fairly recently). And it's why France has been allowed to push the European agenda throughout most of the EU's history. This is rather well-known and hardly a conspiracy theory. It would be very difficult, economically, yes, but above all politically for Germany to abandon the euro.

[Gustaf]

The only reason Germany is gaining from the Euro NOW is the fact that the other countries ed up. Had they acted like Germany that gain wouldn't have been there.

The funny thing is, that it is just impossible that everybody "acts like Germany". If every nation had a export surplus, practiced wage restrain and had a high saving ratio, the world economy would collapse.

If one has a surplus, another one has to have a deficit, inevitable. Germany competed (and still competes) its customers into the ground, and than punishes them for this very fact.

I'm not saying that the GIPS are without guilt, but so ain't Germany.

Yeah...not everyone can have an export surplus, that's true. There is no obvious reason why not everyone could practice wage restrain or have a high savings ratio. Besides, this only applies within the euro zone so any imbalances could be picked up by other countries, say in the third world.

Anyway, your reasoning here is something along the lines of me losing my job to you because I'm an alcoholic and then complaining that if you were also an alcoholic I might have been allowed to keep my job. True as that may be it seems more reasonable to say that had I not been an alcoholic I would have kept my job and the appropriate course of action is to get fewer alcoholics rather than more.

And Germany had to increase competitiveness because their economy was doing so badly in the first years of the euro.

If your point is that it's problematic to force all the euro countries to adopt the same policies and the same level of competitiveness, I agree. That's why the euro is such a bad idea in the first place and should not have been adopted. But given that it's there it seems smarter to try and make all countries have equally strong economies rather than make them all conform to the weakest economy.

[Gustaf]

Sorry but I didn't see this topic earlier.

1)The spending rising is a combination of a deeper recession that forces increased safety net spending and the unwillingness of certain parts of the administration to tighten their belts.
It's disappointing and frustrating but somewhat expected. Going cold turkey after decades of profligacy was never going to be easy, especially when large parts of the society and the political world refuse to accept reality and demagogue like it's the 90's (even the conservative parties).
Also the fact that our constitution says that civil servants are permanent employees that can't be fired makes our choices even more limited when it comes to scaling down our public sector.

2)Ousting Greece out of the Eurozone will only make matters worse as it will show to other EU countries that the concept of European Solidarity is just empty words and that if they fall in difficult times, the great powers will have no qualms to do the same to them. Needless to say that will mean the end of EU as a legitimate organization that can influence world policy (even though I understand that many people here don't see anything wrong with that).

3)Cutting military expenditures is an excellent solution. There is only one problem with that: Germany and France vehemently oppose such a measure. The reason? We are one of the best clients of their military/industrial complexes.
When our prime minister visited Merkel and Sarkozy, it was really hilarious seeing them advising a strict austerity plan and at the same time lobbying for even more german and french weapon purchases by our army.

4)If the Eurobond means Germany paying more, then so be it. You can't pretend to be the boss and when time comes to fulfill your responsibilities to start whining about how hard is your job. Germany didn't have a problem when greek banks borrowed money which Greeks used to buy German goods or when the adoption of Euro led to skyrocketing exports and its commercial surplus. 
And the idea that Germany didn't want the Euro is about as credible as the conspiracy theories about Obama's birth certificate.

You should probably bring this up with Wikipedia, they've apparently been taken over by the Birthers:

"France and the UK were opposed to German reunification, and attempted to influence the Soviet Union to stop it.[7] However, in late 1989 France extracted German commitment to the Monetary Union in return for support for German reunification.[8]"

http://en.wikipedia.org/wiki/History_of_the_euro#Relaunch

I'd hope for an apology for you calling me a conspiracy theorist and a propagandist pushing ridiculous theories when I just stated the standard history but I suspect that would be too much to ask.

[Gustaf]

Yeah, a wikipedia article talking about something that happened 13 years before the Euro was introduced (and never mentioning explicit official German opposition) is undeniable proof that you were right all along.

Happy now?

Ok, now you're being hilarious.

So, you might think that the euro just jumped into existence by itself. That is not the case though. The article I quoted is titled "history of the euro"

The reason for this is that it explains the HISTORY of the euro. You see, the decision to launch the Euro was, surprising and counter-intuitive as it may seem, taken BEFORE it was actually created!! Who could have guessed!

So, that decision is what is known as the Maastricht treaty. It was approved in the early 90s. And it was done because the Germans were forced to accept it in exchange for getting unification. Like the article quotes.

Now, you claim the article is "never mentioning explicit official German opposition" That's strange, since the paragraph I quoted (I'm assuming you read the link) says: "Germany was cautious about giving up its stable currency, i.e. the German Mark" I know you don't like facts to trouble your prejudices but you might want to read this: http://specials.ft.com/euro/FT3SS4YUTPC.html It describes German opposition to the Euro.

But, then again, since I was offering a ridiculous conspiracy theory, I assume you have plenty of proof of your position, right? I mean, the Wikipedia article probably mentions Germany creating the Euro to gain dominance over Europe, since that's what actually happened? Please feel free to quote all the sources you have for this self-evident position of yours.

[Gustaf]

Thirteen years is VERY long time, even for a multi-year project like the Euro. A lot of things had changed between 1989 and 2000 when the final decision was taken.

The wikipedia article is vague about what kind of opposition existed in Germany: was it the government that opposed it, the parliament, the voters? And "being cautious" isn't the same as being opposed.
And of course according to the article even France (the driving force of the project according to you) approved the creation of Euro with only a narrow majority.

My position is reality based, unlike yours. Unless of course you think that Germany being the big beneficiary of the creation of the Eurozone is just a coincidence which nobody, not even Germans themselves could've predicted.

Final decision? You're not seriously claiming the decision was taken in the late 90s are you? Maybe you should read up on this. Maastricht Treaty. Google it.

Now, the French voters almost rejected the Euro, but that's because the Euro has not been popular hardly anywhere in Europe (except in Club Med where people expected to piggy-back on Germany). The French political establishment, on the other hand was heavily in favour. Again, this is very, very basic. It's like I'm teaching a child on basic European politics. I suspect you're just pretending not to be aware of this to avoid having to admit that you were wrong.

Again, your claim is that Germany created the Euro to gain dominance over Europe. You have yet to come up with anything to back this up. Please. Since it's the mainstream idea (as opposed to my conspiracy theory) I assume it must be cited somewhere right? Maybe on Wikipedia? The Economist? Wall Street Journal? Take your pick.

And of course, I already explained why Germany is now benefitting to the Euro. They did the things that Greece or any other country could have done. Increased competitiveness. There is no secret conspiracy involved, just sound policy in face of difficulty.

[Gustaf]

Oy.

You know, as in the DSK thread you take something someone writes, interpret it completely different and then launch a self-indulging tirade about how wrong is what the other person "says" and how right your opinion is. No wonder you are so sympathetic every time we mock people like Palin.

Just because something was negotiated and written it doesn't mean that its implementation is inevitable. Otherwise we'd have a European Constitution by now. Heck, just see what happens now with the July decisions about the bailout mechanism.
If Germans REALLY didn't want the Euro then they could have used that "overwhelming" public opposition and scuttled the entire project, Maastricht or no Maastricht.

And by saying that the Euro was "popular" here in the Mediterranean you are showing your ignorance. Here at least it was always viewed with suspicion, if not outright hostility, and the rising inflation that came with its adoption did nothing to enhance its popularity. Even during better times the populace always remembered fondly our old drachma.

The "painful" measures Germany took was a decision to increase wages by a lower % than the rest of the Eurozone countries. That was impossible to do here (and probably the other regional countries) because our wages were already lower and because of the inflation caused by the Euro. Obviously it was a sound policy decision but to the detriment of the other european economies and not exactly helpful in the supposed ongoing quest of erasing the inequalities between the EU countries.   

This is the last time I respond to you. You can now have all the fun you want by misinterpreting what I wrote and giving another lesson to your "ignorant" pupils.

Hm.

Paragraph 1 is an unfounded personal attack, trying to distract from your lack of arguments, so I'll skip that.

Paragraph 2 is sort of...eh? They did prevent the Euro for a long time. But they had to give that up in exchange for unification. And Germany wasn't very good at getting their way in the EU in those days, for reasons I've already explained. And a major treaty (THE major treaty, in fact, of EU history) is vastly different from some negotiated deal over bail-outs. And we did get the European constitution under another name. The only reason they had to change the name was because of voter rejection. This is also rather well known.

When I talk about euro popularity I was going off of poll figures around the time of the introduction. But I'll readily accept your anecdotal evidence as proof of how I'm clueless. Here, check this out: http://ec.europa.eu/public_opinion/archives/eb/eb50/eb50_en.pdf

"Looking first at the "EURO 11" countries shows that support levels are highest in Italy (88%), Luxembourg and the Netherlands (both 79%). In four further "EURO 11" countries, around 3 in 4 people are in favour of the single currency, while in 4 other countries more than half of the population supports it. Highest opposition levels are noted in Finland and Germany (both 32%), although these are significantly lower than they were in the spring of 1998.
Looking next at the "pre-in" countries shows that people in Greece (75%) are significantly more likely to support the euro than people in Denmark, the UK and Sweden are. In these three countries there are more people who oppose the euro than people who support it. However, in Sweden (-2) the gap between opponents and supporters is very small."

So, as could be expected citizens in Finland and Germany tended to correctly predict that the euro would not be good for them. I won't expect you to admit to being wrong again though. I guess I twisted your words on this one. You clearly agreed with me that Germany was the country most opposed to the euro, right? (it should be noted that Eurobarometer polls notoriously overstate support for European policies so the absolute levels here are likely to be off).

Finally, you don't seem to understand how competitiveness works. It's not a question of how high wages are but how high they are compared to productivity. Thus, there is nothing inherent saying that Greek workers have to be overpaid compared to productivity. Germany adjusted wage inflation to productivity gains, which is what most countries should do.

It's convenient though that as you're running out of arguments and is being proven factually wrong on pretty much everything you say (still waiting for some evidence on your mainstream theory on how the euro was created, btw), you decide to walk out of the debate, after hurling a couple of personal insults my way.

Is it so hard to admit to being wrong?

[Gustaf]

Everyone practicising wage restraint and having a high savings ratio has never actually been tried, except perhaps during the Great Depression. All the major countries that do that in capitalism have a big trade surplus. It is a very supply side view to say that the slack of aggregate demand in such an economy would not be a problem.

The effect of Germany practicing wage restraint has not been good for the euro, because it is undercutting its neighbors. Without Germany, the euro would massively devalue, and this would help the PIGS, obviously. Some have even proposed that one solution to the problem is to have Germany leave the euro by itself.

I still disagree that the main problem for mismanaged euro countries is that other countries have been doing well. Of course, if everyone else also sucked they'd be doing relatively better but it remains a weird approach, imo.

Again, though, the fact that Germany and Southern Europe are not in step economically is of course the reason why the euro was a poor idea to begin with. So I agree with that part.

The demand point is relevant, but I still think that productivity increases is what drives demand in the long run. Wages will eventually have to follow productivity which is why the German way beats the Greek in this case.

[Gustaf]

So, as could be expected citizens in Finland and Germany tended to correctly predict that the euro would not be good for them. I won't expect you to admit to being wrong again though. I guess I twisted your words on this one. You clearly agreed with me that Germany was the country most opposed to the euro, right? (it should be noted that Eurobarometer polls notoriously overstate support for European policies so the absolute levels here are likely to be off).

Go see a therapist. Really.

I need to go see a therapist because I proved you wrong? It's surprisingly common for useless posters on here to resort to some random personal insult as a last resort after having been conclusively defeated in terms of arguments.

But any time you're ready to explain how I showed that I'm clueless by stating something that was factually correct, go ahead. I find it psychologically interesting how people like you try to justify themselves in public (beyond telling me to go see a therapist. Which is rather weak. I've been called lots worse by people losing arguments to me).

[Gustaf]

Everyone practicising wage restraint and having a high savings ratio has never actually been tried, except perhaps during the Great Depression. All the major countries that do that in capitalism have a big trade surplus. It is a very supply side view to say that the slack of aggregate demand in such an economy would not be a problem.

The effect of Germany practicing wage restraint has not been good for the euro, because it is undercutting its neighbors. Without Germany, the euro would massively devalue, and this would help the PIGS, obviously. Some have even proposed that one solution to the problem is to have Germany leave the euro by itself.

I still disagree that the main problem for mismanaged euro countries is that other countries have been doing well. Of course, if everyone else also sucked they'd be doing relatively better but it remains a weird approach, imo.

Again, though, the fact that Germany and Southern Europe are not in step economically is of course the reason why the euro was a poor idea to begin with. So I agree with that part.

The demand point is relevant, but I still think that productivity increases is what drives demand in the long run. Wages will eventually have to follow productivity which is why the German way beats the Greek in this case.

I agree that productivity drives increased demand (in the long run), but I think that the sole driver of productivity in the long run is technology, not wages. Increasing productivity by reducing or suppressing wages is a political question of distribution, not an economic question.

I don't think we disagree on that. I'm not claiming wage decreases leads to higher productivity. Merely that if one has low productivity growth, wage growth will have to be cut to match.

In other words, I think the root of the problem is not that Germany cut back on wage growth relative to Greece but that they increased productivity relative to Greece (and especially relative to the countries' wage growth).

[Gustaf]

So, as could be expected citizens in Finland and Germany tended to correctly predict that the euro would not be good for them. I won't expect you to admit to being wrong again though. I guess I twisted your words on this one. You clearly agreed with me that Germany was the country most opposed to the euro, right? (it should be noted that Eurobarometer polls notoriously overstate support for European policies so the absolute levels here are likely to be off).

Go see a therapist. Really.

I need to go see a therapist because I proved you wrong? It's surprisingly common for useless posters on here to resort to some random personal insult as a last resort after having been conclusively defeated in terms of arguments.

But any time you're ready to explain how I showed that I'm clueless by stating something that was factually correct, go ahead. I find it psychologically interesting how people like you try to justify themselves in public (beyond telling me to go see a therapist. Which is rather weak. I've been called lots worse by people losing arguments to me).

I have a Napoleon-complex because I base my views on real data? I never claimed that knowledge of any of the things I mentioned here was particularly impressive. I never met anyone before who wasn't aware of it so I hardly think it's a sign of megalomania. But I've understood you're a bit of an expert on psychology so I guess I should defer to your analysis.

But I hope none of the hard work in picking apart my narcissism distracts you from backing up your claims in this thread. If you can prove me clueless I'll gladly accept being a narcissist as well.

[Gustaf]

In other words, I think the root of the problem is not that Germany cut back on wage growth relative to Greece but that they increased productivity relative to Greece (and especially relative to the countries' wage growth).

And why not? If Germany had had high wage growth to match its productivity growth, it would be contributing much less to the imbalances in the region. Not only that but most German workers would be better off.

Right, but isn't that a bit marginal? What I mean is that German workers were overpaid about a decade ago. They rectified that. You're claiming that they went too far, if I read you correctly.

However, that seems to imply that the Germans should have anticipated the weaker Euro economies letting their competitiveness go to hell and slowed down to match them.

Germany might be worried about competing with China and the US as well, for example. While I get the argument in technical terms, I'm not convinced of its merits in the long-term. Shouldn't the goal be for the other countries to catch up in productivity growth terms rather than Germany letting inflation run amok?

[Gustaf]

In other words, I think the root of the problem is not that Germany cut back on wage growth relative to Greece but that they increased productivity relative to Greece (and especially relative to the countries' wage growth).

And why not? If Germany had had high wage growth to match its productivity growth, it would be contributing much less to the imbalances in the region. Not only that but most German workers would be better off.

Right, but isn't that a bit marginal? What I mean is that German workers were overpaid about a decade ago. They rectified that. You're claiming that they went too far, if I read you correctly.

However, that seems to imply that the Germans should have anticipated the weaker Euro economies letting their competitiveness go to hell and slowed down to match them.

Germany might be worried about competing with China and the US as well, for example. While I get the argument in technical terms, I'm not convinced of its merits in the long-term. Shouldn't the goal be for the other countries to catch up in productivity growth terms rather than Germany letting inflation run amok?

The eurozone economy is $11 trillion. If the entire eurozone had a trade surplus the same percentage of GDP as Germany, it would be a roughly $550 billion surplus. Who would absorb that?

Well, if no one wants to absorb it, there won't be a surplus that big, right?

[Gustaf]

If your point is that it's problematic to force all the euro countries to adopt the same policies and the same level of competitiveness, I agree. That's why the euro is such a bad idea in the first place and should not have been adopted.

Today, I have to agree with you.
I used to support the Euro until this year, but when I see that Greece, Portugal, Ireland, Spain are going to lose their sovereignty and their democracy, and are forced to roll back the social achievements of the last 30 years, I have to change my mind.

If I have to choose between the Euro and democracy, I take the latter.

Yup. Since the euro means losing monetary policy as a tool to combat recession fiscal policy must be used instead. Weirdly, this has traditionally been liked by the left, which makes no sense to me - it means, in the end, to turn the core of politics (budget decisions) away from political considerations and make it into a tool wielded by economic experts. That's what we see happening now in the eurozone and the reactions to this dismantling of democracy and sovereignty is also happening. And it isn't looking pretty.

[Gustaf]

In other words, I think the root of the problem is not that Germany cut back on wage growth relative to Greece but that they increased productivity relative to Greece (and especially relative to the countries' wage growth).

And why not? If Germany had had high wage growth to match its productivity growth, it would be contributing much less to the imbalances in the region. Not only that but most German workers would be better off.

Right, but isn't that a bit marginal? What I mean is that German workers were overpaid about a decade ago. They rectified that. You're claiming that they went too far, if I read you correctly.

However, that seems to imply that the Germans should have anticipated the weaker Euro economies letting their competitiveness go to hell and slowed down to match them.

Germany might be worried about competing with China and the US as well, for example. While I get the argument in technical terms, I'm not convinced of its merits in the long-term. Shouldn't the goal be for the other countries to catch up in productivity growth terms rather than Germany letting inflation run amok?

The eurozone economy is $11 trillion. If the entire eurozone had a trade surplus the same percentage of GDP as Germany, it would be a roughly $550 billion surplus. Who would absorb that?

Well, if no one wants to absorb it, there won't be a surplus that big, right?

Well then the economy would depressed, because everyone is very productive, but there is not enough aggregate demand.

But this again boils down to the same point. If you think supply is exceeding demand, isn't it more reasonable to increase demand than to decrease supply? Wouldn't the latter just shrink the economy? If you forced 10% of the German workforce to lose their jobs and sit at home, Germany would export a lot less and produce a lot less. But it wouldn't help the world economy much, would it?

[Gustaf]

In other words, I think the root of the problem is not that Germany cut back on wage growth relative to Greece but that they increased productivity relative to Greece (and especially relative to the countries' wage growth).

And why not? If Germany had had high wage growth to match its productivity growth, it would be contributing much less to the imbalances in the region. Not only that but most German workers would be better off.

Right, but isn't that a bit marginal? What I mean is that German workers were overpaid about a decade ago. They rectified that. You're claiming that they went too far, if I read you correctly.

However, that seems to imply that the Germans should have anticipated the weaker Euro economies letting their competitiveness go to hell and slowed down to match them.

Germany might be worried about competing with China and the US as well, for example. While I get the argument in technical terms, I'm not convinced of its merits in the long-term. Shouldn't the goal be for the other countries to catch up in productivity growth terms rather than Germany letting inflation run amok?

The eurozone economy is $11 trillion. If the entire eurozone had a trade surplus the same percentage of GDP as Germany, it would be a roughly $550 billion surplus. Who would absorb that?

Well, if no one wants to absorb it, there won't be a surplus that big, right?

Well then the economy would depressed, because everyone is very productive, but there is not enough aggregate demand.

But this again boils down to the same point. If you think supply is exceeding demand, isn't it more reasonable to increase demand than to decrease supply? Wouldn't the latter just shrink the economy? If you forced 10% of the German workforce to lose their jobs and sit at home, Germany would export a lot less and produce a lot less. But it wouldn't help the world economy much, would it?

Who said anything about forcing 10% of the German workforce to lose their jobs and sit at home? I think the goal is to increase demand, not decrease supply. However, if you cut wages in every European country with the goal of increasing competitiveness, so that every European country was like Germany, and there was no external demand to soak up the trade surplus that others now soak up for Germany, the result would be that, even at those reduced level of wages, there is not enough demand to support those jobs (assuming that the workers are not extended credit irresponsibly beyond their ability to repay). So a lot of those workers would be laid off again. I think your proposal is the one that results in unemployment, not mine.

Essentially, we seem to agree that there is a problem in that German workers are more productive than Greek ones. You seem to be arguing that this should be solved by German workers lowering their productivity (one way of doing this, on average, would be to just fire a lot of German workers). I think Greek productivity should be stimulated as a first solution.

My main point is that the problem is not that German workers are too productive but rather that Greek ones are not productive enough.

I think that if productivity was increased demand would go up (or be sustained at higher levels than would otherwise be possible). We will have to accept lower demand than was the case under the unsustainable regime of overspending.

[Gustaf]

Ok, I never heard anyone use productivity in the second sense, so that's not what I've been saying here. I've been meaning productivity as in producing things in a certain time. Reputable sources like Wikipedia agree with me on this: http://en.wikipedia.org/wiki/Productivity

Now, German economy was stagnant a decade ago. Most people, I think, agreed that this was largely because they had an over-paid workforce. That is, wages were too high relative to productivity. This was also true of other countries in Europe. Germany got its act together, they didn't.

For me this reasoning is something like there being a bunch of alcoholics not doing their job properly. One of them finally goes through rehab and can now do the job that everyone did on his own. So the other alcoholics are fired. Then they complain. "If you were still an alcoholic, we would all still have jobs. Your success is built on us not being sober."

Firstly, that just seems plain wrong, morally if nothing else. It's hardly fair to claim that someone shouldn't have the right to go through rehab for solidarity reasons. Secondly, it seems dubious. If everyone sobered up they would be able to do more productive work, demand would thus be higher, etc. And thirdly, someone else who's sober might come along and kick them all out on the pavement at any time.

http://www.ecb.int/pub/pdf/scpops/ecbocp90.pdf Look at the table on page 18. While it shows that Germany has indeed has the relatively lowest wage growth, it shows that Greece has had by far the highest. Furthermore, they explain it like this:

"As can be seen in Table 3, all euro area countries except Germany and, to a lesser extent, Austria, have recorded wage growth for many years persistently above the euro area average during the past 14 years (see Chapter 5). The major factor behind this divergence between Germany and the rest of the euro area is an adjustment process in Germany following unifi cation. Wage growth in Germany in the immediate aftermath of unifi cation exceeded that in the rest of the euro area countries by an accumulated 30% between 1991 and 1994, and with productivity differentials being much smaller, relative unit labour costs rose by a similar extent as did wages in Germany. With adjustment via a devaluation of the D-Mark not being an option, and with productivity differentials remaining rather limited, wage growth had to fall substantially below that in the rest of the euro area in order to restore competitiveness. This process started in the second half of the 1990s and gained momentum in the past few years."

You may also note that in table 19, when wage growth rate relative to the euro area, excluding Germany, is calculated Greece still soars higher than the average by a similar figure (3.6% higher without Germany, 4.1% with Germany).

During a similar time-period (2001-2006) Greek productivity rose by on average 2.9% compared to a eurozone average of 1.2%. As is evident from this, Greek wages rose faster than productivity thus eroding their competitiveness. Germany had slightly higher prod. growth than the euro average and lower wage growth.

Basically, while there is something to your story of Germany holding back wage increases, it is also clear that a) this was an adjustment that might well have been motivated by concerns about competitiveness and b) that Greece isn't simply being hurt by Germany's actions here, but by their own decision to let wages run away from productivity.

PS: I'm interested in what you think Germany should have done in the early 2000s? Continue to slide behind all other nations in terms of cost-efficiency due to overcompensation? Why should they kill their own economy to make things marginally better for mismanaged economies elsewhere in Europe? 

[Gustaf]

I realize that it sucks for Southern Europe that they suck. I still think it's wrong to frame this problem as "Germany is too efficient. If they only produced less the world would be better off"

I'm sorry, but I just don't think economics works or should work that way.

I think that if all countries pursued a policy where wages reflected productivity instead of being allowed to sky-rocket the world economy would be better off than if all countries pursued a policy where wages are allowed to soar out of control.

Basically, I think forcing Greece to be more like Germany is a better idea than to try and turn Germany into Greece.

It seems like we're in agreement on a lot of it, but my main objection is really the notion that the problem in Europe is that Germany exports too much. I'd rather say that it's that Greece can't compete with these exports and that's what should be fixed.

[Gustaf]

I realize that it sucks for Southern Europe that they suck. I still think it's wrong to frame this problem as "Germany is too efficient. If they only produced less the world would be better off"

I'm sorry, but I just don't think economics works or should work that way.

I never said that Germany should produce less. Instead German workers should get more, so they are rewarded by their productivity. With regard to things like Hartz IV, if they can't bring down unemployment without relying on external demand, then they haven't really solved the problem with unemployment, just pushed it onto someone else.

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And I don't think it's so simple that Europe only has one problem. Europe has multiple problems. To say that everyone should be like Germany does not acknowledge that. The idea that German wages currently reflect its productivity is incorrect. German wages are below German productivity.

Doesn't that amount to the same thing though? If you decrease marginal profit you would presumably push back production.

I agree that there is more than one problem but I don't see the others as relevant to this discussion.

You seem very confident that German wages are too low, but what is this based on? Are they low compared to the US, China or India? They're certainly lower (relative to productivity) than Greece's, but, again, that's more that wages are too high in Greece, or so I suspect.

[Gustaf]

Doesn't that amount to the same thing though? If you decrease marginal profit you would presumably push back production.

Once again, you only see the supply side. Marginal profit depends on the demand curve as well as the cost of labor.

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My judgement is based on Germany's significant trade surplus. That means that Germany is making more than it is consuming, literally. In Greece, the reverse is true. China's wages are also too low, but the aggregate imbalance is actually less than Germany.

Right, but I still think a sudden jump in wages would not compensate itself entirely.

I realize that Germany is making more than it is consuming. My point is this: if we simplify the world a bit, we have Germany exporting and the troubled economies importing. You seem to be assuming the problem is that German wages are too low. Couldn't it be that Greek wages are too high? Given that Germany, in one of the links I posted, is still described as having rather high labour costs and given how they were doing back in the early 00s, I don't think it's given that they're now "too low" by whatever measure. It is undoubtedly true though that a country like Greece is too high, because their productivity growth has been running below wage growth for some time.

That's why it seems reasonable for me to start at that end, rather than at the German end.

But you're very ardently on the demand-side here, I'm really not as much of a supply-sider as I might come off right now.