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Wednesday, November 23, 2011

Angela Merkel and the Agonistic Fancy: The Third War of German Hubris?

by John MacBeath Watkins

Is this the third War of German Hubris?

German Chancellor Angela Merkel has insisted on an irrational economic policy in which the European Central Bank is not allowed to act like a Central Bank (which is, after all, in the name) and all countries in Europe that are not Germany must suffer for being morally inferior to Germany. They must pay every penny back that they borrowed, whether because their government was improvident (Greece) or their banks failed (Ireland and Spain.) They may not have higher inflation to help reprice their economies. As recently as Tuesday, she insisted that the ECB could not act as a lender of last resort to prevent runs on Greece, Italy, Spain, Ireland, Portugal and possibly France.

Since the Euro was instituted, there has been a distinct pattern, in which Germany got the jobs and the periphery got the debts.

 The result can be seen in this graph, which by they way shows that this was not the situation before the Euro:

That graph is from this Paul Krugman post, in which he points out that:
'Now these imbalances need to be unwound. As anyone who has studied international macro can tell you, this requires two things. First, it requires a redistribution of spending, with the creditors spending more while the debtors spend less. Second, it requires a real depreciation on the part of the debtors, a real appreciation on the part of the creditors — that is, wages and prices in the GIPS must fall relative to those in Germany.

'But the official policy of the eurozone’s leaders is that this adjustment should be entirely one-sided. Spending must fall in the debtors, but there will be no offsetting expansionary policy in the creditors — so the thrust of policy is entirely contractionary for the eurozone as a whole. At the same time, the ECB is committed to very low inflation at the aggregate level, which means that real exchange rate adjustment must take place mainly through deflation in the GIPS, which is both very difficult and has the effect of raising their debt burden relative to GDP.'

There is a type of art once popular in Christianity called the Agonistic Fancy, in which the chosen look down with evident satisfaction on the suffering of the sinners in Hell, a bit like Jan Van Eyck's Last Judgment.

Germans seemed to think they were in this enviable position, and the Greeks, Irish, Spaniards, Italians, and Portugese (and possibly the French) were in the position of the sufferers in Hell. The story they told themselves was that Germans were not suffering because Germans were better, harder working, thriftier, just all around better.

Now investors have developed doubts about German bonds.

http://news.yahoo.com/germany-france-clash-ecb-crisis-role-115310251.html
'BERLIN (Reuters) - A "disastrous" German bond sale on Wednesday sparked fears that Europe's debt crisis was starting to threaten even Berlin, with the leaders of the euro zone's two biggest economies still at odds over a longer-term structural solution.
...

'The German debt agency could not find buyers for almost half a bond sale of 6 billion euros. That pushed the cost of borrowing over 10 years for the bloc's paymaster above those for the United States for the first time since October.

"It is a complete and utter disaster," said Marc Ostwald, strategist at Monument Securities in London.'

The Financial Times refers to bonds priced as risky assets as "the Apocalypse trade."

But if the Germans are to burn on the fires of Hell, unable to finance their debt at any reasonable level of interest, perhaps they will conclude that this is not a passion play, but an exercise in ordinary economics, in which the solution is not the suffering of sinners but the perfectly ordinary application of the traditional roles of central banks, one of which is to be the lender of last resort.

After all, Greece can run out of Euros, so can Italy, even France. And now, it turns out that even Germany can run out of Euros. As Matthew Yglesias has so cleverly put it, "Sometimes central banks need to dig into their pockets in order to keep bond interest rates low. But when rich countries’ central banks dig, what they find is their pockets are full of printing presses."

None of the nations of Europe have a printing press in their national central bank. They have given all their money-printing apparatus to the European Central Bank, and it's time to as the ECB to avail itself of that apparatus.

The Germans fought two world wars to test the proposition that they were better than other people, and in the process inflicted terrible suffering on the whole of Europe. These might be called the Wars of German Hubris.

And now, they are doing it again, economically instead of militarily. And for the third time, they will find that they are pretty much the same as the rest of humanity.

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