Thursday, July 05, 2012

How the German One Percent plans to use the European crisis to squeeze the public

Kate Mackenzie at FT Alphaville quotes and comments on a remarkable article by Richard Koo of Nomura Securities in Richard Koo’s semi-successful attempt to persuade Germans about balance sheet recession 07/04/2012. (Presumably it is from a subscription report of Nomura's; she doesn't cite the source precisely.) Koo didn't seem to have named many names, but cited his conversations with "a number of influential politicians, academics, and senior government officials".

Basically, many of them said they intended to use the euro crisis to squeeze "extensive structural reforms" out of other EU nations, "structural reforms" being a euphemism for lowering wages, weakening unions, privatization of state property and deregulation.

Mackenzie quotes the following as "the crucial stuff" from Koo:

But based on their experience of the difficulty of implementing these reforms, they believe firmly that this represents a once-in-a-lifetime opportunity to pursue similar initiatives in southern Europe.

When Germany implemented its reforms around 2005, there was no time to waste because German businesses were moving one factory after another to the low-wage countries of eastern Europe. Even so, they said there was tremendous political opposition.

What they learned from this experience was that such reforms were possible only under crisis-like conditions. That experience contributed to their view that the current economic crisis represented an excellent opportunity for fundamental reforms in southern Europe.

Perfect opportunity?

In other words, Germany's own trying experiences around 2005 had convinced them that the unfolding crisis in southern Europe represented a once-in-a-lifetime opportunity. Chancellor Angela Merkel’s tendency to talk about the need for structural reformswhenever she has a chance is based on her own experience of the difficulty of implementing those reforms in Germany. [emphasis in bold from Mackenzie]
When I say the Koo report as described by Mackenzie is remarkable, I don't mean that it tells us anything about German policy. It's rather the strong impression Koo conveys that the German elite doesn't want to solve the crisis quickly. It's observable in the daily news. But seeing the analysis coming from an economist of Koo's visibility and prestige is something we don't see every day.

Speaking of the daily news, Top-Ökonomen rufen Bürger zu Euro-Protest auf Spiegel Online 05.07.2012. Hans-Werner Sinn, head of the conservative and very Establishment economics institute Ifo (Ifo Institut für Wirtschaftsforschung), has long opposed even the inadequate measures the EU has taken to deal with the eurozone crisis. And he's now getting even more vocal about it. "We're sitting in a trap," he says.

One trap about which he's particularly concerned in known by the stereotypically technocratic label of Target 2. Target 2 is an accounting device the central banks of the eurozone countries use to balance the currency accounts. The "Target" part is an acronym for "Trans-European Automated Real-Time Gross Settlement Express Transfer". Simply put (and no doubt oversimply), when private capital moves from one eurozone to another, the central bank of the receiving country records it on their own books as though it were a loan given, the contributing country as though it were a loan received, a debt. (A tad more technically, they are known as claims and liabilities, claims being the "lender's" side of the transaction, liabilities being the "debtor's" side. In bank accounting, a loan made is recorded as an asset, a debt owed as a liability.)

Greek cartoonist  Γιάννης Ιωάννος (Yannis Ioannou)  on Sundays portrays German Chancellor Angela Merkel as the commandant of a gulag as in this 07/01/2012 version

Sinn and Timo Wollmershäuser discuss the Target 2 arrangement in Target Loans, Current Account Balances and Capital Flows: The ECB's Rescue Facility 05/30/2012. This was no particular matter of concern until the economic crisis that began in 2007 hit. As they observe in that paper, though:

Target imbalances evidently started to grow by mid-2007, when the interbank market in Europe first seized up. Before that they were close to zero. German claims, for instance, which by April 2012 had climbed to 644 billion euros, amounted to barely 5 billion euros at the end of 2006.
The official position of the national central banks and the European Central Bank (ECB) is that the Target 2 claims and liabilities are actually just a wonky, technical accounting convention. But, as Sinn and Wollmershäuser argue in that paper, using the example of such an exchange involved the German and Greek central banks, "The provision of Target loans does not involve the lending of money, but it is a credit or loan inasmuch as that the Bundesbank carries out the payment, and accepts to bear a liability, on behalf of the Greek NCB." (my emphasis)

I won't go further into the Target 2 issue here, other than to say that it is one big potential problem, a financial time bomb that would go off when Spain or Italy leaves the eurozone. How damaging it would be would, of course, depend on the good judgment and willingness to act realistically that the eurozone leaders show in dealing with it. Given their very sad record over the last three years, that doesn't offer much encouragement. But as I've been saying lately, once the business press starts regularly mentioning "Target 2" as a big risk, it's going to be a sign we're all in deep doody.

The point is that there seems to be no major group in German politics right now that's making an effective case for the kind of aggressive German action that might, might still have a chance to save the eurozone and the EU. Members of Chancellor Angela Merkel's coalition are griping about her being too generous to the EU vassal states. So is the SPD, dingy as it is for them to be doing that. But they're totally on board with Angie's austerity policies for the other EU countries.

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