back to article So what the BLINKING BONKERS has gone wrong in the eurozone?

A while ago, one of The Register's anonymous cowards posted a question about inflation. Can anyone explain why printing truckloads of money was the correct thing to do for UK and USA while restricting the money supply and austerity was the necessary [thing] for every other advanced country in Europe? Was it simply that all …

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  1. Fruit and Nutcase Silver badge

    HOW IT WORKS *

    +2% Change in Greek corporate tax rate (to 28 percent), required by eurozone creditors for economic recovery

    -2% Change in UK corporate tax announced in budget (to 18 percent), required for British economic recovery

    ======================================================

    * from the current issue of "Private Eye" (no. 1397), page 5

    The quoted item is not available online. However, there is a word referenced in this item on the cover...

    http://www.private-eye.co.uk/pictures/covers/full/1397_big.jpg

    1. Steve Davies 3 Silver badge

      Re: HOW IT WORKS *

      That (IMHO) describes the difference between the Euro Zone and outside. Can both be right or both be wrong? Only time will tell.

      IMHO those inside the EZ are in a financial straightjacket because the member economies are so different.

      What works for say Germany is more than likely totally the wrong thing for say Greece.

      By not taking the next stage and implementing political union and thus a federal EZ these problems (IMHO) will continue.

      Personally, I think that the EZ was introduced far too quickly and new members added without due diligence.

      Does it deserve to fail?

      Part of me says yes and part of me says no.

      None of the people I used to work with in France would vote for it if they had had the chance. Two of them have moved to the UK since the introduction of the Euro because of their disaenchartment with it.

      The lack of a EZ wide referendum at the start of the EZ (and the farce in Eire where they ran the referendum again until they got the right result) shows the lack of accountability of the EZ Head Honchos to the general EZ citizens very well.

      Not a representative sample but just my 2p worth of opinion.

      1. Chris Miller

        Re: HOW IT WORKS *

        The member economies of the EZ are very different , but are they very much more different than (say) California and Michigan, where a common currency seems to work reasonably well?

        Part (a large part?) of the problem is that (as Tim points out) the German banks were in deep doo-doo. At the start of the EZ, they'd chosen to invest heavily in Greek € bonds paying several percent rather than German ones paying (almost) 0% - what could possibly go wrong?

        For the price of a few hundred billion in support, Merkel gave them time to disentangle themselves (at least, sufficiently to survive a Grexit). Now the banks are clear, the Greeks can go swivel.

        1. Tim Worstal

          Re: HOW IT WORKS *

          "The member economies of the EZ are very different , but are they very much more different than (say) California and Michigan,"

          Much more different.

          And the US has federal fiscal policy to temper the monetary stuff, the EU doesn't. We'd need to be feeding 15-20% of GDP through Brussels to get that sort of effect that the US has.

          1. Anonymous Coward
            Anonymous Coward

            Re: HOW IT WORKS *

            "Much more different.

            And the US has federal fiscal policy to temper the monetary stuff, the EU doesn't. We'd need to be feeding 15-20% of GDP through Brussels to get that sort of effect that the US has."

            I can't find it again, but I remember reading that a long time ago (back in the 1980's) some British economist was asked by the Europeans to "design a single currency". Part of this design was exactly that, though I think he'd recommended 25% as a minimum.

            So they cheerfully went ahead with the Euro but ignored that important point completely. None of the countries involved was willing to trust the EU and it's associated organisations with 25% of their money. Not surprisingly, it's gone wrong.

            Fallout from WWII

            These things have to be balanced against other factors, Back in the 1990s when all this was being planned, World War 2 was fresh in the memory of a lot of European politicians, and a prime motivation was to unify Europe as much as possible "no matter the cost" so as to make another European war unlikely. Seeking to make another war impossible is a laudable aim.

            I see the Eurozone as the last project of ageing politicians desperate to go to their graves thinking that they had made another war impossible. Like many political ambitions, they're full of folly and impatience.

            China

            What history has shown us is that economic instability and decline is often masked by war started by the leaders who got it wrong. At least in the Eurozone it is the fault of them all. Who would declare war on who?

            Scary thing - if you think trouble in the Eurozone is bad, you'd better hope that we don't see what true economic chaos in China looks like.

            1. Tim Worstal

              Re: HOW IT WORKS *

              "Part of this design was exactly that, though I think he'd recommended 25% as a minimum."

              This is the "fiscal union" you see bandied about. So, when one region becomes a cropper and another doesn't (for whatever reason mind) you want less to be paid in taxes from that region and more to be spent by government. You want to be able to vary this by perhaps 3-5% of GDP. It's just the same as running deficit or budget surplus in a nation, same old Keynesian stuff, it's just happening to a region not the entire area within the single currency.

              And things like taxes, social benefits, that are 15-25% of the government budget just about do that for you.

              some region craps out so less is taken out in income tax, profits tax, VAT, and also more goes in in unemployment benefit, pensions still get paid etc. And so we can get that 3-5% variation through these "automatic stabilisers".

              Great. But that does mean that the money has got to flow through Brussels. At that 15-25% of GDP. And that really does mean tha tthe Germans will be paying Greek pensions: which is rather whhere we came in, isn't it?

          2. PghMike

            Re: HOW IT WORKS *

            The US has *political* union, which the EU does not have. The Germans hate sending their money to others; that's why they're refusing any debt reduction to Greece.

            In the US, OTOH, the bluest states have citizens who, for example, are fighting politically to expand Obamacare, which will pump more money from the richer blue states to the poorer red states.

            So, much as we make jokes about Alabama and Mississippi, we're trying to give, not loan, them money. Call me when your typical German *wants* to do that for Greece, Spain and Italy.

            1. phil dude
              Pint

              Re: HOW IT WORKS *

              @PghMike: A nice observation. A further point would be that for US citizens living in Alabama, they are still free to go and live and work in California - and this might be obvious - there are no language and educational barriers.

              The Eurozone has considerable cultural inertia, and language is one part of this.

              Note, the beer icon.

              P.

              1. Anonymous Coward
                Anonymous Coward

                Re: HOW IT WORKS *

                "A further point would be that for US citizens living in Alabama, they are still free to go and live and work in California - and this might be obvious - there are no language and educational barriers."

                Educational barriers - well, looking at where the best paid jobs are in California, where the best universities are to feed them, living costs and the rest, I would say that for someone in Alabama there are financial and educational barriers to be overcome that would probably not be experienced by a kid growing up in Marin County.

                Language barriers are more of a perceived issue for monoglottal Brits.

                1. John Brown (no body) Silver badge
                  Coat

                  Re: HOW IT WORKS *

                  California-->Alabama

                  Language barriers are more of a perceived issue for monoglottal Brits.

                  A'bama "english" --> California Spanglish?

                2. Kubla Cant Silver badge

                  Re: HOW IT WORKS *

                  @Arnaut: Language barriers are more of a perceived issue for monoglottal Brits.

                  More of an issue for Brits, maybe, but still an issue. In the USA, an anglophone can consider work in any state without serious linguistic barriers. For a Greek to be similarly mobile in the EZ he'd need a working knowledge of over twenty languages, from at least four different language families. Some businesses may use English as a lingua franca (ha ha), but the vast number of jobs where this isn't possible means that there's a significant language barrier. Why do so many economic migrants end up in camps at Calais? It's more likely because they have enough English to hope to work here than because we have generous welfare provisions (despite what the Daily Mail says - you wouldn't cross a continent just to get slightly higher benefits).

                  Yes, there are cultural and educational barriers to job mobility in the USA, but these can be discounted because they're constant for all currency unions.

              2. GBE

                Re: HOW IT WORKS *

                'there are no language and educational barriers"

                I'm not so sure about that. I went to dinner with a bunch of people during a world-wide sales organization meeting at a corporate headquarters in Minnesota (which is where I'm from). I could understand the folks from South America, Europe and Asia a lot better than I could understand some of the folks from Louisiana.

            2. Matt Bryant Silver badge
              Happy

              Re: PghMike Re: HOW IT WORKS *

              "The US has *political* union...." Well, it does, but not by invitation. Just like with the UK, the US union came about by force of arms when the North effectively conquered the South in the American Civil War and stamped federal authority on the South. That was a two-way commitment - the South had to take on Northern law (no slaves) but got the unexpected bonus of economic stability through union (which, ironically, was what most Southerners thought they were losing in the Civil War). The UK example is even more stark in that the English invaded their neighbours. A more complex arrangement is how the countries of Europe formed from individual principalities and states, but did so usually through one party dominating the other. China did not really get itself sorted as a country until after WW2 when Mao's dictatorship came to power.

              The big problem with the EU is that no-one has the authority to smack bad governments (like every Greek one since the Generals got kicked out) and impose real financial rules and control. As already pointed out, the current hikes in Greek taxes are pointless as long as the Greeks are doing the tax collecting, and the same goes for the privatisation of Greek assets (which is why the Greeks fought to control that process, they have zero intention of completing the sales). The last time someone tried to establish overall authority over Europe it was some chap called Adolf, and he wasn't really interested in a Greater Europe only a Greater Germany uber alles.....

              1. x 7 Silver badge

                Re: PghMike HOW IT WORKS *

                " bad governments (like every Greek one since the Generals got kicked out) "

                Are you trying to claim "the generals" were GOOD government????

                1. Matt Bryant Silver badge

                  Re: x 7 Re: PghMike HOW IT WORKS *

                  "....Are you trying to claim "the generals" were GOOD government????" No, I am saying that every Greek government since the Generals have spent too much time (and money) playing popularist politics and buying votes. At least the Generals ran a tight budget and did not run up the debts (indeed, they usually had a surplus). Ironically, the "evil" Generals would have been socially-unacceptable to the EU, but their economics would have made them much better EU members.

        2. I ain't Spartacus Gold badge

          Re: HOW IT WORKS *

          For the price of a few hundred billion in support, Merkel gave them time to disentangle themselves (at least, sufficiently to survive a Grexit). Now the banks are clear, the Greeks can go swivel.

          Chris Miller,

          An interesting point here Krugman (who I personally find too partisan), but is making a good point here.

          Edited highlights by me:

          As one German economist put it to Jared Bernstein, “How do you think the people of Manhattan would like bailing out Texas?” Fair point, and a non-trivial challenge, for sure.

          Ahem. As it happens, the people of Manhattan did bail out Texas, big time. The savings and loan crisis, which was very costly to taxpayers, was mainly a Texas affair:

          The cleanup from that crisis cost taxpayers about $125 billion, back when that was real money. As best I can tell, around 60 percent of the losses were in Texas. So that’s around $75 billion in aid — not loans, outright transfer.

          Texas GDP was about $300 billion in 1987. So this was equivalent to giving — not lending, not even taking an equity stake — Spain 25 percent of its GDP to bail out its banks.

          But of course Manhattan was never asked to bail out Texas; we had a national system of deposit insurance, and the big Lone Star bailout was automatic.

          In as much as RBOS and HBOS are genuinely Scottish (probably not really as they'd move South if Scotland ever leaves the UK) - we did the same here. We bailed them out, because we're in a monetary union and it was the sensible thing to do. Obviously, being in a political union makes that much easier. But for a monetary union to work properly, banking needs to work properly.

    2. Anonymous Coward
      Anonymous Coward

      Re: HOW IT WORKS *

      "+2% Change in Greek corporate tax rate (to 28 percent), required by eurozone creditors for economic recovery

      -2% Change in UK corporate tax announced in budget (to 18 percent), required for British economic recovery"

      Percentage changes are irrelevant, it's the actual tax levels that count. PE are good at spotting the ironic!

      One of Greece's major problems is poor tax revenues, partly because their tax laws are rubbish and partly because they're not reliably collected. If a country isn't collecting tax properly then it doesn't really matter what rates are set; no-one's paying them anyway.

      What Greece really needs now is to get a government which makes the various government organisations work properly. If anyone is going to do anything helpful for the Greeks, helping them make their civil service run properly would be amongst the best options. Trouble is that means breaking a few cultural, social and political taboos.

      What Effective Tax Collection System Did For The UK

      One of the reasons why the UK survived the economic down turn is that lenders knew that the HMRC was (despite all it's other faults) a fairly ruthless tax collecting machine; the UK could always tax it's way out of its debts. So lending money to the UK was seen as lower risk. Lenders were practically scrambling over themselves to lend the UK government their money at the most absurdly cheap rates.

      And if you look at it from the lenders point of view, they had 100s of billions at risk. With that sort of money you cannot withdraw it all and hold it as cash, you cannot trust a bank to hold it because they themselves might go bust, shares are a risky proposition, you cannot buy that much gold or commodities without having a painful impact on the price. So just where do you place billions and be confident that it will still be there the following morning? Government bonds from a country you are sure won't default, if you can persuade them to take your cash. That meant putting the rates down.

      Looked at that way, you could conclude that HMRC has done us all a big favour here in the UK. For every billion that doesn't have to be paid in interest, that's ~£15 not taken as tax out of the pockets of every man, woman and child in the country. We're currently paying £43billion per annum (or £670 taken as tax from every man, woman and child) in interest.

      When you start considering that maybe 1/3 of the population are wage earners, that's nearly £2000 per year you're not getting in your family pocket. That's a serious amount of money for your average family.

      And no, I don't work for them or have anything to do with HMRC other than moaning about my PAYE.

      Useful Industry

      Greece doesn't have much in the way of industry, but the one we've all heard of is shipping. So why on earth does Greece have a large shipping industry? It's because there's no real taxation imposed on it.

      Whilst it looks good on the international stage to have a world beating large industry of some sort, it is not socially useful at all if it does not pay tax and does not expend much cash in your home country or employ lots of your own population.

    3. WalterAlter
      Pirate

      Re: HOW IT WORKS *

      Commercial banking needs to be separated from the casino financial instruments of investment banks via a Glass-Steagall regulation, period. Derivatives need to be outlawed and banks that are "too big to fail" need to have their boardrooms lined up against an adobe wall and shot.

      1. DougS Silver badge

        @WalterAlter

        and banks that are "too big to fail" need to have their boardrooms lined up against an adobe wall and shot.

        Wouldn't that be likely to cause the very failure you're worried about? :)

      2. Tim Worstal

        Re: HOW IT WORKS *

        "Derivatives need to be outlawed"

        Why do you want to ban the farmer selling his crop to the baker before he's harvested it?

        1. Rolo Tamasi

          Re: HOW IT WORKS *

          Casino farmers.

          1. I ain't Spartacus Gold badge

            Re: HOW IT WORKS *

            Rolo Tamasi,

            No. Exactly the opposite.

            The casino farmers are the ones who wait until they've harvested their crops, before selling them. That can net them the highest profit, if yields are low, but can leave them with less if it's a bumper harvest.

            The more cautious types sell their crops early - and let the speculators take the risk. They can sell for a guaranteed price, that covers their costs and leaves some profit margin - at the cost of missing otu on possible extra profit later.

            If you hear interviews with farmers, this is something that they agonise about, then have sleepless nights about once they make their decision.

        2. Rolo Tamasi

          Re: HOW IT WORKS *

          Casino farmers

      3. Mike Pellatt

        Re: HOW IT WORKS *

        "Derivatives need to be outlawed" is about as useful a policy as "shorting stocks needs to be outlawed".

        There are plenty of circumstances where both are useful, and a blanket ban would be disposing of the baby with the bathwater, almost certainly with deeply unpleasant unintended consequences - very possibly worse than the unpleasant consequences of the worst excesses of both instruments.

        As in most of life, we're not in "best option" territory here, but "least bad" territory.

    4. Anonymous Coward
      Anonymous Coward

      Re: HOW IT WORKS *

      Or another one would be

      Greek farmers to be taxed more

      French farmers to be given an extra 600m euros in subsidies/loan support etc.

      Though I'd have said trying to tax farmers more is most probably a zero sum game anywhere in the world let alone Greece

  2. BobRocket

    Money supply

    The supply of money shrinks when debt is written off or repaid and it is expanded when new debt is taken on.

    Deflation is where debt is destroyed at a faster rate than it is created (the inverse is inflation).

    Reducing interest rates to zero is an attempt to encourage new debt creation.

    What happens when this doesn't work, negative rates are already available, how low do you have to go before you realise that there is something more going on ?

    At this stage even helicoptering money to the masses will be deflationary, the person in the street will simply pay down debt, accellerating the shrinking of the money supply (money multiplier in reverse).

    There is something wrong with the money itself.

    Money is a fiction and a faith and it only works until it is questioned, once that happens it is inevitable that it will collapse.

    Money has many uses but the most important one is demand creation (show me the money)

    1. P. Lee Silver badge

      Re: Money supply

      I'm not sure I agree with your definition of deflation. It is inflation which reduces internal debt, as long as the inflation is greater than interest rates because you have new, numerically more, but value-wise less units of currency paying off old, numerically smaller but value-wise larger units of debt. External currency debt is of course more difficult to repay as your currency devalues.

      Apart from that, your point is correct - leaving the gold standard made money a fiction and it inevitably collapses when there is a lack of faith and it is widespread credit which creates the illusion of wealth and the inevitable crash. Is my house really gone up in value five hundred percent in a few years? Of course not - its closer to collapsing than it was. However, the increased credit availability drives a bidding war for limited resources, which is financed by committing more and more of my income (life) to paying the bank to lend me the money. With the way interest works, borrowing more has a proportionally greater cost than the additional value borrowed. The banks make more money, but that is just a concentration of wealth. They have more, everyone else has less. It kind of makes sense as long as everyone keeps doing it, but it is essentially a pyramid scheme and it collapses when the prices get so high that there's no one wealthy enough to at the bottom to get on the property ladder. Investors with existing wealth can keep things going for a short time, until the realise that renters can't afford to cover the mortgage.

      Some politicians then think its a good idea to then deregulate the market and "relax credit restrictions" to "help first time buyers." Let's all welcome them to bonded slavery, shall we?

      The basic problem is that money is divorced from the value of the thing it is supposed to represent. That provides an immediate incentive to fiddle the books and banks and government have been only too happy to oblige. Worstall is incorrect and slightly disingenuous. "The economy" and "economic (monetary/fiscal) policy" are not the same thing. An economy is not there so you can "get more of what you want." An economy is the generation and exchange of value. If you give people more "money" without more work being accomplished, you've either stolen or lied. As long as the lies are very small, people can adjust - inflation increases the numerical amount in their bank-accounts while simultaneously reducing the real value of that money. When the lies get very large (such as the sub-prime market or hyper-inflation) the results can be devastating. Hitler's policy of just nicking value from defeated countries wasn't that moral either, but the effect is pretty much the same. People are poorer, though stuff being taken away or inflation/devaluation. At least taking the spoils of war limits the damage to what exists at the time. WW2 and the economic recovery from it lasted, hmmm.... half the time of a typical mortgage these days?

      We're still hiding from the truth. We see tech companies putting their prices up. No doubt, that will result in another "record year" despite all the layoffs meaning more people are poorer from lack of income and revenue is just being diverted to tech from elsewhere, because its too difficult to cut in the short term.

      Could QE fix the Eurozone problem? It could probably paper over the cracks for a bit but it doesn't fix the underlying problem of money divorced from value which leads to corruption of the system. It doesn't help that Europe isn't a country. Many of the people there really hate at least one other community, and I mean hate with shells and mortars. Political union is the pipe-dream of a few, kept alive only by the fact that no-one dares approach the reality of it for fear of the whole thing falling apart. Without political union and common purse-strings, a common currency will be increasingly hard to maintain, resulting in further creative accounting. Like QE and sub-prime, the more you allow it, the harder the bump will be at the end.

      Does inflation create Nazis? Let's widen the question: does economic hardship create people with nothing to lose? Does it hamstring governments so that they are seen to be weak and ineffective - creating a desire for someone to come and take firm action to rescue the country? We've seen how a couple of plane-crashes changed US policy. What happens if people are personally affected by something?

      1. Mike Pellatt

        Re: Money supply

        The basic problem is that money is divorced from the value of the thing it is supposed to represent.

        Of course it is. Money replaced barter, and is therefore a proxy for the perceived value of everything. The determination of the multi-dimensional value of that proxy for everything that could be bartered is, I believe, called "the market' and notwithstanding certain views is far from ideal - because, I'd suggest, of the aforementioned multi-dimensionality.

    2. DougS Silver badge

      Re: Money supply

      Agreed, deflation isn't caused by people paying off debt. If that is all that was happening it would be a good thing for the economy in general, as it would free up credit for future purchases (unless you argue it happens because the population all decides having debt is a bad thing, and will never change that viewpoint)

      The problem with deflation is that it makes existing debt HARDER to pay off, just as inflation makes existing debt easier to pay off.

      If you have a business that has $1 million in debt payments each year and revenue of $2 million and other expenses of $900K, you have $100K a year left over in profit. If deflation causes your revenue to drop by 10% (you have to drop prices because everyone else's prices are falling) and it also drops your other expenses 10% (we'll assume you are able to drop your wages by 10% without your employees complaining) your $1 million debt payment remains the same and suddenly you are losing $20K a year. It is yet another slap in the face that the $20K a year you lose is worth 10% more than it used to be, being equivalent to a loss of $22K a year pre-deflation.

      If the opposite happened and inflation went up 10% you'd be making $210K a year - which even when every dollar is worth 10% less than it was before is still a terrific deal any of us would be quite happy with.

  3. John Sager

    Be careful what you wish for

    The Europeans haven't really thought through all the implications of what they are trying to do, and perhaps they are now coming to a realisation. All this Eurozone austerity is because Germany doesn't want to be on the hook indefinitely for Southern European debt - make the buggers realise what you have to do to live & work in Europe. It won't work, of course. I'm not even sure that a Friedmanite Bundesbank would have been able to sort things - I believe the German Constitution has drawn some red lines.

    The Private Eye thing is just the Eye being itself. Why shouldn't diferent things work in different economic conditions? I'm sure George Osborne thanks whatever deity he holds dear every morning that the UK isn't in the Eurozone. We have a similar situation in microcosm. The richer South funds the poorer North & Scotland on a continuing basis but we just get on & do it, unlike the Germans. We even try to even it up a bit ("Northern Powerhouse", anyone?), with variable success.

    1. Chris Miller

      Re: Be careful what you wish for

      The UK being outside the EZ is probably the single economic decision that Gordon Brown called correctly. The fact that he only did it to foil Tony Blair, who was desperate for us to join, shouldn't blind us to his success.

    2. BobRocket

      Re: Be careful what you wish for

      The Germans (well the politico/financial bods) have no wish to fix the Southern Europeans, if they did then the Euro would strengthen and the German exporting economy would collapse.

      Similarly, if the Northern Powerhouse took off the £ would rise and exports would collapse whilst imports would rocket.

    3. Anonymous Coward
      Anonymous Coward

      Re: Be careful what you wish for

      "The richer South funds the poorer North & Scotland on a continuing basis but we just get on & do it, unlike the Germans."

      Actually, that's not at all unlike the Germans. Since the country has been re-united, a lot of money has been poured into the eastern parts of the country. Most of the infrastructure was completely rotten, large parts had to be rebuilt rather than trying to fix it.

      Even prior to re-uniting the country there was an uneven spread of successful industries; Bayern and Baden-Wuerttemberg (in the south) being much more profitable than any other region in the country.

      (You should know; you love German cars.) :)

      After the country was re-united there was a large financial burden put on everybody to finance the rotten infrastructure. ("Sozialabgabe", which would most accurately translate to: "fix the rot in Eastern Germany tax") It didn't go down well, and a lot of voices could be heard saying "well, I didn't actually want the country to be re-united, let alone pay for it with my hard-earned dosh".

      This is one of the reasons why it's extremely difficult politically in Germany to support other countries in Europe. Average Joe needs to make a living for himself and isn't keen on accomplishing that for some other distant people at the same time.

      (This isn't my opinion at all; It's what you hear across the board, be it in your local pub, or among those who are better off.)

    4. Bloakey1

      Re: Be careful what you wish for

      Hmmmm.

      The Germans know exactly what they are doing and in particular regard to Greece.

      They went through all of this when East Germany collapsed and was taken on board by West Germany. The even had an entity to absorb all of the public businesses and assets so that they could be sold off in an efficient manner (Treuhand). Thie approach did not work for them either and that entity was vilified in the public mind and lost money hand over fist.

      Who was the man behind this calamitous change of events and denudation of the East's assets? Why a chap called Wolfgang Schäuble.

      Funny that, I wonder if it will work second time around.

      1. The little voice inside my head

        Re: Be careful what you wish for

        East and West was different, there was a sense of one country finally reunited, Greeks, on the other hand are seen as just want to keep receiving money, for things that are considered "burning money", pensions, government workers and other wasteful expenses. Greek government was able to convince their people (we will keep you happy with others money).

        Reminds me of what Peru went through during the 90's, when Alan Garcia's was president. He told the IMF Peru was not going to pay its debts. What did the IMF do? Shun the country while Peru got an anual inflation of more than 7000 %. Then Fujimori came along, he fixed the economy, with very unpopular measures, sincering prices with real market values. Re-organized the government and privatized some areas like Electrical Power company, all while defeating internal terrorism. Too bad he's now in jail, because of some alleged Human Rights violations and alleged corruption, which did happen under his government. Peru now enjoys a relatively healthy economy because of Fujimori's works. Greece could use that as an example of how to become a productive country instead of just saying it's not fair, we are not paying our debts, and keep giving us your money anyway.

        Some countries need to be ruled with a harsher hand than others, people mentality varies so much...

  4. James Anderson

    Even simpler

    Bankers and other financial types invested money they would not otherwise have invested in a dodgy creditor (Greece) in the mistaken belief that the EU/ECB was obliged to bail them out.

    When Greece had trouble re-paying the debt the creditors should have taken a haircut (re-negotiate the loan so that most but not all the debt could be repaid).

    But wait a minute most of the financial institutions that made the wrong call were based in France and Germany -- so suddenly the EU/ECB was obliged to mount a rescue; Not of Greece, but the idiots who had lent the money to a country that was clearly incapable of paying it back.

    Having successfully saved it biggest banks and pension funds the German government balked at actually saving Greece (or even funding the EU bailout which saved their precarious banking system).

    So the richest country in the EU, got bailed out at the expense of the poorest country. Then complained about it.

    If we are all going to get to the end of the 21st century as anything but subsistence farmers then we really need to find an alternative this antiquated Victorian financial system which has reliably collapsed every 10 or 20 years for the past two centuries.

  5. Pascal Monett Silver badge

    Germany really doesn't believe the last 60 years

    It's true, but it is slowly changing.

    The prime example I have is that I have been living in the Three Border zone, the area where Luxembourg, France and Germany come together (Schengen is the spotlight, yes the Schengen Treaty was signed there).

    In my area, it is quite common to go shopping in all three countries in a single day. Today.

    But ten years ago, while the French and Luxembourg shops all accepted Visa and Mastercard, German shops held steadfastly on to cash only. Result ? Not so many border shoppers, because cash is a nuisance when you are not planning on just buying one thing and you know its price range.

    Consequence ? German shopkeepers realized, somehow, that staying on cash only was preventing impulse buying, because you can have no impulse when you only brought a fixed amount of cash.

    It's been around five to eight years that German shops in my area have almost all adopted credit card payments. Now, if you go shopping in Perl, you see Luxemburgers and French. Go to French shops and you see Luxemburgers and Germans, etc. It's all a game of merry-go-round, but it seems everyone is happy about it.

    But it still took the German shops until past Y2K to finally cave in to the credit card.

    There's another story on this subject. It is said that, when crafting the Eurozone bills, Germany wanted a national side and a Euro side. That idea was refused and, it is said, it's a good thing because otherwise, German shops would only have accepted German-side Euro bills.

    I don't how much of that is true, though, but it's always good for a chuckle.

    1. Steve Davies 3 Silver badge

      Re: Germany really doesn't believe the last 60 years

      But do the shops in Germany still close at lunchtime on Saturday?

      My supplies of Appfelkorn are dwindling so a vist might not be that far away.

    2. Charlie Clark Silver badge

      Re: Germany really doesn't believe the last 60 years

      But ten years ago, while the French and Luxembourg shops all accepted Visa and Mastercard, German shops held steadfastly on to cash only.

      It might interest you to know that the number of credit cards in Germany peaked about 10 years ago and has been decreasing since. Why? Because the transaction charges of around 4% are not negligible. Where credit card are accepted, it's not unusual to ask for or be offered a discount if you pay cash or use your EC card. Try it the next time you go shopping in Germany.

      Credit cards are common in the travel industry but even then you may see surcharges for credit cards (increasingly common when booking flights).

    3. Chairo

      Re: Germany really doesn't believe the last 60 years

      @ Pascal Monett

      before the mid 2000s European banking systems were quite different and largely incompatible from country to country.. Each nation had their own entrenched payment system, that worked fine internally but made things difficult for foreigners. The French had the "card bleue", which was mainly a debit card with VISA and Mastercard contract, so it could be used abroad as a credit card. The Germans had their "EC card" system, Foreigners usually had a hard time paying with credit cards anywhere in Europe, however. I remember being in trouble around 2008 in the French Pyrenees, because I could not find any filling station that would accept a foreign credit card. I had enough cash, but it was week-end and the cash counter was closed. At the end I gave some guy cash and he let me use his CB to fill up the tank. Not sure, if British or German cards would have worked. Japanese cards certainly didn't.

      Anyway - European credit cards are mostly debit cards with the payment procedure handled by some local VISA or Mastercard contractor. Unlike real credit cards, the debiting of your bank account is done either instantaneous or at most at the end of the month. Generally you need to have the cash at hand quite soon after your purchase.

      1. I ain't Spartacus Gold badge

        Re: Germany really doesn't believe the last 60 years

        Chairo,

        15 years ago, when the Euro came in and I was living in Belgium, it was actaully cheaper for me to move money from my bank account in England to my Belgian one (including exchange rate costs) - than it was to transfer money to a friend in Germany. Even though Germany was supposedly sharing the same currency as me.

        For some strange reason this wasn't considered important when they created the Euro, and was only fixed by the Commission jumping up and down on the banks in about 2002.

        As you say, I couldn't have a UK style credit card either. I had a debit card, which took money straight out of my account, or a "credit card" which didn't take the money out of my account until the last day of the month - and then had to be paid in full, or I lost it.

      2. Mike Pellatt

        Re: Germany really doesn't believe the last 60 years

        The problem with your credit card in France wasn't its acceptability as such.

        The French were way ahead of the rest of the world on card chip "security", and the 24-hour petrol stations only accepted chip cards, not magstripe. The chip system wasn't compatible with the one the UK one when it came in.

        Been there, got the badge.

  6. Ken Hagan Gold badge

    "It wouldn't have been all that bad an idea if the shareholders had lost rather more of their money than they did, just to warn for the future, but the idea that it would be OK for us to wake up and find smoking rubble where we'd once had a payment and banking system was firmly kyboshed."

    Around the time of the Lehmans collapse, the standard (OK, Robert Peston) explanation for the crisis was that no-one knew where the bad debts lay and so no-one was lending to anyone else. We knew what the bad debts were (the sub-prime thingies) but each bank was keeping schtum about their holdings in that respect. It struck me at the time that this secrecy was magnifying the problem and that if the truth had been known then only a few banks (holding the debts) would have collapsed and the rest (who were quite solvent) would have taken over the business.

    There were certainly banks who resisted the loans that were eventually forced upon them by central government. (Forced, that is, to avoid exposing the *other* banks as ones that actually needed the money.) There was also a large group of mutuals who everyone accepted were almost certainly solvent because they hadn't been allowed to play with the poisonous debts in the first place. Both of these groups were implicitly but massively penalised by the bail-out.

    So do we now know where the debts laid? If so, has anyone worked out the consequences of central government forcing banks to declare their positions rather than forcing the taxpayer to burn squillions in a bail-out that was designed to preserve banking secrecy? If not, then I'm afraid that "waking up to find smoking rubble" is actually unproven and the biggest financial crisis in many years might turn out to have been self-inflicted.

    1. DougS Silver badge

      The taxpayers didn't "burn squillions" - TARP paid for itself and made a profit

      What the cost would have been of letting multiple large banks go bust, all the layoffs that would have caused, letting the entire US auto industry go under and all those layoffs, etc. we can't know the number but it would easily have been greater than the whole $700 billion TARP even if that was all handouts and nothing was ever paid back.

      https://projects.propublica.org/bailout/

      1. I. Aproveofitspendingonspecificprojects

        Re: The taxpayers didn't "burn Debtroit"

        Nobody engages in high finance because of altruism. In recession national economies are controlled by their own wild politics. And the most innocuous statement from a foolish politician can wipe millions from a firm's share prices.

        We saw it from Margaret Thatcher's fumblings and we saw it from the chimpanzee's bumblings and when the people running the Autotrades at the demise of Detroit all turned up for government handouts in their company jets.

        The only way out of financial close-down is if someone inspired comes up with a good idea and people are willing to back them. What might have saved Stoke on Trent, two decades back is someone supplying free electricity.

        http://thoriumremix.com/th/

        It might happen to Mitsubishi if the directors of Tepco can be convinced (or forced) to do the "Honourable Thing" and leave the way open for thorium based generation by people who actually know what they are doing. (That is: not anyone from Microsoft.)

    2. Ken Hagan Gold badge

      Re: https://projects.propublica.org/bailout/

      Very interesting. If the same is true for the UK, then my next question would be "Why are we broke?". After all, if we were OK (in 2007) and have since made a profit on bailing out the banks, we should still be OK, right?

      1. I ain't Spartacus Gold badge

        Re: https://projects.propublica.org/bailout/

        Ken Hagan,

        We're broke because we've had a recession since 2007. There are several factors to include in this:

        Recessions means wages drop and unemployment rises. People retire early to avoid being unemployed too. Plus companies make less profit and pay less tax. In a global downturn you can't eaily grow exports to counter some of the worst effects. All this means we're paying out more benefits and taking in fewer taxes.

        This is what's loosely called the automatic stabilisers. Government keeps on spending, and even increases spending, even though tax collections drop. But this keeps demand in the economy, and stops a recession turning into a depression. The government borrows, and waits until the benefits bills drops and the tax take rises again.

        It's also the cyclical deficit. i.e. caused by the economic cycle.

        Now we have the harder problems. The structural deficit. That which will still be there, even when the economic cycle has turned, and we're back to boom time again. This is a lot harder to measure, and allows for most shennanigans of producing figures to suit certain political arguments.

        1. We've just had a nasty financial crisis. The City was paying something like 10-15% of our total tax bill at the height of the madness in 2007. That's not going to be happening again for a while, nor is it really desireable, given the risk of that sector to our economy. So that's many billions wiped off the tax take.

        2. We were also having a property and construction boom. Construction was one of the biggest areas of collapse, and still hasn't recovered. That's another wodge of tax not coming in for many years.

        3. Between 2002-2007 Labour ran deficits of between £30-£50 billion each year. These weren't catastrophic by any means, and probably would have been easy enough to solve had we only had a "normal" recession in 2008. But it was an extra deep one, with a side-order of banking crisis. So suddenly a government that might be spending say £60 bn on the automatic stabilisers has this extra wodge of say £40 billlion on top of that, plus the tax loss from construction and banking. Suddenly a manageable deficit is starting to look quite a lot more scary. When you're piling £150bn a year on a total national debt of £600bn - it starts to add up, and make people nervous.

        4. North Sea oil output has been dropping by 1% of GDP per year for ten years now. Without that constant drop in GDP we'd have recovered much faster. There's never even have been talk of a double-dip recession.

        5. Finally debt interest payments went from £20bn-odd to £50bn-odd now. That's another £30bn a year onto the government deficit.

        Estimates in 2008 put the structural deficit at between £60-£90bn. So even when the recession was over, and all the jobs, benefits payments and taxes were back to normal the government would still be running a pretty fat annual deficit. The Conservatives decided that it wasn't worth the risk of doing nothing about this until the recession was over - as that might lose us market confidence, and so make interest payments higher, or even make it impossible for the government to borrow over £100bn a year - and force really sudden cuts. The counter-factual is impossible of course, we'll never know if they were right or wrong. But we've probably now got a better idea of what the structural deficit really is.

      2. DougS Silver badge

        Re: https://projects.propublica.org/bailout/

        The problem with the cyclical deficits - raising government spending to stimulate the economy and reduce the negative effect of a recession - is that you need to do the opposite during good times. No one ever does that, because during growth there's plenty of money for the government to spend, and "investing in the future" by building new roads and so forth sounds good as parts of the infrastructure become stressed during the boom (i.e. widening oads to land that is slated to be developed in a year or two sounds good during a housing boom, but is wasted when there's a bust and that development never happens)

        It might be better to manage it by adjusting tax rates downward during a recession, and upward during booms. This would obviously have to be done via preset triggers, because you sure couldn't and shouldn't rely on politicians to manage it. I'm not aware of that ever having been tried though, so it may have some issues. Maybe another idea for Tim to throw into his (probably quite large) pile of ideas for future articles.

        1. I ain't Spartacus Gold badge

          Re: https://projects.propublica.org/bailout/

          DougS,

          That's what pissed me off so much about Ed Balls. I don't happen to be a Keynsian, but his theories make perfect sense - and it's undeniable that government spending extra in recessions is a good thing for boosting the economy.

          But it's bloody easy to be a Keynsian in a recession - particularly when you aren't in government watching every gilt auction and praying that demand doesn't suddenly drop and create a self-fulfilling debt crisis. Much harder to be a Keynsian in a boom, when that means less government spending and/or more tax - and less ability to give sweeties to the electorate to win easy popularity.

          And the fact that Ed Balls was at the treasury during that easy boom, and getting it completely fucking wrong, for those years before, didn't make his smug, self-satisfied face any less punchable.

          Actually, to be fair, he did get one thing right. He didn't want us to join the Euro. So credit where it's due.

          But I've been thinking about this Keynsian lark. It's very hard to do. It's hard to predict what the right dose of intervention in the economy is, so you might take out so much tax, that you cause the very recession you're preparing for. It's the problem of the planned economy. Decent economic data tends to take 3 months to arrive - so anything you do is on information that's already way behind. But worse, the levers of power also have a time-lag, so the full effects of interest rate changes are said to take about 2 years to fully go through the economy. So that's a horrendous time-lag from actual events to the full effect of the policy response.

          Being in the construction industry, which took a massive hit in this recession, I can say that our bacon was saved by the Olympics. Just as the recession hit, all the Olympic projects were in full swing, and it stopped a very nasty downturn from becoming an absolute rout - with bankruptcies all over the place. There were an awful lot of companies who survived on no margins for 5 years, and without the Olympics, one or two of the big boys would have probably gone pop, taking hundreds of their sub-contractors with them. It was good for the haulage industry too. Every delivery we made to the Olympic sites had a £60 surcharge for the security paperwork...

          But it made me think. Could we do the planning for some road / rail schemes, maybe a few new school / hospital buildings. All that nice infrastructure that needs renewing / replacing or new build. But save it until there's a recession. Then commission a bunch of jobs that have been kept on hold for a few years. With recessions every 10 years or so, it wouldn't be that long to wait, and urgent stuff would get done as needed. Then we could buy them at a time when building costs are at their lowest, do it with debt in good conscience and be helping the economy.

          Or would the government just end up buggering it all up?

          1. x 7 Silver badge

            Re: https://projects.propublica.org/bailout/

            "Could we do the planning for some road / rail schemes, maybe a few new school / hospital buildings. All that nice infrastructure that needs renewing / replacing or new build. But save it until there's a recession. Then commission a bunch of jobs that have been kept on hold for a few years. "

            FFS, are you blind? Its already happening. Have you not noticed the upgrades to "managed motorway" status on the M1, M6, M60, M62 and elsewhere that have been going on for the last few years? The various other road projects which got the go-ahead mid-depression? The various rail upgrades such as the Great Western electrification (OK I accept Network Rail have buggered that up)

            But the fact is the Tories have done just what you ask, but quietly, through the back door

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