2012 9
Germany and the Eurocrisis
Published by MartinVarsavsky.net in Economy with No Comments
This is the year in which Europe will either fall apart or emerged stronger. I give it 75% that it emerges as a stronger union but the risk of collapse is still there. Germany has the key to solve the problem because of the size of its economy, its saving rate and its export volume. Germany has to decide on whether it continues to transfer some of its wealth in order to create markets for its exports or it let’s Europe fall apart and ends up with an overvalued currency and deteriorated markets. Already today it started paying negative interest rates which is a prelude in my view to a huge rise in the DM should it be born again. Tough choice. I think Germany can actually both save Europe and make money by buying underpriced Italian and Spanish bonds and selling them after stabilization. It can do what the FED did with many financial institutions, make a profit by providing much needed liquidity at a critical time.
Follow Martin Varsavsky on Twitter: twitter.com/martinvars
No Comments
Karl-Friedrich Lenz on January 9, 2012 ·
I am just translating the decision of the German Federal Constitutional Court on this into Japanese, since I am going to talk about it to a Japanese study group on Saturday. Therefore, I take some interest in these matters.
We are talking about 170 billion Euro or more than half of Germany’s budget added to German debt if Germany actually has to pay for the bail-outs. That is not an easy sell to the German electorate, which actually profits from the “crisis” by historically low unemployment numbers resulting from the low Euro.
As a German myself, my opinion is that the Euro was introduced with the express condition that there will be no bail-outs, and that should be the end of that.
I am not sure why you think that “Europe will fall apart” if some bond holders get a hair cut or some Member States go bankrupt. Maybe I misunderstood your statement.
That sovereign states can get insolvent is actually the necessary condition for any rating of their debt. It has happened frequently in the last two hundred years. However I quite agree that there are some interesting times ahead.
Martin Varsavsky on January 9, 2012 ·
If you are a strong central bank, and the markets are against you, but you buy debt and you prevail by the debt not defaulting you can make a gigantic profit. There is a big difference between not being able to pay debt on time and not being able to pay at all. The only country in Europe that I think can’t pay at all and should default is Greece, Portugal is border line, Spain and Italy can pay. Spain has a lower GDP to debt ratio than Germany and deficit is shrinking. I think Germany can both make a killing and save Europe by buying Italian and Spanish debt. By doing so it protects its exports markets and prevents the new German currency from going so high up that German exporters are strangled, something like what is happening to the Swiss now.
Pelayo primo de rivera on January 9, 2012 ·
I agree with your views. Only that democracies sometimes do not act rationally due to the shortsighted politicians or irrational minorities with leverage to overturn a rational decision. We know about that in Spain. I suppose that this is the reason why you give between 1 and 24,99pct chance to a collapse, or not?
Martin Varsavsky on January 9, 2012 ·
I think there is a 25% probability of the euro falling apart not because Italy and Spain are not taking the necessary steps to reduce their deficits and reforming their economies but because the average German voter does not understand the extent that Germany itself can be hurt by a collapse of the euro. The average German voter is tired of supporting first the East Germans, then a lot of Europeans through gigantic wealth transfers and now see this crisis as more of the same which is not. They fail to see that the rebirth and strengthening of the DM and the loss of overall competitiveness that Germany may suffer is not worth the pain and that Germany can actually make money out of being the only large European economy that the world trusts. Also Germany has a historic opportunity of making all of Europe more German like which is not a bad thing in itself. By that I mean diversified economy, citizens who work well and save and a prudent management of the economy.
Manuel Gutiérrez on January 10, 2012 ·
Martin, the low household savings rate in Spain and Italy is a myth. According to the latest OECD figures, Spain had a higher household savings rate than Germany during the whole 1992-2011 period:
Karl-Friedrich Lenz on January 10, 2012 ·
It is of course true that people who bet on countries with low credit rates not defaulting make money from that if the default does not happen. Greece pays bond holders much more than Germany (the last auction resulted in negative interest).
That is exactly why Germany has no business financing other Member States’ debt. Bond holders of Spain and Italy receive higher yields because of the risk involved. For the very least, if German taxpayer money is used to bail out these bond holders, they need to take a hair cut reducing their profits to what they would have got if they had bought German bonds in the first place.
Christopher Wright on January 11, 2012 ·
Martin,
I think Germany also has a lot more to lose by the Euro breaking up or Germany leaving the Euro however it needs to be explained more clearly to the German people than it has been until now.
At the moment we´re got the “extremes of opinions” dominating where the “Germans are all hard working” and “the PIIGS are all lazy”. While the reality is more complicated than that. Kind of shows the importance of teaching Economics at school until 18.
I´m also hoping Europe becomes more German (diversified economy, citizens who work well and save and a prudent management of the economy.) but also more American (in terms of innovation and entreprenurship) and I´m ENGLISH!
Leave a Comment
You must be logged in to post a comment.
victor tejada on January 9, 2012 ·
Personally I think can help some countries affected by the crisis but for me a lot of goverments think down sizing is the great way to solve the crisis but with unemployment the economy is froozen.