Sunday, August 28, 2011


A Mid-afternoon EU Special

Here's an article from Gordon Brown in today's El País. I've tweaked a Google translation to make it accurate enough.

Some have said that, having kept the UK out of the eurozone, it doesn't fall to Gordon Brown to comment now on the difficulties it's struggling with. And/or that, as the creator of the UK's debt mess, he really shouldn't opine on the debt problems of others. And/or that, as an Anglo-Saxon, he should keep his mouth shut. All that said, even if all these comments are valid, it doesn't mean that what he writes is wrong . . .

I can well understand the defiance that we see today in Germany when it faces the crisis that has engulfed the eurozone. German anger is obvious and well founded.

Germany has to be part of the solution of the problem, since it has been an integral part of it

The crisis cannot be resolved without the availability of a common Eurobond

Over the past 10 years, while Spain, Ireland, Portugal and other countries enjoyed the party based on low interest rates, the Germans reduced their wages, they endured harsh structural reforms and went through the ordeal of five million unemployed in an effort to modernize its industries. Their sacrifices have led them to have a large trade surplus and an increase of 80% of its exports to China.

No other country could do this while maintaining the costs of integrating 16 million people from Eastern Europe into a unified, or joining the euro at a rate so uncompetitive, and yet be reconstructed even country's export strength.

Germany now has the strongest economy in Europe, Angela Merkel and the German people deserve to be praised for their export achievements. But if that was the only story to tell, then the remedy to the current crisis would be simple: follow the German example: austerity, and if that fails, even more austerity.

Three years ago, when the financial crisis began to hit, the German Government - like the rest of Europe - quickly defined the problem as Anglo Saxon, blaming the U.S. and UK. A year later, when the financial crisis had become a general economic crisis, the Germans retreated to an area even safer, more familiar, redefining the financial crisis but not as global as a prosecutor, as a crisis of deficit and debt .

As a result, Germany has denied any guilt in what has gone wrong. Actually, if you can argue that is not the source of the problem you may justify resisting the adoption of costly measures to solve it.

But, according to the Bank for International Settlements, Germany provided almost $1.5 trillion to Greece, Spain, Portugal, Ireland and Italy. At the beginning of the crisis, German banks had 30% of all loans to private and public sectors of these countries. Even today, this category of loans is equal to 15% of the volume of the German economy.

Add to that the deep involvement of Germany in the U.S. housing credit extravagance (half of the subprime assets were placed in Europe) and in European real estate speculation, and we ca see that wherever the parties took place, German banks provided the booze. The only party that it missed, as one commentator quipped, was the Bernie Madoff Ponzi scheme.

As a result, banks in Germany today are those with a higher debt ratio than any of the more advanced economies, up two and half times more than their U.S. bank competitors, according to the IMF.

In fact, concerned about the impact the tests might have on their credibility, German banking regulators have been hostile to going through the same testing requirements and agreed capital accounting for all other countries of teh eurozone. And one of the Landesbank-owned German regional banks publicly went so far as to remove itself the test son the eve of the results being made public.

But why should this worry a Germany which is competitive, fiscally sound and economically strong? Because throughout Europe the poor condition of the banking sector is becoming a risk to recovery and stability. German banks, like other European banks, depend on obtaining short-term funds, and in the next three years, these weak and poorly capitalized and profitable banks have to raise 400,000 million euros in the markets, an amount which is about one third of all debt in the euro area, estimated at 1.4 billion euros.

A few days ago it fell to France - qualified, such as Germany, with an AAA credit rating - to face market pressure, due to its high exposure to the periphery of the euro. Each country has its own problems, but as the crisis moves into the core of Europe, Germany could also find that his once undisputed image becomes a questionable financial bastion.

In the short run Germany would do well to support bank recapitalization at the European level, something that she will benefit from. But the time has come to recognize that Germany must be an integral part in solving the problem, since it has been an integral part of the problem itself.

Of course no one should expect Berlin to transfer a large percentage of German wealth to the poorest countries in the European Union on the same scale as in other federal states, such as the United States, Australia and others, but she must be persuaded that the crisis cannot be resolved without the availability of a Eurobond common legislation in favour of greater fiscal and monetary coordination, and a European Central Bank's role to take itself one step further than being the guardian of low inflation, assuming a second role as lender of last resort.

In the end, Germany will have to agree on a common mechanism for Europe to pay their way out of crisis. Her recent inability to act from a position of power threatens not only the country itself but the whole euro project, which Germany has spent decades developing.


Here in Spain, opposition appears to be growing to the process of inserting a EU inspired/mandated cap on the national deficit in the Constitution. But, even so, it's hard not to see the two leading parties jointly pushing it through.

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