European Union

The Stab In the Back Theory of German Fiscal Responsibility


Even the escalators have stopped!

Watching German Chancellor Angela Merkel spend months fending off demands that she force her relatively prudent citizens to pay for profligate Greece has been like a doomed love affair. It's been wonderful to experience, but you just know it's going to end in betrayal and heartbreak.

The great disappointment may be coming in less than an hour, as Merkel is scheduled to make some major announcement on the Greek crisis.

But sooner or later, Merkel will fold. The pressure of the macroeconomic consensus is just too great: Greece is paying interest rates almost as high as it deserves to pay on its bonds; the overvalued stock market is starting to lose steam; and in that great nonsensical epidemic metaphor journos love to use about fiscal crises, we're told that the trouble is now "spreading" to the other PIIGS countries.

Meanwhile, for a perfect example of the Keynesian logic that will sooner or later force a tragic end to this tale, read this Spiegel article by Gustav A. Horn, director of the Macroeconomic Policy Institute (IMK) at Germany's Hans-Böckler Foundation:

On the one side there are the Greeks, who clearly still do not have their financial statistics under control and who produce one false report after another about the country's budget deficit. On the other side are the Germans, who delight in hindering a rapid and unambiguous European response to the Greek crisis…

These observers base their verbal radicalism on the noble economic argument that Greece needs to be made "fit for the financial markets" once again. Another, less sophisticated, argument goes that the vast majority of Germans are unwilling, after years of limiting their own consumption, to make financial sacrifices to help out Greece.

Both Greece's calculation errors and the diva-like reluctance of the German government to help Athens are nothing more than an invitation to speculators to bet on the demise of the southern European country. This also explains why risk premiums on Greek government bonds have shot up to previously unimagined heights in recent days…

We don't have to work!

It is a fact that speculators have access to no more information about Greece than the economic experts in Europe's governments. There are, however, many market players such as hedge funds which derive profits from uncertain events. The more chaotic things are, the more they like it. Their biggest enemy is political clarity, which is why they are delighted when politicians indulge in scaremongering. In the case of Greece, this scaremongering has succeeded extremely well, as the skyrocketing risk premiums show.

The role of rating agencies can also not be forgotten. It was their downgrading of Greece's creditworthiness that triggered waves of speculation….

The populist argument that the majority of the populace is opposed to financial backing for Greece, is also attributable to the German government…

The German government's submissiveness to the financial markets and its cowardice towards the tabloid press (the mass circulation daily Bild, for example, wrote in a headline: "You Greeks Aren't Getting a Thing from Us") could get very expensive for taxpayers. Now the aid will actually have to be paid out. And the fuss the German government continues to make won't change a thing.

So, the "speculators" are not people who want to make money by guessing correctly about economic events (an easy guess in the case of Greece, which will always go deeper into debt and demand more entitlements). Instead, they are agents of chaos seeking to undo the consensus of politicians.

Note also that the consensus of the politicians has nothing to do with the views of the people who elected them. The Greek bailout is overwhelmingly unpopular in France and Germany—a fact that has nothing to do with politicians or "mass circulation" dailies but with people resenting getting ripped off.

And ripped off to pay for a country that Horn himself acknowledges has repeatedly violated the EU's rules, lied about it in reports, and run up levels of debt and deficit spending that—under the EU's own charter—mean it should be expelled from the Euro zone. Nor does any of this behavior have anything to do with the downgrading of Greece's credit status. That's just the fault of the evil rating agencies.

Germany's no-more-Frau-Neissguy talk has been fun to watch, but when the Greek aid package eventually comes through, just remember how little effect the advanced countries have had with their calls for fiscal responsibility. Greek public employees have been on strike since Thursday, to protest the government's proposed austerity measures.

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  1. I hope the German electorate bleeds Merkel’s party like a prize hog.

    The idea that German taxpayers should work into their 60s to pay for the retirement of Greeks in their 50s is profoundly disgusting on many levels.

    And an exact parallel to the public employee pension situation in this country.

    1. Germany already paid through the nose to let the DDR pretend it brought something to the table, economically speaking. Buying up the ostmarks at that asinine valuation (parity with the DM? Dream on!) was absurd. Germany met its charity quota for the next five decades with that bailout.


      1. At least in that case, Germany did get something– reunification. What will they get from Greece, other than a loud cry of “Suckas!”

        1. All the ouzo they can drink?

    2. I hope the German electorate bleeds Merkel’s party like a prize hog.

      And vote for Socialists and Greens instead? That sure worked here in the US.

      1. You know, the Free Democrats exist too.

        1. Okay, I need to find out the Free Democrats’ position on the Greece bailout. But they are a part of the governing coalition. If they don’t bolt, they will be responsible for it just as much as the CDU/CSU.

    3. It would make more sense to give Markel’s party a stronger majority. By enlarging the number of seats held by Free Democrats.

      1. er, coalition …

      2. They went from 5% to 15% of the vote in last year’s election. Excelsior!

    4. The idea that German taxpayers should work into their 60s to pay for the retirement of Greeks in their 50s is profoundly disgusting on many levels.

      And yet appears to be the New World Order of things. Wait until Obama and/or the Democrats demand an aid package of our own for Greece and have to raise taxes to fund it.

      People gonna come unglued.

      1. Aren’t we already doing this via the IMF?

  2. Some of you might remember what I did when a group of American federal employees went on strike.



    1. Good times. Good times.

    2. Noooo!!! You’re dead! I saw them lower your casket into the ground! Ahhhhh!!

  3. Well, the greeks could just let those tax-feeders stay on strike indefinitely. That is of course assuming that they don’t do something as stupid as let bureaucrats continue to get paid during a walkout.


  4. Greek public employees have been on strike since Thursday

    How could anyone tell?

    1. You can tell because they’re marching in the streets demanding more money instead of quaffing Nescafe at the harbor on their three-hour lunch break 🙂

      Or, if you’re one of those rare successful business owners there, they’re chanting anti-capitalist rhetoric outside your door instead of collecting taxes from you.

      1. Or, if you’re one of those rare successful business owners there, they’re chanting anti-capitalist rhetoric outside your door instead of collecting taxes from you.

        So, its an improvement.

  5. Sounds pretty reasonable when you think about it.


  6. This whole Greece thing is getting surreal. And bailout supporters (of all stripes) are equally surreal. This guy doesn’t even present a case for why a bailout is important; he just…wants one, and decries all those he sees as getting in it’s way. It’s become another article of faith: bailouts have to happen, or…something, not sure what, but it’s BAD BAD BAD…will happen.

    1. He sure wastes a lot of space to say “Shut up and do as you’re told, Germany.”

      1. It’s more like “Where’s the money, bitch? Don’t make me use my ring hand!”

    2. Surrealism is a sign of impending paradigm collapse.

      Whether Greece gets bailed out or not, the cracks in the welfare state are devouring pieces of the space-time continuum.

  7. It would be real fun if Merkel was to announce something like:

    “The EU has refused to enforce it’s own rules. Accordingly, Germany will withdraw from the Euro zone on January 1, 2011 and re-implement the Deuschmark.”

    1. Problem with this is that *Germany* exceeded the debt/GDP-ratio rules a couple of years ago and blew-off those in the EU who demanded penalties.

      1. Problem only exists if anyone can stop Germany from bolting. WWIII, this time because they want to be left alone? Interesting.

      2. Problem with this is that *Germany* exceeded the debt/GDP-ratio rules a couple of years ago and blew-off those in the EU who demanded penalties.

        True, but Germany also brought its finances in order, which Greece has no apparent intention of doing.

        Also, there is the fact that the Euro can exist without Greece, but it can’t without Germany.

        The situation is similar to NAFTA violations: The US regularly blows off it’s violations of NAFTA; Canada and Mexico can do nothing about it. In the reverse situation, Canada and Mexico have no choice but comply with their treaty obligations.

    2. I predicted this very same scenario three years ago. The global monetary shuffle will begin with the reissue of the DM…after that dominos will be the rest of the fiat currency.
      Euros fleeing to Yen and Dollars (short term boom) then debt service on both exceeds market’s patientce (basically china takes advantage of situation) and the yen and dollar disappear. I could be wrong. I would be ok with being wrong. But I dont think I am.


  8. “Well, if the ratings agencies would just pretend that Greek’s debt is safe, and if the politicians would just pretend that they are able to rescue Greece without hurting their own taxpayers, and if everyone else would just pretend that the Greek government isn’t lying about its financial situation, the market would stabilize and everyone would be better off!”

    – John Maynard Keynes, speaking from the grave

  9. “no-more-Frau-Neissguy”

    What does that translate to? I thought frau meant woman.

    1. The Chancellor of Germany, Angela Merkel, is a woman, so it’s no-more-Mrs.-Nice-Guy.

      1. No-more-MNG? Tell me more…

        1. He’s sick, he’s obscene…

      2. But nice is “nett.” And guy/dude is “Typ”

        1. It’s a form of Deutschesperanto.

  10. Keynesian stupidity reaches a new high (low?). It must be a day ending in “y”.

  11. It is really interesting that they’re blaming speculators and ratings agencies for this–the only people willing to tell the truth. The only people making the case for reality!

    Can you imagine how bad it would be–how far the Government of Greece would have gone–if it hadn’t been for ratings agencies and speculators?

    Good thing we don’t engage in that kind of blame shifting on our side of the Atlantic. We’re way too sophisticated to blame somebody like Goldman Sachs for what Barak Obama and Congress did…

    At least I am.

    “Another, less sophisticated, argument goes that the vast majority of Germans are unwilling, after years of limiting their own consumption, to make financial sacrifices to help out Greece.”

    Note to the German people: Welcome to the Tea Party.

    Actually, if the bailouts here in the US had targeted foreign entities specifically, I suppose the Tea Party movement here would have been nastier than it has been.

    Expect the pressure to build to do something like Arizona about immigration. …as if they didn’t have enough issues with immigrantion already!

    Oh, and how likely will it be to see Turkey in the EU, post Greece?

    That’s gotta hoit!

    1. How do you say “Taxed Enough Already” in German? I might have to print up a few t-shirts or something.

      1. Don’t you mean “Austrian”?

    2. You mean the Germans are also chanting in the streets and at rallies with badly written signs that they want less government when what they really mean is that they just want more of their own form of authoritarian government?

      1. I’m saying if the German people don’t express themselves politically after having their hard earned future earnings squandered on Greek government bloat?

        …then they’re easy pickin’s for a real authoritarian when he or she comes along, yeah.

  12. Germany ought to bail them out, then repo the Parthenon.

    1. I expect that the Germans will bail out Greece then, twenty years from now, invade Greece.

      1. If you’d been to any of the Greek resort towns lately, you’d realize they already have.

  13. At least there’s no Soviet Union around to allow bailout supporters to cry “But Greece will go communist if we don’t help them!”

    1. Looks to me like they’re pretty much communist already.

  14. And this while the conservative and supposedly fiscal responsible FDP is part of Merkel’s government as well. Why haven’t they dropped their support for Merkel?

    1. Not sure what you’re asking. Merkel hasn’t caved on anything yet. I think you should probably wait until she actually sells out the FDP before you demand that the FDP renounce her. Besides, up to this point, this version of the CDU/CSU/FDP coalition has been a bit bristlier than previous iterations.

      1. Could also be that German banks have too much exposure to Greek debt. Then it is better is keep quite I guess.

  15. I have sent a letter to Greece requesting their appearance before my committee. Their compliance is purely voluntary, but it would be a shame if something were to happen to the Parthenon.

  16. The Financial Times is now reporting Germans willing to cough up to 120B Euros for Greece.…..ab49a.html

  17. Hey, Germany and France wanted a European Union to compete with America.

    Well, congratulations Fritz and Pierre, you got one. Enjoy!

    1. In today’s performance, the role of Greece will be played by California.

  18. a country that Horn himself acknowledges has repeatedly violated the EU’s rules, lied about it in reports, and run up levels of debt and deficit spending that — under the EU’s own charter — mean it should be expelled from the Euro zone.

    Now that’s the most sensible thing I’ve heard yet. Kick em out and let them sink on their own.

    1. Fat chance. All the EU bureaucrats would lose some turf.
      Do you know how much staff is required to shovel Euros over the border into Greece? Why, the unemployment you’d cause!

  19. “…nothing more than an invitation to speculators…”
    Well, at least he didn’t say “cosmopolitans” (but we get the point)…

  20. All of this reminds me of the plot from the novel “Bombadiers” where the main character’s company (a very thinly disguised First Boston) tried to put together a Delaware Holding company call New Lincoln Inc. The purpose of New Lincoln is to float a whole tons of convertible bonds and buy out ALL of the outstanding government debt of Dominican Republic, and dissolve that government with New Lincoln as the governmental entity.

    I’m surprised that Goldman Sach, KKR, TPG or Baines Group hasn’t floated this idea on Greece.

    1. ?

      Since when do holders of sovereign bonds get to “dissolve the government” of a defaulting country.

      Historically, the great banking houses of Europe – the Medici, the Fuggers (sp?), etc – have collapsed by lending too much to governments who defaulted and flipped off their creditors, leaving them with nothing.

  21. Germany’s no-more-Frau-Neissguy


  22. I do take some solace in noticing that even Europeans recognize the absurdity of bailing out a failed welfare state.

    The thing that really chaps my ass about all of this– domestic bailouts, international ones– is that we essentially made a public bet.

    I and people like me bet that these schemes would fail and collapse. The people that support expansive public welfare systems said they wouldn’t. When they collapsed, they essentially said “Well, we lost the bet, our system collapsed so you have to pay us to sustain our systerm.”

    It’s insane.

  23. Germany should announce that it will not bailout Greece, but that it will back the Portuguese, Irish, and Spanish. While they’re in trouble now, unlike the Greeks, those three were responsible during the good times, keeping their debt and deficits low. So hanging the irresponsible lying-about-their-spending Greeks out to dry while guaranteeing the honest, (relatively) responsible, hit hard by the slowdown Ireland/Portugal/Spain both prevents the danger of a spreading crisis and minimizes the moral hazard involved. Also, since those three are in better shape, it’s more likely that the guarantee alone will work, and not cost the Germans anything.

    (Granted, if they’d been being really responsible, Ireland/Portugal/Spain should have run less spending during good times, so the crisis wouldn’t have hit them so hard. But a reward for following the Eurozone rules and telling the truth, while the Greeks are allowed to suffer the consequences unshielded, is symbolically useful .)

    1. You’re right, it symbolically useful. Though there’d be justice if Germany just said NO to bailing out anybody.

      Why do I have a feeling, that’s exactly why it isn’t going to happen in either of these ways?

      There aren’t enough ounces of sanity left in Western governments to make such an outcome possible.

      It all began when they wanted a welfare state and a Eurozone. And that’s pretty much it ended.

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