Claims about Germany and Europe which I disagree with

I’ll put a few of these under the fold…Karl Smith writes:

…the worse case endgame for a Euro failure is collapse of the global capitalist system, the political collapse of the West and the end of the Enlightenment. That’s fairly bad as things go and it could indeed happen.

I can imagine parts of eastern Europe or the Balkans going Fascist, but not Western Europe.  The consequences of a euro collapse would be dire, but not nearly that dire.  A few nice countries have nuclear weapons and battles over territory are no longer going to happen in that part of Europe.  A cynic would add that fascism was also a part of the Enlightenment.

Ezra Klein writes:

…it [the morality play] only works if you think of the European debt crisis as a crisis of Greece, where the governance really was terrible, the economic institutions weak and the labor market coddled. It doesn’t work for Ireland. Or for Spain, which was running a budget surplus as recently as 2005. And is anyone in this conversation really pretending to have deep knowledge of the character of Portugal?

Germans will perceive a moral issue in guaranteeing the solvency of these countries, whether or not they think those countries have “done anything wrong.”  My moral view is not exactly theirs (if I may generalize about various German views), but I hardly think such a German response is beyond the pale.  You can believe “we are not obliged to bail out a country that won’t pay us back, and with whom we wrote a no bail-out agreement,” without believing “they are morally culpable.”

Matt Yglesias tweets:

If there’s a “reasonable probability” euro crisis will “crush the german economy” that’s a sufficient case for action

Not necessarily, not if the action raises risk and raises the badness of a bad outcome, which indeed it does.  Have any of us actually done the decision analysis here?  I don’t see it.  Note also that Matt has been critical of Merkel in the past; now he is asking her to undertake a course of action which a bad politician would be incapable of seeing through.  We will need maestros, and maestras, to get this one right.

Ryan Avent writes:

Sometimes a bank run is just a bank run, and a moralising approach that fails to stop it does nothing but harm millions of innocent bystanders. The desire to stick with the moralising approach may nonetheless prove attractive in Germany and elsewhere.

I think solvency problems are very much on the line here, and a perpetual guarantee of the debts of other economies is not a trivial no-brainer, morally or otherwise.  It is doing much more than stopping a bank run, and once the guarantees are issued, through what credible mechanism can the plug ever be pulled on a country such as Italy, given the economic carnage which would result?

Reflecting on these responses in toto, I view these writers are wanting to make it a moral issue: “why can’t the mighty Germany simply solve this problem?  What is wrong with them and their moral views?” I view these writers as reacting to my original post — written in multiple voices and with parentheses in the title I should stress — with a bit of mood affiliation.  I view myself as trying to explain why moralizing perspectives miss the real difficulties in crafting a solution.


the political collapse of the West and the end of the Enlightenment.

Gee, and here I thought that was 1914.

Thinking in the short term, obviously the moving involving the least collective misery for everyone is for Germany to bite the bullet and backstop the whole continent's debt in one way or another. But just past the immediate crisis I don't see any reason for optimism. If recession really does hit, how are the SPIIG crowd going to get out of the "debt -> austerity -> crap growth -> more debt (or at least not much extra money to pay down the principal) -> more austerity" cycle? It seems like a 1918-style suicide pact.

The SPIIG governments have to be weighing the costs of cutting their losses and getting out. (Right?) People seem to agree that would be another devastating financial crisis, and thinking selfishly that would be bad, but if I were Spain and it's a choice between 2-3 years of total chaos and 20-30 years of grinding hopeless misery, I think I'd go with the first option.

For some reason, I wrote "moving" instead of "solution" in the first paragraph. Oddfish.

"If recession really does hit, how are the SPIIG crowd going to get out of the “debt -> austerity -> crap growth -> more debt (or at least not much extra money to pay down the principal) -> more austerity” cycle?" - See Estonia.

A lot of the moral arguments come with moral hazard, a point that those only arguing morally seem to [generally] overlook.

If someone doesn't enable an addict by giving them money, why are we critizing their morality? I don't understand the fixation with the euro. Did anyone outside the politicians and academics really think that a single currency could work across multiple countries? Once a nation surrenders their sovereign currency, what identity do they have?

"Once a nation surrenders their sovereign currency, what identity do they have?"



Like you I don’t have any problem at all with a collapse of the euro. It would not be the end of the world. But I welcome the alternative if it is formulated in a way that creates a good institutional structure for the future. I can’t understand why you insist on framing the question in terms of morals rather formal institutions, since it’s obvious that no one at the negotiating table is (or should be) doing that. Why are you so resistant to the possibility of rapid discontinuous institutional change? Institutions seems to be a bit of a blind spot. Here is one of those rare windows of opportunity to achieve it along lines that I assume many admirers of Public Choice would welcome with open arms.

Far as I can make out Germany has repeatedly declared NO intention of guaranteeing the solvency of other countries, although we assume that it would be willing to contribute to doing so (e.g. via the IMF or more directly) as a bargaining chip in exchange for the pan-European elimination of moral hazard by means of enforceable automatic penalties for fiscal irresponsibility. Some things are worth their price, and only Germany can work out the cost-benefit to Germany (they have the experience of absorbing the East). If they don’t get what they want I hope the Germans pull back and exit, even if this does mean a bank run.

Example of Reuters and FT reports: Merkel has “dismissed quick fixes such as massive U.S.-style money printing by the European Central Bank or issuing joint euro zone bonds. “Leaders of Merkel's centre-right coalition agreed that Germany's opposition to common euro zone debt issuance was non-negotiable”.

And the idea of Germany’s finance minister is that every country will be responsible for its own solvency:
‘Wolfgang Schaeuble outlined his plans under which states would effectively siphon off a chunk of their debt to a special national fund and pay it off over about 20 years while committing to reforms to keep debt levels on target.
Schaeuble believes his proposal, which has won qualified support from Chancellor Angela Merkel, would boost confidence as states would be sending a signal they were serious about limiting debt levels to 60 percent of gross domestic product. "We need a redemption fund in every single country of the euro zone," Schaeuble told the Passauer Neue Presse.’

Every country in the euro zone needs to set up a special national fund for sovereign debt that is more than 60 percent of gross domestic product, Germany's finance minister told a newspaper.

It’s also funny that you are so pessimistic about Italy when for the first time in decades someone appears actually to have the political will and the window of opportunity to do something radical about it. Even the unions are quiet. This evening’s Financial Times lead article.

Worth a go don’t you think? If it fails there will be a massive loss-taking shake-out, which will be the nemesis of the dysfunctional political economies, and which is the only other forward-moving path.

This talk of *morals* rather than *institutions* just seems out-of-place navel-gazing at a historic moment like this one. I suspect it’s only for people who regard themselves as out-maneuvered by the surprise developments of the last few days.

Europe’s going to bed now. ‘Night.

"the real difficulties in crafting a solution": since there isn't just one problem, you shouldn't expect there to be "a solution". Added to which, even if there were only one problem, there's no guarantee that there would be a solution that could be achieved.

Among the problems are (i) Greece is insolvent, (ii) many countries are using the wrong currency, (ii) Ireland has nailed itself to the cross of its banks, (iv) many European banks are awash with rotten American mortgage-related debt, (v), (vi), (vii),...... You may say that many of these problems are just variants of "people and governments have been deluded about debt for decades", but I don't think that covers all cases.

A cynic would add that fascism was also a part of the Enlightenment.

Part of the Enlightenment? Fascism originated in post-WWI Europe, long after the Enlightenment ended. Furthermore, it had links with/drew inspiration from the Romantic movement, which was part of the Counter-Enlightenment.

Take a few liberties with terminology, Kadin, and think Robespierre. Or perhaps the work of John Ralston Saul.

Totalitarianism has its origins in Rousseau who was definitely part of the Enlightenment. Fascism has its origins in Socialism which can also be considered a child of the Enlightenment (both German and Italian fascists had a lot of ex-socialists, who rejected not so much the "solidarity" of socialism, but who wanted to limit it only to inside the country as opposed to worldwide). Even Hitler's insane racial views came out of "Scientific Racism" whose "rationality" came out of the Enlightenment. This is not to say that Fascism doesn't have parts of its origins elsewhere (certainly the NSDAP's view on blood-and-soil was rooted in the Romantic movement just as you said), or that in specific countries other traditions predominated (Iberian Facism retained a lot of Catholic thinking which probably explains its less tyrannical nature than Hitlerism, but its more tyrannical nature than Anglo-American liberalism).

It would be a mistake to limit the Enlightenment to the English tradition of Locke or Smith (or even Montesqieu). The "radical" vision of the French Enlightenment and the "enlightened despotic" tradition of Prussian (Fredeick the Great) Enlightenment are all from the same mold and had an influence on Fascism. Of course, to a large extent everything in European culture after 1800 has some sort of debt to the Enlightenment so one can't zero in on the Enlightenment to blame for this one thing. But the cynic's perspective is not the same as yours or mine.

Ultimately fascism was what you got when the traditional conservatives (who were undoubtedly opponents of the Enlightenment) were discredited (since they lost WWI), and a fresher, more "modern" version was needed which discarded much of the old lingering Medieval mindset in favor of more "rational" approaches.

Is that Karl Smith even a serious person? I mean, REALLY?

Leaving aside the likelihood of his worst case scenario, my only response is "if capitalism and Western culture is that fragile, then let it collapse". Our civilization should not depend upon a few people (e.g. Merkel and her advisers) having some omniscient understanding of historical processes.

Remember what happened when Credit-Anstalt folded?

When Credit-Anstalt folded, it got a bailout.

The bailout bankrupted Austria. The funds from the BIS were never repayed.

Yup, the bailout was a bad idea.


The Euro didn't exist before 1999. The world somehow functioned.


I mean really. We survived Islam, TGD, two world wars, and Communism. This is a blip.

But think of how difficult it will be for backpackers to exchange currencies while they study abroad!

You mean how it is now? Instantly and electronically, wIth little pieces of plastic?

The original post points 1-11 would have been easier to agree with if you had not framed them in terms of morals and culture, but then the attack from Smith, Klein, Yglesias, and Avent would have been even fiercer.

not if the action raises risk and raises the badness of a bad outcome, which indeed it does

It's amazing how often this is being ignored. Guaranteeing periphery debts is an invitation to even greater disaster -- does anyone really believe they're going to get their houses in order this time? They've already broken all the agreements thus far. Germany is going to have trouble enough with its own demographics in the coming decades.

Greece broke their agreements, and hid the fact with cooked data. However, the fiscal behaviors of the other periphery countries, especially Spain and Ireland, were very responsible. Their debt to GDP ratios were quite favorable while GDP was high. Bubbles caused by overheated investment (from France and Germany, mostly) popped, and GDP plunged. The morality play that these countries had a pattern of overspending is simply a lie.

The euorozone as a whole has twice the allowed 3% deficit:

The changes will include more “automaticity” in the process of punishing states that breach the EU’s 3 per cent public deficit limits. A move to fine a country will in future only be overturned if a qualified majority of eurozone countries agrees to overturn it.
Under their compromise, each eurozone government will have to adopt in its constitution a “golden rule” that prevents it from persistently running budget deficits. The ECJ will merely rule as to whether each eurozone country’s “golden rule” complies with the new treaty.

Of course, this will only forestall disaster until it becomes clear they aren't going to live up to this agreement either.

"The euorozone as a whole has twice the allowed 3% deficit"

I don't think that's entirely fair. The eurozone members have deficits exceeding 3% - but only since the start of the financial crisis. Dave's point was that many Eurozone debt dynamics were entirely stable prior to the financial collapse. Pointing out that they've degraded since the crisis began doesn't exactly refute his point.

What I think is interesting is that people don't recognize that it wasn't the German government, but German banks which made the decisions to purchase sovereign debt.

So, is the end game, that in order to protect German banks, Germany gets more control of EU governance? Without contributing?

I think what will happen is that there will be less of a sovereignty give up and more of a face saving maneuver at the end of the game. And, don't forget, to the extent that Germany exercizes more control, that doesn't mean the Germany you know today is the Germany of tomorrow.

You could have a bunch of Greens running the EU.

'You could have a bunch of Greens running the EU.'
In alliance with the Pirate Party, which is taking up a similar political space that the Greens did in the 1980s in terms of trying to change society, though in the case of the Pirate Party, it has a lot more to do with the nature of politics in an age of endless surveillance of every aspect of daily life.

Something that Germans remain far too intimately familiar with, and not just from some point in the distant past.

I enjoyed this piece in the Washington Post today:
It reminded me how German integration (which Germans highly prized) was tied up with European integration (to keep a unified Germny in check). Ironic that this earlier deal led to so many people "demanding" that Germany take control of Europe's problems. I agree with Michael that institutions matter, but who would have predicted this one? And thus who knows what the "right" next step is?

"I view these writers as reacting to my original post — written in multiple voices and with parentheses in the title I should stress — with a bit of mood affiliation."

Gee no wonder they got a little confused...thanks for clearing up what your main message was. On mood affiliation...which must have a different name in psychology since all my google searches led me back to posts on the blog...not sure why this is a fallacy as opposed to a part of the human condition? Some people are optimists by nature and other are pessimists by nature. Sure your views about specific events are going to be shaped by your world view. And yet, people are capable of handling tension. There are plenty of happy people who are unhappy about the wold right now. But I probably don't understand the concept.

I suppose it is comfortable to be so sanguine about the collapse of economies and worrying about moral hazard after the U.S. banks got their CPR.

To my eye, morality would be thinking about what it going to happen to the proles. You know, the people who actually generate wealth by making things and doing quotidian work, who don't have much of a voice in these decisions, who are going to take the hit.

Enjoy your coming holiday.

The responses did exactly what Tyler urged them NOT to do. That is, "summarily dismiss [Tyler's presentation of the German perspective] as a kind of tragic juvenile moralizing." It's amazing how many individuals, who probably consider themselves intellectuals, failed to address the issue.

As Ryan Avent states, "And one of the great virtues of economics is that it helps us strip away moral interpretations of events that serve to obscure the underlying dynamics and, just as importantly, the things that can usefully be done about them." Yes, and that's exactly what your post was devoid of. I hate how economists always claim that they never make value judgments, hide under the cover of economics, and then go ahead with it anyways. "Oh, I'm just telling you how people would react if you did ____, I'm not say whether you should or shouldn't do _____. But really, you shouldn't do ______." Economics can't be taken seriously any more. It's become just a sub-field of politics, where people have a little bit more evidence to back up their ideological viewpoints. Krugman is the best example, but it can be seen on the right too.

Having now read about 150 pages of Lords of Finance, it would warm my heart a bunch if TC could discuss all this "debt is too big" and "moral hazard" stuff in light of the historical precedents laid out in LofF. In particular, US had "creditor to the world" status after WWI and Coolidge and the bankers took a hard line. Probably a big mistake - laying groundwork for Great Depression and WWII. How is the Germany position (money is too dear to us for any action like the US Fed QE) anything more than a repeat of mistakes made by US after WWI? Philosophy aside, how about some focus on history?

The German nation has been the scourge of Europe since it's inception. If it is not a bayonet pointed at Europe's throat then it is financial weapons of mass destruction that the Hun dangles over her head! That Tyler Cowen continues to stand up in support of this black spot over the heart of Europe shows how morally bankrupt he has become.

I hope your not serious. Germans are giants of Western Civilization. Our civilization is simply inconceivable without them. Germanophobia is an expression of cowardliness and mediocrity.

Alright you've convinced me I'll let the Germans slide - except for those damn Pomeranians.

LOL, Well, the "Pomeranian nation" was dismantled in 1945. Most of Pomerania is now in Poland, and Pomeranians are scattered throughout Germany. Although Merkel herself is half-Pomeranian, which shows Europe's continual inability to free itself from the Pomeranian scourge.

What have the "toy" group dogs ever done to you?

Just listened to the 2010 Phillips Lecture by Tom Sargent, on YouTube. He pointed out that the nascent American Republic bailed out the states right after the Revolutionary War, but didn't bail out states in the 1830's [or so]. Looks to me like at least one of these decisions might have been a mistake, but we're still here.

Sorry, can't get excited about the Euro.

I could have sworn that the point of Occupy Wall Street was that our economic institutions are morality plays.

Well at least someone thinks OWS had a point.

Being one of the German taxpayers who are requested by most economist pundits, academic or media based, and by almost all of the political 'elites' and, of course, the finance sector, to limitless and forever fund certain amenities others were and still are enjoying on borrowed money, I feel myself to be indeed in the moral superior posititon to say rightfully: please start to fund this yourself.

Especially if I consider that the vast majority of German taxpayers had a decline in their inflation adjusted net incomes for some two decades or so. Thanks to the costly integration of East Germany and a subsequent huge reorganisation of the social systems, the so called 'Hartz Laws'.

Besides, the countless people who claim that 'the Germans' did profit from the Euro (and thus should now pay 'back' some of these profits) are wrong, since most of 'the Germans' experienced quite the contrary thanks to the introduction of the Euro.

All you and your Teutonic mates need to do, Sam, is spend. Those pesky Southerners gave you their paper for your stuff-- now you need to return the favor. The balance of payments isn't so complicated.

"Those pesky Southerners gave you their paper for your stuff"

You havew apparently missed the line

"Especially if I consider that the vast majority of German taxpayers had a decline in their inflation adjusted net incomes for some two decades or so"

Whoever got money from exporting to wherever, it was NOT the German main street people.

"Just a bank run" is when the bank is solvent except only for the bank run.

You are not taking into consideration the fact Germany and the rest share a common currency. You can't be sharing monetary policy with another country and pretend fiscal policy (including intra-country transfers) is an entirely different topic.

And the ECB has been less than fair to periphery members, so a fiscal transfer from Germany may be just what's needed to arrive at the 'morally right' position.

Finally, there's another moral aspect to this. Joining a collective of countries such as EMU (or for the matter, entering a marriage) is largely about risk-sharing; the idea is that you have a moral duty to help your peers if in the state of the world materialises where they are in trouble. In fact, the reason Greece was able to borrow so much was precisely that people expected the rest of EMU to honour this moral obligation if things got hairy.

And if you disagree with this take, just tell Natasha that if she ever hits a rough parch and needs a fiscal transfer from you she can get lost, and see how well that goes down, from a moral point of view.

"collapse. . . of the global capitalist system"

Sorry, Karl should have written: "global crony financial fascist system". . .

Corrected it for him.

I am still trying to to stop laughing about Ezra Klein criticizing commentators for not having deep knowledge of a subject they write about.

As one of Tyler's links showed, the four most corrupt societies in Europe are Greece, Italy, Portugal, and Spain. Why should they be subsidized at all by anyone, let alone the honest nations of the north. Better that these nations break free from the euro and do what they have always done in the past -- inflate, devalue, reneg on debt. But that choice has to be their own. I think this is the German end game: make it so preposterously onerous for the PIIGS to stay in the euro that they will choose to exit. Good riddance.

Comments for this post are closed