“The moral superiority of the Germans”

Ryan Avent tweeted:

Dear @tylercowen, Germany and the periphery ARE morally equivalent.

How might a response go?  Not an argument that German citizens are morally superior to other Europeans; that would be false and indeed repugnant.  I mean the kind of “system-wide” moral judgments that progressives offer up when they judge the institutions of Denmark to be superior to the institutions of Mexico, of course without ever judging the residing individuals per se.  Let’s play at intellectual Turing test — with no commitment to endorsing these views — and draw up a short list of, dare I so label them, (ostensible) German moral superiorities:

1. When it comes to default, there is no moral equivalence of debtor and creditor.  The debtor is the one breaking the agreement and breaking his word.

2. When it comes to debt, the periphery countries simply don’t want to pay up.  Their national wealth is many times their gdp and thus much much greater than their debts, even for Greece.  It’s amazing how many people won’t come out and utter or recognize this simple truth.  Italy for instance doesn’t have to make a huge fiscal adjustment.

3. It is a privilege for a poorer country to be in an economic union with Germany, France, the Netherlands, and other wealthy EU countries, just as you might feel privileged to co-author a piece with a great scholar.  If the poorer countries have to engage in some economic sacrifice to stay on good terms in such a union, so be it.  There is also such a thing as catch-up growth, and it is robust in the broader world today, at least if a country is willing, like the East Asian countries have been, or for that matter Turkey and Brazil these days.  The sacrifices being asked from the periphery countries are quite small in comparison.

4. We did a deal with East Germany, and the terms of that deal violated a lot of precepts of economic theory.  It even included an overvalued currency for the poorer region and a long period of adjustment.  Yet we insisted up front that all dealings be done on the terms of the more successful region and culture, with very little compromise.  This transition, for all of its short-term flaws, will go down in the history books as a great long-run success.  In part it succeeded because it was all done on the terms of the values of the successful nations of northwestern Europe.  (I am surprised that this angle is not discussed more in the press, given Merkel’s own story.)

5. Economic unions do not succeed by lowering all members to the standards of the economically less successful and less responsible members.

6. If it wasn’t for us, would Greece, Spain, and Italy (plus Ireland and Belgium) all currently have technocratic, reform-oriented governments as they do?

7. If you are trying to estimate the future economic fate of a country, shouldn’t you put aside a bit gdp drops and the like, and instead look at what do people in that country esteem and which values are transmitted by their system of education?  Do read the Estonia story at the previous link.

8. The German emphasis on rules, and the attachment to the idea of an abstract order, worthy of loyalty in its own right, above and beyond any immediate personal connection or loyalty, is exactly what makes them able to run such a successful economy and successful social welfare state.  When it says “Don’t Walk,” they don’t cross the street, even if no cars are coming.  An economic union should be set up to support those principles, not tear them down, and social democrats should value this most of all.

Even if you disagree with these perspectives, they shape real world behavior.  And might you still bet on a country which stuck to them?  Be honest now.  Let’s go back into intellectual Turing test mode:

9. One clear warning sign of trouble is when you see “trade imbalances” put at the center of the argument, as if “being very productive” and “not being productive enough” were somehow the same kind of disease.

10. There is a view something like “Germany has benefited from the eurozone, and therefore it is obliged to…”, as if those arguments were stronger than the nine principles outlined above.  By the way, might left-wing American intellectuals occasionally engage in a bit of transference and view Germany as a stand-in for the American top earners, the American financial system, and so on?  It isn’t.

11. Another doozy is to think the problem is due to some weird German obsession with Weimar-era inflation, as if there is a need to apologize for an elderly uncle who went bonkers.  I would instead start with the simpler point that Germany does not want to transfer resources to countries which do not wish to pay back their creditors, and which will not commit to good economic policy in the future.

Let’s move out of Turing mode and back to Tyler.  I believe that the Germans have approached this crisis with some bad economic theories, a lack of understanding of how government spending cuts can be self-defeating in the short run, and a good deal of more or less deliberate self-deception about its partners in the union, not to mention Germany’s own ability and willingness to act “fully European.”  I’m also not sure that Germany has a path out of this which leaves their own financial system intact.  You can rack up the moral and practical minus points there in considerable number.  That said, I see a lot of intellectuals dismissing the perspective outlined above, rather than figuring out why it makes so much sense to so many people, not just in Germany.  I think the financial elites in the periphery countries themselves actually see it quite clearly.

The result is significant misunderstandings about what can happen and will happen in the eurozone.  Germany cannot and will not drop its moral perspective, even if there is some theory — and yes theory is the right word here, because no one knows these broad guarantees will work — of how a broader and far more costly commitment can set things right.

In reading American discussions of the eurozone, I am frequently reminded of earlier discussions of the Soviet Union.  Most outsiders simply didn’t realize how little social capital was left in the system, though some of the Soviet insiders did.  Might the same be true of the eurozone?  I’m not calling these countries corrupt, rather there may be remarkably little cross-national cultural capital, and remarkably little deep public support for a costly EU bargain, so little that many German (and other) insiders know that no grand bargain can be sustained or even seriously attempted.

I believe we need to be exposed to this moral perspective, and this intellectual Turing test, as a bracing slap in the face, as a wake-up call, and I see our unwillingness to do anything with this perspective, other than summarily dismiss it as a kind of tragic juvenile moralizing, as a sign of our own decline, right here in the USofA.

Addendum: This piece is actually pretty good.


I think you seriously underestimate the amount of social capital in the european union. Show a group of europeans the various strange legal or cultural differences between the states (say a night of bar hoping in Utah or a day of killing hundreds of ptarmigan in Alaska) and they invariably being discussing the potential future interactions of their states within the EU.

@hmmm: you're totally right. These guys have absolutely no clue of what the European Union is. A comparison with the Soviet Union? Absolutely ludicrous.
It's no coincidence that they keep making wrong predictions about the euro since it came to life.
In my undergraduate teaching experience in Europe, my classes always include citizens from at least 10 different European countries. I've never had that kind of diversity in the US, statewide speaking. In the US, the large majority of undergraduate students would come from some other region of the same state. You expect *much higher* cultural integration and collaboration in Europe between undergraduate Greek and German students working in a group together than what you observe in the US between a Hispanic student from Texas and a black or white student from Philadelphia. These students will rarely choose to be in the same group anyway.

I am at a state university in the inland northwest, a place notorious for its lack of diversity, but in a class this afternoon there were students from a dozen states and at least four countries, and this is by far the least diverse university experience I have ever had. Where the heck are you, a community college in PA?

But badger - I think you put your finger on the whole problem. The EU has a moderately large class of educated, inernationalised leaders who go to university in each other's countries. If you just look at them you will overestimate the unity of Europe. Of course the thing about leaders is that they can drive politics - to some extent. The current crisis is testing just how far democratic governing classes ts can go in ignoring their people - and I would note that Angela Merkel is not one to ignore the voters.

> In my undergraduate teaching experience in Europe, my classes always include citizens from at least 10 different European countries. I’ve never had that kind of diversity in the US, statewide speaking.


What podunk place do you choose to teach in?

My typical undergrad course here in the US had students from two dozen states and a dozen nations.

Also Badge, where did you teach in Europe? Sounds an atypical experience, even for some of the more internationalised institutions such as Oxbridge and the Sorbonne. A Swiss business school?

"In the US, the large majority of undergraduate students would come from some other region of the same state."

This may be true for universities that give massive subsidies for "in state" students, but is totally untrue for large private universities

You do realize that the former is much more prevalent than the latter, right?

@Badger -- "A comparison with the Soviet Union? Absolutely ludicrous."

From the NYT: “'Greece is the last Soviet-style economy in Europe,' said Yannis Stournaras, an economist and the director of the Foundation for Economic and Industrial Research, known as IOBE Athens, ..."

Awesome post, Tyler--some really good truth-telling there!

Yes, great work Tyler.

Devastating, Tyler!
Shame that it should also be necessary.
Is Avent really blind to what every Greek schoolkid knows?


Awesome post.

+ 1000,

crystallizes allot of lose threads of argumentation that runs through one's mind listening or reading the various commentary out there.

The fiscal and monetary issues are orthogonal. Too much discussion breaks along being pro- or anti-Germany and confuses the two issues (including in Germany).

Germany is right fiscally. No transfers. I'll even add that, unlike the relationship of the US with Honduras, Germany and the periphery, signed an agreement that there would not be a bailout.

Germany is wrong monetarily. The ECB should ease policy. It need not be in the form of transfer. They could buy Bunds and it would be helpful for everybody as long as they are doing something in euro.

Finally, I think you overestimate the elites of the periphery.

"The fiscal and monetary issues are orthogonal"

Not really. Monetary issues become fiscal issues if the central bank's liabilities come to exceed its assets. This could occur even if the central bank were to purchase only Bunds, which is not what people are baying for at present in any case.

Europe's problem is political, cultural and social, the debt crisis is just the cherry on top. The comparison to the Soviet Union is apt. At the top of the EU is an unelected bureaucracy working on a model of government that resembles modern China more than democratic Europe. These folks benefit personally, in addition to being intellectually invested in the European project. Their method for moving countries into the EU is to hold referendums, and if they lose, just hold another referendum. Keep voting until they get it right, then stop voting. If they really lose a vote big, like the European constitution, just change it to a treaty and pass it without holding a referendum. Among the people, the mood for a united Europe (political union, as opposed to free trade, cooperation, etc. while preserving national sovereignty) peaked in 2000 and has been in decline every since. The eurocrats have no answer for rising nationalism and they condemn democracy as populism. The moral equivalence I see is between the EU commission and the Politburo.

European elites are scared of their own countrymen. Nationalism scares them to the core. Their second fear is American hegemony. It is Hitler's image and a desire to counterbalance America's power (besides personal benefits) which drive the elites towards ever-greater integration.

However, the average European no longer care about the image of Hitler, have become more nationalistic with immigrant influx and continued anti-nationalistic elitism, and don't care one bit about competing with America's aircraft carriers which they know would only cost them more tax money.

If europe was democratic this would matter. As it is not, it doesn't.

Is it fair that, as an American, I am scared of the typical European or American? A Federated EU is a good thing by my thinking, partially because it would force typical Europeans to question their own cultures. And the various cultures are exactly what brought us into this mess. Then maybe that cultural introspection could spread to the US. It doesn't seem that we can come up with that on our own.

This is only partly true. Many of the debts were incurred by elected local politicians.

Some countries, Greece included, have strong tendency to elect crooks en masse, with genuine popular support.

The fact that the Swiss or the Dutch generally elect at least penny-wise crooks does not scale to the entire EU.

Correction: All debts were incurred by elected politicians.

elected or ejected?

That's the great thing about monetizing the political system. You buy the politicians and then hold the population responsible for the results of your policies.

Most Americans who comment on this crisis are the European-minded elites who have little feel for nationalism and populism in the European countries. Of course, a united Europe in the non-Hitler non-Soviet form was heavily promoted by these very American policy elites. To have it fall apart and threaten America's financial health isn't their desired outcome. It is natural for the American commentators to blame Germany for being provincial, small-minded, stupidly greedy and obnoxiously attached to outdated rules. It is also easy for these elites to judge ethnic and cultural loyalties to smaller nations as provincial and insignificant. But to dismiss them does not make them disappear, and does not make them less meaningful to the inhabitants of small countries. Wishful thinking does not create European cultural solidarity.

The profound differences among European countries were only overcome because of a common enemy. That enemy has disappeared. A self-inflicted enemy, the Euro, is no substitute for an external enemy. The latest move towards ever greater integration, the Euro, was only narrowly pushed through because of presumed economic benefits to everyone involved. This turns out to be untrue, and thereby makes people question the very foundation of their ever-closer union.

Your point about Germany being perceived as the greedy rich is important. It is, of course, untrue that Germany is very rich, and what they do have, was accumulated through savings and discipline. To see the fruits of these labors disappear in what the "rich" countries instinctively know to be a bottomless pit in an attempt to save a currency union that has proven to be undesirable for all involved, is not greed or provincialism or dumb economics but common sense. Most Northern Europeans believe that a healthy system does not require inflation, and they'd rather not be part of an unhealthy system at a huge cost.

'That enemy has disappeared. A self-inflicted enemy, the Euro, is no substitute for an external enemy.'
Well, it is a tired joke - but best satirical comment today.

I believe the "doesn’t have to make a huge fiscal adjustment." link is incorrect. Or am I missing something?

You mean Caplan's "Ideological Turing Test," (not intellectual TT) I think, though in any case you both are far from any concept of Turing's.

One aspect of German moral blindness you captured well was completely ignoring the extent to which modern Germany was the creation and beneficialry of US and European benevolance.

Yes. Here takes the very weak TT connection Caplan makes and strains them massively further. It's a bit pathetic.

Yes – that was a funny proposal.
Like comparing what Conservatives know about Marxists to what Marxists know about Conservatives.
Still – I´m not sure that a liberal PhD can´t describe libertarianism better than a PhD libertarian can describe liberalism due to how extremely simplistic libertarianism is.


Modern liberalism is an incoherent set of policy positions created by interest group politics.

Libertarianism on the other hand, like Marxism is a coherent ideology.

You aren't yelling loud enough, the rest of us don't believe such nonsense yet.

What extent was modern Germany was the creation and beneficialry of US and European benevolence? And to what extent is modern Germany the way it is despite US and European benevolence? One account of the post WWII German economic miracle in West Germany attributes it to Ludwig Erhard's free market reforms, carried out despite the US and British allies' wishes. Apparently the Marshall Plan aid to Germany wasn't that large either, even in 1948 and 1949 it was less than 5 percent of German national income, and West Germany was paying reparations and restitution costs.

So I'd like to see your argument as to what extent that modern Germany was the beneficiary of European benevolence.

Plus, what difference does it make, one way or another? Neither the US or Britain is asking Germany for a bailout.. France has already been the beneficiary of subsidies from Germany through the EU for years and years (see the Common Agricultural Policy). Italy was on the German's side for most of WWII, they had no role in running Germany afterwards. Spain, Portugal and Ireland were neutral in WWII, and to the best of my knowledge played no role in West Germany's reconstruction (too poor). And Greece spent the immediate post WWII period in civil war, so I doubt that they played much of a role in the creation of modern West Germany.

Germany had a hyperinflation due to policies of France-Britain-USA; that certainly didn't stem from any lack of thrift on the Germans' part. They had a nail biter of a security problem because of the Russian Revolution, which France and England were unable to stop because of Woodrow Wilson's reluctance to fund them (they were already past bankrupt). Their fellow Europeans haven't always been good to them. And today everyone mentions the war rather a lot.

The Washington Post blamed them for 'aggression' or what have you in the Franco-Prussian War, inter alia. Oops, that was one of the three wars Prussia had to fight in order to unify Germany, which has widely been considered everyone's natural right since 1919 at the latest. France simply didn't want there to be another big power in Europe, which is perfectly understandable but is not a moral promontory to dance upon. Of course 99.5% of Washington Post readers don't know all that. I have no German heritage myself, but I definitely like the country and don't like the Post's distortion. Of course I don't argue that Germany has some unblemished record.

The Turing Test part is about the single most brilliant commentary I've seen on this topic

Is this post meant as a parody, or did you start suffering from Merkelitis?

If Germany broke away it probably results into a strong neueMark and weak Liras and Drachmas etc. Is that in the best interest of Germany's export driven economy?

Isn't something like a third of their national output exports? if I remember correctly Italy is as big an export partner as the US.

The question is not what Germany is obliged to but what level of industrial shock it is willing to afford.

Hence why us Americans are wondering why they created a central bank and union currency without any of the ability to fix problems at that level. The masses do not (dare I say cannot) understand the long term consequences of these actions and politicians being held prisoner to them is deplorable. It's not much better here in the states with a Fed that desperately wants to be seen as a bunch of evil scientists bent on taking over the world. But at least they can act.

One of the best posts in a long time - great stuff!

Tyler, you posted this on MR exactly 7 years ago. Can we update the score to 3-1 now? I'm impressed by your uncanny prediction skills but depressed that you are so often a harbinger of glooom.

Could the Euro become the global reserve currency?

My (cautious) take: The Euro area is rich in accumulated bank accounts but running a massive long-run deficit, most of all on human capital. Plus what will happen when countries start rejecting the EU constitution in their referenda? And don’t currency markets have some tendency to long-run mean reversion, suggesting the dollar will make a comeback someday? So I say no, the Euro will not become the world’s reserve currency. That being said, every prediction I have made about the Euro has been wrong to date. I said it wouldn’t happen, it can’t last long, and it won’t rise in value. That is 0-3, must I now step away from the plate?


Rahul, I compliment you on (a) your superb memory, and (b) your recognition that "long run" is measured, not in months, but in years, and often in decades, so predictions have to be evaluated after some significant time, not merely after the new year rolls around..

Ha, this is great. Just two posts later Alex is bemoaning the "unhealthy price of textbooks," with a link to an economics text selling at the incredible price of $122. http://marginalrevolution.com/marginalrevolution/2004/12/the_unhealthy_p.html

For those interested, amazon is currently selling the latest edition of "Modern Principles of Economics" for a (healthy?) $136.

It's definitely worth trawling the ancient dregs of MR. Wonder how they will creatively defend this (if they do).

Who actually controls that, though? I've never been clear on that. It appears to be more the publisher than the author. I would like to see a post on this, though.

This was Tyler's take on high textbook prices circa 2004. Maybe it is all a ploy to deter students from enrolling for Tyler's classes:

The economic problem is simple: professors assign a book without worrying much about the cost that students will pay. In fact a pricey book might be a nice way to drive down your enrollment and lower your workload.


I know a professor who has admitted to deliberately assigning an expensive set of books for his class to drive down enrollment (the combined page count doesn't hurt his goal, either). Yes, he has tenure, and yes, the drop in attendance from the first to second classes is well over 50%

Ah, tenure. Is there anything it can't fuck up?

Textbooks and professors: complements or substitutes? If so, which is inferior?

OK that one's too easy. What about economics textbooks and economics blogs?

"Not an argument that German citizens are morally superior to other Europeans; that would be false and indeed repugnant." How do you know it's false? If it's not false, why is it repugnant?


+2 for Tyler's post. .

What makes all of this worse is that Tyler is mainly discussing governance here. Germans (and Dutch) citizens were never allowed to vote on any of this, it was all rammed down their throats by their elites.

Yes, but if internal governance failed the blame lies within Germany and Netherlands and not outside?

Why must all euphemisms about the haves vs the have-nots be sexual?

Not sure about this either, what is consensus politics in the EU states. This is definitely a candidate for 11, or a subset of one of the other points Tyler argues. The European elites may have dreamed up the EU experiment, but without resonance to European psyches about WWII etc. It would not have come about. A similar acquiescence by US voters to the liberalization waves of of the 80-2000's supported Elites here in enacting their policy dreams, with frighteningly similar consequences.

"1. When it comes to default, there is no moral equivalence of debtor and creditor. The debtor is the one breaking the agreement and breaking his word."

Is it really that simple? The debtor entered into the agreement with an assumption of inflation. Say wages and rents were expected to increase 3% per annum. If Germany engineers the ECB such that resulting inflation is something significantly less than that 3%, they have effectively unilaterally altered the agreement ex-post to require the payback of a larger amount of real principal.

That makes the debtor a victim of German economic "violence".

(I will refute my own argument and suggest that periphery states could have engineered bonds with payments tied to local inflation patters, although I guess that would have resulted in higher interest rates.)

I wonder what is the difference between "assumption" and "guess?"

Hypothetical: I buy an expensive painting by a famous artist. I do so based largely on my "expectation" that the market in expensive art will continue to inflate. The seller, because of his personal tax considerations, makes an installment contract with me to pay off the purchase over a period of several years. Sadly, the inflationary trend of the market for expensive paintings levels off. Does my "assumption" of inflation now relieve me of my obligation to meet my payment obligations?

Making an "assumption" about future value, whether of paintings or of currency, has another name--"speculation."

I feel very badly for the hard-working mortgage holders who had nothing to do with "sub-prime" problems, who paid their mortgage payments on time every month, and who find their primary residence "under water," which prevents them from selling when they have an opportunity to better their careers by moving to a new location. I feel no such pangs for real estate speculators who leveraged their credit to buy multiple houses in order to profit from the anticipated continued inflation.

If you incurred a debt in order to profit from inflation, and then inflation let you down, failing to wipe out some of the value of the debt, you are simply a speculator who guessed wrong. Tough cookies, Sparky, pay the bill and move on to something else.

The issue is that both sides of the deal work based on a guess, and yet one side can turn their guess into reality, and the other does not. It is a vert unwise agreement for the debtor.

Ultimately, as long as you have one monetary polict for a zone as diverse as Europe, someone is going to get bitten by the ECB, . So if the germans keep their current policies, the only options of the south are to be culturally assimilated or to leave the Euro.

In their shoes, I'd take the second option, and leave export oriented Germany holding the bag. After all, they are yhe first ones to select betray in this prisoner's dilemma

To borrow the phrasing of the earlier post: the Germans entered into the monetary union with the assumption of sensible governance by the periphery. Say deficits and debts were expected to remain less than, oh, say, 3% and 60% of GDP respectively. If the periphery engineers a clusterf*ck such that not just the eurozone but the whole planet is now on the brink, they have unilaterally altered the agreement ex-post. That makes Germany the victim of economic violence.

PS, anyone who pretends to be astonished to "discover" that Germans are sticklers for low inflation is being disingenuous. There's no nice way to put this: your argument is ridiculous.

You are hiding behind "diversity". Diversity can mean many things and in this case it means the spectrum of effective and ineffective governance. Why should ineffective governance be enabled? Because that is what breaking away from the Euro entails. If Germany did anything, they were betting on ineffective governance having limited effect.

Don't be stupid. The Germans were upfront about their goal of price stability. They put no bailouts into the treaty. Keeping your word is not a betrayal.

"The issue is that both sides of the deal work based on a guess, and yet one side can turn their guess into reality, and the other does not. It is a vert unwise agreement for the debtor."

This is known (or at least knowable) by the debtor before they enter into the agreement.

So if you make an assumption about the future, and then enter into contracts on that basis, people whom you have no contract with have some obligation to make your assumptions come true? And if they do something else other than what you assumed they would do, they're unilaterally reneging? So, let me see, if I make a contract with my brother on the basis that you will give me US$1000 per month (no strings attached) for the next 3 years, can I expect you to pay up? And if you don't, I'll be a victim of your economic "violence"?

In this case, any debtor assuming that eurozone inflation would be 3% per annum was making a stupid assumption, too. The goal of the ECB is explicitly stated to be inflation less than 2% per year, see http://www.ecb.int/mopo/html/index.en.html. And the Germans are notorious for their dedication to low inflation (although, even if we were talking about a country that had a past history of high inflation, I think the government of the day should be morally free to start keeping their word about inflation, I don't think there is a general moral obligation to keep lying, no matter how much you lied in the past).

Also, please note, say that inflation had been higher than 3%. Does the debtor, in this case, have some moral obligation to their creditor? And if they don't alter on that basis, are they therefore a perpetrator of economic "violence"?

While I would agree there is no moral equivalence, I would argue that balance goes in the reverse direction. Creditors possess the money and owe to it the responsibility of seeing it invested well. Failing to do so is their own fault. Both parties made an agreement that could not be met and both are responsible, but the creditor owes a higher duty and if they fail to deliver it they deserve to lose it to someone who can and will. The only exception is one of outright fraud by the debtor. Now there may have been some fraud but mostly it was just ignorance on both sides, but while ignorance on the side of debtors is excusable, ignorance on the side of creditors is not.

See point 2 in Tyler's post

That is also something creditors must take into account when lending and one of the reasons they often favor collateral. If they believed government debtors would pay any price when they aren't even in charge of their own currency, it was foolhardy beyond belief. If they want to get paid they will have to pay themselves producing the money to do it.

Collateral agreements are enforced by the state. Sovereigns cannot be compelled.

Which is why they would have done much better to lend privately, but only if they paid attention to what they are doing.

I have no brief to defend creditors, but why on earth are you letting debtor's off theme hook? Are you claiming that, say, Greek voters and politicians had no obligation to think about the wisdom of their fiscal policy? If they don't, then what on earth is the basis for democracy?
Personally I think that both would-be creditors and would-be debtors have an obligation to consider ability to repay before signing a loan agreement and failure of one party to do their job in no way excuses the other party failing to do theirs.

Debtors are hardly off the hook. They will pay for it, are paying for it, one way or another. It is up to them to determine which way is best. That is the position of debtors. Both are responsible, but those with the money have a greater responsibility. It is their money after all. If they chase unrealizable investments they deserve to lose it. Someone else can do better with it.

Your logic implies the opposite. If I borrow money, then I have more money and the creditor has less, than if I didn't borrow said money. So by your logic, I'm the one with the money, and thus have the greater responsibility. So your logic implies to me that the borrower has more responsibility (I don't accept your starting point, by the way, I'm just following through your logic as an intellectual exercise).
Furthermore, if I chase unrealisable investments with the money I have borrowed, then I indeed will lose it. And then I won't be able to repay the creditor. So neither of us have the money under this scenario. So how does this translate into the creditor being more responsible?
(Personally I still think that both would-be creditors and would-be debtors have an obligation to consider ability to repay before signing a loan agreement and failure of one party to do their job in no way excuses the other party failing to do theirs.)

It is not possession but ownership that matters. Owners presumably earned it and are, or should be, more knowledgeable about earning it, more sophisticated at dealing with it, should be more skeptical of investments and returns, and more cognizant of risks. Money is not an entitlement, but incurs a duty to its management. Debtors will always be more optimistic, more self deluded, and more risk taking, and reasonably so because it is not theirs. They are only the owners agents. Owners that fail in their duty knew, or should have known, the risks, and must take their lumps. Blaming debtors is just shifting their responsibility and if they are incapable of managing their money, they don't deserve to have it.

Why should earning money and thus having it around to lend make you more sophisticated at dealing with it, and more cognizant of risks than a borrower of money? Let's take a dentist, they earn good money by being good at a relatively rare set of skills - involving teeth. How does that translate into being more sophisticated at dealing with it and more cognizant of risks of lending? And the same for other ways of earning money, eg making cars, mining ores, etc. I don't see how any of these magically lead to someone being more sophisticated at dealing with money and more cognizant of the risks.

Furthermore, Greece in 2008 had tax revenues of US$132 billion dollars, the Greek government could afford to hire some people who are sophisticated at dealing with money. (Comparatively, Bill Gate's entire wealth is only $50 billion, less than half of what the Greek government was taking in a year). And the various Greek governments have been borrowing money for hundreds of years, so they should have a lot of institutional knowledge about borrowing money. We are not talking about stupid people here. It's one thing to say that a private 20 year old is less sophisticated at managing money than a big bank, it's another thing to say that all debtors are less sophisticated than all creditors. When we're talking about sovereign nations, or big corporate companies, the idea that debtors are naturally less responsible than creditors is laughable.

As for it being ownership, not possession that matters, I have re-read your earlier comment and I can't see anywhere where you said that, or made any argument that implied that.

Debtors will always be more optimistic, more self deluded, and more risk taking, and reasonably so because it is not theirs.
As presumably the people who were less self-deluded, more risk-averse, and more pessimistic didn't borrow so much in the first place. If borrowers have more of a tendency to make bad decisions than creditors, then this is an argument for holding them more responsible, as a counter-weight to that optimism, self-delusion and risk-taking tendencies. However, I doubt your premise, lending to the Greek government does strike me as being optimistic, and risk-taking, given its past history. So again I don't really see a difference between creditors and debtors here.

They are only the owners agents.

Your premise implies the opposite of your conclusions. If the borrowers are only the owners' agents then they have a duty to act in the owners' best interests, which means repaying the money they borrowed, no matter what. The only reason to think that debtors might be, at times, justified in defaulting when they could possibly repay, is if you think that they have interests of their own or obligations to other people, and thus are not only the owners' agents (for example, declaring bankruptcy in order to be able to keep eating, or pay for your children's medical care, strikes me as reasonable behaviour precisely because debtors are not just owners' agents. To apply this to the Greek government, one can argue that the Greek government is also responsible to future Greek electorates, and thus should default in their best interests, but this argument is incompatible with borrowers being only owners' agents.).

Owners that fail in their duty knew, or should have known, the risks, and must take their lumps. Blaming debtors is just shifting their responsibility and if they are incapable of managing their money, they don’t deserve to have it.

And debtors that fail in their duty knew, or should have known, the risks and must take their lumps. Blaming creditors is just shifting their responsibility, and if debtors are incapable of managing the money they borrowed, they don’t deserve to have borrowed it.

I find the morality code of debtor/creditor odd. When a prospective debtor borrows money, it is the creditor's choice on how much they chose to lend and what they will hold in collateral. When the deal is made, it is the creditor's responsibility to write a contract that protects them in case of default.

I have a choice. I can pay my mortgage or lose my house, keyword being "or". That is the contract. If the bank resents that they are now in the real estate business, that is of their own doing. If I chose to default on my mortgage because it is finacially logical, I am simply exerciseing my options within the boundries of my agreement with the bank.

The creditors on the national scale only have themselves to blame for loaning money without collateral sufficent to satisfy their shareholders.

When a prospective debtor borrows money, it's the debtors' choice on how much they chose to borrow, and what they will invest it in, and under what conditions they will be able to repay it. When the deal is made, it's the debtors responsibility to consider how they will repay the money, and write a contract that covers them against being not able to repay.
The Greek government had a choice. It could have chosen not to borrow money, or it could have put into the contract conditions allowing it to default. If the Greek government resents that it is obliged to keep its word, that is of its own doing. If the creditors to the Greek government chose to try to enforce their loans, they are simply exercising their options within the boundaries of their agreement with the government. (As a legal matter, I understand that much of the debt is under Greek law which the Greek parliament can unilaterally default on, but some under UK law, which the Greek government can't rewrite).
The debtors on a national scale only have themselves to blame for borrowing money and wasting it.

Again, I think that both would-be creditors and would-be debtors have an obligation to consider ability to repay before signing a loan agreement and failure of one party to do their job in no way excuses the other party failing to do theirs. The Greek governments that borrowed the money is as morally liable as the creditors. They, after all, had the option of living within their means.

"When it comes to default, there is no moral equivalence of debtor and creditor. The debtor is the one breaking the agreement and breaking his word."

I think that is too simple and is only true if the terms of the loan have not changed since the loan was taken out. Here in the United States, credit card companies can change the terms of fixed rate credit cards, for example. And one receives updates to customer agreements all of the time. If these changes are not material, then I agree with you.

But the creditor changing terms (think loan shark) can re-introduce moral equivalence here.

Exactly. There is an argument that they have changed the terms of the loan in a predatory way.

How have the terms changed in European loans? Not a valid excuse for Greece nor Italy.

It was in the credit card agreement that the interest rates could change. And indeed, that's what makes it possible for credit cards to exist--lenders are not in the habit of making fixed-rate loans of indefinite term to anyone. Nor was this arcane knowledge available to the few--in fact, everyone knew that interest rates could be raised, since they had been in the past, and customarily were on anyone who missed a payment.

Everything that gets put in an agreement may not be legally enforceable. Many agreements get substantially rewritten if they end up in court for enforcement.

That's a pretty sweeping statement. Could be true in some jurisdictions, but it is a general principle for courts NOT to rewrite contracts .

I think that as soon we have abandoned the concept of usury, we have abandoned the concept of morality in credit transactions. Now it is about economics and self-interest.

The only question that either debtor or creditor should ask when entering or exiting a creditor/debtor relationship is whether it is one's self interest. At least when you know that is all the other side cares about. (And that is typically all the credit card companies care about.)

Before entering into a creditor/debtor relationships which are based purely on self-interest, creditors need to scrutinize debtors to ensure that the relationship is in fact in the debtors interest and sustainable. Or charge a higher interest rate. High interest rates are a substitute for morality. Creditors are compensated by default by collecting huge amounts of money in interest.

Tyler works for the bankster/money power elites that own the NYT and use it as a mouthpiece for propaganda. That is why the paper is still in print even after becoming unprofitable on the shallow level years ago. So of course Tyler will make the argument that people with corrupt government should be forced to pay debts of their corrupt leaders.

I don't have any bigger mouthpiece than this forum, and I will make that same claim till the cows come home. What are you saying here exactly? Citizens do not deserve their corrupt governments?

You seem to neither read the NYT or Tyler on any regular basis... unless this is a parody of some sort

Anything higher than the risk free rate is mostly there to protect the lender against the risk of default. It's their insurance policy.

The claim the borrower is morally worse than the lender is reallllly weird in this context. I mean really weird.

If you think I am wrong and it isn't strange to think this way, consider payday lending. Is it morally wrong for a person to default on a payday loan after 1 year of rolling the loan over?

The terms of the loan never changed, but most people would find it morally acceptable for people to default against a payday lender after some time frame.

In fact, the payday lenders themselves usually don't go after people who default after some time frame.

Tyler says "Yes, these people were morally inferior."

Any level of interest above the risk free rate is there to compensate the lender for default risk. You could theoretically break apart the loan into the risk free rate and the additional rate, with the additional rate being considered insurance premiums on default risk.

In fact, it's really common to think about interest rates like this.


How can default be immoral? The borrower paid "extra", and presumably a fair market price, to compensate the lender.

If economics is enhanced by becoming more "autistic" then this is how you'd think about it.

Okay, situation. A agrees to lend money to B. B agrees to repay it, on some schedule. A holds up their end of the deal. B then reneges (in some way not explicitly allowed for in the contract). This is not morally neutral, A kept their word, B didn't.

How can default be immoral? The borrower paid “extra”, and presumably a fair market price, to compensate the lender.

Said borrower broke their word (assuming that they didn't explicitly allow for the default in the contract).

Is the issue moral superiority? I guess the issue is that you have an imperfect contract to sign a country into the EU.
This contract is imperfect to enable countries which are as different as Germany and Greece to get into a single group.
For instance at the outset , had the Greeks been told that in case of a downturn , their retirement age could be raised or their salaries slashed, they might have thought a lot more before joining the EU.
All the EU populace signed on with an imperfect understanding of an imperfect contract; and it is only now that every one is moving to an understanding of what the downsides are and there are problems.
Before we speak of ant-grasshopper bailouts, there are two aspects:
Either the contract is preserved as it is: those who can, bail out the rest, because each of them was party to writing an imperfect contract, or the entire contract is revised and rewritten and each of the countries undertake a referendum to opt in or out, with everyone having a clear idea of the risks and benefits of opting in or out.

That is a perfect solution-too bad we do not live in a perfect world.

You forget the problem. Most of the eurozone governments want to keep on borrowing money. If they default (which I guess is what you mean by revise and rewrite the contracts), then two things will happen:
1) The money they lent to their own citizens will be lost, and said citizens will be furious with them
2) It will be much harder for said governments to keep borrowing more money in the future, so they'd have to cut government spending immediately.

That's why the Eurozone governments don't want to default. It's not really about morality, it's about the immediate political problems caused by changing said contracts.

The way I see it, there are only 2 ways out of this: more integration or disintegration. Only a chunck of the elite would choose more integration. The voting majority already feels flawed by the current state of the economy and isn't ready to pay for the mistakes made by other countries.

The technocrats aren't the one deciding in the end: the politicians are, and those are the ones who have to please the masses - therefore, I see only desintegration as a possible outcome.

Why does the link in point two lead to a tweet about a paper on "Microbial Biogeography of Public Restroom Surfaces" - am I missing the joke?

Germans are not only morally superior, they are cleaner?

* It sure is a crisis of governance - the consolidated EZ government deficit is only about half that of the USA and the UK. it's clearly nog about deficits, or debts. It's about how the EZ deals with deficits and debts.

* But don't underestimate the damage already inflicted on many countries. Look at this graph: 'ceci nést pas un equilibre economique': http://www.luxetveritas.nl/blog/wp-content/uploads/2011/11/werkloosheid.jpg
Spanish unemployment is in all probability going to breach the 25% threshold, it might very well go up to 30%. The euro has already failed, anybody looking at Spanish unemployment and talking about the large costs of breaking op the Euro has to read his Bohm Bahwerk again: "Kosten sind entgangene Nutzen", "Costs are earnings foregone". Can anybody imagine larger costs than 25 or 30% unemployment in countries like Spain and Greece?

* And yes, Germany has been saving too much. Read this Kantoo post:http://kantooseconomics.com/2011/04/03/is-germany-competitive-is-norway/
(which by the way shows, again, that the national accounts are the real macro economic model)

It's not about competitiveness or not - it's about the circular flow of (German) money (as estimated in the national accounts) which after 2003 was increasingly flowing to southern europe, causing housing bubbles and inflation, but which was so rudely interrupted in 2007/2008. Sure, this flow once had to stop. But doesn't capital flow to the places were it's purchasing power is highest, i.e. to the countries with the lowest prices levels, like Spain and Greece?

By the way - between 2001 and 2004 German inflation was indeed quite a bit lower than in the rest of the EZ, but after 2004 (with the exception of Greece) this was not the case anymore:http://www.luxetveritas.nl/blog/wp-content/uploads/2011/11/Prijsniveaus.png
(again: data from the glorious system of the national accounts)

If default is morally unacceptable then so is charging riskier countries a higher rate of interest. By this I mean that the morally superior Germans have created a system where they bennefit from lending by an amount that is determined largely unilaterally, and this amount is meant to offset the probabalistic chance of default. These lenders guessed incorrectly and do not want to incur the consequences of this.

People often demonize the high interest rates offered to the very poor. I have seen you argue on this blog that these loans are mutually benneficial and the high rates are needed to offset the probability of delinquency. Fair enough not accusing the lender of immoral ussory seems fair (though I still have serious reservations grounded in paternalism and my suspicion that borrowers are fundamentally uninformed on the nature of how interest accumulates). But if you do not blame the lenders for charging higher rates to riskier borrowers I don't think it is reasonable to blame riskier borrowers for exercising the downside of being riskier borrowers.

How does Germany benefit from lending by an amount that is determined largely unilaterally? The German government itself is in debt to the tune of about 80% of GDP and according to Eurostats had a deficit of 4.3% of GDP in 2010. Higher interest rates mean higher borrowing costs for the German government

Individual Germans might be lending money, but then how can they be said to be doing so unilaterally, when there are millions of them? And how about competition from savers in other countries, such as other European countries? I thought that a lot of Italian government debt was held by Italian households, for example.

'a lack of understanding of how government spending cuts can be self-defeating in the short run'
Seriously? You mean a typical educated German isn't familiar with how Hitler actually won power? (Tip - it wasn't inflation, it was Heinrich Brüning's dedication to what is currently called 'austerity,' the deflationary impact hitting society as the Nazis were beginning to wane in the public eye.)

The problem isn't spending cuts - the problem, in the empirically based perspective of Germans, is that in end, Leben auf Pump is doomed to failure. And though it might be hard to imagine for many commenters here, Germans talk about this a lot in regards to the U.S. over the last couple of years - Germans know with a certainty what many Americans seem to have difficulty comprehending, that there is no way that the U.S. can continue without changing how it lives.

For German reading commenters (where none of what appears is new at all in German terms), there is a link to Norbert Röttgen, Christian Democratic Union environment minister talking about 'Leben Auf Pump' from Nov. 28, 2011 -

SPIEGEL: - Chancellor Angela Merkel has noted the environmental and financial crisis have a common cause. Is she right?
(Kanzlerin Angela Merkel hat gesagt, dass die Umweltkrise und die Finanzkrise gemeinsame Ursachen haben. Stimmt das denn?)

Röttgen: I see this in the same way as the chancellor, The major crises of our time arise from a framework of thought and politics that recognize no tomorrow.

(Das sehe ich genauso wie die Kanzlerin. Die großen Krisen unserer Zeit erwachsen aus einem Denken und einer Politik, die kein Morgen kennen.)
SPIEGEL: That sounds as if saving the euro is the lesser problem.
(Das klingt, als sei die Euro-Rettung das kleinere Problem.)

Röttgen: The euro crisis is difficult, but only a section of a wider problem. We are definitely dealing with a comprehensive system cris. The life style of the last decades exist in a dangerous now egoism, which we must overcome.
(Die Euro-Krise ist schwierig genug, aber eben nur ein Ausschnitt eines breiteren Problems. Wir haben es auf jeden Fall mit einer umfassenden Systemkrise zu tun. Der Lebensstil der letzten Jahrzehnte bestand in einem gefährlichen Gegenwartsegoismus, den wir jetzt überwinden müssen.)

SPIEGEL: What is worse, financial or ecological debt?
(Was ist schlimmer, die finanzielle oder die ökologische Verschuldung?)

Röttgen: The ecological mountain of debt is the largest. When a financial bubble pops, one can make rescue packages, and escape from the abyss. When ecological systems end up going kaputt, one cannot simply create a rescue package. This creates the danger that there can be no return to a good state.
(Der ökologische Schuldenberg ist am größten. Wenn eine Finanzblase platzt, kann man Rettungspakete schnüren und vom Abgrund wieder wegkommen. Wenn Ökosysteme kaputtgehen, kann man nicht einfach ein Rettungspaket schnüren. Dann besteht die Gefahr, dass es kein Zurück in einen guten Zustand gibt.)


Excuse the translation - but for any complaints that it is somehow inaccurate, the German is provided.

As a further note - Röttgen is a fairly normal representative of the CDU, which is considered the mainstream representative of German right wing thinking, much as the SPD is considered the same for the left wing. As for what the Greens think - a party that won big in the core of CDU power after Röttgen decided to try to lift the Atomausstieg (ending of nuclear power generation in Germany) - well, they actually pretty much think exactly what Röttgen does in those few sentences. Which is why a CDU Green alliance is quite likely in the future, as the Greens seem to be slowly replacing the SPD as Germany's second major Volkspartei.

Well, maybe Germany does have a set of overarching beliefs which look like morality from the outside - for Germans, this just seems to be self-evident common sense, proved by experience.

Oh wow, Germany is way more doomed than I thought.

Well, from some perspectives - after all, the Germans are dedicated to such ideas as preserving their industrial base, primarily by remaining at the forefront of engineering, with a particular emphasis on quality and efficiency. When any of their competitors begins to damage its own competitiveness, Germans can't resist enjoying something that resembles schadenfreude. After having bought an American car company, a certain slice of the German elite (well, if the people running Daimler are included in that definition - many of them being engineers, after all) got a good look at what their putative previous competition believed, including sheer lunacy about climate change coming from Chysler's chief economist in 2007 - http://news.bbc.co.uk/2/hi/6247371.stm Daimler sold Chrysler at a loss, and that little outburst probably comforted any Daimler employee who still regretted not being broadly represented in the American market.

One is welcome to compare the relative fortunes of the two companies since then, of course.

The German company is the one that believes car companies need to adjust to a future with increasing fuel costs, and the need to find something other than fossil fuels to power vehicles - and is also the company spending large amounts of money in fuel cell technology and hydrogen, while attempting to reduce emissions through efficiency gains. It is also expanding its German facilities to the tune of 1.7 billion or so euros, after earning over 6 billion dollars in profit in 2010.

The other company went bankrupt, and is again majority owned by a European car company (currently earning a surprisingly good reputation for building solid and desirable economy sized vehicles). And seeing how Van Jolissaint apparently kept his job, at least in part, one assumes that Chrysler's future will look a lot like its past.

Germans tend to focus on the concrete - it is one reason they are generally considered dourly unamused when someone tries to pretend that excuses are sufficient to cover stupidity.

I am not sure why you spent the time typing out this parable. One German car company is profitable and one car company in the U.S. is crappy. Okay.

Thanks - very useful insight (even if it's unpalatable for some).

What insight are you referring to?

describing climate change as "way, way in the future, with a high degree of uncertainty" is not lunacy, it's what any rational person who actually understands the state of the data and the reliability of the feedback calculations in the computer models should conclude. Lunacy is spending trillions of dollars to mitigate a poorly understood increase in temperature that may be necessary to prevent humanity from being wiped out at the end of the current interglacial period.

The direct result of climate change is poorly understand, but 50 years is not "way, way in the future."

What's supposed to happen in 50 years?

Hansen once predicted, 24 years ago, that a highway in NY would be underwater in 20 years. Now he claims he really said 40 years. Of course, it isn't anywhere near being underwater, and it almost certainly won't be in 16 years either because there's no acceleration in sea level rise (in fact, sea levels actually dropped over the last couple years). But I bet he'll still be claiming the Warmocalypse is imminent, and lots of people will still agree. Sigh.

What is your point exactly? That you want to talk about environmentalism instead of the topic of the post?

Well, the point being that Germans, including the center right, see various forms of crisis in a way that can be considered 'moralistic,' where Germans just think they are being eminently pragmatic. And that the current financial crisis is still not as important as environmental concerns in their eyes - which might provide some scale on how Germans are affected by the American angst of a collapsing euro. Germans are quite capable of being concerned about more than one thing at a time, and to see complex problems arising from complex beginnings and requiring complex solutions (let's not forget which nation elected a female Ph.D. in quantum chemistry).

Okay, so what you meant is, "Contra common belief, 'Germans' do not see the crisis and potential bailouts as an ethical issue, and are simply approaching it from a practical perspective, doing what they think is in their best interest"

It was a good insight into the German perspective

Quite an interesting post. "Germany and morality"...
Yet I'm stunned at how much thinkers/blogger nowadays are crossing the Rubicon which should keep 'economic assessment' of what could/should be done to improve a currently bad situation and finger pointing 'who' is responsible for it.
Yet, your post is not asking one very important question of what is moral useful for, if it's not to shape collective behaviour. This implies to me that the role of the 'elite' should be to think beyond its nation common sense or moral in order to rationalize the problems its people need to be solved. Germany is precisely failing on that front, but far less than some other countries in the periphery: Greece has obviously been terribly governed, Spain did not acknowledge to major bubbly nature of its 'miracle', France has just kept piling long term unemployement and debt for à years, etc All of this in the name of specific national myths.
And there is not much European common myth shaping economic behavior in Europe unfortunately.
Last little thing, don't forget German people historically demonstrated their ability to extrapolate economic success into moral superiority and further into hubris fully destructive at global level.
Bad things do happen, despite great morality.

Ireland does NOT have a technocratic government. The Irish voters simply elected the opposition in their anger at how badly Fianna Fáil managed the crisis. All of the government ministers are elected politicians. Please do your homework.

Voters CAN vote in a technocratic government. It can be done purely by accident. However, I'm not interested enough in Ireland to do anyone's homework right now.

Once a union is based on the perceived moral superiority of one party, it ceases to be a union.

quoting Macro Man

German economic policy essentially consists of:

1) Tight fiscal policy to crush any signs of a recovery.

2) Tight monetary policy to crush any signs of recovery.

3) Tie yourself to some profligate countries so that you have a cheap exchange rate and can sell shedloads of exports.

4) When the countries you provided vendor finance to start having trouble paying you back insist that they follow 1) and 2).

5) Wonder why everyone hates you.

TMM's mate AH wryly observed: "It's a pulley system - you throw everyone over the cliff and let the rope take you higher. But eventually you reach the pulley."

(ps - this is also quite amusing - http://www.ft.com/intl/cms/s/0/1c426f86-1a7c-11e1-ae14-00144feabdc0.html )

This is spot on. Germany is a gigantic vendor financing scheme with the periphery countries as their customers.

Ed Harrison is also big on this idea.

"Can't afford it our vastly underpriced products? We'll lend you the money!"

And Germany has deliberately extended the crisis to push the euro lower as well. They are by far the most guilty party here -by far.

Look at the "Irish" banks, and how Ireland is screwed even though they played by the rules. How did Ireland deserve what they are forced into today? What moral error have then committed?

If the periphery governments were more effective, this wouldn't be an issue. I might even surmise that if it was just private credit at stake here, the eurozone could have been enhanced by this crisis. Also, the case is overstated since both Germany and PIIGS economies are much more diverse.

Yeah, but the Greek and Italian governments have never been "effective", so in reality those chickens were always going to come home to roost.

" those chickens were always going to come home to roost"

This is the point entirely.

Germany benefited for years from a gigantic vendor financing scheme. Now they are balking at the bill.

In a very real and truly massive way, Germany benefited from lending money to these countries so they could buy German goods.

I don't see how this is more moral than defaulting.

When it comes to default, there is no moral equivalence of debtor and creditor. The debtor is the one breaking the agreement and breaking his word.

So the creditor has no moral obligation to do proper due diligence and make sure they're making a smart loan? The creditor charges a higher interest rate to a creditor precisely because there is uncertainty in the ability, financial or political, of the debtor to pay. Also, since the debtor will eventually have to hit credit markets in the future, there is an incentive for the debtor to make good.

Is American Airlines acting immorally for declaring bankruptcy with $4 B in the bank?

'Is American Airlines acting immorally'
No, cynically - they can't get the concessions they want from their employees, so they are not exactly metaphorically taking their ball and going home with it until people play by their rules - well, with the accompanying pre-approved bonuses for upper management, I'm certain. No reason to spread the pain too far, after all - some people have very delicate butts, from sitting on them all day long in conference rooms, even when enjoying the more than occasional company paid for buffet does provide a certain opportunity to move around.

Though one can only hope that AA's CEO is a bit smarter than Qantas's - at least in public. You have to be pretty stupid to be given a 71% pay hike and then grounding the airline you run without advance notice. (If only there was a tax on CEO stupidity - we could all live like kings. Though I believe Qantas is having a special deal on pajamas - check the Twitterverse for more details -
'AN ATTEMPT by Qantas to repair its battered public image through Twitter backfired when it was hijacked by angry members of the public.

Qantas had used the service yesterday to announce its A touch of Qantas Luxury competition to customers on Twitter: ''Ever wanted to experience Qantas First Class luxury? You could win a First Class gift pack feat. a luxury amenity kit and our famous QF PJs. To enter tell us What is your dream luxury inflight experience? (Be creative!) Answer must include #QantasLuxury.''

A hashtag is conventionally used on Twitter to generate discussion about a topic. The tweets were published hours after the airline revealed its negotiations with the Transport Workers Union had broken down, leaving Fair Work Australia to decide the outcome, expected to take a few months. It also comes almost a month after Qantas grounded its fleet in an attempt to end industrial action, leaving passengers stranded all over the world.'
http://www.theage.com.au/national/a-qantas-luxury--not-having-to-face-flak-20111122-1nsy3.html )

If anything, one would think that bailing on your obligations and wiping out your shareholders should be considered immoral if you're just using it to gain an advantage in a negotiation. If that's the case, when is defaulting immoral?

Let me get this straight. If you cheat me, I am to blame for having trusted you? This is Ryan Avent-style moral relativism with a vengeance!

Default isn't cheating the creditor anymore than charging higher interest for a higher risk loan is price gouging. Going in the Germans knew that Italy and Greece have high pensions and tax evasion and that this was a risk factor. They also knew that they had a high debt to GDP ratio and the nature of their economies require a looser monetary policy. The political climate and low quality of leadership (bunga bunga), was also known. If the economy went in the toilet, Italian and Greek debt were more likely to default. All of this was known ahead of time. As a result, they required a higher interest rate from Italy and Greece than they do from Germany or the US. Unless you're going to say that differential interests rates are equally immoral because everyone is required to pay back all debt.

What's the point behind all the moralizing (on either side). What we need is a good negotiator on the table.

Stalemates are resolved by pragmatism. Do we have any historical precedents where the other side conceded an argument because we convinced them that their position was morally wrong?

What we really need is the Thomas Schelling variety of diplomacy.

That depends on the nature of the default. Sovereign default is not the same as corporate.

AA cannot pay back its creditors. It is simply unable to. If they could, they would.

As Tyler points out, this is not the case for the periphery nations: they COULD pay back their debt, they are choosing not to because it is painful.

Interest rates generally indicate the level of belief that the promise of repayment will be kept assuming good faith on the the part of the borrower -- the risk is usually a function of circumstances beyond debtor control.

Your logic suggests only a sovereign default on a minimum-interest loan would carry any moral weight, which is clearly absurd.

Note that American Airlines declared a Chapter 11 bankruptcy protection not a Chapter 7 bankruptcy. I sense some moral shakiness right there.

I'm not sure liquidation would be morally superior.

At the end of the day, the judge and the law decides what's allowed, and AA is bound. Again, that isn't true for sovereigns, they just renegotiate.

Just because they could theoretically pay doesn't mean there is a politically viable solution. Tyler mentions their national wealth. I'm sure Greece and Italy could make up the money by selling off their national treasures to collectors/Disney/PE firms. Of course, the second that happened the regime that sold off those treasures would be thrown out (possibly violently) and replaced by someone that would nationalize those treasures. Those political calculations, by the way, should be, and are, taken into account in the interest rate given. The idea that debtors will cover obligations with assets exists, they are known as collatoralized loans. If debtors to periphery nations expected to receive proceeds from the sale of national assets, they should have put that into the terms and the debtors would have received a lower interest rate. The way the Italians and Greeks are acting is completely predictable and should have been taken into account when lending to them.

Also, it would be rich for the Germans to expect this. When they were faced with massive obligations following WWI, they didn't sell off assets, they tried to buy foreign currency with marks that were removed from a gold peg to pay for WWI.

Just because they could theoretically pay doesn’t mean there is a politically viable solution..

Of course. What did you think "they don't want to pay" meant?

The way the Italians and Greeks are acting is completely predictable and should have been taken into account when lending to them.

That's true, but it just means they should have been charged MUCH higher interest rates, and therefore the lenders made a mistake. It doesn't affect the moral component of the act of defaulting in bad faith.

This is sort of another version of "if she didn't want to be raped she shouldn't have worn that short skirt in a bad neighborhood." Ok, sure, it was predictable and she made a mistake -- but the act is still wrong.

You have to take the boundaries of what solutions are politically possible into account when coming up with your risk premium.

If you want to force your debtor to do an action as a condition of your loan, then make it a condition of your loan. There is risk inherent in providing unsecured debt and the interest rate takes that into account. If I don't pay my car loan off, my car company can take my car. However, if they request that I sell my iPad or my XBox to pay the difference, they can pound sand. On the flip side, if I don't pay off my loan, it will be harder for me to get future loans, so I'm incented to pay off my loans. At the same time, the bank will tell me to pound sand if I go back to them and say, "Hey, I was safer than you thought I was, please give me a refund on some of my excess interest payments."

Same thing goes for sovereigns. Anyone who lends to Italy with the expectation that Italy is going to mortgage the Colosseum to pay them back is a fool. And you know what they say about fools and their money.

There is no moral similarity between the two. Lenders operate under the assumption there is a risk of default. Unless it's immoral for them to not return money to borrowers that are safer than expected, it's not immoral for borrowers to default in an entirely predictable manner.

Consider this: you have two friends, one reliable and one a bit of ne'er-do-well. For whatever reason, you decide to engage in a no-recourse, no collateral loan to each of them -- if they default, you have essentially no ability to pursue them in court or elsewhere (this is basically the situation of sovereigns).

Now naturally, you lend the reliable friend the money at a lower rate of interest. But you expect the unreliable friend to borrow in good faith, even though you're asking for a higher rate.

So, your reliable friend pays you back on schedule, but your unreliable friend says "Sorry, but I'm only paying you back half. I could pay you back the rest, but it would require me to live in a smaller house and drive a cheaper car, so I'm not going to."

Can you really argue your friends' behavior is morally equivalent?

Oops, bad tag.

Consider this: you have two friends, one reliable and one a bit of ne'er-do-well. For whatever reason, you decide to engage in a no-recourse, no collateral loan to each of them -- if they default, you have essentially no ability to pursue them in court or elsewhere (this is basically the situation of sovereigns).

Now naturally, you lend the reliable friend the money at a lower rate of interest. But you expect the unreliable friend to borrow in good faith, even though you're asking for a higher rate.

So, your reliable friend pays you back on schedule, but your unreliable friend says "Sorry, but I'm only paying you back half. I could pay you back the rest, but it would require me to live in a smaller house and drive a cheaper car, so I'm not going to."

Can you really argue your friends' behavior is morally equivalent?

If you want to force your debtor to do an action as a condition of your loan, then make it a condition of your loan.

I'm not sure you understand what "sovereign" means.

You have to take the boundaries of what solutions are politically possible into account when coming up with your risk premium.

Yes, but we've already agreed the lenders made a mistake in that respect. That doesn't speak to the immorality of a bad faith sovereign default.

Just to throw out a bit more history -
'Think Greece's current economic malaise is the worst ever experienced in Europe? Think again. Germany, economic historian Albrecht Ritschl argues in a SPIEGEL ONLINE interview, has been the worst debtor nation of the past century. He warns the country should take a more chaste approach in the euro crisis or it could face renewed demands for World War II reparations.'

It seems to me that Russia would then have to pay reparations as well... I adore Russia as it happens, but did they not break anything expensive in the war that belonged to others? ;)

Not excluding the 'virtue' of a disputed but certainly large number of Berlin women, I'm sorry to say, some of them repeatedly. Heavy suffering ought to at least be a man's job, if anyone's. No less than Germany, the USSR transgressed the Polish border on a day of peace in '39. It seems they got the benefit of a huge empire for 45 years, and executed half the elite of Poland in Katyn Forest. Nobody's perfect, and I mean that non-sarcastically. It's all too true, and no one has the right to falsify.

In any case, those who had any serious level of power over the events of the 30s and 40s are long dead.

Cheating is cheating is cheating. Why is that so hard to grasp?

Just because one is a habitual liar doesn't excuse lying. And Greek governments have repeatedly broken their promises of fiscal discipline and then have lied about it.

Charge German governments with being fools if you wish, but there is all the moral difference in the world between fools and cheats. There simply is no moral equivalence between Greece and Germany.

If cheating is wrong, then Greece -- where cheating is endemic -- is morally inferior to Germany. Just read almost any newspaper account of civic and business morality in Greece. From a recent NYT: "Today, the government and much of Greek society 'sense that they can get away with all sorts of things because the euro zone partners are petrified of default,' said Mr. Economides of the London School of Economics. 'They sense that at every turn, some form of bailout will be found.'”

if your bank lent money to Darth Vader to build the deathstar then I would not feel sorry for you lose your money. In fact I'd call you immoral for lending him the money.

But I'm a rebel...anyone who lends money to tax collecting entities is amoral. caveat emptor bitches.

I'm fairly confident they didn't know it was this bad, that a crisis would be directly relevant, or that a directly relevant crisis would push this hard. And I think that's Tyler's point. Technically the only entity that knows how successful paying back credit will be is the debtor. The creditor can ask any number of questions, but only the debtor can know the whole package. Granted predatory lending is a problem, but a bad loan does not translate into predatory lending.

So the debtor has no moral obligation to do proper due diligence and make sure they’re borrowing money they can safely repay, or failing that, write into the contract their default terms?

The creditor charges a higher interest rate to a creditor precisely because there is uncertainty in the ability, financial or political, of the debtor to pay.

And that justifies the debtor breaking their word how?

Look, the creditor fulfilled their side of the bargain, they paid the money to the debtor. Now the debtor is not filling theirs, even though they could have written default conditions into the contract at the start. That's the moral difference. Yes, the creditor made a bet that the debtor would repay and that turned out wrong, but that doesn't mean that it's morally neutral that the debtor is breaking their word. The debtor could have always written in the default terms explicitly.

Also worth mentioning - Germany's widely praised virtues are sustained by a large state sector, strong labor protections, and broad welfare state.

In Greece, people drive where they want, build where they want (zoning? here's a few Euros) and pay taxes if they want. A libertarian utopia!

Libertarianism =/= anarchism.

That's hardly anarchism, though I find it difficult to mesh the core libertarian value of having small, well-defined governance. I'm no supporter of libertarianism, but I don't like straw men.

Lower taxes is libertarian, not paying taxes is anarchist. Less regulation is libertarian, bribing regulators is anarchist. Less restrictive driving laws is libertarian, driving on the sidewalks is anarchist.

If you think the high level of social norms, work ethic, responsibility, national cohesion, is not of a piece with being the sort of place that would put in place the earliest and strongest social net, I don't think you understand Germany very well.

You need to take a look a closer look at Greek institutions. Guess what--large state sector, strong labor protections, and broad welfare state--they've got that too, in addition to all the non-compliance you mention. That it was fuelled by borrowing made unsustainable in part by that very ethos is part of the whole point of this post.

The hearts of men never change, not in any age, as Undset said.

Tyler is right: The idea that one people is inherently morally superior to another is repugnant. If one acts in ways we consider morally superior or inferior, we should look to institutional, outside explanations, not vague "national spirit" crap.

I think the "Debtor is always the bad actor" theory was completely blown up by the frankly misleading and inappropriate mortgage instruments peddled to sub-prime borrowers. Similarly, the Germans got rich exporting to the periphery, and lending them Euro's to pay for the goods. They have significant accountability for the outcome. I hope they realize this before the whole thing blows up.

Also, if you loan 200 dollars to a crackhead and he doesn't pay you back... whether or not the crackhead was wrong doesn't change the fact that you're a dumbass with 200 less dollars.

Right, but in this case when we're talking nations rather than predatory lenders who thought their pipeline to money could never dry up. Predatory lending would be much more difficult at this level since every country involved has a functioning (though poorly funded) treasury department to warn a country of this exact problem.

Countdown to eurogeddon at 7 (more or less) days – euro essentially unchanged against the dollar since yesterday, and up roughly 1.5 cents since the countdown began – http://www.ecb.int/stats/exchange/eurofxref/html/eurofxref-graph-usd.en.html

This piece was funny, not in a humorous way, but in a sad way.

All the old moral texts banned lending WITH INTEREST - the periphery countries aren't against paying back what was lent, is paying back the extra something something on top that is supposed to allow the person lending to somehow profit extra.

But I do like the fact that Cowen is acknowledging how much of an idealist he is - its about time conservatives and liberterians fessed up about the fact that they are not in any way, shape or form realists, worried about the nasty, gray, dynamic, uncaring real world, but are instead pure idealists, worried about living in an idealized world of values and notions which have no material basis.

If values and notions have no material basis, then you must have no problem with the way the money was lent.

Very bizarre. This is not even Tyler's opinion, he specifically states he is playing Devil's Advocate.

Furthermore, by "old moral texts" are you referring to medieval times? I am not sure of the relevance of something that changed hundreds of years ago because it had terrible, terrible results.

Try biblical times.

"is paying back the extra something something on top that is supposed to allow the person lending to somehow profit extra. "

The rate variance is actually pricing the risk of default. There's nothing idealist about it.

They also had debtor's prisons and bondage for defaulters in those days. These days debtors face no real punitive punishment.

Excellent piece, Tyler, thanks for sharing.

This underpins why I say the euro will die rather than become the basis for a stronger fiscal union: the PIIGS will not submit to German hegemony, and Berlin will not give up more sovereignty just because the PIIGS have been irresponsible, therefore the form of a stronger union can never satisfy all parties.

Fascinating quote in the piece on Estonia... "Businesses reduced wages by up to 40 percent". Has this been studied at all?

In great detail. All of the recent EU members which are former Soviet Republics have been willing to make enormous sacrifices to get into any non-Russian club which will have them.

Unfortunately, despite determined efforts on the part of certain parties, neither Greece nor Italy ever managed to become a Soviet Republic. As a result they show significantly less willingness to do anything to escape Russian influence.

I don't know where the original argument comes from but the idea of economics as a morality play is the root of tons of stupid economic policies. Who cares if Germany is morally superior if the result of their actions is that they go into a deep recession? There isn't some economic afterlife where Germany can enjoy eternal bliss and wealth for being financially virtuous. Likewise, even if Italy is being bullied, the meek won't inherit the earth in this case.

Avent is wrong only in the sense that morality is used in the first place.

See Tyler's point 8.

There's is nothing rational about following rules for the sake of following rules. That's just a dodge for anyone that points out the rules are stupid and will lead to self-destruction.

Of course, this is why we invoke morality in the first place. Rules are generally understood to be things that we follow to make systems work. If the rules fail to make the system work, then the rules are problematic. Morality has no such pragmatic binding. Being moral for the sake of being moral is the right thing to do. Following rules for the sake of following rules isn't something that's "worthy of loyalty in it's own right." In short, obeying rules to keep order matters only insomuch as order is kept.

In Greece, the system is not working because too many people are not following the rules, while in German it is working because more people are. The result of a worse outcome for everyone else at the benefit of the rulebreakers makes that an immoral choice on their part.

One can follow the rules because that is the rational course, and also argue the rules are stupid and self-destructive. That's sort of a basic notion underlying constitutional republics.

We'll see just how much the german system is working when the periphery stops importing German goods. The bad outcome for everyone is already going to happen. Blowing up the Euro hurts germany more than bailing out "rulebreakers." The only question is whether Germans think pride will put food on the table.

And until the constitutional republic is shown to be an institution capable of dealing with issues without requiring rebellion (whether violent or nonviolent i.e. america in the 60's) you'll have to forgive me if I don't even see laws as being particularly necessary to follow. A law that screws people over isn't a law that will be obeyed. No matter how much one tries to wrap laws up in lofty language about order and virtue.

Germany didn't blow up the euro, the periphery did. Germany can either pay for their irresponsible spending, or not. I think it's hard to argue Germany is better off paying the Danegeld here.

Whatever happens, it's a safe bet Germany will still be better off than the periphery.

Interesting. This "ordnung-is-ordnung" behavior of Germans (e.g. pedestrians waiting on a red light even though no car is anywhere in sight) isn't common in the Netherlands or Denmark, where people are generally less uptight about nonsense rules, yet these two nations are as economically developed as Germany, if not more.

There must be more than one route to a successful nation.

It's also a gross generalization not at all consistent with my experiences in Germany. But hey, all Greeks are alike too, right?

Interesting, because this generalization *is* largely consistent with my hikes around, at least in West Germany.

At some places, the above mentioned behavior ends very abruptly, like: Aachen (Germany) - "red light phobia" everywhere, Landgraaf (a few kilometers from Aachen, but already in NL) - people couldn't care less.

Reminds me of the parable of the elephant and the blind men.

'Might the same be true of the eurozone? I’m not calling these countries corrupt, rather there may be remarkably little cross-national cultural capital, and remarkably little deep public support for a costly EU bargain, so little that many German (and other) insiders know that no grand bargain can be sustained or even seriously attempted.'
This struck my eye on re-reading, along with the bit of U.S. decline being indicated by dismissing another perspective tragic juvenile moralizing (though I'll admit, on re-re-reading this passage, it does seem a bit confused - we aren't to look at morality, except when we should be looking at morality?).

The EEG/EC/EU has survived longer as a cross border entity longer than the entire Soviet Empire, which for European standards also had a respectable lifespan, comparable in some ways to the peak of the Swedish Empire.

And the EU was able to integrate and develop those nations which had been subjected to Soviet domination, an accomplishment which stands in stark (and even fairly comparable in terms of disparity, history, etc) contrast to how Mexico has developed in the same period of time after joining NAFTA.

And this might be part of the confusion - the EU is as much about selfish self interest as it is anything approaching idealism. The Czechs and Slovaks are happy to be living in again divided countries, yet both enjoy the numerous advantages conferred by being in the EU, and neither feels the EU is a yoke around their necks. Neither nation has any armies placed on borders, neither is talking about getting revenge for whatever historical wrongs they feel they need to revenge.

Eastern Europe may not be the best example, of course, since the Soviet Empire was a bit of an anomaly, and Eastern Europe's problems did not magically disappear under two decades of EU membership and continual economic development under a rule of law.

How about formerly Fascist dictatorships like Spain, Portugal, or the right wing junta in Greece?

Europe, excluding the unsurprisingly ugly experiences in the former Yugoslavia (parts of which are also EU members today), has built up a hell of a lot more cross-national cultural capital than in the preceding 60 years before its founding - World War I and II being examples of what a lack of cross-national cultural capital looks like, after all, at least in normal European terms. Or the 60 years preceding that, where several nations formed, such as a militaristic Germany and Italy, after democracy movements in 1848 and 1849 were brutually crushed throughout Europe.

Believing that Europeans know much less of the advantages and disadvantages of the EU (and whatever amount of cross-national cultural capital it possesses) than some American is just another reason it is so much fun to read this site and its comments - though nothing has yet topped the discussion provided by various Americans concerning the TGV, obviously without ever having been on one.

Though I will venture to guess that the percentage of American posters to this comment section owning a valid passport is at least double - maybe even triple - that of the commonly accepted American percentage of passport holders - which is estimated to be around 20% of all American citizens.

The fact that the Nothern Europeans are in the right on this issue - and the German citizens even more than their elite who put them into this, does not make the German future any rosier. Yes, the German elite, such as Stoiber and Kohl, repeteadly promised the German citizens that their fear of a transfer-union (bailouts for the South) would never happen.

Northern European culture or moral is not in any way superior, though prior_approval seems to think so. I was born there and emigrated to the States only in middle age, and *Life is better here*.

Well, then we are the reverse - but at least the country I am currently living does not have a secret list of citizens to be assassinated on the president's whim. And the country I am living in actually does provide routine health care to all the children living in it, for free. Further, the country I am living still has a working industrial economy, using century old principles like Kurzarbeit to keep its industrial functioning, along with such things are labor laws which are enforced, and unions able to force management to consider labor as something beyond a mere inconvenience when distributing wealth only to management.

But the U.S. does offer certain attractions, especially for the people with adequate wealth to live in an area like Fairfax or Montgomery county, most particularly somewhere like Great Falls or Potomac. On the other hand, I'm pretty sure the attractions of living on the Anacostia have remained the same for decades, as has the appeal of the Rt 1 corridor.

America is much more than its Hollywood self image. Well, much less, actually. But most Americans, having never travelled beyond the borders of the U.S., aren't able to make an informed comparison. Though people who leave their birth nations are not really representative of those nations, something we likely could both agree on.

But to respond to Tyler's argument (even though as I stated, morality is irrelevant) being moral isn't a get out of jail free card. Being wronged, or doing the right thing, doesn't magically mean you have the right to screw over someone else. Being right doesn't magically catapult you to judge, jury, and executioner. The fact that it's impossible to have a judge in such a case highlights the fact that viewing this through a moral lense is pointless, but either way, unless you're a satanist, "do unto them as they do unto me" isn't considered all that moral.

Guess Tyler's forgetting that for millenia making loans was considered to be a mortal sin... I suppose it's been long enough since usury was seen as evil that most folks don't even remember the reasons these days.

It was also considered wrong for millennia for women to own property, and homosexuality was a mortal sin. Maybe some of those old ideas weren't so good.

I am not sure if Merkel's solution is morally superior, but I think it's inefficient.
East Germany's example is very relevant. An initial monetary mistake (too high conversion rate for the east german mark) was compunded by insisting on a low inflation target. The only way to keep the country together was massive fiscal transfers (which generated at least some resentment). Surely we can aks they don't repeat the mistake.
Also inflation would be a lot less expensive than transfers or guarantees for Germany. It's a way to get italian and Greeks with nominal assets to participate (and much easier than taxing them given the limits of italy's and greeks institutions). Plus defaults have massive costs...
So inflation gets you 1) easier adjustment 2) no default costs 3) more resources from rich italians and greeks...
How is insisting against it the rational way to get out of this mess?

Obviously you need supply-side reforms as well, but they don't work without the lubricant of easier money...

If this was a game of chicken and they now declare victory, well played...
If they really believe what you wrote above, we are all in trouble...

OK, Tyler passed the Turing test I guess, if he really is not on that side (?). But can Germans pass the test in the other direction? I think Merkel probably can, but I don't think the average German voter can. So, you get what we had here last week. I think at the end of the piece Tyler is still saying nothing new - the Euro is going down, and these numbered attitudes are a big reason, whether they're correct or not.

I think most people in the street can identify with all of these arguments better than the counterarguments. If you're not an academic economist, it's a lot more intuitive and very easy to pass this Turing test. Get an average German voter without a formal economics education to pass the Turing test in the other direction, and *that* will be news.

Things are way more complicated than the moralizing view of the Germans acknowledges. Let´s assume, for a moment, that in the case of the Greeks they acted in a imoral way when they took all that debt. But what about Spain or Ireland? Since their fiscal record is way better than the germans, their sin must be found somewhere else. The germans would then point their fingers to the real state bubble, saying that Spain had a moral obligation to keep its banks from getting so much risk. But, how does this not apply to the french and germans banks that are stuffed with preriphery debt as well? In fact, one can even argue that Spain tryed (but failed) to control the bubble throgh macroprudential measures. Have Germany and France acted in the same way regarding their own banks? No, they let the party go on and would still be serving the drinks if it was possible. And yet, the spanish are lazy and the germans are virtuous...

"1. When it comes to default, there is no moral equivalence of debtor and creditor. The debtor is the one breaking the agreement and breaking his word."

Nonsense. Contracts aren't moral issues, but economic transactions. The creditor's economic harm from default by the debtor is compensated by the rate of interest, which implicitly includes the risk of default. If all debtors were to pay all their debts, all creditors would pay the risk-free rate of ~ US Treasury notes. I don't see you up in arms over the usurious rates Greece and Italy are paying, do I? (looks quickly . . .) Nope. I don't.

Lending contracts are just like any other contract, and should be broken if the net economic benefit creates utility. That's the theory behind economic breaches. Sucks to be a creditor who doesn't get fully repaid, but it's not a "moral" issue, any more than it's a "moral" issue if a car dealer sells a car for more than its blue book. That's how markets work.

This is another in a long line of Tyler standing up for the rich and powerful against the poor and powerless. Kudos, sir; I'm sure your paymasters are pleased, and the checks will keep rolling in. And kudos to y'all for joining in; it costs nothing to side with comfortable thoughts of your own superiority.

+1...NYT does hire someone who doesn't support the money printers.

NYT will happily pay Krugman, David Brooks and Tyler Cowen so people feel they are "seeing all sides". In fact they are all being led to the slaughter through three different sheeple shoots.

-1 for the sheeple reference.

"Lending contracts are just like any other contract, and should be broken if the net economic benefit creates utility. That’s the theory behind economic breaches. Sucks to be a creditor who doesn’t get fully repaid..."

No it's not. Under efficient breach, the creditor gets paid. According to Black's Law Dictionary, efficient breach theory is "the view that a party should be allowed to breach a contract and pay damages, if doing so would be more economically efficient than performing under the contract."

Deadbeats of the world unite?

"[I]t’s not a 'moral' issue, any more than it’s a 'moral' issue if a car dealer sells a car for more than its blue book. That’s how markets work."

If the car dealer lies about the condition of the car and makes promises it does not intend to keep, that is not how markets work. It is fraud. (Go ahead, make my day, tell me fraud is not a moral issue).

Greek governments repeatedly lied to the EU about their fiscal condition and continued to run up a tab on their EU-supplied credit card.

In reading the comments, what I think is interesting is the categorization by national identity with respect to lender/debtor positions.

First, it is not Germany, but German banks that have purchased a risk product of another sovereigns debt--full aware of its public finances. It was more lucrative to lend abroad than at home.

Second, an Italian who buys his own governments bond is morally equivalent to a German bank who does the same, and shares the same interest. Yet, it is the Italian that may lose soveregnty.

Third, when we were traveling in Spain by rail two years ago, I thought Germany had a great thing going for itself...that siemens train financed by Spanish borrowing with an EU subsidy was good for both Germany and Spain. But would have Spain purchased without support, or would either have purchased or sold if they had had to assume currency risk for such a large purchase that would be paid over time. So, in this model, is it the creditor or the debtor who holds the moral high ground, if you can even say such things about international trade.

Third, as we

Are you still alive?

I did it to create suspense and see if you were reading it.

"Realistic. When you grow up here, in this climate, you think that way. The next winter will come, even if you protest against it."

The perfect takeaway, for comparing Estonia with Greece.

"1. When it comes to default, there is no moral equivalence of debtor and creditor. The debtor is the one breaking the agreement and breaking his word."

Under what sort of moral philosophy is default, or any sort of breach of contract, an immoral act? I suppose bankruptcy is also immoral under such a system.

The only moral philosophies I can imagine that would consider default on a financial obligation to be immoral are very naive or simplistic.

If you're saying that a fraudulent agreement where the debtor goes in always intending to default is immoral, or at least unethical, then I think you've got a stronger argument. But absent some sort of fraud or intent to deceive from the outset, mere default is not even a moral question.

Recent Greek governments used their EU-provided credit card to run up a huge tab while breaking their promises to put the country's fiscal house in order and lying to the EU about it. Now they simply don't want to pay their creditors even though -- Tyler's hypothetical alter ego says -- they have enough wealth to pay up.

What is it about breaking promises and lying that you don't get?

If Greece Read Tyler again. His hypothetical proponent of the view that Germany is morally superior to the "periphery" says "When it comes to debt, the periphery countries simply don’t want to pay up. Their national wealth is many times their gdp and thus much much greater than their debts, even for Greece. It’s amazing how many people won’t come out and utter or recognize this simple truth. Italy for instance doesn’t have to make a huge fiscal adjustment."

Groundwork of the Metaphysics of Morals,5 where Kant uses false promising as his most convincing example for the first for-mulation of the Categorical Imperative: “Act only in accordance with that maxim through which you can at the same time will that it become a uni-versal law.”6 The example posits an individual in need of money who knows he will never be able to repay a loan.7


I was blown away. This was a really outstanding essay.

1) is incorrect. If the lender thought that the borrower was definitely going to pay back the loan, the interest rate would be the risk free rate. There is an expectation of default built into the transaction, so a defaulting borrower is not breaking any real promise.

Another way: the promise is more like "I will pay you back with interest above the risk free rate in 999 of 1000 universes". Except in the case of fraud, both sides know what they are agreeing to.

All our problems can be summed up like this:
That we know what the problems are and how to fix them, but we won't.

Same mindset that gave us this mess.

One thing that bothers me a little about this discussion is the fact that whole countries are being treated as if they were individuals. Am I really immoral if I want a default, and don't vote for more taxes to pay off the bonds taken out by the politician I didn't vote for who used the money to buy votes? Or, am I simply the property of a sovereign who holds all the actual authority moral and otherwise.

articles like this are why Tyler is the best blogger of all time

Let's see if Tyler stands up for upholding the moral contract of those who paid into Social Security or Medicare.

Dear Tyler, this is a very good post and your level of understanding of the issue is shockingly accurate. As a Greek citizen grown up in Sweden and presently living in Finland, I would say that the arguments I hear in support of the Germans-are-so-moral position are very similar to the ones in your post. So let me reverse-engineer the Turing test and give you the responses of the other side:

1. That is true when the creditor brakes the contract. In this case however, the debt contract, i.e. the Greek government bonds are not broken. When German banks lent money to our government, they did it on an IOU basis, the terms of the contract were that the debts would be paid back if the Greek government judged that the costs for repaying them were lower than the reputational damages it would suffer in case of default. If the German bankers had read the terms of the bonds they bought, they would have noticed that there was never a term that they would get their money back no matter what; in fact it was foreseeable to the investor in Greek bonds that under the terms of the contract offered to them in a situation where unemployment would go to 20% they wouldn't get all their money back. It was all in the contract, educated experts read it, understood it and accepted it. Now unemployment is above 20% and the Greek government has every right to exercise the option not to pay back. No contract has been breached.

2. Again, even if it were so, even if we somehow could send paratroopers in Zyrich to invade UBS and confiscate all undeclared funds in accounts owned by Greek citizens and give them to Germany, this was not among the terms of our debt contracts. There was never a term that we would pay them back if we could (except for the 10% of Greek bonds issued under UK law), the terms were that we would pay them back if we decided that it was in our best interest to do so.

3. No it's not. The US too were once a poorer "country" in a union with a richer one (Great Britain) and they were told that being subjects to King George and citizens of the empire in which the sun never sets was worth the taxation. You know the rest. And let me add that circular arguments of the "It's a privilege to be in a union with Germany because Germany is a country with which if you unite you will be privileged" kind will make your Turing machine blow up.

4.Unemployment in Saxony is the same as in Hungary. If you take into account the effects of cross-german-states subsidies, then the Hungarians have better living standards than the east Germans would have if they didn't have the financial support of Bavarians and Westfalians. So what they are saying is that we should implement all the German laws and decrees and in return we rise to the standards of living in east germany minus the bucks from the west? No thanks.

5. True,but irrelevant. First, PIGS never had any aspirations to alter the arrangements within the German economy. Second, Spain has been fiscally more responsible then Germany, which together with France completely ignored the deficit rules. Not to mention that when the Spanish tried to legally force the French and Germans to comply, they simply changed the rules, which in turn made it possible for the Greek government to borrow so much without consequences.

6. No, the european tea party/Ron paul fanclub that presently run Greece and Italy are not technocrats. A phd from MIT does not qualify you as a technocrat economist if you can't make correct economic predictions, just like an MDs degree from Harvard doesn't qualify you as a physician, if you kill your patients. Saving patients qualifies you as a doctor of medicine, building robust economies qualifies you as a technocrat economist. Not to mention that in the case of Greece, the longest serving prime ministers of the last 30 years were a professor of Law in a German university and an economist with a phd from Chicago under Friedman and professor at UC Berkeley. So if anything, European union has made Greece LESS technocratic, not more.

7. Why on earth would you do something like that?? You wouldn't, unless you were a Turing machine programmed to equate morality with economic progress. And even if your turing machine survived the infinite loop of ranking the morality of the views of each contry's citizens, it would surely go nuts upon looking at the Estonian unemployment rate and see how well "morality" has served them. And let's not get started and say that a country that does not recognise citizenship rights to 1/3rd of its residents does not quallify as western. No the Russian-Estonian past is no excuse, Greece-Turkey have an even worst past but Turks born in Greece enjoy all the rights that I do, and then some more (such as bonuses when applying to university).

8. Order is good in its own right because disorder is bad. Circular argument, computer does not compute, Turing machine needs reprogramming. Oh and Germans too cross the street when it says "not walk", not to mention that for someone like myself who has grown up in Sweden, the German complete disregard for laws and common sense when driving is insane and costing many innocent lives that would have been saved, if only these guys with the BMWs could agree to only drive 200km/h in autobans and not on one-lane 80km/hr secondary road networks, while using their iphones to notify one another when they spot a police check point.

9. Wie bitte?

10. Nobody ever said that. A fair Turing machine would not equate the argument that Germany is economically better of with in the eurozone than outside it to the argument that Germany owes something to the euro zone countries, they don't. Except for Greece, where they still owe us the €80b that is the present day value of the gold they stole out of the bank of Greece in 1941-1945 and which the German government agreed in 1953 to pay back as soon as Germany would be reunified. Or at the very least they owe us the moral satisfaction of their government admitting that they will default on this obligation and never pay it back. Because the present position of the German government is not that they will default on these €80b, it is that Germany has not been reunited yet and that we will get our money back when Germany is reunited, i kid you not, this is the official response that you will get from the German authorities on the issue.

11. True, but to the extend that Germany wants Spain to forfeit the option of peseta devaluation, Spain could and should demand that part of the benefits of this arrangement go to the Spanish people. Nobody gets something for nothing. Louisiana would probably not be in the same currency area as New York if NY did not agree to transfer resources to it. Spain should not agree to be in the same currency union as Germany if the Germans don't agree to share some of the gains of having an undervalued currency to the countries that suffer the losses of having an overvalued one. This is how the US works, this is how Canada works, this is how currency unions work.

orionorbit - on your point 1, can you provide a link to the relevant contracts?

Point 7
Estonian unemployment rate skyrocketed, but it has never been as high as in some other Eurozone countries. Also, unemployment has been declining fast during the recovery as well. Of course, it is higher than what would be desired. But this is exactly the mentality - it does not pay to have all sorts of restrictions on layoffs. If a job has lost its economic value, it is gone without much delay.

" And let’s not get started and say that a country that does not recognise citizenship rights to 1/3rd of its residents does not quallify as western".

I am not quite sure what you mean here, but about half of ethnic Russians, Ukrainians etc in Estonia *have* Estonian citizenship, either via naturalization or via ancestors who were Estonian citizens. About half of the rest have *chosen* Russian, Ukrainian, etc citizenship. Those who have no citizenship are a minority - about 7% of the population. Remaining stateless has its appeal - they can travel without visas in both Europe and Russia, and have no conscription.

When it comes to default, there is no moral equivalence of debtor and creditor. The debtor is the one breaking the agreement and breaking his word.

The creditor charges the debtor higher interest to make sure he is compensated for the risk that the debtor breaks the agreement. Is this moral, Mr. Markets-in-Everything?

I guess some things are just business, and other things are serious moral issues in which the involved parties can be ranked in some sort of moral hierarchy. How can we decide, let's ask someone objective like Tyler.

Yes, I think it is very interesting.

I would bet that Tyler Cowen is against usury laws that limit the amount that creditors can charge. Yet does he think that debtors have a moral responsibility to pay debts with 40% interest rates, even if this is completely against both their short-term and long-term self-interest?

If we are going to moralize about debt, shouldn't it go both way? Or in other words, don't we need usury laws?

I don't understand the turing test. Are you a liberal showing you can impersonate a conservatives moralizing or a conservative impersonating a liberals moralizing. Maybe the liberal conservative distiction does not apply here.

What I see is you quote a liberal and then take up a conservative voice in response. I don't think this is how turing tests work.

I guess I am in the narrow minority that thinks the post was self-indulgent and naive. Didn't you guys notice that Tyler started by immunizing himself -- with the subjunctive mood -- before proceeding to make a bunch of baseless normative assertions? If his normative claims appeal to you, then that says something about yourselves, but not much about the world.

There is something about how national sovereigns interact within the EMU that is dysfunctional, in the sense of generating outcomes we all agree are suboptimal (I assume). Shouldn't the priority be to figure out what that is and fix it? Moralizing is unlikely to get us there. And even it were worth the effort, Steve's critique seems pretty devastating.


A debtor breaks his promise, having always intended to break it.

A debtor makes a promise, then tries to make others responsible for keeping that promise. (e.g. Greece, Italy lobbying for ECB purchase of their bonds; Banks extracting taxpayer bailouts).

A creditor lies to a potential debtor in order to extract a promise from him.


A debtor breaks his promise, having tried his absolute best to keep it.

A debtor breaks his promise after discovering he was lied to by the creditor.

Or we might ask, what sort of relationship do you want anyway?

I think a debtor or a creditor who finds that continuing the relationship is to their disadvantage should terminate that relationship. We might call this a breach or we may not, depending on the precise terms of the contract. But the reason that people enter into relationships is because it is hoped that they will be mutually beneficial.

Another point should be made about debtors trying their absolute best to keep an obligation to a creditor. A debtor has other obligations than just to his or her creditors. For example, a debtor might have obligations to children. A debtor also has an obligation to take care of themselves. I think the standard you are proposing that a debtor try their "absolute best" is actually extremely unclear in practice. To what extend should a debtor stop taking care of themselves or family members in order to satisfy a creditor?

I am more of a utilitarian when it comes to contracts. If the contract is not sustainable, the sooner that this is admitted, the better. It is up to the creditor to do proper due diligence to ensure that the contractual relationship is in fact sustainable and mutually beneficial before entering into it in the first place.

"When it comes to default, there is no moral equivalence of debtor and creditor. The debtor is the one breaking the agreement and breaking his word."

I think this view, that creditors are morally superior to debtors, is an interesting one. I would not have known that Tyler Cowen held it.

As a lawyer, I think it is interesting how contracts often frame relationships into a seemingly precise set of rights and duties. Some people think if you do not breach and the other party does, that makes you morally superior. But the utilitarian view (which I would have expected Mr. Cowen, as an economist, to be more likely to hold) does not view "efficient breach" as a bad thing. Also, from a relationship perspective, isn't it the duty of both parties to make the relationship work? When creditors enter into relationships with debtors on terms that are not likely to be sustainable and then are inflexible when it becomes clear that the relationship is not tolerable, it seems to me that they are at the very least every equally morally at fault for the failure of the creditor / debtor relationship.

I think more insight can be brought to this issue by contrasting contracts with marriage. Purely contractual relationships are for people who don't really care about each other. If the other side doesn't fulfill their side of the bargain exactly as specified, you don't want anything more to do with them. A marriage relationship, in contrast, while it also involves give and take, does not revolve around specific rights and duties, but instead a mutual desire to make the relationship work through give and take of an unspecified nature. Should the European Union be considered more like a contractual relationship (where the parties don't really care about each other) or more like a marriage relationship (where everyone has to give in order for things to work out). I think if the European Union is going to succeed, it has to be viewed more as a marriage relationship than a contract relationship.

Overall, I think it is extremely foolish to frame the issue in terms of moral superiority versus moral inferiority, as Tyler Cowen does. The question really, is the relationship worth preserving? I think from the perspective of the long-term interests of Germany, it should be.

Perhaps when a beneficial relationship is lost forever, Germany will be able to comfort itself with the belief that it was morally superior. This actually happens in many failed marriage relationships as well. I am not sure that the consolation prize of feelings of moral superiority is nearly as good as actually getting things to work, however.


A close read suggests that this isn't actually Tyler Cowen's view. I didn't get the turing test thing at first.

Wow. It's interesting how people can write articles that completely disregard raw data.

1. Economic condition in Germany is not that good either. It has bigger sovereign debt to GDP ratio than Spain. These people just assume that Germany has it better without looking at numbers.
2. Spain and Italy had their debt under control before crisis 2008. Italy had high debt but it's debt to GDP ratio was coming down.
3. Private banking regulation in Spain is exemplary. It was not enough to prevent effects of cheap money from the Germany.

The crisis was caused by economies in eurozone being out of sync. When money from Germany moved freely to Spain and Italy, these countries did not have own monetary policy to do anything about bubble that excess money created after they had joined eurozone.

Eurozone is not optimum currency area, see: http://en.wikipedia.org/wiki/Optimum_currency_area and that's the reason t are in trouble. ECB's monetary policy mostly reacts to what happens in the German economy because it's the biggest. It seems that the assumption is that other countries so something wrong if their economy is not in sync with Germany and must pay the price for it.

First off I out myself as a German who somehow stumbled across this site.

While I acknowledge a healthy intellectual on this bloc, I wonder how little a lot of you know about us nowadays germans. So I give my best to try to clear up some of your points.

A. The germans and respectively their government is in a deep dilemma. We get criticized if we act to little in this crisis and we get criticized if we act to strong. A hencedown lose-lose situation in terms of morality.

B. To be fully aware and understand the germans and their todays behaviour you have to start at the beginning, the creation of the euro and the monetary union. In order to reunite Germany in 1989/90 it was a major precondition by the french (and to little extend the british) that the germans have to basicly give up the DeutscheMark and to transcend into a monetary union. Otherwise Germany would not have been reunited. To be clear, this doesn´t set us free of any responsibility of todays mess, but the germans took a giant leap towards Europe and gave up a lot of their national identity.

C. During the creation process of the Euro the Germans were extremely blunt and clearly stated that the EZB must have the same standard like the old Bundesbank (e.g. inflation-tackling policy, indepedence etc.). So every country participating should have clearly known, what our point of view was/ is. This was our part of the contract for giving up the DeutscheMark and the Bundesbank.
And to clear up the myth german fear about inflation is because of the Weimar-era, this kind of policy is based on our constitution and on an economic theory (read ordo-liberalism) which was further developed into the social market principles by Ludwig Erhard in the 1950/60 and more and more deepend during the last 60 years as an "third"way as opposed to the neo-liberalism and keysianism. The knowledge of our Weimar past is just a minor reinforcing factor.

So now to Tylers points :

@ 1. Wrong premise. When making a contract the creditor has the responsibility to make a due dilligence on the debitor and has to have a transparent contract. Once the contract is made the main responsibility shifts toward the debitor. If the debitor now defaults, he has to bear the consequences : a) getting probably no further credit (if he completely defaults) or b) renegotiate the contract terms in which the debitor gets tougher terms, but the creditor has to make sure the debitor can meet the new terms.
This is not only conventional wisedom in Germany, but law as well plus upholded by germans highest federal court many times.
The 50% haircut for the greeks was initiated by the german government and fiercely fought by the banks and other government like France, because not only the german government, nearly all lawmakers and the vast majority of german public/people acknowledged that the greek people need the chance to recover (and have the right to).
Creditor and debitor have shared responsibility in this whole process, to only presenting one part in this complex is an intential mislead and a false premise.

@ 2. Absolute wrong perception of the german point of view. Germans don´t think that the periphery countries don´t want to pay back their debt.
The germans think that the greek people were held hostage by former incompetent mafia-like governments and a totally messed up tax office, therefore the germans have sent money, technology, man-power and knowledge to help re-building their infrastructure, no laws, no "we take over", just well-intentioned help.
The germans are totally amazed and surprised why italy is in danger and think the italians are under attack by greedy hedge-funds, but are sure the italians sort this out.
Of all southern nations the germans have built the closed ties with Spain over the last 10-15 years, hell will freeze first before we let them down (On top of that, germans investing like mad in Spain and still do).
If you believe that germans don´t understand the existing wealth in these countries, the assets they have and the abillity to pay back their debt, we would be the worst buisness people in the entire history of mankind.

@ 3. Germans don´t think it is a privilege for poorer countries to be in a economic union with us, this is nonsense. But we think that all members of this union have the responsibility to keep their house in order, or leave.
We had an open discussion within the german public and lawmakers whether or not the greek people should leave the Euro or not (on their own terms). The vast majority of lawmakers and public were in favor of the greek people having a vote/say in their own future.

@ 4. Every German knows, we made a lot of mistakes during the reunification process. But you have to get your historically facts correct on this issue.
The Germans had barely more then 1 and a half month for the whole negotiation process to re-unify Germany. The reason why is: a) Gorbatschow got substantially pressured by the soviet hardliners not to give up East Germany and was overthrown shortly after the reunification vote, b) record numbers of east germans moving west and even more in threating to come ( a common east german phrase was "if the DeutscheMark doesn´t come to us, we are coming to her"). If you read some historic documents, you would realise the unification of Germany was nothing short of a miracle.
So, we had a speed up country merger, sure there had to be mistakes - this is common known fact. But there was historically no real alternative - fact as well.
Now what, playing "cry baby cry" ? We sorted this out and rebuilded the East (and still are). I don´t see any harm in it to be proud of what was achieved.
We have paid a solidarity tax at 3%, basically 2 trillion euros over the last 20 years our eastern brothers and sisters.

@ 5. True. This is in fact a german point of view (but I would say shared as well throughout all successful north european countries).
But part of this truth is that the strong economies transfer wealth via the EU regional fund to weaker economies to help leveraging them.

@ 6. No german view. This is just a populistic rant.

@ 7. Can´t see a german point of view in it.

@ 8. The germans don´t see rules as a self-fulfilling purpose or blindly follow every rule. This is WW2 stuff and has very few in common with modern day germany.
Germans believe in a level playing field and in setting economic/social boundaries in which everybody can develope in his own way. Setting commonly agreed rules is just a small perk in any civilized society. I highly recommend you to read the theories of ordo-liberalism and the social market principles if you want to understand the economic boundaries set. In terms of the social "rules" the germans are no different then any other nation inside the EU. The "Don´t walk" example is just laughable and plain ignorant - have you ever been to Germany ?

@ 9. I would say this is a 50:50 among germans, mostly depending on your political colour.
Among more economically right leaning it´s more a sign of productivity, among more left leaning it´s more a sign of subpar internal stimuli. But either way, you can´t blame the germans for producing others want to buy. Alot of this stuff is bought from outside the EuroZone as well and we had an even stronger export surplus during the time of the DeutscheMark, which most people often like to forget.

@ 10. This view actually exists. We like our neigbours, we want them to have success and are willing to contribute to a commonly shared project. Guilt as charged.
But the will to contribute as boundaries as well, we are willing to pay into it but don´t want to be held hostage as you could see in the eurobond discussion.

@11. Already mentioned above under C.

@Conclusion: I challenge you on that.
a) First a monetary union doesn´t work without a fiscal union with correction mechanism, so the French-German approach is a good one and consistant with economic theories if you want to preserve the Euro. b) Second Eurobonds take away any reform incentive, this is hot money again. c) Making the EZB lender of last resort and doing unlimited bond purchases does contradict the primary goal of the EZB (inflation tackling) and d) you make the Euro to the b*tch for the financial market indefinetely, because the speculators know they will get bailed out.
e) You would be right that spending cuts alone won´t do the job, but I am pretty sure that there will be some sort of marshall-like plan in which the stronger economies jumpstart the weaker ones, because it´s already discussed for month that cuts can only work in conjunction with targeted stimuli.

But you can´t have the (e) stimuli if you don´t do the (a) fiscal union first.

P.S.: I don´t reread my comment, so please forgive me if I made any type of misspelling or grammar error. It´s not my first language. Best wished and good luck to us all ;)

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