Germany Did Not Cause The Greek Crisis

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There seems to be a broad theme about that the real villain in the European debt crisis is Germany. Steven Pearlstein has an article in the Washington Post advancing this thesis.

Here is Pearlstein’s take on the matter:

What Germans won’t accept is that they wouldn’t have been able to sell all those beautifully designed cars and well-engineered machine tools if Greeks and Spaniards and Americans hadn’t been willing to buy those goods and German banks hadn’t been so willing to lend them the money to do so. Nor will they accept that German industry was able to thrive over the past decade because of a common currency and a common monetary policy that, over time, rendered industry in some neighboring countries uncompetitive while generating huge real estate bubbles in others.

The danger of Germans misunderstanding the causes of the current crisis is that it leads them, and the rest of Europe, to the wrong solutions.

While European governments surely have long-term structural budget problems, the immediate fiscal challenge comes from the decline in tax revenues and the increase in transfer payments that result from slow growth and high unemployment. The right policy response to that — along with the very real threat of price deflation in Europe — isn’t to put the entire continent in a fiscal straitjacket that makes the recession even worse. The immediate need is for the European Central Bank to deliver additional monetary stimulus in the form of lower interest rates and direct purchases of government bonds. The reality is that the price of avoiding a dangerous deflationary spiral in Greece and Spain is allowing inflation in Germany to rise to 3 or 4 percent.

Pearlstein seems to admit in a backhanded sort of manner that the German economy produces superior products which lots of countries want to buy. In the his next breath, however, he concludes that the German banks were working hand-in-glove with the manufacturers to finance these exports and had the banks not been so rapacious then none of this would have come to pass. A vast mercantilist conspiracy, so to speak.

He then goes off on another riff which baffles me. Somehow he concludes that the existence of the Euro and EU monetary policy enabled this German export success. And, incredibly, caused some of their EU brethren to generate real estate bubbles or simply become economically uncompetitive. Who knew that the Euro had such powers?

Mr. Pearlstein neatly avoids any discussion of the abject failure of the Greek government to run their country in any manner remotely approaching competence. No mention of bloated government workforces, nor of unfulfillable social welfare promises, not to mention cooking the country’s books in order to deceive its creditors. In his tale, the Greeks are the victims of parsimonious Germans who refuse to spend all of the fruits of their labors and a currency regime that doesn’t keep them from sinning.

His solution is predictable. The rest of Europe must now bail out those who have strayed. Putting one’s financial house in order is to be deferred to better times (good luck with that one) while the order of the day is to prevent recession via fiscal stimulus and more debt to paper over the untenable deficits of Greece and perhaps other members of the PIIGS fraternity. The cost, he admits, might be higher inflation for countries like Germany, but since they have already been established as the villain in this tale it’s a price they should willingly shoulder.

To his credit, he does suggest that Greece must default on some of its debt, but in a nice way. He suggests that bondholders swap their debt for new debt with a lower face value and that the new debt be guaranteed by the EU. If the creditors that are thus crammed down find themselves in financial peril then it will be the responsibility of their respective national governments to tend to that problem.

Note, once again, that Greece is relieved of all responsibility for its role in creating this mess. It defaults, but it really suffers none of the adverse (healthy?) consequences of default. Continuing access to the credit markets is assured by the EU guarantee and since the default will be billed as a restructuring it doesn’t even suffer the ignominy of having walked away from its debt.

That the government of Germany has acted oafishly during this crisis is a given. Their various statements and actions such as the banning of naked short-selling have done little to diffuse tensions and in some cases have exacerbated the problems. As for their banks, they deserve what they are probably going to get and the Germans will pay a heavy price in saving them. That being said, I think that it’s beyond reason to suggest that the root of the Greek problem lies in either Germany or the EU. The Greeks knew what they were signing up for when they joined the EU. They knew the upsides and they knew that they were required to manage their economy within certain prescribed parameters. That they failed to do so is solely their fault.

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