There were two articles today that exist in direct contradiction to each other in substance, but when taken together reveal how ECB President Draghi and IMF Director Lagarde HOPE to punish and repress the German saving class in an effort to salvage the EU via the alleviation of debt owed by the so-called peripheral nations. The first article of significance is an op-ed piece by the FT’s Wolfgang Munchau titled, “Draghi, Schauble and the high cost of Germany’s savings culture.” The article lays it on the line that the Germans bear a great deal of responsibility for the ECB’s negative interest rate policy because of Chancellor Merkel’s push for austerity budgets to correct the massive deficits of the heavily indebted “peripheral” nations of the EU. The Germans were pushing themselves into AUSTERITY simultaneously by pushing forward a law on its own BALANCED BUDGET RULE. The battle cry from Germany was growth through austerity. In July 2012, when the debt plagued EU was on the verge of financial collapse, the profligate peripherals were willing to accept any demands put forward by the Germans in an effort to gain access to the Berlin credit card. As Munchau notes: “If German fiscal policy had been neutral during that period, the ECB’s job would have been easier. It would have been able to achieve its inflation target and would not have had to cut rates by as much.”
German intransigence on the issue of budget profligacy means that the ECB will extract German wealth through financial repression, which means the that the frugal burghers will be taxed through negative interest rates to bail out the debt-burdened peripherals. Germany will be forced to share its current account and budget surpluses with the entire EU by direct transfer payments or financial repression.
Late Monday, IMF Director La Garde was quoted in an FT article, “IMF Calls For ‘More Dynamic’ German Economy.” The IMF is attempting to push Germany to undertake massive fiscal stimulus through welfare payments for the settling of refugees as wells public investment on significant infrastructure projects. The IMF has coupled with Larry Summers in promoting fiscal stimulus as an alternative to the questionable effectiveness of NIRP. At this juncture, a massive program of infrastructure investment would lead to an increase in German inflation because the German economy is just about at full employment. The end of German negative output gaps with the commencement of fiscal stimulus would mean pressure on German prices to rise (so say Bernanke and all of the followers of the New Keynesian paradigm.) But would the ECB RAISE RATES TO STEM GERMAN INFLATION WHILE OVERALL EU UNEMPLOYMENT REMAINS ABOVE 10%? The question remains: WHOSE EURO IS IT? The IMF memo “… recommended Berlin implement a number of reform measures to help boost the still fragile economy recovery in the euro area.” An additional problem for the IMF and ECB is that there is no guarantee that enhanced German spending would result in increased growth in Spain, Italy, Portugal et al.
Tags: Christine Lagarde, ECB, EU, Euro, Germany, IMF, Mario Draghi, NIRP
May 9, 2016 at 11:43 pm |
Lending Club scandal and Larry Summers is in the middle of it along with various other corporate criminals.
May 9, 2016 at 11:59 pm |
An analogy. Papa has given his credit card to his profligate son who is spending 80B Euros every month. And all Papa worked for all his life is going down the drain. Is there a point when Papa says ” Genuk”?
Your final question Yra has the appropriate adjective when asking who will guarantee the ECB. Germane. German and e for exit as Papa finally takes back his credit card.
May 10, 2016 at 3:34 am |
did this became a political blog?
May 10, 2016 at 5:59 am |
Dan, I don’t believe so, in any measure. Politics and the movement of money cannot be separated. Policies are enforced at the point of a gun.
May 10, 2016 at 6:00 am |
Dan–absolutely not.The german situation is one of political economy where this blog always deems to go and search for investment and trade opportunities that the models fail to recognize.If it gets political in any sense I must have erred badly
May 11, 2016 at 2:23 am
thanks. i am also 100% for discussions with respect to political economy and macro opportunities it brings. and i always read your commentary with pleasure with my morning coffee.
recently though it has become a little bit mono-thematic in a similar vein as your loved book “The Rotten Heart of Europe” is (great book btw).
but maybe that’s the world we live in – without diversity of macro opportunities. it is sad – or maybe simply i am not young enough for this game anymore ;).
May 10, 2016 at 4:00 am |
On Mon, May 9, 2016 at 9:29 PM, Notes From Underground wrote:
> Yra posted: “There were two articles today that exist in direct > contradiction to each other in substance, but when taken together reveal > how ECB President Draghi and IMF Director Lagarde HOPE to punish and > repress the German saving class in an effort to salvage the EU” >
May 10, 2016 at 5:21 am |
it seems to me what force the eu’s hand is immigration. CB’s have no control over this and events are overtaking them.
May 10, 2016 at 6:05 am |
Could you please clarify “It seems that upon further examination Grexit and Brexit are a distraction.”
“further examination” – by whom?
“a distraction” – for who?
Thanks!
May 10, 2016 at 7:35 am |
Trader—meaning a short term concern by the pundits but as the Footsie and British bond markets[gilts} show a minimum concern.And in my OPINION and the way I will trade Grexit and Brexit is that they are not as meaningful as what takes hold for Europe after the resolution of these two issues–it is the political forces that BREXIT will unleash across the Eurozone which will become very important for the debt and therefore equity markets.It is difficult to get a handle on the sovereign debt markets because of the huge buying by the ECB but this is where my focus will continue to be