PIIGS to the slaughter

[DodgerUSA]

http://www.atimes.com/atimes/Global_Eco ... 1Dj03.html


PIIGS to the slaughter
By Spengler

To paraphrase a Wall Street adage: bulls make money, bears make money, and PIIGS get slaughtered. Of course I'm referring to Portugal, Ireland, Italy, Greece, and Spain. Germany won't bail them out again.

Germans work. The country's unemployment rate stands at 7.5%, against an average of 13% for Europe's so-called PIIGS. Those are heavily massaged estimates from the Organization for Economic Cooperation and Development (OECD). More revealing is a comparison of youth unemployment, now at 10% in Germany. By contrast, as Doug Saunders observed in the July 16 Globe and Mail, "The under-30 unemployment rate in Spain has just hit 44 per cent, twice the adult rate. Italy also has passed the 40 per cent mark, and Greece has gone even further. If you count all the people who've given up looking, it means the number of people between 20 and 30 who have any form of employment in these countries is something like one in five."

There is another important distinction between the German ants and the southern European grasshoppers: Germans save. They had better, because three-fifths of them are likely to be over the age of 60 by the middle of the present century. Gross national saving in Germany last year stood at 26% according to the OECD, against about 16% among the PIIGS, whose demographic profile is just as bad.

Thrifty, hard-working Germans in May bailed out dissolute, corrupt, feckless, spendthrift and lazy Greeks, Spaniards, Italians and Portuguese. That, at least, is how it appears to the German public. The German term welsch refers to anyone from lands to the east or south of Germany. Martin Luther quoted the proverb Deutsche Treue, welsche Tucke, or "German honesty, welsche perfidy". The German word for "gibberish" is Kauderwelsch, that is, trader's pidgin from France or Italy.

As Wolfgang Proissi put it in a June essay for the Bruegel thinktank in Brussels, Germany "fell out of love with Europe". The bailout package was hated. Proissi wrote:

"Once again we are the fools of Europe," the headline of mass-circulation daily Bild read, adding, "750 billion euros for bankrupt neighbors, but our tax reduction is scrapped". The highbrow Frankfurter Allgemeine Zeitung also issued a devastating judgement: "Since a transfer union has been effectively introduced and the central bank is now under political command, the fate of the euro as a soft currency and the failure of the monetary union are certain," its editorial said. "Whoever holds savings or pension contracts should now be prepared for devaluation in the long run." According to a poll carried out by the DGZ-Bank, 44 percent of Germans would like to scrap the euro immediately and have the deutschmark back.

Germany simply doesn't need the rest of Europe as much as it used to. Even in the unlikely event that the PIIGS avoid a major debt restructuring, i.e. bankruptcy, their economies will be crippled for years.

German exports have crossed an important threshold: shipments to Poland, Russia and China (combined) now exceed those to France. The original European Community members are becoming less important to Germany and Eastern Europe and Asia are becoming more important.

Europe's dependence on Russian energy supplies too often is the focal point of discussion of Russian influence over Western Europe. Why political influence should attend oil exports is far from clear; Mexico, Venezuela and Nigeria all export a great deal of oil to the United States, yet none of them has notable influence on America. Countries that want to sell oil generally take money for it, and except for the Arab oil embargo following the 1973 Arab-Israeli war, no oil producer in the past half-century has used the threat of cessation of supplies as political blackmail.

Germany's long-term problem is not energy, but people. With constant fertility, three-fifths of Germany's population will be aged 60 or over by mid-century, and it seems unlikely that the country's fertility rate of around 1.3 births per woman will rise at the behest of natalist government policies. What Germany requires is exports that translate into savings, and it cannot get them from the turgid European economies around it - most of Europe is in the same demographic predicament with an average fertility rate for the continent of just 1.5.

Foreign policy analysts should focus more on Germany's exports. Despite the country's problems, it still excels in many areas, particularly industrial machinery. Germany has one more generation in which to turn its industrial prowess into a buffer of savings to allay retirement costs. It is in a race against time; it cannot afford to fritter away resources supporting the welschen to its south and east.

Failing demographics underlying an expensive welfare state make the European Union (EU) a failing proposition. It is a loser's game in which the most benefits accrue to the weakest, and that is a game that Germany simply cannot afford to play.

Politically, the EU is the child of the Cold War, bringing the European members of the North Atlantic Treaty Organization (NATO) into a free-trade zone and eventually a currency union. America's strategic mistakes under the George W Bush administration and strategic withdrawal under the Barack Obama administration have left Germany with less political reason to adhere to Europe.

As Russia moves into some of the political space left open by America's withdrawal, Germany will orient eastwards to Moscow rather than westward to Paris. Germany is moving closer to Russia, proposing a Russian-European "cooperation on security" following talks between German Chancellor Angela Merkel and Russian President Dimitri Medvedev in June. A number of commentators, for example, Stratfor's George Friedman, note the growing coziness between Berlin and Moscow.

But it is misleading to compare the Russian-German relationship to past periods in which land armies were the decisive factor in international relations. Unlike the Cold War, when Germany negotiated business agreements with Russia under the shadow of the Red Army's guns, there is not much of a military dimension to this shift. Instead, a new growth area is emerging based on three elements: German technology, Russian resources and Turkish labor.

Russia is now Turkey's closest ally, as Turkey breaks from the West and pursues a rogue foreign policy in the Middle East. Turkey has become the principal hub for Russian energy exports, while 7 million Turks or Turkish-speaking citizens of former Soviet republics in central Asia are working in Russia. Turkish construction companies and Turkish labor are building most of Russia's infrastructure, replacing the dwindling supply of Russian labor.

Playing an inherently weak hand, Russia has been able to place itself at the center of Eurasian policy, using its energy resources to form alliances with Turkey on one side and Germany on the other. Europe is in danger of gradual dissolution as a political entity, and NATO's southeastern flank has ceased to exist. Russia is the beneficiary of both. In this context, US Secretary of State Hillary Clinton's tour is an unconvincing cosmetic exercise. American influence under the Obama administration has imploded, and Russia, despite its economic and demographic weakness, has moved into the vacuum.

Expect nothing dramatic from Berlin during the next year. Germany's interest is to maintain stability in the eurozone for as long as possible. When the next round of the European debt crisis erupts, the Germans will not come to the rescue and the first cracks in the structure of the European community will appear, culminating in a Latin America-style debt crisis for Southern Europe.

Spengler is channeled by David P. Goldman, Senior Editor at First Things (http://www.firstthings.com)

[Terry]

Iceland devalued it’s currency 2 years ago when it was effectively shutout of the international financial system, it enjoyed a good year of tourism last year and it’s finishing industry is doing well. The Icelanders grew tired of fishing and tourism and decided 10 years ago to become a financial center, now they have gone back to what they do best. They way out of this situation for the PIGS is to:-

1)Devalue it’s currency – not an option in the Euro.
2)Grow it’s economy by exporting more – not an option for the PIGS they relied heavily on financial assistance from
Brussels and saw a massive property boom in the last 10 years. The PIGS are heavily dependent on agriculture.
3)Default on it’s debts - Can’t do that in the Euro.
4)Take the painful path of austerity and reduce national debt, this is exactly what Greece and now Ireland are doing now. Portugal and Spain to follow.

I am hearing that the EU bailout money will not be able to bailout Spain and that the Germans may ask the Russians or Chinese for a loan. If this were come true it would have far reachning ramifications. The Germans will not ask the US for money as the US is in a similiar situation to the PIGS.

[ellens]

Good points, Spengler and Terry. Fundamentally, the PIGs in Southern Europe can't pay off the debts they have incurred on their short-term spending sprees of the last 20 years because there is no potential for accelerated economic growth in the future. Their populations are aging and there are few areas of economic specialization in any of these countries that show a major growth potential. Northern Italy is industrialized as is northeastern Spain, but Southern Italy and Southern Spain aren't, Portugal isn't, and Greece isn't, if by industrialized we mean modern industries with growth-potential.

The EEC or EU was a political idea that made sense after WWII and while the Cold War was going on, as a preventive act to make sure Europeans would not fight wars against each other anymore, initially, and subsequently to defend them against Soviet aggression. The Euro-Slavic zone at this point is incapable of sustaining major warfare because there aren't enough young men and the consumer culture makes it impossible. Hence, there is no reason for the EU to exist anymore other than inertia and "nostalgia". What we are seeing in Germany is how fast that "nostalgia" for the post-WWII era is rapidly fading.

[Pastaneta]

For a very long time, I had been wondering how European could live so well while working so little... Now I know: they maxed out the credit card...

The next domino can be France...

[Terry]

Within the EU France and Germany are in pretty good financial shape they are behind the bailout of the PIGS. After the PIGS the country which likely to fall into financial trouble is the UK, it has the largest government deficit of any G20 country.

The PIGS were given billions of dollars in development aid by the EU over the past 25 years and all they had to show was a large public sector and a real estate boom. Very little was invested in industry and new technology.

Spengler sums it up in his blog

http://blog.atimes.net/?p=1626

[Pastaneta]

Terry:

I don't know about Germany, but I know about France. The sécurité sociale is in the hole and pensions are not funded... So don't bet that France is in a good state...

[Michael]

Terry:

I don't know about Germany, but I know about France. The sécurité sociale is in the hole and pensions are not funded... So don't bet that France is in a good state...

Yet, still, even amongst those who admit there is a problem, everyone is determined to defend les avantages acquis and Le modèle social français

[Pastaneta]

Yet, still, even amongst those who admit there is a problem, everyone is determined to defend les avantages acquis and Le modèle social français

This is the beauty of a financial crisis.... You cannot demonstrate against it... So les avantages acquis will go...

[ellens]

I recently saw the movie, "Inside Job" which showed many of the players that helped engineer the current global financial crisis. It was aided and abetted by the highest members of both American political parties and by many distinguished economics professors, etc. Of course, the American public was to blame too for buying into the whole lifestyle of spending beyond one's means and piling up debt. In true Agatha Christie fashion, everyone should admit blame and plunge the knife in - to themselves unfortunately. The blame for the economic crisis in most of the developed countries (although not all, I don't think Canada suffered a banking collapse, nor Israel) lies on ALL possible players. So, quite correct you are Pastaneta, they can't riot or protest against themselves.

This must be the next chapter of the Decline of the West. A consumer civilization laid low by overconsumption.

[Pastaneta]

Ellens:

while you can riot against government, you can' against financial markets... Europe is laid low by decades of overconsumption and rights given to workers. Like Margaret Thatcher said, the problem with socialism is that you ran out of other people's money... Well they did. Between the week of 35 hours, tenure for all workers, 5 weeks of vacation (this is France) and debt financing, now they have run out of money.

They can riot but it won't give them money... There are less and less rich people to tax as the system has discouraged entrepreneurship... So now they'll have to work... What a disaster for them...

I remember the ant and the grasshopper...

[total issues]

For a very long time, I had been wondering how European could live so well while working so little... Now I know: they maxed out the credit card...

Germans didn't, but Americans did . Germans don't work long hours either, but they work them productively.

[Pastaneta]

Maybe... And maybe we'll find out that they are also in the hole...

[Terry]

In a nutshell Iceland was shut out of the international financial system; no serious investor would lend it money. It devalued it currency so making it’s exports cheaper, this also had the effect of boosting tourism, good source of revenue for the treasury. By not being part of the international financial system for 2 years Iceland could afford to let a few banks go bust.

Now we cannot apply this to Greece or Ireland or the remaining PIGS (Portugal, Ireland, Greece and Spain). The PIGS cannot simply be locked out of international finance as their currency is the Euro, the ECB (European Central Bank) is their reserve bank. They cannot allow banks to fail as a large amount of debt is owed to other banks in the Euro area and to UK banks.

Nor can the PIGS leave the Euro either voluntarily or by pressure from other EU countries. For if the market knew that Greece for instance is going to reintroduce the dracma two secnarios could unfold. You could see a turn around in the Greek economy as the dracma would have a low value compared to the Euro and other currencies, thus increasing exports and benefiting tourism. Conversely you could see a flight of capital out of Greece as investors would have little confidence in the new dracma. Greece's debt would have to converted from Euros into dracmas. So you are left with the option of the German taxpayers bailing out the PIGS, with help from the French and British and that isn’t going to go on for ever.