In Defense of Germany

Gideon Rachman's op-ed piece in today's Financial Times offers support for Germany's approach to the euro crisis.  He cites the newest Economist, in which it is argued that an international consensus on what Angela Merkel should do--shift from austerity, develop a banking union with euro-wide deposit insurance, and a type of debt mutualization (like euro bonds).  President Obama is among the world leaders pushing Germany to do something.

But Rachman argues otherwise. He thinks the demands are politically dangerous as well as unrealistic. Take a Europe-wide bank deposit system like the FDIC in the U.S. Rachman quotes a senior Dutch politician, "'We cannot push through a banking union when the French have just cut thier retirement age to 60 and we have raised ours to 67.'"

I have argued numerous times that the euro was a political decision, designed to force more political integration in the EU. But, as Rachman notes, the necessary integration cannot happen that quickly.  Among things needed would be to have a European government that could override the current national governments. They would need to harmonize the various European social security systems.

Rachman also claims that Merkel has had a political success that is little noted as yet.  She has been able to keep the far-right and far-left parites on the sidelines.  Meanwhile, in the last French election one-third of the voters supported either a far left or a far right party. Currently, the extremist parties are leading in the polls in the Netherlands.  The political center is holding in Germany and this is no small accomplishment.

Is Germany Ready for More Integration?

An article in yesterday's Financial Times states that there are substancial discussions going on behind the scenes in Germany regarding further integration.  The official position of Germany fails to indicate that because Germany is concerned that comments might negatively influence some important elections coming up--the Irish referendum, elections in Greece, and parliamentary elections in France.  Further, there is always a concern of spooking financial markets.

According to the article, there is a broad consensus among the two major parties and the Green Party that greater fiscal integration is needed. It quotes Joschka Fischer, former foreign minister and member of the Green Party, “We are now very close to break-up,” he said. “Either we move ahead very fast, or we will go back to disintegrating. Will we share our wealth? Will we integrate our debt? Will we transfer our power to common institutions?”

Presumably, Germany is willing to put all of these on the negotiating table, but further fiscal integration also has to be on the table. The author also cites a recent Pew Global Attitudes Poll that shows a majority of Germans favor more integration, that is not the case in France, Italy or Greece.

This is not the impression one gets from most news stories and op-ed pieces.  The poll also found Chancellor Merkel the most respected leader in most countries--Greece excepted--which is inconsistent with the reporting that Merkel is isolated from the rest of the leaders.

Energy Change Plans in Germany

Germany passed a plan last year to shut down all nuclear plants by 2022.  Not that Germany had built a new plant in many years; like the U.S. the nuclear plants are older.  There has been a strong anti-nuclear movement in Germany since Chernobyl.  But, plans for the change are behind schedule. Part of the reason may be that the euro crisis has consumed so much time of the government leaders.

The plans include a much greater reliance on renewable energy. The goal is 50% of energy produced by renewable sources by 2030.  This is mostly wind power generated mostly by turbines in the North Sea.  But much of industry is in the southern part of Germany so a new network of power lines are needed.  This will requires an investment of $25 billion over the next decade.  This process has been slowed by paperwork and regulations in the various German states.  Also, farmers are demanding more money for the land taken for the power lines. As a spokesman for the German Farmers Federation notes--land is limited.

For those who are concerned about global climate change, nuclear power is a good option to replace coal plants, but the Green Party in Germany is also very anti nuclear.  But relying so heavily on wind power presents problems too.  Since electricity cannot be stored, what happens when the wnds are down?  Another problem is that there is power loss as the electricity flows through power lines, so the further the power has to travel, the greater the loss.

After the earthquake and tsunami in Japan hit last year, Warrren Buffet said that many died in the tsunami and few will die from the troubles at the nuclear power plants. But, people will still build homes on the coast but nucelar power will be killed.  At the time I heard him say this, I thought he was right. I still do.

Here We Go Again with Greece

This will be the third May in a row in which I teach a course on economic policy in Germany.  The first time I included a case study on the Greek crisis since it was in the news at the time.  Later in the summer, the Greek story settled down only to come on strong again the next April/May. So, I used it again.  Now, we see Greece is again a major story and I will use it a third time.

There are some differences though. While I introduce the students to optimum currency area theory and apply it to the euro-zone, I didn't seriously consider whether Greece might exit the euro in the past.  Now I think the probability is at least 50-50 that they will exit the zone.  A lot depends on the Greek election in June, but even if the more radical elements do not win, will the people put up with "austerity" to the point where it might pay off? How long will it take?  Can they even do it or are their debts too high?

To add to the concerns is the recent French election and how the relationship between France and Germany will alter.  For most of the post-war period, France called the shots with Germany often financing the projects. But, with the passing of years and the growing strenth of Germany's economy, Germany is asserting itself more.  Both the French and German leadership have been committed to the European Union and increased political integration, but this may be changing too.

A recent book in Germany, written by a former banker with the German central bank, is roiling things more.  Thilo Sarrazin's book is entitled, Europe Doesn't Need the Euro. Chancellor Merkel has been quoted as saying the the euro fails, then Europe fails.  It should be an interesting time in Germany