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German model is ruinous for Germany, and deadly for Europe
Topic Started: 10 Oct 2014, 06:29 AM (2,774 Views)
peter fraser
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German model is ruinous for Germany, and deadly for Europe
Ambrose Evans-Pritchard
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France may look like the sick man of Europe, but Germany’s woes run deeper, rooted in mercantilist dogma


The Kaiser Wilhelm Canal in Kiel is crumbling. Last year, the authorities had to close the 60-mile shortcut from the Baltic to the North Sea for two weeks, something that had never happened through two world wars. The locks had failed.


Large ships were forced to go around the Skagerrak, imposing emergency surcharges. The canal was shut again last month because sluice gates were not working, damaged by the constant thrust of propeller blades. It has been a running saga of problems, the result of slashing investment to the bone, and cutting maintenance funds in 2012 from €60m (£47m) a year to €11m.


This is an odd way to treat the busiest waterway in the world, letting through 35,000 ships a year, so vital to the Port of Hamburg. It is odder still given that the German state can borrow funds for five years at an interest rate of 0.15pc. Yet such is the economic policy of Germany, worshipping the false of god of fiscal balance.


The Bundestag is waking up to the economic folly of this. It has approved €260m of funding to refurbish the canal over the next five years. Yet experts say it needs €1bn, one of countless projects crying out for money across the derelict infrastructure of a nation that has forgotten how to invest, sleepwalking into decline.


France may look like the sick of man of Europe, but Germany’s woes run deeper, rooted in mercantilist dogma, the glorification of saving for its own sake, and the corrosive psychology of ageing.

“Germany considers itself the model for the world, but pride comes before the fall,” says Olaf Gersemann, Die Welt’s economics chief, in a new book, The Germany Bubble: the Last Hurrah of a Great Economic Nation.

Mr Gersemann says the Second Wirtschaftswunder – or economic miracle – from 2005 onwards has “gone to Germany’s head”. The country has mistaken a confluence of exceptional events for permanent ascendancy. It cannot continue to live off exports of capital goods to China and the BRICS as they hit the buffers, or by stealing a march on southern Europe through wage compression, a zero-sum game.

Marcel Fratzscher, head of the German Institute for Economic Research (DIW), makes a parallel critique (more Keynesian in flavour) in his new book, Die Deutschland Illusion, no translation needed. It is a broadside against the fiscal fetishism of finance minister Wolfgang Schauble, now written into the constitution as a balanced budget law from 2016 onwards, making it almost impossible to override. It is the self-deception of a country “resting on its laurels”, prisoner of the “household fallacy” that economies are like family budgets, and falsely reassured by the misplaced flattery of foreigners who rarely look under the bonnet at the German engine below.

The International Monetary Fund gently prodded Berlin this week to pull its weight in a world economy gasping for demand, if only for its own good. “Germany could afford to finance much-needed public investment in infrastructure, without violating fiscal rules,” it said. For good measure, the fund said there is a 40pc chance of a triple-dip recession in the eurozone over coming months and a 30pc chance of deflation.

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The German economy has already stalled. Output contracted in the second quarter. Factory orders fell 5.7pc in August. Germany’s “Five Wise Men” council of economic experts will slash the country’s growth forecast to 1.2pc next year in a report on Friday.

Prof Fratzscher accuses Germany’s elites of losing the plot in every important respect. Investment has fallen from 23pc to 17pc of GDP since the early 1990s. Net public investment has been negative for 12 years.

Growth has averaged 1.1pc since the beginning of the decade, placing Germany 13th out of 18 in the eurozone (or 156th out of 166 countries worldwide over the past 20 years). This chronic weakness been masked by slightly better growth since the Lehman crisis, and by the creditor-debtor dynamics of the EMU debt crisis. German looks healthy only because half of Europe looks deathly.

The Hartz IV reforms – so widely praised as the foundation of German competitiveness, and now being foisted on southern Europe – did not raise productivity, the proper measure of labour reform. Data from the OECD show that German productivity growth slumped to 0.3pc a year in the period from 2007 to 2012, compared with 0.5pc in Denmark, 0.7pc in Austria, 0.9pc in Japan, 1.3pc in Australia, 1.5pc in the US and 3.2pc in Korea. Britain has been negative, of course, but that is no benchmark.

Prof Fratzscher says the chief effect was to let companies compress wages through labour arbitrage. Real pay has fallen back to the levels of the late 1990s. The legacy of Hartz IV is a lumpen-proletariat of 7.4m people on “mini-jobs”, part-time work that is tax-free up to €450. This flatters the jobless rate, but Germany has become a split society, more unequal than at any time in its modern history. A fifth of German children are raised in poverty.

Philippe Legrain, a former top economist at the European Commission, says Germany’s “beggar-thy-neighbour economic model” works by suppressing wages to subsidise exports, to the benefit of corporate elites. This is “dysfunctional”, and the more that EU officials try to extend the model across the eurozone, the more dangerous it becomes.

Capital flows within EMU have been a form of vendor financing for buyers of German exports, but it should be obvious that such a structure must reach breaking point – for Germany as well as EMU – if France and Italy buckle to demands and follow Greece, Spain, Portugal and Ireland into wage deflation. Europe is already sliding slowly into a contractionary vortex, replicating the errors of the Gold Standard in the 1930s. Doubling down would be calamitous.

Germany must move with great care. As Mr Gersemann argues in his book, it is enjoying the last days of a particularly powerful demographic dividend, soon to reverse with a vengeance. The European Commission’s Ageing Report (2012) said Germany’s workforce will shrink by 200,000 a year this decade. The old age dependency ratio will jump from 31pc in 2010, to 36pc in 2020, 41pc in 2025, 48pc in 2030 and 57pc in 2045, tantamount to national suicide.

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This is a grave failure of public policy over decades. Tax policies and social structures have encouraged the collapse of the fertility rate. Lack of investment has compounded the error. Within five years it will surely become obvious to everybody that Germany is in deep trouble, and a balanced budget will not prove any defence. Within 10 years, France will be the dominant power of continental Europe.
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Edited by peter fraser, 10 Oct 2014, 06:31 AM.
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The US had now problem borrowing 85 billion every month for who nows how long, and here the Germans are reluctant to borrow one billion for a very worthy cause, this bridge and roadway.

If Germanys economy wont really work, when they have a better employment system that most, with their house prices cheap and not in a bubble like most western economies, what chance do we have. When their youth unemployment is around 9%, when US ,euro ,UK and Australia is around 27%, with Australai being the WORST of them all with the biggest bubble of all to go with it, who will buy and rent our houses in future when our young have so few jobs, with more dissapearing by the day thanks to having the highest wages in the world. Talk about economics gone wrong , Australia has leaded the charge there since the GFC hit.

Maybe the Germans see all the trouble every other idiot is in as a result of wreckless debt levels. And to think they are scared to borrow 1 billion for such a worthy cause, unlike the Us who was borrowing 85 billion each month to pay for absolute shit and prop their stock market up with.

Maybe the Germans know whats ahead, and are positioning themselves to take full advantage as we all continue to head down the economic sinkhole. Do you expect them to ramp up car production when they know and can see the whole world now declining.

When it comes to economics ,the Germans shit all over us.

That's why they still have a motor industry yet ours is closing down. The US, the euro and UK still have a motor Industry, here in Australia , we were the only dopes in the industrial westernised world to lose our motor Industry. Not sure if some of you clowns can really understand just how bad that is for numerous reasons. The worst being, that here in Australia, we cannot compete with any western economy, let alone Asia. Western economies cannot compete with china, yet we, cannot not even compete with other western economies. All these things show that our economy is the biggest failure of them all, represented alone with the highest youth unemployment, our future.

We cannot compete with ANYBODY anymore, many Industries or businesses here that have not closed down yet or moved overseas are merely propped up in the exact same way as holden and ford were before enough was enough. So let's be very clear here, our tax dollars are being used to prop up countless failing businesses to make things appear better than they are. But this is the self destuction we engineered for ourselves long ago.

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peter fraser
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10 Oct 2014, 08:27 AM
The US had now problem borrowing 85 billion every month for who nows how long, and here the Germans are reluctant to borrow one billion for a very worthy cause, this bridge and roadway.

If Germanys economy wont really work, when they have a better employment system that most, with their house prices cheap and not in a bubble like most western economies, what chance do we have. When their youth unemployment is around 9%, when US ,euro ,UK and Australia is around 27%, with Australai being the WORST of them all with the biggest bubble of all to go with it, who will buy and rent our houses in future when our young have so few jobs, with more dissapearing by the day thanks to having the highest wages in the world. Talk about economics gone wrong , Australia has leaded the charge there since the GFC hit.

Maybe the Germans see all the trouble every other idiot is in as a result of wreckless debt levels. And to think they are scared to borrow 1 billion for such a worthy cause, unlike the Us who was borrowing 85 billion each month to pay for absolute shit and prop their stock market up with.

Maybe the Germans know whats ahead, and are positioning themselves to take full advantage as we all continue to head down the economic sinkhole. Do you expect them to ramp up car production when they know and can see the whole world now declining.

When it comes to economics ,the Germans shit all over us.

That's why they still have a motor industry yet ours is closing down. The US, the euro and UK still have a motor Industry, here in Australia , we were the only dopes in the industrial westernised world to lose our motor Industry. Not sure if some of you clowns can really understand just how bad that is for numerous reasons. The worst being, that here in Australia, we cannot compete with any western economy, let alone Asia. Western economies cannot compete with china, yet we, cannot not even compete with other western economies. All these things show that our economy is the biggest failure of them all, represented alone with the highest youth unemployment, our future.

We cannot compete with ANYBODY anymore, many Industries or businesses here that have not closed down yet or moved overseas are merely propped up in the exact same way as holden and ford were before enough was enough. So let's be very clear here, our tax dollars are being used to prop up countless failing businesses to make things appear better than they are. But this is the self destuction we engineered for ourselves long ago.

I think that you have the wrong take on this Ted. It seems that when it comes to the economy the Germans have decided to sh*t all over themselves, not us.

I was surprised to read " written into the constitution as a balanced budget law from 2016 onwards"

That's like imposing a regulation on a business (that currently has a good cash flow) that says they can never have an overdraft in the future, which means the minute they have a cash flow problem they are stuffed even though most cash flow problems can be managed with a come and go facility.

I had no idea that Germany had decided to suicide financially in this way. It's sad really.
Edited by peter fraser, 10 Oct 2014, 09:45 AM.
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Black Panther
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peter fraser
10 Oct 2014, 09:43 AM
I think that you have the wrong take on this Ted. It seems that when it comes to the economy the Germans have decided to sh*t all over themselves, not us.

I was surprised to read " written into the constitution as a balanced budget law from 2016 onwards"

That's like imposing a regulation on a business (that currently has a good cash flow) that says they can never have an overdraft in the future, which means the minute they have a cash flow problem they are stuffed even though most cash flow problems can be managed with a come and go facility.

I had no idea that Germany had decided to suicide financially in this way. It's sad really.
The Germans are still haunted by the Weimar Republic and Hyperinflation.
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peter fraser
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Black Panther
10 Oct 2014, 10:04 AM
The Germans are still haunted by the Weimar Republic and Hyperinflation.
I expect that you are right. The curious thing is that Germany cured their hyperinflation by printing money responsibly to restart factories and pay workers wages, as well as draft young men into the armed forces. At a time when the world was on a gold standard Germany had no gold and yet they prospered. Pre WW2 they were the miracle economy and all done with debt.

They seem to be ignoring their own past successes.

Edited by peter fraser, 10 Oct 2014, 10:44 AM.
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Dam
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peter fraser
10 Oct 2014, 10:43 AM
I expect that you are right. The curious thing is that Germany cured their hyperinflation by printing money responsibly to restart factories and pay workers wages, as well as draft young men into the armed forces. At a time when the world was on a gold standard Germany had no gold and yet they prospered. Pre WW2 they were the miracle economy and all done with debt.

They seem to be ignoring their own past successes.
Germany is a country of old fart, retiree or soon to be, rent-seekers, they do not want inflation.They manage to keep a null budget by not investing ,not spending anything for the Army (France/UK/US do the costly lifting) and and not spending much in education (as they have very few kids, unlike France).

And they still manage to be arrogant.

France will exit Euro pretty soon (which will ofcourse ends it overnight) and it s going to be interesting to seen how they fare with a DM=2USD and an Instant 50% competitiveness loss against France.
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Dam
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peter fraser
10 Oct 2014, 10:43 AM
At a time when the world was on a gold standard Germany had no gold and yet they prospered.
To add to it.

The historical parallels are relatively shocking with the current situation where all French/Europeans "elites" are as stubbornly ready to sacrifice the country young/future to stick to the Euro with the accompanying Austerity as they were during the 30s to stick to the Gold standard.France then applied a strong austerity, reduced defense spending dramatically, increased unemployment all the while Germany gave up on The gold standard and was investing like mad.Wipe out ensue.
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newjez
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Dam
10 Oct 2014, 11:07 AM
Germany is a country of old fart, retiree or soon to be, rent-seekers, they do not want inflation.They manage to keep a null budget by not investing ,not spending anything for the Army (France/UK/US do the costly lifting) and and not spending much in education (as they have very few kids, unlike France).

And they still manage to be arrogant.

France will exit Euro pretty soon (which will ofcourse ends it overnight) and it s going to be interesting to seen how they fare with a DM=2USD and an Instant 50% competitiveness loss against France.
Probably what should happen, can you see a roadmap for it yet?
Whenever you have an argument with someone, there comes a moment where you must ask yourself, whatever your political persuasion, 'am I the Nazi?'
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Dam
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newjez
10 Oct 2014, 01:55 PM
Probably what should happen, can you see a roadmap for it yet?
it could be as soon as 2018 but certainly (if the Euro survives until then which is far from certain, almost unlikely I would say) 2023.
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peter fraser
10 Oct 2014, 09:43 AM
I think that you have the wrong take on this Ted. It seems that when it comes to the economy the Germans have decided to sh*t all over themselves, not us.

I was surprised to read " written into the constitution as a balanced budget law from 2016 onwards"

That's like imposing a regulation on a business (that currently has a good cash flow) that says they can never have an overdraft in the future, which means the minute they have a cash flow problem they are stuffed even though most cash flow problems can be managed with a come and go facility.

I had no idea that Germany had decided to suicide financially in this way. It's sad really.
Well I could argue both ways, but do agree the bridge upgrading seems a neccesary spend for the future and the economy .

I forgot about their previous Inflation problem, and now remember seeing pictures of them hauling wheel barrows full of cash down the road to buy a loaf of bread. And I think another pic, where it looked like they were sweeping up the cash from the gutters like it was rubbish and also burning it to keep warm.

So maybe they are scared Peter, they know first hand what happens when you do the stupid things the US and chinese have been doing.

Like I said they know what's coming. And also probably know the debt levels and money printing bullshit that has gone on dwarfs anything that caused the problems for them previously.

We are now heading towards seven years since the GFC hit, and they are still pumping funny money and have rates jammed at zero. How many more years until you finally understand the bigger picture here ...honestly. 
You don't seem to really understand after all these years just how screwed up the economies of the western world are Peter. And that they are not improving , just heading further I to decline . Yet you clowns want to post bullshit about vesting interests claiming the euro or us is improving.

You have started numerous threads, a few about the euro improving. Its NOT improving Peter, its declining, with the last 12 forecast being continually revised down. See the dopes in charge have no idea, and keep revising their fanciful estimates down continually.

And now with the US winding down their funny money program, their stock market will sink, hard, and they won't raise rates and they will announce more QE soon to stop their stock market from collapsing.

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