Summary: As the euro-crisis, now in its third year, grows in breadth and intensity, many analysts conclude that Europe’s leaders are stupid. Perhaps not. Perhaps they pursue hidden goals. Goals important to them, if not to Europe’s peoples.
Many people writing about the euro-crisis conclude that Europe’s leaders are stupid. How else to explain the long series of late, slow, half-measures which never address the core problems?
In a recent post about Obamacare Chet Richards advises us to take John Boyd’s advice and beware of such facile analysis. If we understand people’s orientation, we might see their actions as logical. For example, we might believe them stupid because we do not see their goals.
We know that Europe’s leaders seek to protect their banks (and bankers). They seek to preserve the European Monetary Union, and continue progress to eventual unification. Perhaps there is a third goal in the shadows. Massive deficits combined with recessions — even depressions — provide the opportunity to break Europe’s social welfare systems, including the unions and legislation that empowers workers.
The same dynamic is at work in America.
Why do they think this will work? Because it worked in Germany. And it’s working now in the periphery of Europe. But pursuing this goal while protecting the banks means they’ve not taken the reforms necessary to preserve the EMU (one cannot do everything at once). So they might achieve their two lessor goals, but in doing so wreck their greater dream of a unified Europe, for which they have worked so hard since WWII.
For details about their success in Germany see this excerpt from a report by Joshua Rosner of GrahamFisher, 17 July 2012 (Hat tip to Yves Smith at Naked Capitalism):
In 2002, with the unemployment rate at 8.7% and still increasing, German Chancellor Schroeder asked his friend Peter Hartz, former Human Resource Director at Volkswagen, to chair a commission tasked with restructuring the German labor market. Under Hartz’s leadership the commission redefined the German workforce, reducing traditional full time employment and introducing the concept of “minijobs.” These so called “minijobs” provided German companies with the ability to hire short term workers without restrictions on hours worked and who were terminable at will. While “minijob” workers did not pay taxes on earnings; the earnings maxed out at a meager €400.
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From 2002 to 2005, the German public and private sectors embarked on a series of massive Hartz reform austerity measures focused on using the high levels of unemployment to extract meaningful wage reductions from public and private labor. Even though the Delors Commission report, the intellectual basis of the monetary and economic union, specifically stated that governments should convince business and labor of the advantages of “gearing wage policies largely to improvements in productivity” rather than direct intervention in the wage and price formation process, the German government interpreted this language in ways the authors never intended.
The cuts in real wages for German workers, and reductions in Government programs, benefitted the German financial sector and exports. They also indirectly but substantially supported the country’s low cost of funds, giving German business a competitive advantage relative to its EMU peers.
Germany’s success during the last decade resulted from its current account surplus within the Eurozone supported by pressure on pay and working conditions rather than superior productivity growth.
Unfortunately for the German population, while German business profited handsomely, and German Banks exported capital to the rest of the world, the costs were borne by German workers who faced wage pressure. German households never reaped the fruits of their labor. The imbalances that Delors warned about were being built into the very structure of the Eurozone by the German government’s sole focus on protecting domestic business interests at the expense of their own population.
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For more information
(1) Forecasting the crisis in Europe
- The post-WWII geopolitical regime is dying. Chapter One , 21 November 2007 — Why the current geopolitical order is unstable, describing the policy choices that brought us here.
- Can the European Monetary Union survive the next recession?, 11 July 2008
(2) Posts about Greece
- A great speech by the PM of Greece. How soon until an American President says similar words?, 3 March 2010
- The EU does Kabuki for Greece. Is it the next domino to fall?, 14 April 2010
- Important: Former Central Bank Head Karl Otto Pöhl says bailout plan is all about ‘rescuing banks and rich Greeks’, 20 May 2010
- Hot news! The Wehrmacht failed to take Greece. Now Germany tries again, with a different method., 28 January 2012
- Europe has chosen a harsh future. All the paths for Greece lead into darkness., 24 February 2012
- A note from Athens: Feeling on the ground has palpably changed, 1 March 2012 — A clear sign that the Greek people are ready for change
(3) Reporting Europe’s slow march to the cliff
- The periphery of Europe – a flashpoint to the global economy, 8 February 2010
- Governments cannot go bankrupt, 2 April 2010 — But they can default.
- About the Euro crisis: the experts are wrong; the German people are right., 7 May 2010
- The Fate of Europe, nearing the point of decision, 13 September 2011
- Europe drifts towards the brink of a cataclysm, 26 September 2011
- Delusions about easy fixes for Europe, dreaming during the calm before the storm, 30 September 2011
- Is Europe primed for chaos, as it was in July 1914?, 7 October 2011
- Today Europe’s leaders took another step towards the edge of the cliff, 27 October 2011
- Where to from here, Europe? Some experts share their views., 8 November 2011
- Status report on Europe’s slow re-birth (first, the current system must die), 10 November 2011
- Looking ahead to see the new shape of Europe, 22 November 2011
- Europe passes the last exit. A great crisis lies ahead., 21 February 2012
- The Fate of Europe has become visible. Only how and when the break comes remains uncertain., 6 June 2012
(4) Other articles about Europe’s march to unification
- “France’s Broken Dream“, Martin Feldstein (Prof Economics, Harvard), Project Syndicate, 26 May 2012
- The End Of The Euro: A Survivor’s Guide“, Peter Boone and Simon Johnson, The Baseline Scenario, 28 May 2012
- “The Euro: an alternative moral tale“, Simon Wren-Lewis (Prof Economics, Oxford), 1 June 2012
- Important: Remarks by George Soros at the Festival of Economics, Trento Italy, 2 June 2012 — Deserves attention, as he has proven to understand currency unions better than almost everybody.
“We know that Europe’s leaders seek to protect their banks (and bankers). They seek to preserve the European Monetary Union, and continue progress to eventual unification. Perhaps there is a third goal in the shadows. Massive deficits combined with recessions — even depressions — provide the opportunity to break Europe’s social welfare systems, including the unions and legislation that empowers workers. The same dynamic is at work in America.”
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The idea that we are dealing with some very bright people who are sociopathic in their ability to lie and distort cannot be over stressed.
“If we understand people’s orientation, we might see their actions as logical. For example, we might believe them stupid because we do not see their goals.”
These US and Euro leaders speak as with one Voice. Lagarde today will tell the USA the fiscal cliff “is a major concern”! And half of the US Voters will support such unraveling nonsense that they will more and more come to regret.
The sheep start fires to help the wolves find them (for dinner) in the the fading light!
Good post FM
Breton
“The idea that we are dealing with some very bright people who are sociopathic in their ability to lie and distort cannot be over stressed.”
I strong dislike the widespread use of psychobabble to characterize enemies. The will to power is one of the basic facts of human character. To dominate one’s spouse, children, co-workers, neighbors. Some have bigger visions; they usually (not always) justify their actions in terms of the greater good. Labeling this with long latin words tells us nothing more than we learn from a Disney film about the Great Circle of Life. If there are prey there will be preditors. We choose to be weak or strong.
Au contraire! I know you dislike sociological or psychological (or spiritual) perspectives. It is a hole in your significant knowledge base. And most importantly such perspectives do provide an explanation of the “WHY?” of the sheepish behavior we see and you, so rightfully, point out:
Man does NOT universally operate like O’Brien offers above and most importantly most cannot imagine that there indeed are those who are not constrained in their actions by conscience (I suspect that idea of a conscience is not Disney-esque to you or is it?)
Such “a boot stamping on a human face” generalization is a literary device.
As a Military man you surely know it is a goal to subjugate the repulsion to kill another and many times it fails. The horror of (some)is not universal. If it is for you…..oh, sorry, then.
There is an element of Man that is be referred to as moral or therwise why are you bothering?
Carry on…….
Breton
Breton,
All your points are good and valid. There is not higher viewpoint reachable by us from which to resolve these differences of perspective.
this case I use a value system that looks for operational utility. Labeling ones opposition “sociopaths” feels good, and might work as agit-prop — but otherwise what’s been accomplished? We’ve given our views a pseudo-scientific gloss that will only impress those that already agree. Does it generate any useful operational insights?
“Man does NOT universally operate like O’Brien”
“Universally”, like “always”, is a big word. But men often act like O’brien. As we saw with the NAZI’s, how easily they got regular people to participate in their horrific activities. As we saw in the Milgram experiment (and the many replications since then), getting regular people to torture (Wikipedia). As we saw in the Stanford prison experiment, where regular people quickly became cruel
power-made jailers (Wikipedia).
“There is an element of Man that is be referred to as moral”
Star Wars was correct that the dark side lies within all of us. We have 3 thousand years of history showing that people are neither inherently good or bad. In a good social system they will usually be good. But in a bad system a majority can easily be corrupted and depraved. That’s why the issues discussed here are so important. That’s why it’s so serious that America slumbers while darkness spreads.
In effect you steer towards a conspiracy theory. As far as I know the great depression was to our present knowledge caused simply by economic policy based on false theories, no hidden agenda, no conspiracy.
It is far more important to consider what effect a large external event, would do to our system. The French Revolution was sparked off by a famine caused by nature. The world economy is today more exposed to external jolts as ever. We keep getting jolts. Arab revolution, Fukusima. Not yet the big one. Beside any other aims, I would welcome a less interconnected, less cascade-effect prone world.
(1) “In effect you steer towards a conspiracy theory”
No, not at all.
(a) Groups act to some degree in concert, based on their common goals and thinking. This is the key to John Robb’s work on “open source movements.”
(b) They’re VERY open about their intent. A conspiracy with their goals and actions in the daily newspapers? We just prefer not to understand what we see.
(2) “the great depression was to our present knowledge caused”
Just like this one. I don’t say or imply that the causes of this downturn were in any way deliberate.
(3) “It is far more important to consider what effect a large external event, would do to our system.”
“Far more important” than what? What can be more important than understanding the goals of the key actors? Without that, we’re passengers. Speculating about events you have little control over is entertainment.
(4) I don’t see the relevance of the rest of your comment to this thread (although I agree).
There does seem to be a trend, accelerating since the end of the Cold War, for Western elites to walk away from the general welfare of their own people. They don’t need a mass educated, politically and economically contented work force ready to be drafted into mass armies etc. How badly do elites in India need much of their own population, and so they treat them accordingly.
Although FM disagrees, I still believe European “statesmen” might have been able to create a prosperous cohesive Europe, even with the EMU structure as it is, IF they had kept their banks and lending-borrowing, both private and public, on a very short leash. Instead, the banks kept the politicians on a short leash, and still do. No talk of debt defaults; only talk of eurobonds, bazookas, and “saving” banks, all to be paid for by the taxpayers. Unless you want to make banking a risk free business, which is a massive incentive for wild lending and economic unhappiness, then you have to let the banks take losses to the point of failure – and/or control them like public utilities.
Instead the current European elites are throwing their own peoples under the bus. And therein lies a potential problem: The problem of an eventual and perhaps radical change in politics with political parties of the far left or far right forming governments not under the control of the current crop of leashed politicians and their corporate and financial masters. But it wouldn’t be the first time that a slovenly and greedy elite lost power. And if things get bad enough, more para military cops in the streets won’t be the solution. Not only does this elite appear to already be losing its dream of Europe, but it may also lose control over the lower “orders” of society. This is not a prediction, only an observation.
Rankism: using rank in any form to oppress, subjugate or humiliate another. These include racism, sexism, some types of nationalism, etc. Rank is supposed to be responsibility and service. Anyone who uses it otherwise (e.g. national and international leaders, others referred to above) are rankists.
The elites constantly speak of balancing, re-balancing, and so on. For example, trade imbalance between north and south, driven by productivity imbalance and wage imbalance. Solutions are always to the detriment of labor and the middle class; austerity, reduced wages, reduced safety net, reduced services.
What about the glaring imbalance between the FIRE sector, and the rest of the economy; i.e. the government sector and the industrial sector, and the non-financial services sector? Finance alone now gleans 40% of private sector profits. Real estate values remain well above historical norms. Insurance (Warren Buffet’s real franchise) has grown enormously ahead of manufacturing and non-financial services. The 800 lb. gorilla in the room is Finance (includes TBTF banking), Insurance (rent seeking holders of bonds and equities and real estate), and Real Estate (replete with tax advantages). I guess it’s not polite (or politic) to speak of re-balancing this sector with the 800 lb. gorilla listening.
“What about the glaring imbalance between the FIRE sector, and the rest of the economy … I guess it’s not polite (or politic) to speak of re-balancing this sector”
What’s not to like? It works well for the stakeholders in America. Too bad most of us are not included in their ranks.
yeah, it’s not necessarily a secret plan where our leaders are sitting around a round table in shadows discussing their takeover of a their nation, but instead a complete disconnect from the general public and the feeling of the need to take care of one’s own. They’re all abundantly wealthy and – for the most part – belong to the same groups, associations, clubs, etc.
They are all friends, family, colleagues and they are going to help eachother and make eachother happy before they consider you. They put eachother in office for a reason.
“They are all friends, family, colleagues and they are going to help eachother and make eachother happy before they consider you.”
That’s a powerful point. They have social cohesion, which makes them strong.
When we recover our ability to stand together, we too may become strong. Until then, no matter how individually strong or brave, we are chaff.
yes! precisely!
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