Germany’s Fear And Desperation Leak Out

A hullabaloo erupted between France and Germany that both governments are trying to silence to death. According to unnamed sources of Zeit Online and Reuters, German Finance Minister Wolfgang Schäuble broached an unprecedented topic with the members of Germany’s Council of Economic Experts on Wednesday when they presented their Annual Report. In its 49-year history of advising German governments, the Council has never delved into policy proposals for other countries. And yet, Schäuble asked them: Could they produce a reform concept for the troubled French economy?

The French, who are currently engaged in national soul-searching and navel-gazing to halt their declining “competitiveness,” were not amused. The office of President Francois Hollande wrapped itself in silence. Prime Minister Jean-Marc Ayrault brushed it off. The German Ministry of Finance declined to comment on “unofficial discussions.” Council Chairman Wolfgang Franz backpedalled: “That’s largely misinformation,” he said. “An order for a Special Report is not even in the most distant sight.” He figured that the French government “wouldn’t tolerate something like that.”

Nevertheless, he said, the government is highly interested in reform ideas that would make the monetary union more stable. And it is in this context that the Council would “think about France” in December. After which they would talk again with Schäuble, he said.

But the Council is already “increasingly worried” about the economic developments in France, admitted Council member Lars Feld when he presented the Annual Report to Schäuble. “The largest problem isn’t Greece anymore, or Spain or Italy, but France because France has done nothing to rebuild its competitiveness and is even heading in the opposite direction.” He didn’t mince words. “France needs labor market reforms,” he said. “It is the country among Eurozone countries that works the least each year; so how do you expect any results from that?”

The problems are piling up in France. While central government spending—56% of the economy!—is expected to remain relatively constant and provide some stability, the private sector is deteriorating with breathtaking speed. Every day, new evidence seeps out.

On Friday, it was an Insee poll of CEOs in the manufacturing sector. They’re cutting investments in plant and equipment in the second half. In 2013, they would reduce their investments by an additional 2%—though in the previous poll in July, they’d planned on increasing their investments by 5%. A harsh reversal, one that has been playing out for months.

Then the Bank of France released an estimate for fourth quarter GDP: it would shrink by 0.1%. For the third quarter, it also estimated a decline of 0.1%. If these figures are confirmed, France entered a recession in July. Five quarters in a row of total stagnation, a first in France’s post-war history!

The Germans are concerned. France bought €101 billion of German goods in 2011, or 10% of total exports. But German exports fell 2.5% in September, and exports to the Eurozone crashed 9.1%. Germany has been through this before. Its economy lives and dies by its exports.

Schäuble must feel the pressure. But fear of a dip in exports to France might not be enough for him to risk a diplomatic confrontation with his most important neighbor. He certainly wouldn’t want to stir up, without good reason, even more accusations of meddling and Teutonic arrogance. So why this unusual request?

Fear and desperation within the government about a much greater threat. The credit markets, which are currently sleeping through the French private-sector fiasco, might wake up someday—as Greece found out, it can happen suddenly—and demand much higher yields. Even if still digestible for France, it would likely throw Spain over the edge, and Italy would follow. Or the markets might walk away from France entirely.

France is too big to bail out. If the debt crisis suddenly arrived in Paris, only all-out, no-holds-barred, unrestricted bond-buying operations by the ECB could save the euro. But it would violate even the last pretense of treaty-based limitations, and would in the process debase the euro. While this might please some countries, including France, it would enrage German voters who might take out their anger on Chancellor Angela Merkel and her government. And that strikes terror into their hearts.

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  20 comments for “Germany’s Fear And Desperation Leak Out

  1. Sap1 says:

    Please read this. It is amazing how Greece is at the center of everything, when other countries have much bigger problems.

  2. Roger Yates says:

    Kill the banks not the societies. The EU should co operate to buck the debt and force America to do what should have been done in 2008. Let these institutions fail. In any case we do not need a paradigm of competitiveness and economic growth. We have an environmental disaster on the horizon that originates in just that paradigm. This would suggest that a reversal of growth and a root and branch reorganisation of our economic and power structures is needed. It may be that the mafias that control our societies are going to scuttle the ship. But it is not rocket science to see what needs to be done. The downturn is slowing the growth of carbon emissions. This is a GOOD THING. The only problem with the recession lies in our failure to redistribute and reorganise,which causing a collapse in our social fabrics and international co operative arrangements. To keep the banks afloat? WHAT?

  3. Rik says:

    @Roger Yates
    Next to the banking issue there is a huge competitiveness problem. But that one differs per country and substantially. The US and Northern Europe will have to start making adjustments, but Europe's South (including France imho, but not yet in the opinion of markets) are simply too late to do that without big structural adjustments and most likely a huge drop in income and living standards.
    Plus they all have an aging problem, on which the policy reaction is also just started (and basically was already long overdue).

    Europe's South simply looks like guaranteed economic Zombies and France as well btw. No platform for adjustments and likley will first have to fall from their own cliffs before there will be one.

  4. Rik says:

    Germany stil gets it wrong.
    It is not developing the product (inventory of necessary changes);
    It is even not manufacturing the product (making new laws);
    it is getting the products sold.
    The population in France simply doesnot like the crap (working and stop drinking wine for lunch and not retire at 55 and no free entitlements). Especially with these salespeople (French politicians) as well ('well, my new boss says it is great, but I as well have my doubts, but won't you buy it anyway' ).

    That is the European problem people were grown up with the entitlements and now simply think (well a large part of them) that they grow on the trees. These people will have to be convinced.

    It is hardly rocketscience what is wrong with France and what should be changed. I can have a plan without having been in the country for 10 years or so and within a week (with typing being the largest problem) and better than the plans they come up with themselves. One small problem nobody will be buying it. It is getting it politically accepted (both voter and politician level) that makes it complicated.

    Doubt btw that Schauble does it for when France falls in the PIIGS 'stable'. If France goes no way Germany will be able to keep the fort alone. Germany in order to survive would simply have to leave beforehand or at least asap. No use fighting together if it means dying together. No way Merkel will survive the only option left in that case (truly massive, Ben Square on Steroids printing, politically at home. Schauble will have noticed that, he is not a complete idiot. And with the French population not seriously moving until there is a shock event (and it is too late), it looks a bit of a useless excercise.

  5. Roger Yates says:

    Rik. What you call living standards I call a load of consumer junk no one needs. Our problems flow from too much success, too much competitiveness, too much production and too much growth. We need more thought, more experimentation with alternatives, more political power from the bottom up. The space for positive evolution is expansive in the area of gaining power over our destinies and developing meaningful lives as social beings. The space around growth and consumerism is contracting, as you have pointed out . I would much rather "get a life" than "get an iphone". All the evidence is that real social connection engenders happiness. Now to produce social change is not easy, but neither is the search for a cure for cancer. Who suggests we should abandon medical research because it is foolishly idealistic and it is obviously " human nature" to die at 40? But we are told it is human nature to be greedy and competitive and many have been persuaded to believe it although there is no behavioral evidence for it.

  6. Jerome says:

    The right solution is to abolish Feminism, which is very damaging to the economy in these sense:
    1. Less employment for men.
    2. Less Maternity, thus less useful work-force, i.e. less education/civilization and of course reproduction.
    3. Sending the women out on the market costs tremendous amounts also directly:
    3.1 Increased Energy expenses.
    3.2 Increased Cosmetics & Fashion.
    3.3 Fabricated jobs and "Education" courses in order to "Employ" them.
    3.4 Wreckage of good business by means of "promoting" women to leadership roles.

  7. Wolf Richter says:

    Roger – You're going to get the US thought police chasing after you with comments like…. "I would much rather 'get a life' than 'get an iPhone'" That's heresy in a country where people believe the opposite to be true. Or at least they believe, "My iPhone IS my life." Or something. I enjoy your thoughts immensely. Keep them coming.

  8. Wolf Richter says:

    Jerome – I assume you're joking. At least I HOPE that this is sarcasm.

  9. AC_Doctor says:

    Great article Wolf. I wonder what my fellow Americans were thinking when the re-elected Obama other than his aura of "free shit for everyone" but the rich. Socialism has taken the toll in the EU and its on the edge of failure right now while over half of America wants to go down that fatefull path of destruction. I fear the ball can't be kept in the air much longer and the paper ponzi will finally collapse leaving trillions in wealth destruction for those who believed that our governments and bankers where really working in our best interests!

  10. Mark says:

    as i see more and more fools glued to their 50" TeeVee, their Kindles and Xboxes i see no future for the American intellect….

  11. Roger Yates says:

    AC Doctor. There is no Socialism in Europe. You don't seem to understand the meaning of the word. In Europe we have mixed economies that are strongly Neo Liberal in character. The same in America. To call Obama a Socialist is ridiculous. What has failed is precisely the Neo Liberal model of Capitalist Finance. Marx would be laughing his ass off. As he said " A Capitalist will sell you the rope to hang him with." A pretty accurate description of what is happening. They are destroying the Capitalist economy. Have you not noticed? By the time the Capitalists have finished melting down the economy you guys will be begging for a bit of Socialism.

  12. Rik says:

    I like to use standard of living iso (or use it next to) GDP (per capita) as it better reflects also immaterial issues and good. Like working 30 hours iso 60 a week, clean air, a bigger house, a large garden, more space in general, things like that. Basically the things that have a real value (could have even by in money if it were not so difficult to value in money).
    I also use it in relation to the pricelevel in a country. Earn a 100 and have to pay 100 for package A (to live) or earn 200 and have to pay 200 for the same package doesnot increase your standard of living but does increase (double even) your part of the GDP. The mechanism is different from country to country. A fully selfsufficient country would likely see with a drop in income of 50% a drop in prices, Greece hardly sees lower prices while incomes drop 10s %, so it causes much more problems.

    I can agree to a large extent with your ideas. But simply donot see the vast majority doing that. A lot of people do rather have an I-thingy than a life (and subsequently donot know how to use it properly). Sad but true. It will work for you and it would be better if most people did but they donot.

    Why I use standard of living in relation to Southern European countries. As using it next to GDP (as that is often the only thing we got available) gives a better insight. What the problems will be, if the population will start to revolt. At the end the population will start to judge things more on the standard of living than on the GDP. But likely closer to my (very inperfect) definition than to yours (would be my guess), we live in a very profane world.
    With prices hardly going down (at the moment), a lot of the essential stuff having to be imported that will hit them harder than say the US or Canada (that have thier own resources).
    I use it more as a parallel excise to do next to the fully financial GDP stuff. Especially here relevant as the decisionmaking is often (next to very complicated) very political. What can you sell what can people bear (and the latter is often more based on standard of living iso GDP. A sort of double check.

  13. Roger Yates says:

    Rik "I simply donot see the vast majority doing that. A lot of people do rather have an I-thingy than a life"
    I think people are coerced very powerfully by the consumerist/wage slavery paradigm. This is not a matter of choice. There is virtually no space outside the present orthodoxy. Those who do venture outside it are very effectively punished.
    Consider this close look at Small Government and Libertarianism. There is a form of Socialism called Libertarian Socialism. Far from being a stateist and top down/command economy system, so reviled by Small Government Capitalist libertarians, it proposes no central government at all. It proposes a free association of equals as the basis for society. Now imagine a situation, and here I am taking no sides on the ultimate ethical questions, just examining notions of government. The workers for Mr Henry Ford inform him that they are taking control and ownership of the car plant after a democratic vote on the matter,
    He is welcome to bring his skills to the table but the plant is no longer his property but theirs. Indeed there is no longer private property. Mr. Ford would immediately invoke layers of government. First the Law of property rights, necessitating a layer of State Judiciary, then coercion to defend that, necessitating a Police Force and sanctioning the use of state violence, and of course the state bureaurocracies to administer all that and finally a military to back the police with lethal force if needed. Suddenly we have Big Government to defend the interests of of the very people who propose Small Government when it comes to the interests of the many. As I say, the debate around the ethics of private property and the ultimate practicality of the true free association of people stands aside from the indisputable observation that Capitalist Libertarianism is really no such thing. It is a system of coercion and violence against individuals by a State.

  14. KingTut says:

    So if the Germans are giving up on the French, and have already given up on the Greeks, Portuguese, Irish, Spanish and Italians, why the F are they still in the EU? The European dream? Yes, but does that still ake sense for the Germans?
    Once the Germans realize they will default if they stay in the EMU and might not if they leave, they will leave. Germany will be better off without the ass-clowns of the EU. No one respects the Brussels Bozos anymore. Germany would have more influence internationally, a better currency, and more freedom to trade with anybody if they left.
    Then the EMU could devalue the Euro to $0.60 where it belongs, and they will have some collective relief.

  15. Rik says:

    Thanx for the remarks, interesting thoughts.
    However it is so much easier to set up a model that could work or better even would have worked if things developed differently it is something else to make that model work. The whole world as we know it is eg organised around states. And these states simply like, in both main forms, to get bigger and bigger internally. Dictatorships to keep grip on the situation, cream off the economy and effectively democracies (better non-dictatorships) do the same thing.
    It simply donot see it happening. 80-90% of the people want something different (may be because they were programmed that way, but that hardly makes it easier to make them change their minds).
    This is furthermore something even if you would start with it now that would take several generations.

    I doubt if we have that much time. Imho the best option for necessary change is via the present structures.
    I also strongly believe that growth will be needed to finance it. History shows all 'not direct profit' plans end up in the fridge when there is no new money to finance it from (look at the environment now, priority no 100 or so).
    The other way to get these big things done is after the original set up collapses.

    Another complicating factor in your set up is wanting de facto to abolish private ownership. Will make things even more difficult to organise. I only see that working when you can establish a sort tribal like cultre which needs a complete reprogramming of the populations.

    Fully agree we have to do something about running out of resources, global warming, overpopulation etc. However imho the best available option is within the present structure (probably adjusted considerably). In order to create another platform to make it work would take generations.
    The other option is a shockevent. Which we would have anyway if 'my' plan A fails (which is a real possibility as there is not really enough platform for it). But it is simply the best possible option.
    Btw even if global warming etc were more dubious than they are, I do think we cannot take the risk especially since solutions take half a century to be effective. You cannot afford to be wrong.

    Basically human kind imho doesnot have much more room to get grip on things. The solutions for these worldwide long term problems look simply too complicated for the majority of the people to understand while there is more and more a platform needed to make them work. Nearly impossible to create such a platform for such complicated issues. Like with global warming it got its own 'half' of Western societies, but did it in a way that pushed the rest of humanity off. They forgot to integrate the other parts just told them what to do, which clearly easy predictably didnot work. Add running out of money and it is long term at best in the fridge until likley things cannot even by the biggest idiot be denied. Simply too complicated to handle by the 'management'. In a nutshell it is abot time we learn to live withing our own limitations (place where we live but also limited 'braincapacity').

  16. Roger Yates says:

    Rik I was not saying I wanted to abolish private property or that I think that Anarchism or Libertarian Socialism is a reasonable way to organise society. I cannot see that either possibility are inherently any more fallible than other systems, however, although they may well be. The point is they are not an option in the present power structure and if you are not permitted to try something how can you know? It is if the Dinosaurs are saying that dinosaur is the ultimate system for organising genes, morally and in practice, and any further evolution is to be crushed. That is surely what the "triumph" of "LIberal Democracy" and free market economics has achieved. yes? The Cuban revolution could have been seen as a valuable experiment. A political ideology that supported Pinochet has no moral ground to argue against this.
    I share your view on the immanence of the environmental/resource crunch. It makes me think that just the people we need are bureaucrats and policy wonks. Growth, which frankly I doubt is an option from here on out (population, resource depletion, democracy depletion), and market freedoms ( growth as well as a free market I mean) are antagonistic to regulation by their nature, and we have a crisis where greater regulation and political control is necessary. Surely this is the reason that market libertarians are so predisposed to deny the evidence for climate change?Of course it may be possible to grow an economy endless environmentally damaging junk for a consumer cannon fodder peasantry, but that will take big social change. So we are back to square one. What I do think is we need to foster real liberty and my last argument was intended to challenge the notion that it lies with the Neo Liberals. Spot the contradiction!

  17. Andrew P says:

    With all the poisonous Schadenfreude coming out of Germany about the USA, I would love to see the EU go through state secession followed by civil war. And the Europeanist ideology is so strong that there would be a civil war if a state seceded – the overwhelming majority of the EU political class will act to preserve the union at all costs.

  18. Rik says:

    I donot mean that the dinosaur system will stay in place for ever I only say you and I very likely will not see a completely different system in our life times.
    All the Asians and Co that have jumped on the capitalisted/consumer bandwagon will take at least one or two generations to get off again. And as long they as a large group are ok with more or less the current system it will be difficult for the rest of humanity to start something else. At the end of the day populationwise (what will count if incomes worldwide get closer to each other) the West is just a small part.
    And looking at Asia they will simply compete (aka pay) to get access to limited resources (they have low wages to pay it from). The West relatively high wages are largely based on cheap commodities.
    It will first change when humanity drives aganst the wall/falls of the cliff.

    The Cuba/Chili example is an interesting one. Sympathetic idea and horrible management thereof or dodgy but competent management and maybe less symphathetic ideas. Knowing both I would at the end of the day rather live in Pinochets Chili than in Castro's Cuba, holiday/short term stay is different. At the end of the day Cuba failed nearly completely in the execution (and it is not because of the US). Fortunately it is getting better now. But it also shows what most people find important, much more people fled Cuba than Chili, much easier to leave Chili than Cuba.

  19. Roger Yates says:

    Rik. Here's the other side of the story. Not pretty, but not comparable, I think.
    Cuba has better healthcare outcomes than the USA
    Personally I would rather live in Blighty…..

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