Germany is not New York

Published on RWER Blog, by Peter Radford, July 2, 2012.

It takes no extraordinary acuity to see that New York is not Germany, and that Germany is not New York. It takes a little more struggle to wish that they were more similar.

For if Germany were New York it would be part of a transfer union where funds flowed easily and anonymously from one local economy to another within the larger whole. Right now that would imply funds rolling out of Germany towards, for example, Spain without a word of debate. It would just happen. And, hey presto, Spain would be bailed out without having to commit to suicidal and, most likely, unsustainable economic policies.  

Instead Germany sits in a very rigid and not well designed union where transfers of funds come only after retribution is exacted, penalties assessed, and horrors inflicted so that the creditors can feel morally justified in ‘helping’ out the, presumably morally inferior, debtors.

The Spanish problem is that it had a real estate bubble of sufficient proportion to blow up its banks. In order to save those banks the Spanish government had to borrow a great deal and thus ruined its own creditworthiness. A private sector problem thus became a sovereign debt problem. Lacking an independent monetary policy, and not having its own currency to devalue, the Spanish government was forced to use its only policy weapon, namely fiscal policy. In other words the full brunt of saving the banks was transferred to the unsuspecting taxpayers of Spain. The result is grinding depression, massive unemployment – in excess of 20% across the economy as a whole – and a drop in economic activity that has only made things worse. The drop in activity has made it impossible to hold debt levels down to the levels that Spain’s creditors would like, so interest rates on new debt have risen enough to burden the budget sufficiently that there now looks as if there is no escape. Spain is going down.

Remember, all you moralists out there, that the Spanish government was a model of fiscal rectitude before the real estate bubble burst. Its debt to GDP ratios were better than those of its more self-congratulatory neighbors to the north. The Spanish problem is not rooted in some imagined folly of rotten fiscal policy, nor is it the outcome of a too forgiving social welfare state. It results purely from unwise real estate investment and the huge inflow of foreign capital that inspired too lax and too much lending in the private sector.

And Spain is not Florida … //

… I wonder what the political atmosphere would be were the good citizens of New York and its ilk informed of the extent of their largesse. And that they just bailed out a number of states who relentlessly criticize their New York style social and economic mores. Or that, by and large, it is the states electing die hard anti-deficit Republicans who most benefit from the deficits they hate.

The US manages to avoid being honest within itself about the real effects of local economic decisions. The flow of Federal cash masks a wide array of local ills. And those ills, being inoculated from error by that flow of Federal cash, create the illusion of being anything but ills. The wealthy sates in the US continually subsidize the less wealthy. This creates a dangerous illusion. It is the pretense that, somehow, it is Washington that is profligate and not balancing its books, whilst the truth is that the deficit has local roots. And those local roots are often in places whose citizens scream bloody murder at the size of the deficit they see in Washington’s budget.

The flip side of this illusion is, of course, that states can sometimes flop and yet be bailed out without enduring the kind of terror that Germany is insisting the Spanish go through.

No. Germany is not New York. Whether that is a good or a bad thing for Germans and New Yorkers is neither here nor there. But for the Spanish and Floridians the difference is vital. And therein lies the issue. Florida pretends to be a separate state, which it is not. Spain is a separate state but pretends to be part of a union, which it is not.

Odd how that works. (full text).


Unemployment in Europe, May 2012, the disaster continues, on RWER Blog, by Merijn Knibbe, July 2, 2012;

European and US Governments Encourage Bank Manipulation and Fraud to Cover Up Insolvency, on Global, by Washington’s Blog, July 2, 2012;

Crushing Interest Rate Swaps and LIBOR Manipulation: The plight of state & local municipalities, on Global, by Ross Ruthenberg, July 2, 2012;

Europe: An Emergency Program to Resolve the Economic and Social Crisis, on Global, by Damien Millet and Eric Toussaint, July 2, 2012;

Outfoxed by Club Med: German Dominance in Doubt after Summit Defeat, on Spiegel Online International, by SPIEGEL Staff, July 2, 2012 (Photo-Gallery).

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