Stop Blaming Germany!

When the European crisis began to unfold about 2 years ago and investors and the media were first discovering how it came about, they focused a lot on the lazy PIIGS. Michael Lewis did a nice piece on Greece and their culture of free handouts, retiring at 50-55, and pointed out that Greece’s national railroad paid out 400 million euro in wage expenses when they only collected 100 million euro in revenues for 2009. People were not focused on how Europe’s reaction and solutions on the aggregate would affect markets as markets were trending upward and their did not seem to be a correlation at the time between austerity and markets or printing money and markets. Instead, most journalists lambasted entitlement socialist societies that recklessly overspent and lived well beyond their means. Occasionally, journalists would point out that Germany benefited from a weak currency relative to what the Mark would be if they were not part of the euro to add to the obvious overstated fact that the PIIGS benefited from lower borrowing costs. If the author was really up to speed they would also note that a major problem was that these PIIGS could not collect taxes. I even saw an article in the Wall Street Journal stating that there were more Porsche Cayennes registered in Greece than there were people who reported making an income higher than 50,000 euro annually.

Two years later, it had become clear that Germany (the leader of Europe with France), does not want to experience extreme inflation as they did after World War I. They are trying to “Germanize” the PIIGS into working harder and more efficiently, spending less, and growing their private sectors at the expense of the public (i.e. switching from socialism to a more capitalist society). Collectively in the media this strategy has been referred to as austerity. In a perfect world, there would be no need for austerity because countries would never have borrowed and spent more than they could pay back, and people would not be retiring at 50 years old and living on pensions for 30+ years. Unfortunately, we don’t live in a perfect world. Now that the crisis has progressed and markets have grown more jittery, media outlets have finally noticed the relationship between printing money (EFSF turned into a bank, or EFSF lends to countries and levered, ECB “buys” bonds, etc) and the market going up as well as “evil” austerity and the market going down. The media has done a complete 180 and now blames Germany for the crisis as if they should just print money, risk inflation, and give the PIIGS a free ride without pain to “solve” the crisis so that markets recover, as if markets are the only thing that matters to this world.

I can’t stress enough the fact that Germany is doing the right thing long term with their current policy and approach (the U.S. should be taking notes). It sickens me to read articles that imply that the direction of the market is the only thing that matters. The reason the gap between the rich and poor has continued to widen since the 2008 crisis is due to the fact that central banks and politicians act as if the markets are the only thing that matters. Printing money and inflation helps the wealthy and hurts the poor. I’ve written about this before, but to sum up, the bottom line is that stocks and real estate are traded in nominal dollars and as a result receive a boost in times of inflation (especially as it pertains to food and energy costs as it has recently). Over the past few years we have seen stagnant wages with increasing food and energy costs which have crowded out discretionary spending for the lower and middle class with minimal impact on the wealthy. The purpose of this article is to defend Germany’s approach (they most likely will end up printing anyway in exchange for strong European fiscal/financial integration among the euro nations anyway) and remind readers that the market is not necessarily tied directly to the health of the global economy and certainly not the only thing that matters (although it would appear that way as its direction has vast implications for the rich and powerful; the people that can actually invest in it).

The root of all the of the world’s financial woes and market turmoil stems from the fact that individuals, states, and countries ran up their “credit card bills” like a reckless teenager with no thought of future consequences. Like a teenager by his/her parents, these irresponsible offenders cannot be given a free pass. They shouldn’t be destroyed obviously, but they need to learn a lesson. The aforementioned behavior cannot be condoned or ignored. Germany is absolutely right to hold out on printing before getting some credible assurance that this will not happen again. The United States needs to take some pain and cut back as well. In the short run our current path may appear the best, but there are no free lunches in life. We will pay for our overspending one way or another. If we don’t take a little pain via spending cuts or “evil” austerity now (austerity is synonymous with living within your means and being responsible, somehow that has become a bad thing) we will suffer much more severe and prolonged consequences in the future.