Bas wrote:
$this->bbcode_second_pass_quote('', 'I') couldn't have produced that myself, and I thank you for producing it; the only thing missing might be a remark on the reunion and the solidarity tax. And yeah, when chancellor Merkel said "don't expect any miracles from the German presidency of the EU" was right around the time when I thought, Germany is becoming the engine of Europe again. (which I presume you saw a fair bit earlier than that; you're obviously much better informed than I am)
PeakOil is You
THE Petrodollar Thread (merged)
Re: Where's All The Petrodollars?
by MrBill » Wed 07 Feb 2007, 11:09:53
Well, several very important things happened to Germany due to reunification. And several political decisions were disasterous for the country. Call them necessary to reunite the country once again, but their economic cost was high, and they are still being felt through-out the Germany economy.
First of all taxes are a wealth transfer. A reunification tax is a tax on western Germany's prosperity to fund change in eastern Germany. The money taxed away is not available for saving, re-investment or even spending in western Germany. That permanently reduces growth in western Germany below its potential growth.
Which would have been fine had it been temporary, as promised, and if it would have been used to transform eastern Germany, but it was handled poorly from the very beginning. Starting with the decision to accept oestmarks on par with deutschmarks. The purchasing power was much lower, so there was no reason to accept them on par. Accepting oestmarks on par with deutschmarks just made deutschmarks worth less while artificially boosting spending power and therefore prices in the east.
Also, from the very beginning German unions insisted on wage scales for east German workers the same as in western Germany even though levels of productivity were much lower. Therefore, a lot of eastern firms went bankrupt, and jobs and business flowed to Poland and other CEE countries with lower real exchange rates and lower wages. In the meantime, those CEE countries have grown quickly, but eastern Germany has stagnated. That has permanently lowered eastern Germany's growth below its potential. And has meant the temporary tax on western Germany has gone on far longer than was necessary.
Re-unification from an economic point of view was simply handled poorly. And there were some other factors. Like laws on Germany's books that allowed anyone from a Germanic background to claim German citizenship. When the wall came down and the Soviet Union collapsed many eastern Europeans like Germans from Kazahkstan came back to Germany to live, work and study. That also cost the German taxpayer a lot of money and could have been handled differently.
Basically, Germany had a very strong social-democratic model based on some of the highest taxes in the world and a workplace model based on cooperation between the workers, management and unions that produced some of the highest labor costs in the world. It worked fine when it was in a closed system.
However, re-unification, and the pressures of adjusting to the EU and the EMU, along with people immigrating to Germany that had not paid into the collective, but would none the less draw benefits from the system upset the proverbial apple cart. I have often said, "you can have any social-economic system you want, like cradle to grave social-welfare, so long as you can pay for it."
The problem was that after re-unification Germany's cozy, closed system was thrown wide open to new competitive pressures, and despite their high taxes they could no longer afford the same level of benefits being paid-out to more pensioners, more disabled workers, more students, more day care places, more of everyone and everything except more competitive western workers. The workers in the east were uncompetitive relative to their counterparts in Poland and CEE, and cost pressures in Germany made German employers uncompetitive. So you ended up with a sort of death spiral. Or in this case 10-years of low, slow growth and painful readjustment.
I would not necessary look at unemployment statistics alone. I do not think they tell the whole story. But look at unemployment amoung well-educated, experienced workers that cannot find jobs because they are too old and too expensive, but legacy labor laws make it very hard for the employer to hire older workers at different conditions than other workers, so they look only for younger, cheaper workers. Or for example look at the number of German factories built-in CEE or Asia instead of being built-in Germany. Those are the more telling statistics, but they are usually anecdotal evidence and missed in the data.
But back to your comment about Angela Merckel. I think what she means is that Germany cannot go on paying for others while ignoring its own national interests. Wages in Germany have slipped below the EU15 average even as Germany pays four times more into the EU budget than the next largest contributor. Germany gets far less back from the EU budget than many other members. Germany is the economic engine of Europe accounting for one third of its output and two thirds of its exports. However, if the EU keeps handicapping Germany eventually it will falter and fail despite its best efforts to be one of the world's leaders in manufacturing and exports. Then all of Europe will be poorer for it. As I said, 'you can have any system you want, so long as you can pay for it.'
The organized state is a wonderful invention whereby everyone can live at someone else's expense.
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Re: Where's All The Petrodollars?
by MrBill » Wed 07 Feb 2007, 11:23:52
Bas wrote:
$this->bbcode_second_pass_quote('', 'N')ow these things are very interesting (I would almost challenge you to prove some of those things using models, and you'd probably need a fair number of those to do so ) But I basically agree; however, China will move up the foodchain no matter what and faster than most people think too. And maybe, because of this, the new EU members from eastern Europe are most likely to lose out because of this; they are relatively highly educated still, but lower on the ladder than western Europe.
$this->bbcode_second_pass_quote('', 'N')ow these things are very interesting (I would almost challenge you to prove some of those things using models, and you'd probably need a fair number of those to do so ) But I basically agree; however, China will move up the foodchain no matter what and faster than most people think too. And maybe, because of this, the new EU members from eastern Europe are most likely to lose out because of this; they are relatively highly educated still, but lower on the ladder than western Europe.
This is why I would caution new entrants from CEE from joining the EMU before they are ready. They have already benefited from economic convergence with the eurozone, but if they join too soon or at the wrong rate they will put themselves in an economic straight jacket from where interest rates and the value of the euro are decided for the whole EMU and not in response to local pressures. This might result in higher structural unemployment or high inflation depending on whether the nominal rate is too high or too low.
My advice is to reform your real economies and your currency will remain stable against the euro in any case. Just look at the Czech koruna that has performed much better against the euro than the Hungarian florint for example.
Cyprus wants to join the euro in 2008. Okay? But I think the pound is too strong. Probably why I am starting to see a lot of French wines on the supermarket shelves instead of local wines. Or at least cheaper. But on the other hand a strong currency does keep down imported inflation! ; - )
The organized state is a wonderful invention whereby everyone can live at someone else's expense.
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MrBill - Expert
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Re: Where's All The Petrodollars?
by Bas » Wed 07 Feb 2007, 11:37:27
Thank you for the outline of reunification; I once wrote an essay about it in comparison to the Dutch model of the 90's. (not really comparable but that was what I was assigned to do) so much was familiar, and indeed, Germany would have been better off had they delayed the reunification a decade or so. (though I've had the pleasure of attending the 2000 love parade ![[smilie=love7.gif]](https://udev.peakoil.com/forums/images/smilies/love7.gif "love7")
$this->bbcode_second_pass_quote('', 'I') think what she means is that Germany cannot go on paying for others while ignoring its own national interests.
$this->bbcode_second_pass_quote('', 'I') think what she means is that Germany cannot go on paying for others while ignoring its own national interests.
This is new to me, but at the same time very understandable; they have subsidized the EU for a very long time. Also you said the average wage has dropped below the average of the EU15 yet still you can buy more for your euro in germany than in most other countries, (and I should know as I can be in Germany on my bicycle within half an hour) Anyway, all this shouldn't matter wage-wise as the unions can increase their demands when they want, so let's go back to the German contributions to the EU; it can't go on like that forever as subsidies are inefficient by definition; it's like they are paying reparations to Europe for WWII, more than 60 years after the end of it. (Though I have to mention, Holland is the biggest contributor per capita to the EU I believe).
Anyway, the goal should be to abolish all subsidies (and rebates) in the end and I think we have in Germany a very committed partner but what the rest of Europe is doing is basically wrong; sucking of Germany's tit. There should be a complete overhaul of the contribution system and Spain/Italy/France should become net contributors like the rest of Western Europe and England shouldn't be needing the rebate, as it must be a bit disgraceful to them.
Just curious...are you English?
- Bas
Re: Where's All The Petrodollars?
by Bas » Wed 07 Feb 2007, 11:42:50
$this->bbcode_second_pass_quote('MrBill', 'B')as wrote:
$this->bbcode_second_pass_quote('', 'N')ow these things are very interesting (I would almost challenge you to prove some of those things using models, and you'd probably need a fair number of those to do so ) But I basically agree; however, China will move up the foodchain no matter what and faster than most people think too. And maybe, because of this, the new EU members from eastern Europe are most likely to lose out because of this; they are relatively highly educated still, but lower on the ladder than western Europe.
$this->bbcode_second_pass_quote('', 'N')ow these things are very interesting (I would almost challenge you to prove some of those things using models, and you'd probably need a fair number of those to do so ) But I basically agree; however, China will move up the foodchain no matter what and faster than most people think too. And maybe, because of this, the new EU members from eastern Europe are most likely to lose out because of this; they are relatively highly educated still, but lower on the ladder than western Europe.
This is why I would caution new entrants from CEE from joining the EMU before they are ready. They have already benefited from economic convergence with the eurozone, but if they join too soon or at the wrong rate they will put themselves in an economic straight jacket from where interest rates and the value of the euro are decided for the whole EMU and not in response to local pressures. This might result in higher structural unemployment or high inflation depending on whether the nominal rate is too high or too low.
My advice is to reform your real economies and your currency will remain stable against the euro in any case. Just look at the Czech koruna that has performed much better against the euro than the Hungarian florint for example.
Cyprus wants to join the euro in 2008. Okay? But I think the pound is too strong. Probably why I am starting to see a lot of French wines on the supermarket shelves instead of local wines. Or at least cheaper. But on the other hand a strong currency does keep down imported inflation! ; - )
Is Hungary in the EMU? I know that the krona came from a much lower point though, A holiday in Prague was much cheaper than Budapest in 2000 at least...
- Bas
