Tag Archives: Germany

The State of the World: Germany’s Strategy

Mr. George Friedman is the CEO and chief intelligence officer of Stratfor, a private intelligence company located in Austin, TX.

This article is published here in by permission of Stratfor.

The idea of Germany having an independent national strategy runs counter to everything that Germany has wanted to be since World War II and everything the world has wanted from Germany. In a way, the entire structure of modern Europe was created to take advantage of Germany’s economic dynamism while avoiding the threat of German domination. In writing about German strategy, I am raising the possibility that the basic structure of Western Europe since World War II and of Europe as a whole since 1991 is coming to a close.

If so, then the question is whether historical patterns of German strategy will emerge or something new is coming. It is, of course, always possible that the old post-war model can be preserved. Whichever it is, the future of German strategy is certainly the most important question in Europe and quite possibly in the world.

Origins of Germany’s Strategy

Before 1871, when Germany was fragmented into a large number of small states, it did not pose a challenge to Europe. Rather, it served as a buffer between France on one side and Russia and Austria on the other. Napoleon and his campaign to dominate Europe first changed the status of Germany, both overcoming the barrier and provoking the rise of Prussia, a powerful German entity. Prussia became instrumental in creating a united Germany in 1871, and with that, the geopolitics of Europe changed.

What had been a morass of states became not only a unified country but also the most economically dynamic country in Europe — and the one with the most substantial ground forces. Germany was also  inherently insecure. Lacking any real strategic depth, Germany could not survive a simultaneous attack by France and Russia. Therefore, Germany’s core strategy was to prevent the emergence of an alliance between France and Russia. However, in the event that there was no alliance between France and Russia, Germany was always tempted to solve the problem in a more controlled and secure way, by defeating France and ending the threat of an alliance. This is the strategy Germany has chosen for most of its existence.

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Greek Crisis, Debt and Competitiveness: A Case Study of Irrational Expectations

Dr. Periklis Gogas is an invited contributor to The Business Thinker magazine. He is Assistant Professor at Democritus University of Thrace, Greece, teaching Macroeconomics, Banking and Finance. Recently, Dr. Gogas was a Visiting Scholar at the Ross School of Business, Uinversity of Michigan.

The economic crisis that troubles Greece since 2009 is the worst since WWII. A cascade of measures were taken by the Greek government and the troika supposedly trying to steer the Greek economy into primary surpluses and ultimately growth in order for Greek debt to become sustainable. The recipe chosen for this turnaround was apparently simplistic, one dimensional and is proving to be wrong severely damaging the Greek economy, its bond holders, the EU and casting serious doubts for the euro’s survival. The main ingredients of this failed recipe consist so far of huge direct and indirect tax increases, severe pay-cuts to public sector employees, a virtual halt in all government spending in education, health and government investment in infrastructure, research and technology. It is obvious to anyone, whether economist or not, that this policy is doomed for failure. Greece’s official statistics came to prove this belief. Two and a half years after the crisis unraveled, all the measures failed and this was no surprise to anyone but to the people that conceived them. Every single target projected by the troika’s “wise” and the Greek officials for government revenues when introducing a new tax or contractionary policy, was met with flat out failure. In economics we say that people have rational expectations when they do not make consistent errors in their forecasts about future events. They may be wrong many times but on average they must be correct. In this case, every single expectation is always over-optimistic and tax revenue falls short of the set targets. Anyone can see this, but the people who make the decisions. And even worst, instead of taking this as evidence that their policies are wrong and implausible they come back with new arrows from the same arsenal.

The examples of incompetence are numerous: one of the first measures taken was a major fuel tax increase that resulted in gas prices doubling from €0.85 to €1.70 per liter. At the same time, the annual road tax and car excise taxes increased in a similar manner. Apparently, naïve government officials assumed that government revenue will also double or at least increase significantly. Wrong! Government revenue from automobiles saw a sharp decrease from €1.7 billion per year to €0.7. Someone forgot to estimate the elasticity of demand on such huge price increases. To make the story even worst, after the huge decline in government revenue no one yet bothered to correct the mistake and increase revenues! This simple fuel and road tax hike of course had a multiple effect on the economy by burdening Greek production and worsening its competitiveness across-the-board.

Another example is tourism: supposedly tourism can be promoted as the heavy industry of Greece. At the same time, Greek government actions through indirect taxation actually divert tourism income from Greece to other countries. My master’s class students just organized a trip to Frankfurt. The whole trip including a direct flight to Frankfurt and a three-night stay in a down-town hotel costs €150 per student. A round trip from Thessaloniki to Athens by car would cost €150 for gas and €50 more for tolls. Apparently the Greek state is subsidizing the German tourism industry by making it prohibitively expensive for Greeks or others to travel within the country. Why would anyone implement such measures and even more so why stick to them when they are proven wrong?

Now, the bog issue is that the troika demands that private sector wages must decrease so that Greece will become more competitive. This is strange. Not even Greek employers themselves think this is necessary. A recent discussion with the president of a Greek chamber of exporters revealed something very important: total labor cost reflects not more than 8% of the final product price! Thus, even an extreme 50% decrease in private sector wages would not increase Greek competitiveness by more than 4%. Moreover, eliminating the 13th and 14th wage would further reduce government revenue through income taxes and social security contributions that are associated with these payments. The impact of these proposed cuts of course would be a vicious cycle that will further reduce total demand, production, employment and government revenue.  There is no economic reasoning for these contractionary and recession inducing policies. The evidence from their implementation is decisive beyond any doubt; they lead to a dead-end.

What is the solution then? Usually complex problems have simple solutions. The private sector is very efficient finding solutions to these problems when no governments or international institutions intervene and interfere. A firm that bears an unsustainable debt and is on the brink of bankruptcy would come into an agreement with its creditors to write-off part of the debt. This is a mutually beneficial solution. The firm will not go insolvent and the creditors will face the minimum possible capital losses. In the Greek crisis there is now the danger that both Greece will go bankrupt and bond holders will lose all of their investment. A real haircut of 50%-60% of nominal debt could render it sustainable. This haircut necessarily should include bonds held by both private investors and the European Central Bank (it is exempt now) and other creditors with only exception the bonds help by pension funds (they are not excluded now). The Greek banking sector could survive this hit by substituting Greek government bonds with an appropriate amount of government involvement in their capital structure financed by the troika. At the same time, a reduction of all taxes, direct and indirect, would help to stimulate the private economy, increase demand and jump-start production, employment and growth, ensuring that Greece could service the remaining debt and become credible again in international capital markets. And finally, Germany musts decide what it wants: a truly united Europe, or just some close trading partners for German products? If the former is the case, then they must immediately make the next necessary step for economic integration. This step will set the ground for the euro to survive and EU to become a true and stable union that can leave behind the fiscal problems that seriously challenge its structure and ultimate existence. This step is no other than the Eurobond: a united Europe that collectively borrows and distributes funds according to the need and economic cycle fluctuations. This, will speed up the convergence process within the national economies and significantly reduce from one hand the cost of borrowing to the economies in need and also one the other the risk assumed by international investors.

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About the Author:
Dr. Periklis Gogas is a faculty member at Democritus University of  Thrace and an adjunct lecturer at the Greek Open University teaching  Macroeconomics, Banking and Finance. He is also a Financial Consultant for Gerson Lehrman Group, Austin, Texas. He received his Ph.D.degree from the University of Calgary with supervisor Dr. Apostolos Serletis and worked for several years as the Financial Director of a multinational enterprise. His research interests include Macroeconomics, Financial Economics, International Economics and Complexity and  Non-linear Dynamics.

 

 

Which Europe?

Mr. Nikos Konstandaras is managing editor and a columnist of Kathimerini, the leading Greek morning daily.  He is also a contributor to The BusinessThinker.com

This editorial is also published in Kathimerini.

Many years ago, as Europe was taking its first steps toward greater unification, the French historian Fernand Braudel posed the question whether this would lead to an “inventive Europe, making for peace, or a routine Europe, still creating the kind of tensions that we know only too well?” In the years since the publication of “A History of Civilizations” (1963 and, posthumously, in 1987), Braudel would have seen reason to hope but also to fear: the European Union does express the humanistic spirit that can conquer problems at home and abroad, and is trying to show solidarity among its peoples at a time of crisis, but, at the same time, its member states remain set on serving first their own interests and satisfying their own obsessions, before considering what is good for Europe. Europe is at the crossroads that will determine the answer to Braudel’s question.

European history is an endless effort by the continent’s nations to maintain a balance between them. Whenever one entity assumed a disproportionate amount of power, it provoked the others’ reaction, leading to the formation of opposing alliances and, of course, war. Even though the EU has developed beyond the wildest dreams of the visionaries who saw unification as the only way to put an end to endless conflict, in the last two years we have seen a resurgence of the fear of imbalance. This time, though, the majority of countries are afraid not of the most powerful among them but of the weaker ones, whose failure could threaten their own well-being. Because Europe’s mission of “pacification” has succeeded so well, power and threats are today measured by each country’s economic standing, not by military might.

Consequently, Germany, which for decades was the silent worker of the unification project (demilitarized and penitent for past evils), is without doubt Europe’s greatest power. At the other end is Greece, with its heroic sacrifices of the past (when it was poor and always tied to the wagon of some greater power), which is the object of scorn for its inability to adapt politically and economically to the benefits of being an equal member of the European Union — which has lead to political and economic bankruptcy. For two years, Greece has been blamed for the harm it caused Europe’s single currency; in other words, the EU’s weakest member, and not its strongest, is perceived as the greatest danger to the rest. Greece, of course, is responsible for the mess it is in and for the halting effort to change, but the exaggerated fears of the other countries reveal a weakening of the vision of a “Europe of the peoples,” in which each nation has something to offer.

Europe’s unification was embraced by its peoples at the political level because the principles of liberal democracy took root in the major Western European countries, leading to an unprecedented rise in the quality of life and making their citizens the envy of other nations who could only dream of one day sharing their benefits. The subjects of the Soviet Bloc, for example, knew that their union (which had been imposed by force) existed mainly to serve the interests of Russia. The desire for freedom, democracy and economic benefits became the glue of unification. The cultural — or “civilizational” — identification opened the way toward stronger political union (up to the point that it did not eradicate national sovereignty), but it was in the economy where the greatest leap was taken, with the creation of the single currency. Now that confidence in the euro is shaken, the only solution appears to be greater economic — and, thereby, political — union. In the debate, however, we are forgetting the cultural closeness that inspired the whole effort. Countries are now measured solely on the basis of their economic indicators and not as members of a union that is far greater than its parts. The economic crisis, though, is not just a matter of sovereign debt; it also betrays the need for Europe as a whole to secure a dignified level of life for all its people while achieving competitiveness at a global level.

At a time when the whole planet is looking for balance and no country is a superpower, the Europeans cannot afford to question the dominance of their strongest member. But their acquiescence to Germany’s persistence with austerity programs across Europe could lead to a worsening European recession, the further shrinking of the middle class and the marginalization of society’s weakest members. In this case, the faceless, supranational forces of the global market will have won — not Europe. A “non-inventive” Europe will face the danger of a resurgence of tension among its members, but the despair of great numbers of citizens could trigger something worse: civil conflict. The end of the dream of Europe would be not just a defeat but the start of a nightmare without end.