Secretary Gates apparently said today that European countries should increase their defense spending, because the United States has a debt problem and is not willing anymore to pay for Europe's defense.
Well, one of many reasons the US has such huge debt is the enormous defense budget, which is so much higher than those from other major powers. European nations are not spending more on defense, because we have debt problems as well and can't afford the US debt levels, because we cannot print dollars.
Besides, the US has not spent a fortune in Iraq, Afghanistan and Libya to protect Europe, but because of its own perceived self-interests. Thus I take issues with these statements by Secretary Gates as reported by the BBC:
"Standard & Poor's warning the United States could lose its AAA rating may ultimately bring investment to Germany, reduce interest rates on its bonds and help the country lower its own debt," writes Deutsche Welle:
"Standard & Poor's reassessed US sovereign debt and decided to put it on negative watch for the first time, meaning there is one-in-three chance the ratings agency will downgrade the country's hitherto cast-iron AAA credit rating in the next two years. "Germany wins in this equation because it gets a dividend through stability," said Clemens Fuest, a member of the German finance ministry's technical advisory committee. "Interest rates will be pressed down as a result." Germany maintains a secure AAA rating, pays less for a 10-year bond than the United States, and has a constitutionally-mandated 'debt brake.' In Europe, German bonds, known as bunds, have long been the benchmark for investors. (...)
EU countries mired in debt are getting help from an unlikely source: China. The ascendant superpower is buying up large amounts of European bonds and investing heavily in euro zone countries. Moreover, there is talk of a reversal of the long standing EU arms embargo on China. Is this all a coincidence?
Kurt Volker, a former U.S. ambassador to NATO and now managing director at Center for Transatlantic Relations at Johns Hopkins University commented: "If all this were to play out - that is, lifting the embargo, subsequent sanctions, etc. - it would bea new low point in U.S.-E.U. relations." (HT: NATO Source)
I agree. I hope the EU does not lift the arms embargo. In my opinion NATO countries should not sell any arms to non-NATO members.
Ahead of the G-20 summit we are witnessing rising German-American disagreements. Germany wants to reform the financial markets and deal with the debt crisis, while US academics and the president prefers economic stimulus plans and criticize the teutonic export champion. Spiegel International:
Krugman is far from alone with his concerns about German and European austerity packages. Last week, US President Barack Obama sent a letter to other G-20 countries in which he fired a not-so-subtle shot across Berlin's bow. "I am concerned about weak private sector demand and continued heavy reliance on exports by some countries with already large external surpluses," he wrote in a clear reference to Germany. He also warned against reversing economic stimulus policies too soon. "We worked exceptionally hard to restore growth," he wrote. "We cannot let it falter or lose strength now."
Germany and France were hoping that the G-20 summit would focus on measures aimed at reforming global financial markets. In particular, Merkel would like to see an international tax on financial transactions as well as a mandatory bank levy, which would go towards a fund to be used to bail out banks in future crises. But opposition to both proposals has been stiff. And the US, in particular, is hoping to use the G-20 to push for more economic stimulus rather than less, given ongoing high unemployment at home.
Personally, I am not sure, if the US and Europe really need and can afford more stimulus plans right now. They make the long-term debt crisis worse. Besides, tax cuts do not lead to more consumer spending, when citizens are smart enough to realize that the economy and government finances are in trouble and consider tax cuts for what they are: desperate measures to stimulate growth. In those cases citizens use the tax cuts to save more money to prepare for the worst. Of course, stimulus is more than tax cuts.
ENDNOTE: I am sorry for the lack of blogging. In the last six weeks, I learned quite a lot of stuff the hard way: First, a new bike with strong front wheel breaks is not necessarily a good thing. Second, I cannot fly. Third, a broken elbow joint requires two surgeries, the second one kept three doctors over four hours busy. Fourth, doctors and nurses are nicer and more caring than I thought. Even the hospital food was good. Our health care system is still okay. Fifth, even if only the elbow is broken, fingers don't work (typing etc.) very well. Regaining full flexibility apparently takes months. Sixth, one can get quite a lot done with just one functioning arm. Now "I'm a graduate of pain." Yeah.
Guest post by Joe Joe Noory is an Architect, investor, and independent observer of news and opinion:
Somewhere between the emotional populism of wanting to burden the higher performing European states with guilt over resisting to bail out the Greek government, and the risk investors are being offered to take are the hard truths of bailing out of the broke Greek government by investing in their bonds: they might not just default on ?8,5 billion in obligations to bond purchasers due on 19 May, but run the risk of never being paid back for future bond offerings (of perhaps two years or less), much in the way depositors in an uninsured failed bank will never see a red pfennig of their invested savings on a default.
Ifo's Hand-Werner Sinn indicated that very same sentiment on Wednesday morning, according to this wire piece:
The warning came as a new poll showed nearly two-thirds of Germans were opposed to helping Greece, with a majority believing that membership of the EU brought more disadvantages than advantages. Asked on MDR radio if Berlin would ever get its money back, Sinn, who heads the Ifo institute and is one of the top economic advisers to the government, said: "To tell you the truth, no." Greece "will not be in a position to carry out the necessary budgetary rigour" and will eventually have "to ask for Germany to waive the debt," he said. He warned that bailing out Greece could set a precedent for other euro area countries labouring under high debt and public deficits. "It would be understandable if the Italians or the Spanish put pressure on us to pay up now because it is an important precedent for them," said Sinn.
Before you react, take the statement for what it is: a warning. It isn't a characterization of the ur-Greek citizen, or a nationalistic reflection, or a cultural issue, but a warning that the discipline to raise revenue and cut budgets in face of the street protests and strikes of civil servants and dependants on entitlements. It isn't a characterization of what they did, but a warning of future events, one which prices them and tells us what something is really worth, just as watching those who short an equity or commodity does.
Atlantic Review appreciates that two Wall Street Journal contributors respond to our blog post on their article.
George Pieler and Jens Laurson took issue with the French finance minister's claim that German productivity ails Europe's economy. Joerg Wolf agreed with their criticism in Atlantic Review's post Germany as Maya the Bee, but expressed disagreement on the issue of tax cuts, even though that was not a central part of their article.
Jens Laurson and George Pieler have now submitted the following riposte, which we appreciate and are happy to post here:
In commenting on our Wall Street Journal piece ("Not so Faaaaast, Germany"), Joerg Wolf, Editor of the Atlantic Review, disagrees with the following observation: "Germany should cut taxes. But it should do so for its own good..."
Mr. Wolf makes three points which we should like to examine; hoping to clarify an evident misunderstanding that has arisen.
Mr. Wolf says Germany has been advised to cut taxes "especially of top earners, over the past twenty years. Such advice is neither helpful nor original and creative." Well, neither originality nor creativity was our intent, nor is that an argument against the argument. The question is, whether it is good advice. Certainly if it is such oft-repeated advice there must be something to it? For the record, we think cutting taxes is good-indeed essential-advice. This is partly because Germany has one of the highest top personal tax rates in world (47%). More worryingly, the German state absorbs nearly half the nation's GDP which means an astonishing, if hidden loss of productivity. This formula has worked for Germany so far, a reflection of popular acceptance of high taxes in exchange for government-guaranteed income security programs. We don't think that will work so well in the future, though. The German tax cuts over the last two decades Mr. Wolf mentions, in any case far outweighed by the tax increases in the same time, are irrelevant to this discussion.
Investigative reports by the New York Times and Der Spiegel have left Goldman Sachs and Greece squirming in the limelight. For at least fifteen years, the American investment bank has been helping Greece legally massage its public finances. The arrangement enabled Greece to keep its European partners happy without having to make tough fiscal decisions. Specifically, the bank created currency swaps that enabled debt issued in dollars or yen to be swapped for euro-denominated bonds that would be paid back at a later date. Sound fishy? Those on both sides of the Atlantic think so. From the New York Times:
Wall Street tactics akin to the ones that fostered subprime mortgages in America have worsened the financial crisis shaking Greece and undermining the euro by enabling European governments to hide their mounting debts....Wall Street did not create Europe’s debt problem. But bankers enabled Greece and others to borrow beyond their means, in deals that were perfectly legal. Few rules govern how nations can borrow the money they need for expenses like the military and health care. The market for sovereign debt — the Wall Street term for loans to governments — is as unfettered as it is vast.
Der Spiegel has been following the issue for a longer period of time, and the frustration in Germany over Greece's behavior is particularly acute. The magazine notes that the accounting procedures have only delayed the day of reckoning:
At some point Greece will have to pay up for its swap transactions, and that will impact its deficit. The bond maturities range between 10 and 15 years. Goldman Sachs charged a hefty commission for the deal and sold the swaps on to a Greek bank in 2005.
The activities of Goldman Sachs in Greece are neither surprising nor novel. Indeed, Der Spiegel notes that Italy has engaged in similar activities with another bank for some time. The controversy highlights how difficult fiscal reform is in modern democracies. Today was Greece's day of reckoning, tomorrow could be America's. Anne Applebaum at Slate writes, "I have seen America's future and it is Greece."
The revelations come at a very inopportune time for Greece, the bank, and the EU. What do these revelations say about the proposed bailout of the country by the EU? Can the Euro survive when its member states can easily fabricate their numbers? (Imagine California making secret purchases in eurobond markets that are swapped out at a later date for dollar-denominated bonds.) Is the Euro feasible without greater political cohesion among the EU's member states? And what does this transaction say about the value-added of investment banks? As Baseline Scenario notes, are investment banks in sovereign markets really producing "productivity-enhancing financial innovation" or just "a sophisticated form of scam?"
This post is from Andrew Zvirzdin, who used to be a guest blogger, but now joins Atlantic Review as part of the team. Andrew is originally from upstate New York and is currently finishing his second year of grad school at the Maxwell School in Syracuse
After the implosion of the Dubai miracle in the desert, investors are nervously looking elsewhere for the next debt debacle. No small wonder that the focus has turned to European countries with high debt loads such as Greece and Italy. Top European monetary gurus have been quick to assure investors that no European default is likely. But these days, anyone with a big credit card bill looks suspect in international finance.
The remarkable thing is that the EU has taken a significant lead in charting the course towards global economic recovery, despite its heavy debt burden. Consider for example that Germany and France were among the first countries to escape the present recession late this summer. Their robust growth was due in part to automatic stabilizers already in place when the financial crisis hit. And the notorious-and by some estimates, beneficial-cash-for-clunkers program in the US was inspired by Germany and other European countries who already had similar but more successful programs.
Now, as Europe is fading as the American health care punching bag, the continent's ability to live with government debt is under close scrutiny. Paul Krugman has recently warned (here and here) against an excessive focus on fiscal deficits in the US, pointing to Europe as an example: "If these countries can run up debts of more than 100 percent of GDP without being destroyed by bond vigilantes, so can we." CNBC is less positive in its assessment but acknowledges that Italy's resilience despite high debt levels means there is still a "lot of debt tolerance out there."
Still, debt will remain a worry on everyone's mind for some time to come, though the Eurozone has the tools needed to weather this storm (as I have written about here and here), and the US still has its financial strength. With the US and European countries consistently ranked as among the most indebted countries in the world, both sides of the Atlantic will likely need to work together on debt-related matters. Indeed, as the eurozone has already shown, teaming up with other indebted nations makes it that much harder to be bullied around by international markets.
In commenting on our Wall Street Journal piece ("Not so Faaaaast, Germany"), Joerg Wolf, Editor of the Atlantic Review, disagrees with the following observation: "Germany should cut taxes. But it should do so for its own good..."