The Lack of Cultural Agreement Roars, the Eurozone Mews

Economic systems are the result of cultures.  Where there is little cultural agreement, the economic system will be unstable, as will be governmental action.

No, this is not another “Rules” post.  But this is a post about the Eurozone and Japan today.  Japan faces trouble, but there is cultural agreement on what should be done, so there is no great crisis today, though the demographics may force issues eventually.

The Eurozone does not publicly recognize that there are large disagreements over what economic policy should be.  In the countries that are in economic trouble, there are many that push their governments to spend more on them, forcing the governments to borrow more.  This is particularly true of the unions.

My view of unions is that they slowly kill whomever they serve.  Industries with high unionization die eventually.  Countries that support unions die slowly as well.

Unions introduce inflexibility into the economic process which has a huge cost, eventually.  Greece is controlled by its unions.  They are willing to seek their own prosperity even if it leads to the destruction of the nation.  They don’t think the nation will be destroyed, but think that there are parties in power that hold back value from them, and they must be opposed, deluded fools that the unions are.

But there is a bigger problem for the Eurozone.  What do they do about Portugal, Ireland, Spain, and maybe Italy?  Yeah, the Eurozone could rescue Greece, but could it rescue Spain?  The answer is simple, NO.  But rescuing Greece discourages Spain from taking hard actions.

There is a lot of moral hazard involved in rescuing countries in the Eurozone.  Far better for nations to rescue banks that have lent to Greece, Portugal, Ireland, Spain, Italy, etc.  From what I have read, Europeans don’t exist.  Nations exist around a common culture and language.  Nations in Europe exist, and many act against the concept of a Eurozone.

Both positively and negatively, one can say that the Eurozone can’t make everyone into Germans.  The Germans exercised discipline that other nations would not.  Because of the size of Germany, and those allied with them in the Eurozone, the Euro is a hard currency, harder than many cultures/nations with lower labor productivity would like.

Why is the Euro weak?  Because the present crisis has relegated it to the status of an experiment.  Wondering over how Eurozone obligations will be repaid is an issue outside the Eurozone.  There are solutions, but they are painful — 1) let Greece become a state of Germany.  Not happening. 2) Let the Eurozone pour money into Greece; I’m sure they will reward you by adopting austerity measures, not. 3) Let Greece default, and then, let the Eurozone attempt to ameliorate it.  It will be difficult, and I doubt that debts to Greece will be settled at over 40% per Euro.

The major trouble is that banks in countries with relatively orthodox finances have lent to countries with liberal finances.  Well, who else could have done it, but the banks making the loans are in a fix because their health is subject to the creditworthiness of those that they lent to, which should be no surprise, but we forget.

Thus the big crisis in Europe is really over the soundness of the banking sector.  Rather than bailing out nations in trouble, far better to bailout your own banks that made bad loans, and let the profligate nations fail.  Remember, the Eurozone was not a promise to support profligate nations, but an effort for responsible nations to share a common currency.  If nations are not responsible, it is not the responsibility of the other Eurozone nations to subsidize them.

Do you want to save the Eurozone?  Save it by protecting your own banks, and letting profligate nations fail.  You will end up with a “hard” Eurozone of nations that are not profligate, and can live up to the demands of a strong currency.  The Eurozone exists without the UK.  It can exist without Greece, Portugal, Spain, Italy, and Ireland.

Subsidies don’t work, and that is what the loans to Greece are.  The Greeks will just suck them in, and continue their unruly fracas over who gets what.  Far better to let Greece fail, and scare marginal nations to clean up their acts.


I don’t write this because I want the US Dollar to prosper because of a failure of the Euro.  Hey, I want credible alternatives to the Dollar, because it is at best the best of a bunch of sorry currencies, and I am not ready to sign on to the cult of Gold.  I like gold as a currency, but am not crazy about it as an investment.

My view is that the Euro can exist even after the failure of nations that leave the Euro, and that Euro obligations could still be enforced on defaulting nations because of the large amount of commerce inside Europe.

My advice to European statesmen, including those that share my surname, is to focus on your national interests.  The Eurozone is too vague to matter to those who elect you.  Focus on protecting your banks, rather than those the banks have lent to, which would waste money.


  • Saloner says:

    Thank you for your sobriety.

    I agree that bailing out one’s own banks is a better bet than bailing out countries, with one caveat: They should suffer sufficient hair-cuts to keep them from resorting to this nonsense for quite some time atleast.

    I think the bailouts have been a severe hindrance for the markets to clear and let economies pick the pieces up and get on with it. No one knows what the real value of the “assets” on Bank, and even the Fed, balance sheets are. I fear that without clarity on this issue we aren’t going to go anywhere soon. Sure, we’ll perhaps be able to extend the charade underway a little longer; but are bond markets going to be ever complacent about Govt. paper?

  • Jem says:

    Bailing out banks is better than bailing out countries, but better yet would be letting the banks also fail and bailing out individual depositors.

    Just as national bailouts create moral hazard by acting as a subsidy on popular but ill-advised government spending, bank bailouts create moral hazard by acting as a subsidy on popular but ill-advised lending to non-creditworthy entities.

    Bailing out depositors makes sense still, because it’s not reasonable to require every potential depositor to form a correct judgment on the financial activities of the banks. But it absolutely is reasonable to require every bank to make correct judgments (or at least properly hedge their judgments) on the creditworthiness of the entities – sovereign or otherwise – to which the lend. Really, that’s their job; and those that do it poorly should be allowed to fail to make room in the financial markets for those that do it well.

  • Terry says:

    A little bit too much union bashing for my sensibilities, Dave. While unions are often too zealous, the absence of unions leads to massive worker exploitation, especially in the absence of govt. regulation (eg–minimum wages). I offer WalMart as my primary example.

    On the other side, increasingly unregulated financiers (oh, say, GS) have been gaming the system to maximize personal gains (not even really corporate profits, much less shareholder returns) at huge economic costs to society–whether or not of one culture.

    Please take a more balanced view on this matter.

  • IF says:

    1) I agree with most, but not all that you write here. A bold alternative would be to seize the moment and create a true European nation state. With elected government (by popular vote), federal taxation and deposit insurance. Unfortunately I don’t see any politician with the balls to push this through.

    2) Germany has large public unions. I think unions are a good thing, in moderation. And restraint is what unions show in many nordic countries. Without unions the situation is not balanced enough for my taste. Of course unions in the US are seen (maybe rightly so) as quasi mafia structures. I still have not come to a conclusion.

    3) There is another Merkel in the SPD (German labor party). Her trajectory seems ascending. Sure you are not related to anyone of them? Not a rare name, but not terribly common either.

  • john says:

    While I agree that the centralization of wage bargaining power that is a unions raison d’etre , when grafted onto a nation’s politics tends to a kind of capture that leads to problems like those of the PIIGS, centralization of market power of financial interests leads to regulatory capture that turns the markets into a casino as we have here in the US.

    In the one instance a broad base loots a country, in the other a narrow peak. In both cases, most people loose in the end. Markets are about the distribution of life’s benefits and only work where competition is fair, a necessary referee function for governments. Governments are about concentrating power. What we in the post Adam Smith west tend to think of as good government is that which keeps markets fair and tends the essential things that markets can not attend to or attend poorly.

    To keep markets fair it is as important to empower workers to collect their fair share of productivity gains as it is to prevent the monopolistic tendencies of all dominant market players. Unions came into being to address the first problem, financial regulators the second. They both suck, but like democracy and capitalism, they don’t suck as bad as any known alternatives.

    Or is there a productivity sharing or market regulating breakthrough I don’t know about?

  • matt says:

    I think that it would be better to create a newly capitalized bank (with the funds that would have been reserved for bailing out banks) to create lending continuity in the economy while letting the terrible mega banks fail with the terrible countries they lent money.

    If you really want to do it right, you create many mid-sized banks with government funds to replace the mega banks (that you let fail) so that you don’t have a too big to fail problem (initially). When the crisis is completely behind, you have IPOs or spin them off to private equity funds/private parties.

  • In response to the above I believe 3 would be the most likely trajectory here.

  • I agree on the question of policy, although, even if she shares your name, she is probably not reading The Aleph Blog. You never know, though :-)

    But I’m curious what you think about what is, in addition to what should be. The European recovery is very sluggish already, and the ECB bank lending survey that came out today makes very depressing reading. Now that several countries have gotten a good whiff of bond market panic, I would guess that saving might rise and demand fall, making a European double dip more likely.

  • All — I prefer tapping banks to tapping taxpayers. Yes, make lenders take haircuts, but don’t challenge system stability. SO long as we have fractional reserving, we must aim for stability.

    Starting new mutual banks with public money I can agree with.

    As for unions, my family has had bad experiences with them, with both my father, uncle and wife being forced into unions that they did not want to belong to. Also, their record in the American context has made them poisonous to industry lifespans, and promoting jobs overseas.

    Unions were a force for good until the early 1900s. Once getting Sunday off and safety standards were assured, most of the good of unions was achieved. In a technologically driven economy, the value of the work of individuals varies more then in the mass production era. Unions are less important, and even more so in a period of high unemployment.

    As for my surname, I know that I am not related to Angela, and I am not sure about Petra. I do know that it is an honorable surname for those who want to make a “small Mark” upon the world.

  • IF says:

    Not sure about your last sentence. Some notes from

    Merkel is the diminutive of Markwart, which was a first (not family) name popular in 1100-1200. It was never a title in Germany, hence not noble. It means “custodian of the march, sentinel of the border” or “guard of the forest”. It is also the fairy tale name of the jay bird (which sounds alarm when people intrude). As elsewhere observed, the border guard probably also collected tariffs. Too much fun.

  • Lu Yong Han says:

    I agree with your quote “industries with high unionization eventually die”.
    General Motors and Chrysler is solid example, Boing and many other highly unionized corporations are to follow GM’s footstep.
    Should Union Leaders are smart and capable indeed, they should and must lead the nation/country as statesman, so that the nation/country administered under these “smart and capable” leaders becomes rich and prosperous. Look at what happened to POLAND under the ruling of their SOLIDARITAS leader? Answer is crystal clear.

  • Eric says:

    You’re invested in SWY, right? Not trying to be snide, but if unions ultimately kill the firms they serve, why would you think that heavily unionized Safeway would be a good investment?

    FYI (and this *is* meant to be snide), I think it’s funny how anyone who has spent a career in the financial industry and who could rattle off dozens of instances of greedy managements at insurance firms, S&Ls, real estate lenders and investment banks taking too much risk and toppling the firm — and almost the entire economy — would have a problem with unions. Which do you think is a higher number, firms killed by overreaching management or firms killed by unions (not to be confused by firms killed by secular industry changes)?

  • Eric, I appreciate your comment, and it deserves a fair reply. Yes, I own SWY, and many other companies where the labor is unionized. Like Buffett, I try to avoid unionized companies, but will buy them if the value is somewhat more compelling.

    As for unions, you can read my comment above, and know that I have not appreciated their coerciveness toward my family. I did not mention how the public sector unions are going to crush states and municipalities with their pension and retiree healthcare promises.

    You ask: Which do you think is a higher number, firms killed by overreaching management or firms killed by unions (not to be confused by firms killed by secular industry changes)?

    Truth, I don’t know. I think it would be close. I have written about overreaching management teams at many points — this blog is about risk control, among other things. Of the insurers that I have worked for, two are insolvent, and two have been taken over by others (and the acquirers suffered for it). Finally, I have worked for two private companies in the finance industry that thrive to varying degrees. Financial companies are inherently less stable than utilities or industrials. That’s why the debt carries a higher yield. They combine more often and die more often. Lending off of borrowed money is a fool’s game, especially when one borrows short to lend long.

    The secular industry changes often come in unionized industry as technology is used to fight high labor costs. Foreign steel did not kill the steel industry. Nucor did. Southwest killed the airline industry with a cheaper model.

    So if I may, I think it is a false dichotomy. Both are bad practices. Regulations for financials should limit leverage, ability to mismatch, etc. Open shop laws should limit the ability for unions to coerce membership. They are separate issues. I am no fan of financial industries. They exist to serve the real economy, and should not be overly promoted, as our government has distinctly encouraged.

    Oh, and IF — When I was young, I was told that the Merkel name came from something that meant “Small Mark.” I.e., a short guy named Mark was the paradigm for what would become a surname.

  • IF says:

    I guess this is what my English teacher used to call a “false friend”. I wouldn’t have known myself what the meaning/origin of the many *marks in Germany was. They didn’t tell us in the geography classes. But yes, in a sense Merkel is a “Small Mark”