A Closer Look At Germany's Death Spiral
Subscriber Bill G responded to yesterday’s post on Germany’s financial/cultural death spiral by asking:
“And when did debt to GDP cease to be a good measure of economic health? https://countryeconomy.com/countries/compare/germany/usa?sc=XE02”
His point is that if Germany’s government debt is only 65% of GDP, that country is — by definition— in way better shape than the US (debt 120% of GDP).
This is a reasonable question with an interesting answer. So here goes:
Vendor Financing
In the business world, there’s a semi-sleazy practice in which a company lends money to its customers who then use that money to buy the company’s products. This boosts sales and profits, making company managers seem worthy of big year-end bonuses.
Assuming the debtor/customers can pay off their loans, this practice can continue, unbeknownst to outsiders, for a long time. But if customers start defaulting, the “vendor financing” scheme unravels.
Germany has been running the government version of this scam.
With the introduction of the euro as a common currency in 1999, it became clear that eurozone members had wildly differing financial profiles. Greece and Italy, for instance, were bankruptcy candidates who, in a rational world, would have to pay way up to borrow money. But high interest rates would render their debt prohibitively expensive, forcing them out of the eurozone.
So the currency union cooked up the following scheme: The European Central Bank (ECB) would buy non-German government bonds at prices that equated to extremely low interest rates. And Germany would guarantee the solvency of the ECB.
For long stretches, most eurozone countries were able to borrow at lower rates than the US government had to pay, since their bonds were de facto German (i.e., “investment-grade”) paper.
Now here’s where “vendor financing” comes in. Italy, Greece, Spain, et al used some of the money they borrowed to buy German-manufactured goods. As a result, Germany’s economy grew, its trade balance was positive, and its government deficits were modest (when they weren’t actual surpluses).
It’s easy to view the resulting chart as a picture of a financially sound entity.
But remember that Germany, via the ECB, had promised to make good on everyone else’s bonds. Should, say, Italy default, those obligations would in effect become part of Germany’s national debt. So its real obligations are much higher than the official numbers.
And now that Germany is “deindustrializing,” its ability and willingness to cover everyone else’s debts are being called into question, causing peripheral Europe’s interest rates to rise. Note that Spain was able to borrow 10-year money for less than 2% until 2022, when the US ended Germany’s cheap-energy industrial preeminence by blowing up the Nord Stream gas pipeline.
A Eurozone Without Germany Is Toast
So here we are, at a crossroads: Either peripheral Europe starts paying market rates for its ever-increasing government debt, which will force the dissolution of the eurozone and a return to national currencies. Or the ECB — without explicit German guarantees — steps back in and buys huge amounts of low-quality sovereign debt with newly created currency, which will spike inflation and crash the euro.
Either way, Germany’s days as an industrial powerhouse are over, and the eurozone is, as a result, toast.
The sheer incompetence and lack of wisdom of the current and recent German politicians is truly staggering, even worse than here in the UK perhaps. Of course the US blowing up Nordstream has been a large part of this but here we are decommissioning nuclear power stations and using coal again! I never saw this coming to be frank and am shocked at how Germany appears to have lost the plot. I voted Brexit and would do so again. The EU as can be observed is not a beacon of democracy and grows ever darker in how it seeks to control people and of course is near bankrupt. So Lagarde wants to introduce a CBDC to as she has said 'to control people'. Then the EU wants to use retail savings to invest in EU projects!! Really! Will people get their money back or when they want it. The persecution of right wing parties is also disgusting and so obvious. In other words only the EU and Brussels have the right view and truth. We could add Hungary being charged 1 million euros a day as a fine because they do not want they country ruined by often criminal immigrants and very low skill along with an alien culture. I think Hungary is wise looking at the state of the UK and what mass immigration is doing to us. No, the EU is finished and we need to have the last rites. However, I am anti the EU 100% but not Europe. As Europeans we need each other and can work very well together without free movement, a Brussels out of control with 'their' agenda and costs. Many of us never signed up to an EU that wants a superstate. Keir Starmer and his Cabinet are the most incompetent Government I can recall and lack wisdom and common sense. I have never known a PM so loathed and frankly hated than him but he does not get it. Labour are a disaster and most see this but then at this time so are the opposition. Time to kill the EU and have a new way of being together.
In order to govern and prevent AFD ( 25% of Germans ) from having any say whatsoever in what goes on , the ” coalition “ had to make peace with the far left AND the greens . Basically ,every party EXCEPT AFD . If you think the greens and far left will allow Germany to industrialize or worse yet “ militarize “ you haven’t been following the German Green Party . These are the people that cement themselves to the pavement to stop cars from polluting . Truly unhinged .