How much more will the EU spend on bailing out the Euro?

Germany has been here before. The political union of East Germany with West Germany was cemented with a currency union. The politicians decided to do it at the political rate of 1 ostmark to 1 DM, a very favourable rate for ostmark holders. The Central Bank’s advice to do it more slowly, or at a lower rate for the ostmark was ignored.

The result was a very expensive and long job to try to get East Germany up to somewhere near West German living standards. The one independent study of the costs to West Germany puts them at Euro 1.3 trillion over the first twenty years. Today the cost is around Euro 80 billion a year.

It was a much easier task than uniting the Euro currency area. All the people involved spoke the same language. Most of them felt they belonged to the same country. A politically acountable government was put in charge to take the main decisions, which had authority and consent from most of the people. Labour migration was relatively easy to the richer places, owing to the common language and sense of common nationhood. Around one quarter of the population of working age left East Germany to get jobs in West Germany.

Despite all these advantages, it was a long and difficult task. It created tensions between the two Germanies. Some in the West complained that the East Germans relied too much on subsidy and needed to raise their game. Some in the East felt the support of West Germany was too grudging, that they did not show enough sympathy and understanding for how East Germans thought about it all.

If it cost that much to unite the two Germanies with a single currency, how much do people think it will cost to unite the 17 members of Euroland? Why wouldn’t it cost several times the Euro 1.3 trillion it cost Germany? I read rumours of a further bail out for Spain in discussion. Yesterday Spanish ten year borrowing costs rose about 7%, the level which is said to be too costly. Italy did succeed in raising some new borrowings, but at high rates. It looks as if it is going to take a lot more subsidised lending to save the Euro. At some point the markets will ask just how much of this extra credit can Germany support?

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90 Comments

  1. lifelogic
    Posted June 15, 2012 at 5:34 am | Permalink

    Indeed how much can Germany afford, how much will the German voters put up giving and how much pointless suffering will the recipient countries tolerate?

    • lifelogic
      Posted June 15, 2012 at 5:42 am | Permalink

      It seems the government if finally coming round to some sense with reports HS2 is to be ditched and soJusme plans to get lending going let us hope these actually work. Certainly government owned RBS natwest is still sucking the blood out of industries for
      no good reasons related to risk.

      So just deregulation, the 5 runway Heathrow high speed Gatwick hub, easy hire and fire, halve the state sector, get lending going,

      • lifelogic
        Posted June 15, 2012 at 5:50 am | Permalink

        Also cheap non PC energy – it is a shame it will not now be in time for the next election – so Labour will ruin it all again in three years time anyway.

        Are the bank lending plans actually likely to work this time? Or will the banks throttle business yet again? Mind you easy hire and fire and some real deregulation might also inspire more confidence in the businesses they lend to.

        • uanime5
          Posted June 15, 2012 at 3:16 pm | Permalink

          Exactly how can energy be PC (politically correct)?

          • lifelogic
            Posted June 17, 2012 at 11:38 am | Permalink

            PC energy is “allegedly” clean, green, sustainable, environmental, renewable, probably organic, holistic, caring sharing and non judgemental too.

            In fact, of course, it is usually non of these things, just very expensive, intermittent, hugely subsidised and totally pointless (even in the bogus c02 terms). But some Cameron and LibDem types feel warm feeling, as they genuflect to the revolving bat and bird killing machines.

            They used to be vote gathering machines but I suspect now they are vote losing too.

        • zorro
          Posted June 15, 2012 at 4:21 pm | Permalink

          I seriously doubt as it hasn’t worked previously. They only like loaning almost free money to others at 15% with decent security!

          zorro (Can I become a bank?)

        • Bazman
          Posted June 15, 2012 at 5:25 pm | Permalink

          You have never come up with reason why hiring and firing will be good for anybody except unscrupulous employers.

          • lifelogic
            Posted June 17, 2012 at 11:29 am | Permalink

            What is unscrupulous about getting rid of employees who cannot do the job or are no longer needed? Of course it will make business more efficient how on earth could it not?

          • Bazman
            Posted June 18, 2012 at 6:41 am | Permalink

            And that would be the only reason? We are seriously supposed to believe that?

      • Mark
        Posted June 15, 2012 at 1:20 pm | Permalink

        Do you plan to turn the M25 and M4 into runways?

        • lifelogic
          Posted June 17, 2012 at 11:41 am | Permalink

          Just a new runway at Gatwick and Heathrow and a High Speed train link round the M25. Say 15 mins link to make one sensible 5 runway hub airport as is clearly badly needed.

      • Sebastian Weetabix
        Posted June 15, 2012 at 2:22 pm | Permalink

        Not sure about the easy firing part. Watch as the multinationals instantly fire everyone and move to Timbuktoo or wherever and enjoy the wage arbitrage, unencumbered by any significant cost penalties for doing so.

        • lifelogic
          Posted June 17, 2012 at 11:42 am | Permalink

          They can make redundant now.

  2. Dr Alf Oldman
    Posted June 15, 2012 at 5:34 am | Permalink

    This is a timely blog. Surely, it is now time for the credit rating agencies and the media to debate:

    “What do you think are the principle risks for Germany and how might she effectively mitigate those risks?”

  3. norman
    Posted June 15, 2012 at 5:42 am | Permalink

    Why listen to the markets? Just print the stuff. Politicians know best.

  4. Pete the Bike
    Posted June 15, 2012 at 6:35 am | Permalink

    Things are going well on the continent. Bank branches are limiting withdrawals now almost everywhere in France, some branches such as Caisse d’Epargne don’t even deliver any cash in the afternoon now. Lots of soldiers are moving into Paris for the weekend. European finance officials have discussed limiting the size of withdrawals from ATM machines, imposing border checks and introducing euro zone capital controls as a worst-case scenario should Athens decide to leave the euro. On Monday, a bank “holiday” was announced in Italy. None if this is reported in the mainstream government controlled media of course.
    So we can rest easily in bed knowing that politicians have our welfare at heart and that we are safe in their hands.

    • colin
      Posted June 16, 2012 at 1:46 am | Permalink

      “The mainstream government controlled media”–is not controlled by the government but by the same people that control the government

  5. colliemum
    Posted June 15, 2012 at 6:42 am | Permalink

    Looking back at the last couple or so of years of ‘subsidised’ lending the answer to this question, “At some point the markets will ask just how much of this extra credit can Germany support?” can only be:
    As long as there’s some profit to be made by the markets (the money markets, that is), there’s no point asking that question.
    I’m getting the impression that we’re getting close to the point where the global money market/banking industry is losing the connection to actual markets, countries, governments and citizens.
    This looks more and more like games played by supercomputers – so in the end the players don’t care if Germany can or cannot support any extra credit because there’s always going to be some other economy who can be made to ‘support’ such credit.

  6. John Fitzgerald
    Posted June 15, 2012 at 7:07 am | Permalink

    John, a very good analogy and this quite nicely highlights the difference. I was living in West Germany at the time of reunification and can report from personal experience that the cost was born by the tax payer in that country. I cannot remember the actual rate but the taxes were increased by a significant percentage! This is what caused a lot of resentment in West Germany. However whenever any of us saw an East German family travelling in their Trabant (for those that do not know this is an awful East German car) in the locallity they were always greeted enthusiastically (at the start anyway)!

    As you highlight the common ground for this venture was 3 fold: A common Government; A common currency; a common language. These are the three reasons a unified Europe is next to impossible!

    As a foot note I can report, again from personal experience, that the majority of the people I was in contact with (mostly German) were of the opinion that it was happening to fast, hence the reason it cost so much!

    • The Realist
      Posted June 15, 2012 at 8:36 pm | Permalink

      Sadly those trabants quickly became 2nd hand BMWsand mercs because of the artificial exchange rate resulting in non-sustainable wind fall gains not backed by productivity. The black market was 10-12 Ostmarks to 1DM so there you have it. markets ignored again with a form of crony capitalism that has reigned the last 20-30 years! 20 years later West Germany still has a 5c Unification tax resulting in circa 80bn plus annual transfers to still support the’ black’ side of Germany as the Bavarians and Swabians call it.

  7. Michael Lewis
    Posted June 15, 2012 at 7:17 am | Permalink

    If you want to talk about the mind bending idiocy of trying to fix a problem of too much debt with more debt – have a word with your colleague at No. 11 Downing St.

    140bn to prop up asset prices – won’t work.

    Why not give people their money back (tax cuts) and let them decide how to spend it? Are we soviet republic now with the government trying to fix the price of houses, credit, etc.. etc..

    As bad as anything that the EU have come up with…

    • Caterpillar
      Posted June 15, 2012 at 8:56 am | Permalink

      Michael Lewis,

      I agree some one does need to have a word with Nos 10 and 11, and the BoE. If the asset price prop doesn’t work as you suggest then this would be the best possible outcome, to think of policy failure as the best outsome is a little scary.
      The Chancellor apparently said “Funding for lending to the family aspiring to own their home and the business that wants to expand” – it is remarkable that the Chancellor believes propping up the housing market and keeping savings rates (for deposit targeting savers) down is either useful or morally acceptable. Still he would seem to beleive that mispricing risk is the way to go whether for household or business borrowing.

      {It will be telling to see the Coalition’s and Conservative MPs’ economic, ideological and ethical defence of these below market rate and any old asset swap policies}.

      • Caterpillar
        Posted June 15, 2012 at 9:14 am | Permalink

        I’ve also just read a couple the Governor’s quotes;

        “the need to generate a recovery while rebalancing our economy, supported by a loose monetary policy and a large depreciation of sterling” and “Let us all work together to show that in a market economy our financial sector can get us out of this mess.”

        I am obviously a simpleton, I am unable to see much connection between seemingly experimental economic policy and a market economy.

    • Paul H
      Posted June 15, 2012 at 9:09 am | Permalink

      Spot on! All this will do is prop up house prices for a bit longer (maybe) and put more money in bankers’ pockets. If Osborne wants to throw money at businesses then he should cut their taxes and regulatory costs. Ed Balls is starting to look vaguely competent.

      • zorro
        Posted June 15, 2012 at 4:05 pm | Permalink

        This is just more banker welfare, they will use this oney to shore up their balances and cover their Euro bungles.

        zorro

        • zorro
          Posted June 15, 2012 at 4:06 pm | Permalink

          money

    • APL
      Posted June 15, 2012 at 9:25 am | Permalink

      Michael Lewis: “Why not give people their money back (tax cuts) and let them decide how to spend it?”

      Because that model implies that we don’t need 70% of the civil service. Somewhere in government, who knows where, there is opposition to that idea!

      Michael Lewis: “Are we soviet republic now with the government trying to fix the price of houses, credit, etc.. etc..”

      No, it can’t be that bad, this is a Tory government, … oh! No it’s not, it’s just blue labour.

    • zorro
      Posted June 15, 2012 at 4:04 pm | Permalink

      Silly – more propping up of the property bubble. We need a looser fiscal policy (tax cuts) and tighter monetary policy…..

      zorro

    • JimF
      Posted June 15, 2012 at 4:49 pm | Permalink

      From the WSJ today:

      “The U.S. has managed to stage a better recovery, not because of the Federal Reserve’s or the Obama administration’s attempts to put a floor under house-price falls, but precisely because prices fell and because banks and households were forced to restructure these debts.

      A failure to accept harsh truths and allow asset prices to adjust is why the U.K. economy is where it is.”
      repeat
      A failure to accept harsh truths and allow asset prices to adjust is why the U.K. economy is where it is.”

      Sometimes people out there can see what people here can’t. It will in the end benefit your constituents JR for their house prices to drop.

  8. David
    Posted June 15, 2012 at 7:23 am | Permalink
    • uanime5
      Posted June 15, 2012 at 3:40 pm | Permalink

      The problem with this article is that it only measures how countries are different from each other and assume this is a good measure of how likely they are to maintain a monetary union. Unfortunately this article doesn’t provide any evidence or reasons why countries need to be similar in order to successfully maintain a monetary union.

      So by this article’s standards 30 countries with high levels of corruption would have a good monetary union score, while 15 countries with no corruption and 15 with little corruption would have a worse monetary union score. Yet the 30 countries with little or no corruption will probably be more successful than the 30 countries with high corruption.

  9. Matthew
    Posted June 15, 2012 at 7:27 am | Permalink

    It would be great to see some leadership from the government.
    Mr Cameron continues to push for a great European utopia of further integration of the euro countries.
    This won’t happen ,there being no will for a political union and such moves towards a union would not be in the interests mod theUK.

    • Denis Cooper
      Posted June 15, 2012 at 9:58 am | Permalink

      The worrying thing is that it might happen, however daft and unworkable the idea may seem to us and indeed however unpopular it may be with most of the ordinary people in those countries which get swept up into a comprehensive political union by their national elites. We’ve been here before, back in the 1950’s at the start of the EEC/EC/EU project, and back in the early 1990’s with the decision to press ahead with EMU, and then with the decision to expand the EU eastwards, and believing that “it won’t happen, and if it does happen it won’t work and will soon fall apart” has proved to be a mistake and damaging to our long term national interests. Apart from anything else, just as we see now, if it did get to the point where it might seem to be about to fall apart there’s a high likelihood that our own government would betray our interests by striving to keep it together.

      • zorro
        Posted June 15, 2012 at 4:08 pm | Permalink

        If they do have a much smaller EURO area, don’t be surprised if Cameron extols its virtues (manouevres to join?) and frets about the big bad world outside of Europe……I wouldn’t discount that.

        zorro

      • Tad Davison
        Posted June 15, 2012 at 4:27 pm | Permalink

        So right Denis!

        Tad

  10. lifelogic
    Posted June 15, 2012 at 7:36 am | Permalink

    Re. the new government lending scheme let us hope it is real and works.

    I see that the BBC & Robert Preston in his irritating, hammy actor droning voice, has, as usual, got things totally wrong on bank lending. He thinks the banks are not lending due to perceived risk and lack of demand from good borrowers. In fact there is very good demand from good borrowers many who are far more credit worthy than many of the banks themselves and have good security available too. The repayment of loans has largely been enforced by the banks or borrowers the predictable, consequential effect on growths that we have seen.

    Banks, including the government owned ones, have introduced artificial repayment and stress testing rules that have, in practice, often taken lending down to 40% of security values even on solid property assets (where before it might have been 75%).
    They are also deterring lending with high fees, short term agreements and high margins.

    They simply do not want to lend, do not have the money or the inclination to lend other than in the most simple and restricted cases.

    • norman
      Posted June 15, 2012 at 8:50 am | Permalink

      It’s not real.

      It won’t work.

      The government needs £50bn more borrowing for this year, following on from the £75bn printed earlier.

      I read last week about £40bn of undeclared losses banks are carrying. They have to be taken care of somehow, can’t have banks failing. Maybe just coincidence these two events so close together? The cynic in me (and I’m 99% cynic) thinks not.

      That leaves us £50bn. You could conservatively knock 10% off that for bureaucracy. Down to £45bn, or around £800 for each person in the UK if my quick mental calculation is right. A third of what the government is going to borrow this year.

      A lot of the remainder will be taken up by crony capitalism, very little of this wealth stolen from the very people Osborne says he’s going to give some of it back to will be of any practical use.

      Still, let’s play the game then in a years time we can come back to the subject and ask ‘What were the benefits derived from the £140bn of wealth stolen from citizens?’ and the answer will be either postponed the recovery even further, none or ‘imagine how bad things would have been without that splurge’ depending on your level of honesty.

      • lifelogic
        Posted June 15, 2012 at 1:57 pm | Permalink

        Is it real and will it work?

        I tend to think that trying to get lending to SMEs going via some dis-functional, stressed, perhaps almost insolvent, banks might not be the best way. The increase in the banks share prices today rather suggest the banks may get most of the benefit rather than the SMEs themselves.

        Still something is certainly needs urgently if you want any new investment and growth. Just stop them snatching money back at least.

        • Conrad Jones (Cheam)
          Posted June 17, 2012 at 6:25 pm | Permalink

          The only way to increase lending to SMEs is by making Banks only lend to House Purchasers if the value of the loan for a property is less than two times income of one of the borrowers. i.e.Banks should only take into account one of the peoples salaries income for a House Purchase.

          By restricting lending to the Housing Market, lending will naturally increase to SMEs. It’s not free market economics but it’s better than what we have now. If cheap loans are made available to small businesses, there will be no growth and employment will decrease.

          The alternative is to prevent Banks from creating money out of thin air as they do now. This way, when a Bank fails, the deposits can simply be transferred to a more stable Financial Institution – such as a Mutual.

          Can someone explain to me why George Osborne does not simply order the Bank of England to issue Currency Directly rather than issue Treasury Bonds? It’s like they want our National Debt to increase.

    • lifelogic
      Posted June 15, 2012 at 9:33 am | Permalink

      Miliband seems to be think this way too. Clearly he does not have a clue what is going on at many of the SMEs.

    • lifelogic
      Posted June 15, 2012 at 9:39 am | Permalink

      Sorry I meant “enforced by the banks on borrowers with the predictable, consequential effect on growths that we have seen.”

      My businesses together have repaid debt of about £1.5M over the last three years mainly toNatwest when they would dearly have liked to use the money for new investments and developments. But the banks clearly just want it back and will only lend on new, very expensive and very restricted terms.

      • zorro
        Posted June 15, 2012 at 4:11 pm | Permalink

        It’s really worrying for businesses knowing that these vampire/zombie banks can call in loans willy nilly to cover their incompetent ‘investments’ in the EURO area.

        zorro

        • lifelogic
          Posted June 17, 2012 at 11:45 am | Permalink

          Most can be called in or at renewal are severely restricted.

    • Bob
      Posted June 15, 2012 at 11:37 am | Permalink

      @lifelogic

      Have your say on the TV Licence fee: https://submissions.epetitions.direct.gov.uk/petitions/34655

      • Tad Davison
        Posted June 15, 2012 at 4:40 pm | Permalink

        Dunnit, now I’m getting friends and family to do it too!

        Tad

      • Alan Wheatley
        Posted June 15, 2012 at 5:26 pm | Permalink

        Scrapping the licence fee is a daft idea.

        Far, far better to enjoy what is good of the BBC because of the licence fee and improve that which is not good.

    • Electro-Kevin
      Posted June 15, 2012 at 3:03 pm | Permalink

      Lifelogic @ 7.36 – I sense that lenders know that the housing market is over valued. That’s why they demand such large deposits and proof of credit worthiness. It’s also the case that inordinately high house prices mean inordinately high deposits for those on average incomes.

      • lifelogic
        Posted June 17, 2012 at 11:47 am | Permalink

        I do not get that impression. I get the impression that they just have more borrowers than money available to lend. I do not think it is due to perceived risks at all.

  11. AJAX
    Posted June 15, 2012 at 7:43 am | Permalink

    The Bundesbank would be very foolish to go to its vault & start shovelling the contents into the financial black-hole that’s opening

    The market is trying to correct & the more violent the attempts to prevent it the more violent the correction will ultimately be

    You can’t buck the market, as some1 once said, … or perhaps you can, but only for a while & at a very high cost

    • The Realist
      Posted June 15, 2012 at 8:42 pm | Permalink

      Agree the Germans have a painful lesson at home. Sadly those trabants that East Germans drove quickly became 2nd hand BMWsand mercs because of the artificial exchange rate resulting in non-sustainable wind fall gains not backed by productivity. The black market was 10-12 Ostmarks to 1DM so there you have it. Markets ignored again for a form of crony capitalism that has reigned the last 20-30 years! 20 years later West Germany still has a 5c Unification tax resulting in circa 80bn plus annual transfers to still support the’ black’ side of Germany as the Bavarians and Swabians call it.

  12. Brian Tomkinson
    Posted June 15, 2012 at 7:47 am | Permalink

    Good question, but I should like to know ‘How much more will the BoE spend on bailing out Britain’? Another £140 billion out of thin air and how much more to follow? Is the £5 billion a month to the banks to write off their undisclosed losses of £40 billion? We keep hearing about the importance of confidence but this behavior frightens me more and more.

    • zorro
      Posted June 15, 2012 at 4:15 pm | Permalink

      We live in a banktocracy, a complete stranglehold, it seems, over politicians.

      zorro

      • zorro
        Posted June 15, 2012 at 4:18 pm | Permalink

        Happy birthday John, what does it feel like to be 40?

        zorro

  13. oldtimer
    Posted June 15, 2012 at 8:45 am | Permalink

    Angela Merkel said yesterday (or the day before) that Germany could not shoulder the burden of the EZ alone. No doubt she had her international audience in mind as well as her domestic audience. I do not see how she will continue to lead German voters by the nose on continuing support for the EZ and adding to taxpayer liabilities. Then last night we had the announcement from the Chancellor and Governor of the Bank of England of a new credit facility, blaming the euro crisis.

    Perhaps we shall hear the proposed denouement this weekend at or after the G20 meeting in Los Cabos, Mexico? Will it be yet more words kicking the can down the road? I do not have a clue what actually will emerge, but my guess is that they will try to maintain the ramshackle edicie of the EZ.

  14. Acorn
    Posted June 15, 2012 at 8:47 am | Permalink

    Did you mean to say, “How much more will the UK spend on bailing out the Pound? It appears, according to Merv, that we are going to get a UK version of the US FED’s T.A.L.F. programme. Presumably now the money printing bit of the BoE’s A.P.F. programme has finished. We have had various microscopic versions of the US TREASURY’s T.A.R.P., none of which have had any impact on small business or households; so Merv must be getting desperate, cos he has never been keen on buying non treasury debt into the APF.

    But it does appear that Merv has woken up to the fact that the UK economy has a “demand side” problem, not a “supply side” problem. Business has run out of customers competing for their products, not banks competing to lend them money. Total national debt running at near eight times GDP, half of it in our banks, can cramp your style after a while.

    Keep watching the BoE balance sheet to see what new “assets” it has acquired.

  15. English Pensioner
    Posted June 15, 2012 at 9:05 am | Permalink

    The question which I would rather have answered is “How much more is the UK going to spend on bailing out the Euro”. Frankly, if Germany is prepared to pay the Greek debts, that is up to their Chancellor (and hopefully the German electors), but I see no reason for us to help out. Our money could be better spent on taking measures within this country to mitigate the effects of the Euro crisis.
    Incidentally, we should also stop lending money to Argentina through the IMF.
    Why do we always seem to support those who are against this country?

    • Bob
      Posted June 15, 2012 at 11:48 am | Permalink

      @English Pensioner

      “Why do we always seem to support those who are against this country?”

      Because LibLabCon are traitors to this country, and those who vote for them are no better.

      The evidence is clear, just see how our service personnel are treated in comparison to criminals and terrorists. They come back from the front line to be greeted with redundancy notices, while billions of pounds is being given away in grants to countries such as Argentina.

      It’s not rocket science!

      • Conrad Jones (Cheam)
        Posted June 15, 2012 at 2:31 pm | Permalink

        Check out the Housing Benefit Cheats – there are many instances of people claiming Housing Benefits then running two cars and going out to work. No one complains or checks.

        Landlords – those bastions of capitalism; are nothing more than profiteering off a fraudulent system which draws money away from Serive Personnel and the Elderly; both groups having contributed to the Country.

        Vast Corporations with Offshore Tax Haven Offices and Nominee Accounts also restricts the flow of available funds.

        Let’s face it; the Government hate the Elderly (who they perserve as no longer useful) and ex-Service Personnel – who they regard in the same light. They love Housing Benefit cheats as many Government Officials either are Landlords or who have Friends who are Landlords.
        Something for nothing Society.

        The Property Market is far more important to them than someone who has become crippled fighting for Queen and Country. A land fit for heroes?

        After witnessing first hand how a Criminal (who stole my life savings) was treated, I have no faith in the Law Courts.

        As for Terrorists, well they certainly exist but not in the form which is portrayed in the UK Media.

      • sjb
        Posted June 15, 2012 at 5:25 pm | Permalink

        Bob wrote: Because LibLabCon are traitors to this country, and those who vote for them are no better.

        Will UKIP be using that assertion in their election literature or will their candidates be shouting in voters’ faces when they canvass door to door?

        • Conrad Jones (Cheam)
          Posted June 17, 2012 at 3:09 pm | Permalink

          UKIP seems to be the main opposition Party now.
          http://www.dailymail.co.uk/debate/article-2158835/Going-Viral-Nigel-Farage-slams-incompetent-Mariano-Rajoy-warns-Euro-Titanic-hit-iceberg.html

          Labour, Conservative (excluding MPs such as John Redwood and Steve Baker), Liberal Dems, ALL support the EURO.

          The only opposition Party (apart from newly created Partys such as Monetary Reform Pary), is UKIP.

          Labour is in the wilderness now and hopefully won’t be returning anytime soon. The Conservatives – despite having some excellent spokespersons for sanity; ignore reality and pursue a gutless regime of Austerity as if we had a fixed monetary system.

          Nigel Farage pointed out, very successfully; that Italy is forced into providing 20% of the Spanish Bailout which it will only receive 3% interest on. To borrow this back – which it needs; Italy will have to borrow at the rate of 7%. So it loses 4% on the Money it has been press ganged into lending to Spain.

          I suspect the implications of this are for too complicated for people like Ed Milliband to comprehend. George Osborne probably struggles with the Mathematics of this also; he appears to mainly accept the advice of his blinkered virtual Economists, the type that have created the European Chaos, or is that, ‘European Casino’.

          We must hope that UKIP is the true opposition Party – they are a highly intelligent and well meaning Party who understand the fact that the EURO is doomed. Nationalist Parties are now emerging in Europe, just like in the 1920s and 1930s. UKIP is by far the best alternative to that, as their message is based on Economic Facts and not Racist Lies.

  16. zorro
    Posted June 15, 2012 at 9:24 am | Permalink

    Give me odds please on whether Osborne’s new plan to lend banks our money so that they can lend it back to us will acttually be used by the banks to shore up their exposure to Eurogeddon…..

    Zorro

    • uanime5
      Posted June 15, 2012 at 3:30 pm | Permalink

      Given the banks’ past track record I’d say the odds are pretty high.

  17. Denis Cooper
    Posted June 15, 2012 at 9:39 am | Permalink

    As the GDP of Germany is about €2600 billion, perpetual subsidies running at €80 billion a year to the east is only about 3% of GDP; so I suppose that would be sustainable in the long term, provided that those in the west were still willing to pay it as part of the price for keeping Germany intact.

    The question is how much the German people would be willing to pay in perpetuity to keep the eurozone intact, and my guess is that they would be willing to pay another 3% of GDP provided that the existence of the eurozone was still seen as being a net positive for their national economy and for their international power.

    Reply:It would be much more than that

    • sjb
      Posted June 15, 2012 at 5:09 pm | Permalink

      “[…] if all EFSF/ESM commitments are fully utilised, Germany could amass potential liabilities to the peripheral economies amounting to €671bn, or 25 per cent of German GDP. [emphasis added]”

      The blog entry goes on to mention the attractions of a Eurozone Redemption Fund proposed by the German Council of Economic Experts.

      Source: http://blogs.ft.com/gavyndavies/2012/06/15/germany-and-the-redemption-fund/#axzz1xrnvM3R3

      • Denis Cooper
        Posted June 17, 2012 at 6:33 am | Permalink

        But that 25% of GDP has built up over years, it’s not an annual cost.

    • The Realist
      Posted June 15, 2012 at 8:43 pm | Permalink

      In fact they pay 5% tax rate as a reunification tax

      • Denis Cooper
        Posted June 17, 2012 at 6:34 am | Permalink

        I take it you mean 5% extra on income tax.

  18. Mark
    Posted June 15, 2012 at 10:21 am | Permalink

    What are your views on Osborne’s attempts to blow yet more financial bubbles?
    Reply will write about this tomorrow

  19. stred
    Posted June 15, 2012 at 10:34 am | Permalink

    RT television was commenting that the banks lending to Spain and others were lent the money by the ECB at 1% interest and charging the higher bond rates around 7%.

    Is this correct, or is Spain borrowing the recent 100 billlion at a lower rate?

    Reply Yes,lower rate

    • Tad Davison
      Posted June 15, 2012 at 4:51 pm | Permalink

      The IMF also says Spain’s deficit is bigger than the Spanish government originally said. That could have further ramifications.

      Tad

  20. boffin
    Posted June 15, 2012 at 10:48 am | Permalink

    Mr. Redwood mentions the direct costs of the German reunification ….. but let us not forget the indirect ones.

    Anyone with a UK mortgage in that era felt the spillover effect on the rest of Europe sharply and very painfully, as German funding needs pushed up interest rates across the EU.

  21. Leslie Singleton
    Posted June 15, 2012 at 11:10 am | Permalink

    Agree 100% except that a mere “many times” more expensive doesn’t say it nearly strongly enough and of course that’s just the financial aspects meaning some of us think that there may well soon be civil strife, assassinations (we have already had at least one suicide) and even eventually in a worst case war caused directly by the euro . Obama bleating how he wants it to work (to assist his re-election) isn’t going to do it. Germany was a RE-unification which must have made it mega many times easier before we start .

  22. Mark C
    Posted June 15, 2012 at 11:16 am | Permalink

    As ever, an interesting piece.

    Happy Birthday!

    • Electro-Kevin
      Posted June 15, 2012 at 2:54 pm | Permalink

      If correct I second that.

  23. Bernard Juby
    Posted June 15, 2012 at 12:48 pm | Permalink

    I went to a meeting of the “great and the good” in London where they were extolling the virtues of the then proposed new Euro.
    I asked the German representative there whether there were any lessons to be learnt from their recent experience between merging the Eqst with the West?
    He waffled for 10-15 minutes but did not answer the question. It did not go un-noticed!

  24. Atlas
    Posted June 15, 2012 at 1:19 pm | Permalink

    John – happy birthday!

    We await the Greek election results with, as the Chinese proverb goes, “Interest”.

  25. peter
    Posted June 15, 2012 at 1:37 pm | Permalink

    Interesting analogy – I remember that period as I was there. The West Germans did tire of the extra taxes after a couple of years.

    I’m afraid the EZ have to wake up and smell the coffee, the Euro is not working largely due to the way it was designed being based on the DM so if merging economies so the richer parts carry the poorer parts is too complex as you rightly point out they need to start preparing now for an orderly withdrawal back to their original currencies.

    You cannot keep throwing money at something that is flawed in the first place.

  26. Gewyne
    Posted June 15, 2012 at 2:18 pm | Permalink

    I think Messr Farage summed things up pretty well in his speech on “The Genius of Mutual Indebtedness”

    “You know, this deal makes things worse not better. A hundred billion [euro] is put up for the Spanish banking system, and 20 per cent of that money has to come from Italy. And under the deal the Italians have to lend to the Spanish banks at 3 per cent but to get that money they have to borrow on the markets at 7 per cent. It’s genius isn’t it. It really is brilliant.”

    “And with Greece teetering on the edge of Euro withdrawal, the real elephant in the room is that once Greece leaves, the ECB, the European Central Bank is bust. It’s gone.

    It has 444 billion euros worth of exposure to the bailed-out countries and to rectify that you’ll need to have a cash call from Ireland, Spain, Portugal, Greece and Italy. You couldn’t make it up could you! It is total and utter failure”

    http://www.youtube.com/watch?v=TN_1mF-3JTI

  27. Conrad Jones (Cheam)
    Posted June 15, 2012 at 2:19 pm | Permalink

    Why is the ECB buying discounted Bonds, forcing other Investors to take a “haircut” of up to 53%, and then the ECB demands the full face value of the Bonds thereby making a Profit at the Expense of the Nation in trouble.

    http://www.ifre.com/iif-criticises-ecb-for-claiming-seniority-in-greek-debt-swap/21022197.article

    From the BBC:
    http://www.bbc.co.uk/news/business-18454851
    “The European Central Bank is ready to provide further support to the eurozone’s banking system if necessary, its president Mario Draghi has said.”

    The BBC portrays the ECB as a kind and sympathetic organisation, prepared to “help” a Country in Trouble.

    The reality is that – at best; the ECB is an incompetent organisation making the debt crisis bigger; at worse, the ECB is a leech sucking the life blood out of a distressed Nation’s Economy through it’s Bonds market.

    The ECB’s “support” program:

    “BUY LOW, SELL HIGH, let everyone else take a haircut”.

    “Since May 2010, the ECB had bought up Greek sovereign bonds with a par value of €40bn in the secondary market under its securities markets programme. Most were bought at significant discounts to their nominal value.

    However, rather than accept the effective 53.5% haircut on their bonds, which most other private investors took when accepting a range of new securities in exchange for old ones, the ECM circumvented the offer at the last moment. It has since been repaid in full on some of the bonds, thus making a profit on the deal.”

    Did anybody in Greece vote for Mario Draghi ?

  28. Electro-Kevin
    Posted June 15, 2012 at 2:53 pm | Permalink

    I wonder why the same people who like German reunification also like the disbandonment of Britain.

  29. Alan Hill
    Posted June 15, 2012 at 3:26 pm | Permalink

    Mr Redwood

    Have you any idea how we might stop politicians tinkering with the economies for ‘political reasons’.

    If you can solve this intractable problem there is probably a Nobel Prize in it for you.

    Only half in jest.

  30. william
    Posted June 15, 2012 at 4:06 pm | Permalink

    Why does this government keep in office ,Sir Mervyn King,who was one of the 364 economists who signed the 1981 letter? I know he is retiring,but his QE policy and the latest gimmick has been a disaster of epic proportions.

  31. Tad Davison
    Posted June 15, 2012 at 4:56 pm | Permalink

    I didn’t know until Mark mentioned it, but Happy Birthday from the Davison clan, Cambridge chapter!

    Tad

  32. zorro
    Posted June 15, 2012 at 5:15 pm | Permalink

    Gideon on the BBC News referring to how he can push out £140bn (a good proportion to the banks)…..’The only reason we can do is because we have dealt with Britain’s debts and that gives us the opportunity to do this…..’……..Oh right, so when did he deal with Britain’s debts? Is that by increasing them by 60% over this Parliament? Why does this nonsense go unchallenged?

    zorro

  33. Derek Emery
    Posted June 15, 2012 at 6:11 pm | Permalink

    It’s simple really. It will take as at least twice as many trillions as the EU can extract from countries that appear to be solvent with Germany at the head of the pack. Once the real limit is reached the house of cards must fall down in complete disarray and the large number of EU zombie banks that are presently hiding will become exposed.

  34. TFS
    Posted June 15, 2012 at 8:27 pm | Permalink

    John,

    Ever thought that the MaxKeiser show should be required viewing by all MPs?

    The lastest episode explains how Greece just got stiffed for paying the European banks fees of £800m+ on a £5b loan. Shouldn’t there be a profiteering law passed against these banks?

    I have never seen in plain sight such criminal activity; by the suited brigade.

    The unregulated financial market is built on counterfeit accounting and its at over £700 trillion; how can this be? shouldn’t we just have a wholesale clean-out of politicians; cause from where were sitting in the cheap seats you aint doing diddly.

  35. Local Tory
    Posted June 15, 2012 at 8:27 pm | Permalink

    A functioning single currency needs labour mobility to the economically stronger areas and structural fund transfers to the economically weaker areas. We should also all note from the PIIGS that cheap money on its own does not make for sustainable increases in real wealth. In the long term only productivity gains can improve living standards.

    Happy Birthday by the way.

  36. Almost Ex Tory
    Posted June 15, 2012 at 10:33 pm | Permalink

    Much of the discussion on the break up and failure of the Eurozone has been heard before BUT:
    there is such a vested interest in preserving the system and its perks (from the Eurocrats and Politicians, who would otherwise disappear into obscurity) that you feel that the system will do anything to keep the European Project afloat.

    A system that has presided over a Europe that is broke, books that have not balanced for ? 16 years, still maintains the move from Brussels to Strasburg and has the temerity to preach austerity to others will have the shameless nerve to do anything to maintain the status quo.

    I would love to see Herman Van Rompuy, and J Manuel de Barroso and others of their ilk to be made redundant, but do we really believe this and the break up of the Euro state will actually happen?

    • Brian Tomkinson
      Posted June 16, 2012 at 10:16 pm | Permalink

      I should like to see Van Rompuy, Barroso et al (tried-ed). Why should such actions go unpunished?

  37. Lindsay McDougall
    Posted June 17, 2012 at 1:58 pm | Permalink

    Whenever people bandy about sizes of bail out funds, please bear in mind the following numbers:

    The GDP of the entire EU in 2011 was € 12.6 trillion, £ 10.2 trillion. These are American trillions, equal to 1,000 billions each.

    It’s more difficult to find stats for the Euro zone but the order of magnitude is about 70% of EU GDP.

    The GDP of UK is about € 1.85 trillion, £ 1.5 trillion.

    So £140 billion here, £140 billion there, and fairly soon you are talking serious money.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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