15 April 2013

You Remember When it Was Reported that Germans Were Amongst the Poorest People in Europe?

Well, Wolfgang Münchau has made what should be an obvious observation, that, "if the same unit of account gives us a higher wealth figure for Spain than for Germany, and when you also know that this cannot be true," which means that on a very deep level, a Euro in Spain is worth something different (less) than one in Germany:
A European Central Bank survey shows that households in northern Europe have a much lower net wealth than those in southern Europe. Average German net assets per household are just under €200,000, while they are €300,000 in Spain and €670,000 in Cyprus. No, this not a typo.

German newspapers screamed that poor Germans are bailing out rich Cypriots. This interpretation is wrong but the truth behind these counter-intuitive findings is even more disturbing. What the survey shows is not wealth differentials but the de facto exchange rates between the eurozone economies. They are not measures of net wealth but of imbalances. And they are enormous.

Since the start of the eurozone, wages and consumer prices have remained broadly constant in Germany. In southern Europe, the general level of wages and prices has increased year in, year out. Over the period, this persistent inflation gap has led to a large discrepancy in asset prices. This is why an apartment in Milan costs much more than one in Munich, the city with the highest property prices in Germany. A German euro buys more real estate in Munich than an Italian euro buys in Milan.

In the frantic German debate about these figures, the focus is on median wealth – the statistic that pinpoints the exact middle if one were to rank households by wealth. Looking at the median, the gap becomes even more extreme. In countries with extremely large wealth differentials such as Germany, where a few super-rich people own a large share of the land and real estate, the median is significantly lower than the mean.
When I mentioned that the Germans set up the Euro to export inflation to aid exports, I neglected to mention the obvious, that inflation is a devaluation of currency, and the inflation, largely caused by what the Germans demanded when the Euro was created.

Münchau correctly notes that the only way for this to be corrected is for Germany to inflate, or Spain (and the rest of them) to deflate, and since the Germans are opposed to any sort of meaningful inflation, this means crushing deflation in the rest of the Euro zone.

Of course, this doesn't mean that the Germans cannot come up with a way to make the situation even worse:
Professors Lars Feld and Peter Bofinger said states in trouble must pay more for their own salvation, arguing that there is enough wealth in homes and private assets across the Mediterranean to cover bail-out costs. “The rich must give up part of their wealth over the next ten years,” said Prof Bofinger.

The two economist are members of Germany’s Council of Economic Experts or “Five Wise Men”, a body that advises the Chancellor on major issues. There is no formal plan to launch a wealth tax but the council is often used to fly kites for new policies.
Yes, German "Wise Men".

Now there's a concept that makes the rest of us feel so confident about the future of the EU.
Prof Bofinger told Spiegel Magazine that it was a mistake to target deposit holders in banks, the formula used in the EU-IMF Troika bail-out for Cyprus where those with savings above €100,000 at Laiki and Bank of Cyprus face huge losses. “The canny rich in southern Europe just shift their money to banks in Northern Europe to escape seizure,” he said.

Prof Feld said a new survey by the European Central Bank had revealed that people in the crisis countries are richer than the Germans themselves. “This shows that Germany has been right to take a tough line of euro rescue loans,” he said.
Only, as Münchau notes, it's all about inflation and a market flaws created in the Euro Zone at German insistence.
The study shows how EMU states have twisted themselves into a Gordian Knot under monetary union, and why Germans feel a strong sense of grievance over escalating bail-out demands. Yet it is also highly controversial since it relies on data before the housing crash in Spain, and may understate implicit wealth in Dutch pensions or German life insurance.
Oh, yes, here is another reason why the numbers are bullsh%$.
Any attempt to enforce a wealth tax in future rescue talks will be seen by Club Med as further evidence that the Northern powers will try to impose all the burden of crisis adjustment on those in trouble rather than accepting their own shared responsibility for the failings of the EMU. This comes a day after Germany said over the weekend that there could be no banking union after all without a fresh EU treaty, effectively kicking the issue into touch for years.

Critics have long argued that North Europe is equally to “blame” for the crisis since it flooded the South with cheap credit, and they accuse Germany of destabilizing the intra-EMU trade system by screwing down German wages and running a current account surplus of 7pc of GDP.
(emphasis mine)

As I've said many times, it's exporting inflation to the periphery.

It's why kicking the Germans out of the Euro probably the only thing that will keep the EU together.
Any serious move to a wealth tax could the erode the pro-euro ardour of South Europe’s uber-rich. The ECB bond buying policy has largely rescued the wealthiest strata while the full brunt of EMU austerity has fallen on ordinary people and the unemployed.

The political debate on euro membership may change dramatically if rich Cypriots, Italians, Spaniards, and Portuguese start to see EMU as a threat to their property, rather than a defence.
This is seen as a problem. I see it as a solution.

The sooner that the Euro Zone breaks up, the more likely it is that we will not see the break up of the European Union and a return to conflict in Europe.


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