World Cup – is German Football like the German Economy?

I did a post on this topic earlier in the year but thought to update it with some recent data. In teaching economics I try and relate as much as I an to the interests of the students. I have found that sport is one way of engaging a class especially in the macro indicators of a country – growth, unemployment, inflation, trade, inequality etc. The German economy has been the backbone of the EU for a number of years but has this corresponded to the success/failure of the national football team? The performance at the 2004 Euros were the catalyst to an overhaul of the German coaching system – outlined brilliantly in Raphael Honigstein’s book – Das Reboot. This came to fruition in the 2014 World Cup final when German beat Argentina 1-0 in extra time.

However a year earlier in 2013 there was an all German final in the European Champions League with Bayern Munich defeating Borussia Dortmund 2-1 at Wembley Stadium in London. In order to get to the final both teams beat Spanish counterparts – Real Madrid and Barcelona. What is fitting is that in economic terms German is the powerhouse of the European economy whilst in contrast Spain has suffered greatly from the euro crisis and austerity measures that have been imposed on it. If you look at post-war Germany you can see some correlation between the success of the national side and state of the economy.

The Economist looked at this and made the point that German has opened up its borders to not just traditional labour but also football players. Of the two squads on show at the Champions League Final at Wembley in 2013, 17 were from outside Germany.

Most visibly, Germany opened up. Just as immigrants flock to German jobs (more than 1m net arrivals in 2012), so players join German clubs. Between them Bayern and Dortmund have four Brazilians, three Poles, a Peruvian-Italian, a Serb, a Croat, a Swiss of Kosovar extraction, an Austrian of Filipino/Nigerian stock, a Ukrainian and two Australians—and so on. Of the German players, several have dual citizenship or a “migration background”. If the choice is between a German Europe or a European Germany, as the novelist Thomas Mann once put it, football points to the second.

2014 onwards

The 2014 World Cup victory, almost 25 years since they last won it, was achieved largely through the restructuring of German coaching system. The style of play was transformed from a defensive minded ‘park the bus’ attitude to one of free flowing counter attacking style. However the economy was not as buoyant as in previous years with unemployment 6.6% and the spectre of deflation rising its head. Roll on the 2018 World Cup and the defending champions had a disastrous campaign with not even getting out of pool play. This coincided with weakest growth in Germany for five years. The Euro 2020 (played in 2021 because of covid) saw Germany going out to England in the last 16. With regard to the club scene Bayern Munich did win the Champions League in 2020 but no German team made it to the semi-finals in 2021 as both Bayern Munich and Borussia Dortmund were knocked out in the quarter finals.

As with most countries the German economy failed to return to its pre-covid growth rate as shortages of manufacturing inputs have hampered any recovery. However, there are plenty of orders on the books for German companies for a potential rebound when supply constraints ease. On the football side of things under new manager Hansi Flick, ex Bayern Munich, the national side breezed through qualifying for Qatar 2022 in what was a weak group, but are still ranked only 12th in the world which is an improvement on 16th in 2018.

2022 – recent results and economic outlook

Recently their poor run of form in the Nations league with just one win in six games and a home defeat to Hungary has left new manager Hansi Flick with a big challenge to get the best out of a talented squad. However, the lack of a real number 9 is a concern and although they can beat other teams it is their lack of consistency that could let them down. As for the German economy it is still a gloomy outlook – high inflation, constant supply chain problems and weaker global demand have impacted their manufacturing industry. Although unemployment figures are low there is pressure on wages which could put further pressure on inflation.

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Current Account Imbalances – What do they mean?

Today I have been covering this topic at a Cambridge AS Level revision course. In 2008 the world economy went through what is known as the global financial crisis (GFC). A lot of commentators had forecasted the GFC but there was a common assumption that the crisis would be caused by persistent current account imbalances. However it was poor regulation of financial markets and excessive risk-taking that were the root cause of the crisis and not current account imbalances. This becomes apparent when you look at how deficit and surplus countries were impacted by the GFC:

Eurozone – current account deficit countries went through a major recession
Australia had a consistent current account deficit – averaging 4% of GDP – but went through the crisis years without experiencing a recession. Australia has to thank China’s insatiable demand for natural resources.
Switzerland had significant current account surpluses which has averaged 7.8% since 1981 – peaked 14.9% in 2010 – but the GFC had a major impact on its economy. This was mainly because it hit the country’s two biggest banks.

What do current account imbalances mean?

Current accounts are endogenous in nature, driven by numerous factors. However many commentators tend to take a very simplistic view of what causes a deficit. A good example of this is Donald Trump’s accusation of Germany’s current account surplus being funded by America’s deficit and the assumption that reducing German’s surplus will improve America’s deficit. This rationale would mean that the US deficit is exogenous and the German surplus is endogenous.

Furthermore some have challenged the view that Germany’s surplus reflects the country’s superior productivity and stagnant wage growth. Although German does have high earnings from overseas it is what Germany does with these surpluses that is the issue – rather than spend on imports, which would reduce the current account deficit, it saves a large part of these surpluses.

The definition of the current account balance found in most textbooks is the difference between export earnings and import payments of the 4 accounts – Goods, Services, Primary Income and Secondary Income. This tends us to focus on the comparative advantage that a country may have and it dependence on certain imports. According to Paul Krugman competitiveness encompasses not only prices of goods and services, but also their quality, production costs, and how they are delivered in the market place. Furthermore a firms’ business strategies and the labour market impact greatly on price competitiveness.

But if you just focus on prices it is difficult to comprehend why Switzerland retains a large current account surplus even though it has a strong Swiss Franc – a strong currency makes exports more expensive and imports cheaper. Additionally the US has had a current account deficit since 1984 even with the fluctuating US dollar – US deficit today = $116.8 bn but the currency is not seen as overvalued. Competitiveness is more a symptom than a cause of what is happening in the economy so should not be seen as what drive current account imbalances.

A better explanation

The definition that reflects more closely the primary concern of current account deficits is a country’s saving or borrowing from the rest of the world. Excessive borrowing from overseas will continue as long as deficits keep persist until the country is unable to repay its debts.

However if the make-up of the imports is generally capital goods then they add value to the economy as it will improve the competitiveness of the country’s products. Therefore if the rate of return on imports exceed the cost of borrowing to buy them it makes sense to borrow more in the long-run. Australia have experienced this situation and has little difficulty in servicing its debt. On the contrary if a country borrows to to support spending the implication is that consumers are borrowing from different trading banks. The risks are more prevalent if the trading banks borrow from overseas and have to default to foreign lenders if borrowers become less likely to pay back their debt.

Governments are much more likely to become highly indebted as unlike consumers / businesses countries cannot be closed down or forced to sell its assets. Furthermore they may political leverage to enable them to borrow more. Foreign lenders may stop lending to a country with large external debts making it impossible for that country to finance it’s ongoing deficit and consequently lead to a crisis like that in the eurozone. There are three important observations:

1. It usually takes too long for questions to arise about whether countries that borrow excessively are competitive.
2. Whether motivated by carelessness or expectation of a bailout if things go wrong, imprudent lending is always the root cause of persistent high deficits that finance private or public spending in excess of earnings.
3. Large and persistent deficits create vulnerability as borrowers start to become dependent on access to funds.

Are surpluses bad?

It is generally regarded that surpluses are harmless but if households, firm, or governments spend less than they earn the surpluses must be invested abroad. However investments abroad can be very risky especially in volatile countries so prudent investment is essential.

For a lot of countries the purpose of exports is to generate revenue so that they can buy imports of goods which they may not produce – or could produce but relatively less efficient. In China a surplus does keep the export sector industries employed but suggests there is a strong presence for saving or weak domestic demand. More balanced trade would increase the level of imported goods into a country and increase real incomes as the value of its currency rises. This will allow for more inflows of foreign capital from abroad stimulating growth in the domestic economy. It would help a sluggish world economy if surplus countries, like China and Germany, were to spend more on imports.

Final thought

All current account imbalances are note created equal. In the 19th century the US had large persistent deficits in order to fund the growth and development of the country – inter state highways, national parks, hydro dams etc. Therefore these imbalances were creating value for the economy and highly productive. By contrast Greece ran large deficits to assist private consumption which doesn’t add any productive potential to the economy or value creation. Furthermore it left lenders exposed to bad debts who had to be bailed out.

Source: The Deficit Tango – Charles Wyplosz – Project Syndicate

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Inflation – causes and examples from the global economy.

Here is an excellent video from CNBC which includes news clips from the 1970’s and beyond. Below are some of the main points:

• 1960 – pint of milk in the UK 3p. Today 50p
• Cost Push Inflation – today: supply-chain bottlenecks, shipping costs rising, labour shortages
• Demand Pull Inflation – usually associated with an economy operating near full capacity
• Milton Friedman – inflation a monetary phenomenon and the domain central banks.
• With the expansion of money why has there been little inflation recently? Velocity of circulation is not evident – i.e. number transactions.
• CPI – Headline Inflation but Core Inflation is more valuables it takes out volatile components of the CPI which have no reflection on the strength of their economy – e.g. oil. Gives you a better idea of the inflation trend.
• A little bit of inflation is good – ‘Goldilocks’ not too hot but not too cold.
• Hyperinflation – Brazil – 1980-1995. Weimar Republic – issues 100 Trillion D Mark note.
• !970’s – Stagflation – wage price spiral – higher interest rates 20% – trade-off was the higher unemployment rate.
• Central Banks – focus on inflation but also avoid a deflationary environment.

Will China’s dominance be more regional than global?

Below is a very good video with FT’s global China editor James Kynge and FT economics commentator Martin Sandbu. They discuss whether China will dominate global commerce or whether the world economy could split along regional lines. They also give a good account of the growth of China since the 1970’s. The main points from the video follow.:

• China – major player in the global economy forever more but not the centre of a global economy, partly because other parts of the world will not be keen to let it and global economy starting to become more regionalised rather than globalised.
• China growth – 1979 to 2018, GDP growth averaged 9.5 per cent a year.
• Global centre of gravity – last 40 years has moved towards China
• How did China grow? – late ‘70s market reforms and attracting foreign direct investment. Significant reason was in mid ‘90s, when the sons and daughters of farmers were allowed to migrate from the village to big factory towns. Western countries were pursuing globalisation at the time so China’s cheap production costs were a popular option
• China still a poor country – ranks 61st and the world in terms of countries by their average per-capita incomes. China is still very much a developing nation. But it’s a very different type of economy, from the type of developed country that we can see elsewhere in the world. China’s middle class – 400m people. But there are a billion Chinese that are much less well-off.
• China and the middle income trap – getting from poor to middle income is a very different process from getting to middle income to high income.
• Chinese consumers last year spent about $7.3tn – greater than the entire GDP of the Japanese economy. But now I think we’re entering a very different phase. And that one is characterised by China’s emergence as a technological power.
• China leads the world in many technologies. – wind and solar power, online payment systems, digital currencies, aspects of artificial intelligence, 5G telecoms, ultra-high-voltage power transmission.
• Within the world trading system there are three hubs – Germany – China – USA. However trade relationships seem to be more regional within these hubs and it is suggested that China will become more dominant on a regional basis rather than global.

Financial Crisis and Political Upheaval in Nazi Germany

A recent paper by Sebastian Doerr, Stefan Gissler, José-Luis Peydró and Hans-Joachim Voth investigates the role that a financial crisis in Germany played in the Nazis coming to power. They show how financial distress can lead to radical voting when accompanied by a convergence of cultural and economic factors. In less than four years, the Nazis went from capturing 2.6% to 37.3% of the popular vote. The authors identified the failure of one bank as being significant in growing the support of the nazis – Danatbank.

Danatbank and Dresdner Bank
Danatbank (the second largest bank in Germany) was widely seen as responsible for causing the financial crisis, and it was headed by the well-known Jewish manager Jakob Goldschmidt, a favourite target of Nazi propaganda. Its collapse in 1931 saw a surge of support for Hitler. Dresdner Bank, Germany’s third-largest lender, failed as well. Exposure to Dresdner Bank had a similar negative effect on city incomes as exposure to Danat, but had almost no effect on support for the Nazis. By contrast, Dresdner Bank was not the key target for Nazi propaganda – even if it had numerous Jews occupying leading positions like most German banks. While the economic impact of the two bank failures was almost identical, only exposure to Danat had a significant effect on Nazi voting. By 1932 Danatbank and Dresdner Bank merged.

Note: The shaded area indicates the period of the 1931 banking crisis, from the beginning of troubles at Austrian Creditanstalt to the merger between Danatbank and Dresdner Bank. Blue vertical lines show: (A) beginning troubles at Austrian Creditanstalt (May 1931), (B) Nordwolle accounting irregularities discovered and Hoover Moratorium established (June 1931), (C) failure of Danatbank and ensuing bank holidays (July 1931), and (D) forced merger of Danatbank and Dresdner Bank. 

The Depression enabled the Nazis’ rise to power, but the financial collapse of 1931 thus lent seeming plausibility to a key Nazi hate narrative, helping to bring a large part of the German middle class round to the party’s world view.

IMF calls for Germany to change its trade policy

I have blogged a few times on Germany’s current account surplus and how it distorts the global economy. The surplus is currently the world’s largest in absolute terms at US$350bn which is 8.5% of Germany’s GDP. Recently the IMF called for a radical shift in Germany’s trade policy before it provokes a protectionist backlash in the USA.

The fact that Germany is selling so much more than it is buying redirects demand from other countries around the world, reducing output and employment outside Germany at a time at which monetary policy in many countries has become ineffective. Furthermore the IMF has suggested that Germany should be investing more in public infrastructure to soak up excess savings and stimulate more demand in its own economy and therefore redirect spending. The underlying criticism is that Germany should stop trying to drive down its debt – German debt ratio has fallen from 81% of GDP to 60%.

A significant advantage that Germany has is that it is part of the euro currency. If Germany still had the Deutschmark the trade surplus would have no doubt increased the value of its currency making exports more expensive and imports cheaper. The value of the euro is dependent on the strength of other countries with the currency and the European Central Bank interest rate. Interest rates being -0.4% are a disguised way of holding down the value of the euro (exports cheaper and imports more expensive) and seen by some as bad etiquette for a currency bloc running surpluses near US$430bn – three times that of China.

The German viewpoint

• Germany says that it requires huge savings to prepare for the oncoming aging population.
  They deemed it a fundamental error to boost spending of cut or cut taxes (expansionary fiscal policy) at this late stage of the business cycle, warning that a fiscal stimulus would destabilise Germany whilst not doing much to help the rest of Europe or the global economy.
• The German surplus is a result of millions of decisions in Germany and abroad – German products are very high quality and reasonably priced so therefore there is more demand.
  Germany needs a safety-buffer with the increasing dependency ratio as by 2020 the ratio will double to one retiree to one worker.
• The euro is a free floating currency and there is no manipulation of the exchange rate. Its value reflects the strength of eurozone countries.

Policies to reduce the surplus.
Germany has little control over the value of the common currency, but it has several policy tools at its disposal to reduce its surplus.

• Increase spending in infrastructure
• Raising the wages of workers
• Increase domestic spending.

Source: Daily Telegraph – Germany rejects IMF cal for radical shift in trade policy – Friday 19th January 2018

Germany’s current account surplus – a concern?

A lot of economics textbooks focus on the damaging effect of a current account deficit but what about a current surplus? Also in the media a lot is spoken of a country’s trade deficit and the concern that it is borrowing from abroad to finance current purchases of goods and services. China’s surpluses have been a big talking point but it is Germany with a current account surplus since 2002 (introduction of the Euro) with a 2015 surplus of 8% of GDP which has taken the limelight – see graph from The Economist.

A lot of students taking the subject for the first time believe that a trade surplus is good and a trade deficit is bad. However, as in a lot of areas of economics, you can’t categorically say they are good or bad. For instance, a deficit might be caused by importing vast amounts of capital goods which will create value in the economy through jobs and goods which can be sold domestically or overseas. The capital goods can also increase the level of productivity and improve competitiveness of such goods. In some respects deficit countries can be better off than surplus countries, as they are consuming more goods that they are producing.

Is a trade surplus good or bad?

For a lot of countries the purpose of exports is to generate revenue so that they can buy imports of goods which they may not produce – or could produce but relatively less efficient. In China a surplus does keep the export sector industries employed but suggests there is a strong presence for saving or weak domestic demand. More balanced trade would increase the level of imported goods into a country and increase real incomes as the value of its currency rises. This will allow for more inflows of foreign capital from abroad stimulating growth in the domestic economy. It would help a sluggish world economy if surplus countries, like China and Germany, were to spend more on imports.

Reasons for Germany’s trade surplus.

There are three main reasons for Germany’s ongoing trade surplus:

1. Since the advent of the Euro in 2002 its value has been very weak. This is because the Euro is valued in relation to the entire 19 country eurozone and given the economic condition of the other member states, Germany’s strength in trade is not significant enough to boost the currency. If Germany still had the Deutschemark today it would be no doubt stronger and therefore reduce export competitiveness. It has been calculated that the Euro gives Germany about a 20% price advantage compared to what it would have had if it was still using the Deutschmark and has the largest foreign exchange advantage of any country in the world, with the possible exception of China.
2. Another reason is that the German government has been running a very tight fiscal policy and also keeping the wages levels down. In the wake of the worries over the eurozone, Germany slashed its public expenditure with reducing public infrastructure spending and been more focussed on running surpluses. This is all very well but they are taking money out of the system which leads to less demand in the global and European economy.
3. The lower cost of imports of oil and gas increased the trade balance in 2015 by around 1.2%. Without the decline in oil and gas prices, the trade surplus would have fallen compared with the previous year.

Germany’s trade surplus is a worry for countries in the EU as well as overseas in that it is importing demand from other countries and reducing output and employment. This is especially prevalent when you consider that monetary policy in a lot countries has become ineffective. When this happens expansionary fiscal policy – dropping taxes and increasing government spending –  is way of trying to boost demand but even though the fiscal position of the German economy is very healthy they are doing the opposite and being prudent. Germany is one of the few major economies in a position to easily and cheaply increase demand.

Trump and the German current account surplus

In 2016 Germany recorded the world’s largest current account surplus of €297bn (approx US$315bn) overtaking that of China again to become the world’s largest. The country with the biggest deficit is the USA and head of the National Trade Council Peter Navarro (see earlier blog post) has accused Germany of currency manipulation by having a weaker Euro as compared to the stronger Deutschmark, its previous currency.

As you already maybe aware a weaker currency makes a country’s exports more competitive and imports more expensive. Therefore German cars, tools etc are very competitive on world markets. Trump has indicated that he may put a 35% tariff on imported BMW’s but for America to say that Germany is manipulating its currency is not a winning argument for the following reasons:

1. The Euro is weak as it is more an indication on the Eurozone economy which includes countries which have poor economic conditions – yes if Germany had the Deutschmark again it would be stronger
2. The US is embarking on a policy of expansionary fiscal policy with tax cuts and increased government spending on infrastructure. This will boost jobs but will also increase domestic interest rates which makes the US dollar stronger and thereby reducing export competitiveness of US goods and services but makes imports a lot cheaper.
3. The European Central Bank has cut interest rates to virtually zero and is implemented a policy of quantitative easing (buying back bonds) in order to stimulate the weaker economies in the eurozone.
4. With virtually zero interest rates, German savers are being punished as are German life insurers.
5. Does Navaroo’s allegation hold any creditability when the US is running massive deficits.

The German Problem

In order for German industry to remain competitive employers and trade unions agreed to restrain wage growth – this led to a weakening of the euro. To overcome this imbalances in economies wages should be increasing in Germany as it is a stronger economy and weakening in the poorer countries like Greece and Spain. This means that the latter has a competitive advantage and should attract investment.

Also a ageing population tend not to be big spenders and with the current demographics in Germany, firms are looking abroad to sell their products instead of at home. Ultimately this leads to excess savings which is capital sent abroad

With a current account surplus of 9% GDP the only way this can be reduced is with extreme measures such as:
– Lowering VAT (value-added tax)
– Increasing wages
– Government to increase its spending and run budget deficits

However the surplus is a sign of German’s export prowess and as one German politician said ‘America needs to make better cars”. Only when the German savings are turned into cash will surpluses turn into deficits.

Source: The Economist – Feb 11th 2017

Germany’s current account surplus – causes and consequences.

Germany’s current account surplus, 7.5% of GDP and forecast to go as high as 7.9%, is causing major problems in the eurozone – see graph below.

German Current Account Causes

• Germany’s labour costs have been approximately 20-30% lower that its Eurozone competitors and the German real exchange rate is strongly undervalued relative to the rest of the eurozone. This makes its goods artificially cheap, crowding out those of other eurozone countries from both eurozone and world markets. If Germany still had the D-Mark, it is almost certain that the increased competitiveness of German exports would have caused an appreciation in the German currency. This appreciation would have rebalanced demand – increasing the price of exports and reducing the price of imports. A flexible exchange rate would have moderated the rise in the German current account surplus.
• German manufacturing has been very competitive in recent years with improvements in productivity, and high-tech German exports have weathered the global downturn, better than many other countries. Germany had less exposure to financial services and has a very competitive manufacturing sector.
• Germany’s jobless rate is at a very low 4.7%. This should be stimulating demand but the German regulatory and tax structure is geared in favor of output and exports, and against consumption and investment. Furthermore, the German government are running budget surpluses which takes money out of the circular flow. This is when its infrastructure is looking very tired – canals, the rail network and autobahns need upgrading. Investment has fallen from 23% to 17% of GDP since the early 1990’s. Net public investment has been negative for 12 years.

German Current Account Consequences

• The large current account surplus and undervaluation of currency was good for Germany, but it was holding back exports in other countries. Greater German domestic consumption and targeting higher inflation would provide a boost to global demand and help to stimulate growth in terms of export demand especially in southern Europe. Surpluses steal demand from elsewhere and they export unemployment to other countries. This matters in an era of “secular stagnation” and excess global savings.
• Given the imbalances in the Eurozone, southern European economies face a long period of deflation as they slowly seek to restore competitiveness against their northern competitors. However, given European wide austerity, this period of deflation is proving very costly in terms of lost GDP and high unemployment.

Socialism and Lying

The Economist wrote a piece about a group of behavioural economists, including Dan Ariely, that recently ran an experiment to test Germans’ willingness to lie for personal gain. 250 Berliners were randomly selected to take part in a game where they could win up to US$8. The game rules were as follows:

Each person to throw a die 40 times and record each roll – a higher total = bigger payoff
Before each roll the person had to write down the number on either the top or the bottom side of the die.

However, they did not have to tell anyone which side they had chosen, which made it easy to cheat by rolling the die first and then pretending that they had selected the side with the highest number. If they picked the top and then rolled a two, for example, they would have an incentive to claim—falsely—that they had chosen the bottom, which would be a five.

Honest participants would be expected to roll ones, twos and threes as often as fours, fives and sixes. But that did not happen: the sheets handed in had a suspiciously large share of high numbers, suggesting many players had cheated.

After finishing the game, the players had to fill in a form that asked their age and the part of Germany where they had lived in different decades. The authors found that, on average, those who had East German roots cheated twice as much as those who had grown up in West Germany under capitalism. They also looked at how much time people had spent in East Germany before the fall of the Berlin Wall. The longer the participants had been exposed to socialism, the greater the likelihood that they would claim improbable numbers of high rolls.

Economic Systems: France v Germany

Here is a useful video on economic systems from the BBC – CIE AS course Unit 1. France’s economy has struggled in recent years and President Hollande has plans to reduce the levels of bureaucracy and the size of the state sector – moving to less government intervention.

Critics say France has too centralised and big a state sector. By contrast, in Germany much of the decision making is at local level.

So how do the two systems compare?

Youth Unemployment in Europe

Here is a very good video graphic from The Economist. It looks at youth unemployment rates in the main economies of Europe and discusses the reasons why some countries have had much higher rates. Notice German’s low rate which was falling during the GFC which was mainly due to labour reforms which allowed small businesses to fire employees more easily and liberalised work for part-time and temporary work.

Global Minotaur or Merkeltaur – Germans Kick Greece out of Euro

Ben Cahill of Senior College put a cartoon on the Tutor2u blog about the role Angela Merkel has in determining the destiny of Greece. The cartoon below has Merkel showing the Greeks to their only option ie. the labyrinth to be consumed by the minotaur. What she basically saying to the Greeks is that you have no choice but to stick to the reform measures and strict austerity measures. Furthermore one could say that after the soccer quarter-final on Friday “One gone, one to go”.

This cartoon also reminded me of book that I recently read called the Global Minotaur by Yanis Varoufakis. The Minotaur is a tragic mythological figure. Its story is packed with greed, divine retribution, revenge and much suffering. It is also a symbol of a particular form of political and economic equilibrium straddling vastly different, faraway lands: a precarious geopolitical balance that collapsed with the beast’s slaughter, thus giving rise to a new era.
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According to the myth’s main variant, King Minos of Crete, the most powerful ruler of his time, asked Poseidon for a fine bull as a sign of divine endorsement, pledging to sacrifice it in god’s honour. After Poseidon obliged him , Minos recklessly decided to spare the animal, captivated as he was by its beauty and poise. The gods, never allowing a good excuse for horrible retribution to go begging, chose an interesting punishment for Minos: using Aphrodite’s special skills, they had Minos’s wife, Queen Pasiphae, fall in lust with the bull. Using various props constructed by Daedalus, the lengendary engineer, she managed to impregnate herself, the result of that brief encounter being the Minotaur: a creature half-human, half-bull (Minotaur translates as ‘Minos’s Bull’, from the greek taurus, ‘bull’).

When the Minotaur grew larger and increasingly unruly, King Minos instructed Daedalus to build a labyrinth, an immense underground maze where the Minotaur was kept. Unable to nourish itself with normal food, the beast had to feast on human flesh. This proved an excellent opportunity for Minos to take revenge on the Athenians whose King Aegus, a lousy loser, had had Minos’s son killed after the young man won all races and contests in the Pan-Athenian Games. After a brief war with Athens, Aegus was forced to send seven young boys and seven unwed girls to be devoured by the minotaur every year (or every nine years according to another version). Thus, so the myth has it, a Pax Cretana was established across the know lands and seas on the basis of regular foreign tribute that kept the Minotaur alive.

Beyond myth, historians suggest that Minoan Crete was the economic and political hegemon of the Aegan region. Weaker-city states, like Athens, had to pay tribute to Crete regularly as a sign of subjugation. This may well have included the shipment of teenagers to be sacrificed by priests wearing bull masks.
Returning to the realm of the myth, the eventual slaughter of the Minotaur by Thesus, son of King of Aegeus of Athens, marked the emancipation of Athens from Cretan Hegemony and the dawn of a new era.

Aegeus only grudgingly allowed his son to set off to Crete on that dangerous mission. He asked Theseus to make sure that, before sailing back to Piraeus, he replaced the original mournful black sails with white ones, as a signal to his waiting father that the mission had been successful and that Theseus was returning from Crete victorious. Alas, consumed by the joy at having slaughtered the Minotaur, Theseus forgot to raise the white sails. On spotting the ship’s black sails from afar, and thinking that his son had died in the clutches of the Minotaur, Aegus plunged to his death in the sea below, thus giving his name to the Aegean sea.
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This suggests a tale of a hegemonic power projecting its authority across the seas, and acting as custodian of far-reaching peace and international trade, in return for regular tributes that keep nourishing the beast from within. The role of the beast was America’s twin deficits, and the tribute took the form of incoming goods and capital. Its end came from the collapse of the banking system. The book is well worth the read and not too long either.

Euro Crisis – is it the Ultimatum Game all over again?

Jame Surowiecki in the recent edition of The New Yorker likened the euro zone crisis to the fairness trap. With Greek politicians looking at renegotiating its aid package and austerity measures, the German government has indicated that they are running out of patience and money to lend to Greece. Policymakers have talked about a Greek exit from the Euro – Grexit – which would mean they would default on their debts and no longer be part of the Euro currency.

As many economists have pointed out when economies go through a recessionary or contractionary phase their exchange rate starts to depreciate. This makes exports more competitive and imports cheaper which ultimately helps growth. However for Greece to leave the Euro it would destroy vast amounts of capital as well as costly for the rest of Europe. Greece owes almost half a trillion euros and containing the damage would mean the recapitalisation of banks, continent-wde deposit insurance and more aid to Portugal, Spain, and Italy. However it seems that this would be a much more expensive option than Greece staying in the euro zone.

Rationally there should be some sort of compromise with maybe a relaxing of austerity measures and giving Greece a bit more time to bring about some serious structural reforms especially to its tax system. However according to Surowiecki Europe isn’t arguing just about what the most sensible economic policy is but what is fair.

The Germans see it as unfair that they have to bailout Greece especially as the Greeks have continued to live beyond their means – how did they afford to host the Olympic games in 2004? Borrow more money? Why should the Germans be obliging when there is no meaningful reform in Greece?

From a Greek perspective it is equally unfair that for them to suffer years of slim government budgets and high unemployment in order to repay foreign banks and richer northern neighbours.

This fous on fairnes could prove disastrous – remember the Ultimatum Game.

The Ultimatum Game by Werner Goth 1982
In this game somebody offers John £100 under the condition that he shares it with Sarah. The two of them cannot ex- change information and John can make a single offer of how to split the sum. Sarah, who is aware of the amount at stake, can say yes or no. If her answer is yes, the deal goes ahead. If her answer is no, neither John or Sarah gets anything. In both cases, the game is over and will not be repeated. You may not be surprised to learn that two thirds of offers are between 40 and 50 percent.

From research carried out (Karl Sigmund et al.), only four in 100 people offer less than 20 percent. Proposing such a small amount is risky, because it might be rejected. More than half of all responders reject offers that are less than 20 percent.

However, why should anyone reject an offer as “too small”? The only rational option for a selfish individual is to accept any offer, as £1 is better than nothing. A selfish proposer who is sure that the responder is also selfish will therefore make the smallest possible offer and keep the rest.

This game-theory analysis, which assumes that people are selfish and rational, tells you that the proposer should offer the smallest possible share and the responder should accept it. But this is not how most people play the game.

The fairness problem is exacerbated by the fact that our definition of what counts as fair typically reflects what the economists Linda Babcock and George Loewenstein call a “self-serving bias”. This is even more pronounced when both parties feel they are not part of the same community – known as “Social Distance”. For instance:

1. The Greeks’ resentment of austerity might be attenuated by the recognition of how much money Germany has already paid and how much damage was done by rampant Greek tax dodging.

2. The Germans might acknowledge that their devotion to low inflation makes it much harder for struggling economies like Greece to start growing again.

The pervasive rhetoric that frames the conflict in terms of national stereotypes is the following:

Hardworking, frugal Germans v frivolous, corrupt Greeks
Tightfisted, imperialistic Germans v freewheeling, independent Greeks

This makes it all the more difficult to reach a reasonable compromise.

The Greeks do work long hours but less productive.

A hat tip to colleague David Parr for this piece from the BBC. According to the OECD the Greeks put in the hours at the coal face but when it comes to productivity they do lag behind the power house of Germany. The average Greek worker is at the workplace for 2,017 hours per year which is more than any other European country. This compares to the German worker who is there for 1,408 hours per year. However, according to the OECD, there are two reasons for this:

1. The Greek labour market is composed mainly of people who are self-employed who tend to work longer hours.
2. There are different numbers of part-time workers in each country. In Germany one in four are in part-time employment. As all workers are included in the calculation this brings down the average in Germany. Fewer people work part-time in Greece.

But if you look at productivity you see that Germany ranks 8 in productivity per worker out of the OECD countries – while Greece comes in at 24th.

The German economy – it’s not all over!

“They think it’s all over” is a well known quotation from Kenneth Wolstenholme’s BBC TV commentary in the closing moments of the 1966 FIFA World Cup Final, where England beat West Germany 4–2 after extra time. But it’s not all over for the German economy. Some interesting facts from The Economist on the economy as compared with its G7 colleagues.

* Highest growth of GDP/Capita among the G7 countries
* 6.6% unemployment – second-lowest
* Smallest budget deficit and least government debt relative to GDP
* Current account surplus which is 5% of GDP
* Household debt 99% of disposable income. UK – 170% USA – 128%

Although there are major budgetary issues in EU countries this has impacted on the value of the euro. With a falling euro this makes euro country exports more competitive and Germany has definitely benefitted from this. However, to rely on exports as the engine room of your economy is risky as recessions overseas can quickly revoke any growth. Last year domestic demand did increase and unemployment was the lowest rate for nearly 20 years. This could could put pressure on wages which may mean greater domestic spending.