Understanding German Politics

Inquiring minds in the US note the upcoming German election and may be wondering about the platforms of the major political parties. Reader Bernd from Germany explains.

Die Linke (The Left): Die Linke is made up of the former SED/PDS (The East German Communist Ruling Party), some former West German Communist and Socialist Parties and a “rebel group” of the SPD. They all have merged and are now called "Die Linke". By and large they have a communist/socialist platform, albeit not Stalinist. Their main requests are: dissolve NATO and replace it with a new organization to include Russia in it, end all wars, control or nationalize all relevant banks and some crucial industries, increase support for the poor, raise taxes for the rich (above income of 60k Euros gradually go to 75%), introduce a stiff wealth and inheritance  tax. They are pro Euro and want the introduction of Eurobonds immediately. To alleviate the economic crisis in Europe they advocate some serious deficit spending for social and work programs. They have voted against ESM; EFSF and Cyprus deal in Parliament.

SPD (Social Democrats): SPD is the grand old Social Democratic Party, with a wonderful and long tradition. SPD originated from the worker's movement. Its first party program is from 1869. It the only party that tried to stop Hitler's power grab by opposing the emergency laws in 1933. Many went to concentration camps for opposing Hitler. In post-World War II Germany SPD provided three Chancellors, Willy Brandt, Helmut Schmidt and Gerhard Schröder. All three Chancellors were major reformers in Germany for one or the other topic.  SPD lost its original power base in the wake of Schröder's reforms in the early 2000s. SPD is a staunch pro Euro party. They also want Eurobonds immediately, as well as a common fiscal policy, a bank union and a quick unification of Europe.

Die Grünen (The Green Party): Die Grünen started as a mix of 1968 communists/socialists and anti-nuclear energy activists in West Germany. The second part is made up of some left over former East German anti SED “rebels” who helped to bring down East Germany.  Today this is the party for so the so-called "politically correct". In Germany we call them the Latte Macchiato Moms/Dads. The typical party member is a well-paid Government official or teacher with a work week of 36 hours. They believe firmly in manmade climate change and want to tax and spend their way to eliminate the CO-2 footprint. No amount of money is too much for preventing climate change. They are staunch pro Euro advocates similar to the SPD.

Freie Demokratische Partei FDP (Free Democratic Party): originated from a mix of former liberal parties during the Weimar Republic with an originally clear idea on liberalism. The FDP once strongly supported human rights, civil liberties, and international openness, but has shifted from the center to the center-right over time. Today’s main goal is to get at least 5% of the popular vote, otherwise they will have no representation in parliament. They are a coalition partner to Merkel's CDU party but most of them would be hard pressed to state why. FDP may not pass the 5% threshold in the next election. FDP states that they wish Europe to return to the “No-Bail out Clause” and the Maastricht Agreement, however, in Parliament they voted for a massive breach of both agreements, following Merkel’s position.

CDU (Christian Democratic Union): CDU is a center-right, typically Catholic, typically pragmatic popular party. It is the party of most Chancellors now including Angela Merkel. I call it the "yes Chancellor Club". Merkel calls herself pragmatic, some German people call her "Mutti". Mutti in German means a cunning, but one minded pragmatist, who will reprimand/control her husband for coming home late from a bar. CDU is pro-euro but against Eurobonds. Under Merkel CDU has lost its profile and has made some erratic shifts in position, which is a major turnoff for many supporters. Notably Merkel’s agreement to the breach of all EU-Agreements and her shift to a so called “green energy” has alienated many voters.

CSU (Christian Social Union): CSU is the Bavarian sister to the CDU. Whereas CDU operates in 15 States, CSU is in Bavaria only, where it traditionally gets 50 plus percent of popular votes, thus catapulting it above 5% on federal level. Voter participation in Bavaria is traditionally above 75%. CSU follows Merkel, but tensions are rising. Many CSU members are far from convinced that Merkel is right. Most of legal obstacles against Merkel's Euro policies in front of the Federal Constitution Court come from members of the CSU. Due to its high degree of organization and its firm foundation in the center of Bavarian populace, CSU is rather influential in German Federal Politics.

Alternative für Deutschland) AfD (Alternative for Germany): AfD is a liberal-conservative party supported by many German economists. More than two-thirds of its initial supporters hold doctorates. Its main position is a return of the EU to the original meaning of the Maastricht agreement, alternatively a return to national currencies. The second major topic is the strengthening of German Democracy, advocating a Swiss – like model. In April 2013, the party held its first convention in Berlin, which was attended by about 1500 supporters. The convention elected the party leadership and adopted the party platform. The three elected speakers are economist Bernd Lucke, the entrepreneur Frauke Petry, and the publicist Konrad Adam. The key demand of AfD is to provide a mechanism for countries to exit the Eurozone. In old Germany, "liberal" was in regards to Civil Rights, not free-flowing money or other policies those in the US may associate with the word. Liberal for AfD is a bit different than for the current FDP

Mish Note:

Reader Bernd is not (not Bernd Lucke, the economist and AfD elected speaker). I will have election predictions next week from Reader Bernd.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Explosive Video on Ending Fractional Reserve Lending and Bank Corruption at Philadelphia Fed Conference

At an economic conference at the Philadelphia Fed, academics gathered to discuss fixing the banking system, including ending fractional reserve lending. The video is quite entertaining to say the least.

Professor Jeffrey Sachs of Columbia University really lays into the banking system a few minutes into the recording. Play it!



Link if video does not play SR 76 Wall Street

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Wine Country Conference Speaker Slides and Videos; Hussman: "An Unstable Equilibrium "

I am pleased to announce that the Wine Country Conference speaker presentations, along with the Yahoo! Finance media interviews and associated articles on Advisor Perspectives are now available online at Wine Country Conference Speaker Slides.

Additionally, we are releasing an edited video of each of the speaker presentations. John Hussman’s presentation "An Unstable Equilibrium" is now available.

Two more video presentations will be available next week and three the following week at Wine Country Conference Speaker Presentations.

Thanks again for a successful 2013 WCC and we look forward to many more!

If you enjoy the videos, please consider making a Donation to the Les Turner ALS Foundation. Specify "Mish Campaign" on the donation to earmark funds for research.

All told, we raised nearly $500,000 for ALS research, subject to final audit. $100,000 of that came from a very generous matching donation from the Hussman Foundation.

The 2014 conference will raise money for autism research and programs.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Italy Presidential Election Still Deadlocked; Political Posturing in Perspective

The seven-year term of president Giorgio Napolitano is up in May. The Italian parliament has the task of voting for the next president. However, parliament is so splintered  that no suitable candidate has surfaced.

The first three rounds of voting require a two-thirds majority. In the first round of voting, Pier Luigi Bersani, the left party leader struck a deal with Mr Berlusconi to support Franco Marini, an 80-year-old former Christian Democrat trade unionist.

However, in a secret ballot vote shocking to Bersani, about 200 center-left politicians voted against the deal as did Beppe Grillo's Five star movement.

The second round vote also failed as did the third given no candidate can come to a two-thirds majority.

The 4th round of votes only requires a simple majority. For that vote the center-left abandoned Marini in favor of former prime minister Romano Prodi.

The rally around Prodi attempt may gather in some center-left votes, but Berlusconi wants nothing to do with Prodi. He was willing to back Marini in belief that Marini would shield him from prosecution, but will not back Prodi.

The Financial Times reports ...

Mr Berlusconi’s People of Liberty attacked Mr Prodi head-on and declared that it would consider backing the candidacy of interior minister Anna Maria Cancellieri, who has been nominated by the small centrist party led by caretaker prime minister Mario Monti.

Mr Monti gave a press conference in parliament to make a strong endorsement of Ms Cancellieri, who would become Italy’s first female president.

“She is not a representative of the old politics, nor of politics in general and is not a member of any party. She is a servant of the state, independent and authoritative,” said Mr Monti, who would have been a leading candidate for the presidency himself had it not been for his decision to shed the neutrality of a technocrat and launch his own party, which polled only 8 per cent in February’s elections.

Mr Monti, a former European commissioner, praised Mr Prodi – his former colleague as European Commission president – but said at this moment Italy needed a figure who would unite not divide the parties.

On paper Mr Prodi has 495 votes if the Democrats and the allied Left Ecology and Freedom party remain united. That leaves him needing just nine more to gain the absolute majority he needs in the fourth round, when the requirement of a two-thirds majority expires.

Mr Bersani spent several fruitless weeks seeking support for a minority government from the anti-establishment Five Star Movement, the third largest force in parliament, and must now be hoping that he can persuade a handful to help him break the deadlock over the presidency.

Beppe Grillo, the activist leader of the movement, has told Mr Bersani to give up, describing him as a “dead man talking”. The movement, which stunned the establishment by winning a quarter of the popular vote in February, is backing Stefano Rodota, a leftwing academic and lawyer, as its candidate for president.

Grillo's Rise

Bloomberg fills in a few more details in Bersani Coalition Fractures

Bersani was deserted by allies on the first ballot as Franco Marini, the candidate he backed with Berlusconi forces received 521 of 1,007 possible votes, less than the necessary two-thirds majority. With no path to a Marini victory, both the Democratic Party and Berlusconi’s forces cast blank ballots on the second vote.

Marini garnered 521 votes in the first vote, more than twice that of Stefano Rodota, the candidate of Beppe Grillo’s Five Star Movement. More than 400 lawmakers cast blank ballots in the second vote.

The Democratic Party and Berlusconi’s People of Liberty, or PDL, were thrown together by the emergence of Grillo, an ex- comic and anti-corruption crusader who won a blocking minority in the February elections. Five Star, which refused to support Bersani’s bid for the premiership last month, campaigned against political scandals and says its aim is to sweep established lawmakers from power.

Grillo is gaining support from Bersani’s group. Rodota, a professor and former lawmaker with a forerunner party of the PD, is getting the votes of Bersani ally Nichi Vendola and some dissenting PD members.

Berlusconi is appealing convictions in wire-tapping and tax fraud cases. He is also standing trial accused of paying a minor for sex and abusing the powers of his office. He has denied all the charges.

Political Posturing in Perspective

The office of power is that of prime minister. The office of president is largely symbolic except perhaps to Berlusconi who seeks to avoid prosecution with a pro-Berlusconi president in place.

And even if the parties could agree on a president, and they will eventually, the politics are such that new elections will be held because barring a miracle, no coalition can possibly form now.

Bersani failed miserably. He will soon be gone. The center-left will rally around Florence mayor Matteo Renzi. But to what end?

It is conceivable that new elections result in yet another deadlock. It is also conceivable Berlusconi's party will be back in power.

Whatever the result of the next election, any coalition that forms will not be stable. Support from Grillo's Five-Star Movement may be necessary to form a new government and Grillo seems unwilling to give it.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Excel Spreadsheets, Krugman, and a Question of Logic

In a 2010 paper Growth in a Time of Debt and again in a book entitled This Time is Different, Harvard economists Ken Rogoff and Carmen Reinhart presented the idea that when a country's ratio of debt to gross domestic product reaches 90% lower economic growth is on the horizon.

However, Rogoff and Reinhart made an Excel Spreadsheet Error in their work that has the economic world in a tizzy.

A new study by three researchers at the University of Massachusetts finds that Rogoff and Reinhart made several mistakes that invalidate their thesis. They made a spreadsheet error that resulted in their leaving five countries out of an all-important average of countries with higher than 90% debt-to-GDP ratios. By restoring the full average, the UMass authors say, the growth rate for countries in that range becomes 2.2%, not the -0.1% cited by Rogoff and Reinhart. That makes the average growth rate at that ratio "not dramatically different than when debt/GDP ratios are lower."

One irony of the finding stems from the fact that the debt-to-GDP ratio always was something of a heffalump. As economist Robert Shiller pointed out in 2011, yoking the two statistics together doesn't necessarily tell you anything useful. Debt is measured in currency, he observed; GDP is measured in currency units per year. But there's "nothing special about using a year.... A year is the time that it takes for the Earth to orbit the sun, which, except for seasonal industries like agriculture, has no particular economic significance."

Error Austerity Debate

CNBC picked up the story in Reinhart-Rogoff Error Sparks Austerity Debate.

Adding fuel to to an already contentious debate over whether tough austerity measures are helpful or harmful to an economy, is a new revelation that there was a mathematical error in an influential economic research study, often cited as having paved the way for fiscal policies pursued by the U.S. and Europe.

The charge was raised in a paper, released Tuesday, by an economics doctoral student and two professors at the University of Massachusetts that called into question the findings of Harvard economists Carmen Reinhart and Kenneth Rogoff's 2010 paper "Growth in a Time of Debt," which concluded debt over a certain level was dangerous for countries.

Reinhart and Rogoff said they made a bad calculation within an influential economic research paper in 2010, but rebut claims that the errors were made intentionally. They also stand behind the central theme of the paper that too much public debt will slow economic growth.

Krugman Chimes In

Paul Krugman chimed in with his response Reinhart-Rogoff, Continued.

I was going to post something sort of kind of defending Reinhart-Rogoff in the wake of the new revelations — not their results, which I never believed, nor their failure to carefully test their results for robustness, but rather their motives. But their response to the new critique is really, really bad. ....

The Obvious

Let's step back from the politics of the debate to focus on the obvious. My friend Pater Tenebrarum on the Acting Man Blog sent this common sense analysis of the setup in an email.

Empirical studies cannot be used to settle points about economic theory. It should be obvious that deficit spending is nothing but deferred taxation. And obviously, since government spending has no concept of the categories of profit and loss, such spending is typically a mindless waste of scarce resources. No bureaucracy has any inkling of opportunity costs or consumer wishes. The spenders are saying: government bureaucrats know better how to allocate resources than the private sector. Perhaps, but certainly not in this universe.

GDP Definition

I remind readers that by definition, government spending adds to GDP.  The government can pay people to spit at the moon or dig ditches and fill them back up again and those activities will add to GDP.

Does such economic stupidity matter at 90%, 95%, or 130% of GDP?
Is it even relevant?

What does matter is the obvious. And it should be obvious that wasting money to stimulate the economy is just that: waste.

The trigger point as to when such waste matters most likely varies country to country based on factors that no excel spreadsheet can properly discern in advance.

Rogoff and Reinhart made an error. So did Krugman. At least Rogoff and Reinhart have the general idea correct: economic stupidity matters at some point, something Krugman cannot seem to grasp.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Merkel Needs Opposition Party Votes to Pass Cyprus Bailout

Germany approved the Cyprus bailout on Thursday as expected. However, Merkel required votes from the SPD and Green Party, to do so.

One might not understand the implications when reading the Wall Street Journal report Germany Approves Cyprus Bailout.

Germany's parliament on Thursday voted in favor of aid for troubled Cyprus by a large majority, giving Chancellor Angela Merkel's euro-crisis policies broad backing in the face of opposition criticism ahead of fall elections.

Despite a federal election in Germany just five months away, the ruling coalition led by Ms. Merkel succeeded in convincing coalition lawmakers and the main opposition parties—the Social Democrats and Greens—that the negotiated deal serves German interests, and a rejection would rattle the euro zone and lead to a Cypriot bankruptcy.

"Germany got what it wanted from the bailout," said Christian Schulz, senior economist at Berenberg Bank.

What vs. How

Merkel may have gotten "what" she wanted. I rather doubt she got it "how" she wanted. Reader Bernd from Germany explains ...

"The falling apart of CDU/ CSU and FDP coalition is beginning to show in all seriousness now. If Bundestag needs to vote one more time before the federal elections (i.e. on Slovenia, Spain, France), the Government might not make it."

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Switzerland to Hold Referendum Banning its Central Bank from Selling Gold Reserves

In Swiss law, private citizens can put forth any initiative that can gather 100,000 signatures. A campaign by the Swiss People's Party to "Save our Swiss Gold" gathered 106,052 signatures so a vote will be coming up.

Switzerland is to hold a referendum on a popular measure that would ban the central bank from selling its gold reserves and force it to keep at least 20 per cent of its assets in the metal.

Under the terms of “Save our Swiss Gold”, which is led by members of the ultra-conservative Swiss People’s party, the Swiss National Bank would have to repatriate gold reserves held abroad and keep them at home.

Governments in the eurozone’s beleaguered southern periphery tend to hold a large part of their total foreign reserves in gold – the Italian central bank holds 2,451 tonnes, more than 70 per cent of its total reserves, while Portugal’s holding of 383 tonnes accounts for 90 per cent.

However, proponents of the Swiss measure flatly reject the idea of sales, arguing that disposals of gold reserves at low prices between 2001 and 2006, as well as more recently, have cost Switzerland billions of Swiss francs.

They insist that the SNB’s gold reserves, which stood at SFr49.5bn at the end of February, accounting for about 10 per cent of its balance sheet, are the best store of value available to the central bank.

The Swiss National Bank is of course against the idea and will provide a response in "due course". I can translate their response in advance: "We reserve the right to trash the Swiss Franc at will, if and when we want to."

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com 

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