In the late 1990s, Nortel Networks was a leader in selling telecommunications equipment to new start-ups. But, what few people understand is how Nortel itself was a key contributor to the ultimate bursting of the tech bubble. In order to encourage these communication service providers to buy Nortel’s communications equipment, Nortel would provide financing. In some cases, Nortel would actually pay the communications companies to buy Nortel’s products. Nortel would offer 100% financing on the equipment sale, and then would provide a further 20% to 30% of the purchase price via working capital loans. All this free capital contributed to too much communications capacity being built, prices collapsing and the bursting of the tech bubble. Ultimately, Nortel went bankrupt.
Why do I bring up this story? Because it reminds me a lot of Germany’s situation today and the issues surrounding the European common currency. Germany is the second largest exporter in the world, which contributes significantly to its prosperity. Unlike the US which runs large trade deficits, Germany runs large trade surpluses. And, much of this trade surplus is with Eurozone countries.
So, what is the connection between Nortel and Germany? Well, let’s review what has been happening in Europe for the past decade. Southern European countries, such as Greece and Italy, have incurred high levels of government debt in order to provide social welfare for the people. And, once the Greek and Italian people receive this social welfare, they spend the money. And, a meaningful amount of this spending goes toward German exports. So, who buys the Greek and Italian debt and thus provides the money to the Greek and Italian governments? You guessed it, in part German banks. So, Germans provide money to the countries who are buying their exports. And, to be honest, the French are no better and doing the same thing. Now do you see the similarity? And, we know how things turned out for Nortel.
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