Merkel – dithering to destruction?

It is a sad fact that the wrong leader at the wrong time can massively exacerbate a difficult situation. The German Chancellor Angela Merkel is a past master at postponing decisions and substituting fudges for decisive action. In some circumstances this can work, since by doing nothing politicians often do better than if they had done the wrong thing with great determination. However, this is not one of those times.

At Davos – which in 2012 turned out to be remarkably unremarkable – Merkel made a passionate call for greater European integration.

“Do we dare more Europe? Are we ready to be more European? Yes, we are ready,” she told delegates. Fine sounding, but ineffectual stuff. It would have been more to the point had the German Chancellor posed a question not to the delegates, but to German votors, which went something like: “Do we as Germans dare square up to our responsibilities and to the logic of our position in Europe?”

The Telegraph’s Louis Armitstead quotes a telling comment from an unnamed “high profile industrialist” at Davos.

“As part of the euro, Germany has had a decade of being artificially competitive. The country has gained at the expense of others – including the UK – and it’s now time they put their hands in their pockets and paid out instead.”

The point here is that had Germany still possessed the Deutsche Mark, the Bundesbank would by now have been in an even more embattled position than the Swiss Central Bank. The Mark would have been seen as one of the premier safe havens on the planet and funds would be pouring into it, pumping it up and up and up, just as they are doing to the Swiss franc. Germany’s exporters would have been crushed by a hugely appreciating Deutsche Mark and the German economy would now be in dire straits. This would, over time, have a chilling effect on the funds pouring in to Germany and would impose an outer limit on the onward and upward climb of the Deutsche Mark, but by then the damage to Germany’s export industry would in all probability, be profound.  Tucked safely inside the euro, the value of which is being dragged down persistently by the troubles of the peripheral eurozone countries, Germany’s exporters are having themselves a party.

This can’t be a free lunch for the Germans. If they want the comfort the euro brings them, it has to come with all its attendant costs. Sure, impose German rectitude on profligate free spending socialist states who promise outlandishly extravagant social benefits to their citizenry. This has to be done. But absolutely do not encourage German voters to think that slagging off Greeks and Spaniards, and now Italians, is a substitute for responsible action. Germany benefited hugely from the fact that the euro membership of the peripheral states enabled these countries to access far more cheap credit than their economic status actually warranted. That state of affairs enabled those countries to buy vast amounts of German goods, boosting the German economy. They are still, albeit to a somewhat lesser extent, buying those goods. Now is the time for funds to flow in the other direction. That’s just ying yang, or quid pro quo.

The problem is, Merkel is not, by nature, a politician who likes to grasp the nettle. As Armitstead notes:

In contrast to almost everyone’s pleas for urgency, Merkel (at Davos) asked for patience from markets and business leaders: “Things do take a very long time… please take the long drawn-out process with a degree of acceptance.” She added that the weaknesses “arose over years – so they can’t be overcome at one fell swoop”.

Merkel’s approach is all about kicking the can down the road, muddling on in the hope that somehow moribund economies – crushed by a newfound state love of austerity  – will rejuvenate and that eventually soaring growth will solve every problem. In fact, as economists love to point out, the problem is getting worse, not better. Austerity squeezes tax revenues.  Debts keep increasing. Interest payments take up ever larger chunks of such revenues as are available, and the citizens smoulder. Time is something Europe’s politicians are running out of. It really is time that this message got home, because it certainly didn’t at Davos, this go round. Maybe next year… a la Merkel…

This article was written by Anthony Harrington and originally published on QFINANCE

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  • David Lilley

    I agree that your case can be sustained but it is wrong to blame Angela or Germany.

    The banks took the decision to hold all their eggs in one basket, AAA rated government bonds. They further took up bonds that paid best but these belonged to what we now know as the PIIGS.

    The PIIGS borrowed and borrowed and their spending artificially boosted GDP which inturn enabled them to borrow more. Just as increasing your salary enables you to get a bigger mortgage.

    The PIIGS were poor countries but borrowing enabled them to spend as if they were rich countries. A tripling of pensions and benefits in Ireland, a doubling of wages in many of the periferals. Wages in Greece are still 32% more than in Germany.

    When the EZ crisis was perceived to be a liquidity crisis, brought on by the financial crisis, bailouts were considered the solution and Germany put in 211b Euro of the 440b Euro EFSF. But it turned out to be a solvency problem. The PIIGS cannot make it in the new global environment and it is more than just a problem of “lend us a fiver to get us through a bad patch”.

    Ten years of leverage must be met by ten years of deleverage and that means going back to the days when you paid your way plus paying off the debt that you should never have been allowed to amass.

    It is not so much austerity as living within your means. Germany has done more than enough for Greece only to be asked for a second bailout leaving nothing in the kitty for the other PIIGS.

    Greece and others should be looking for statesmanship and a business plan and not relying on handouts or asking their lenders to do their thinking for them.

  • Silver Surfer

    QFinance seem to be following a well traveled road in Britain which arrives at the notion that Germany was the sole beneficiary of the Euro. This can’t be true, what was good for German exporters was good for Dutch, French, Spanish, Italian and other exporters. And for that matter, how is a Euro trading at 1.6 to the dollar undervalued? I can tell you from the perspective of someone earning in dollars that the Euro was strong and still is – it was launched at near parity and strengthened as its’ share of global transactions increased. There are now 450 million people in the EU and it will grow. 

    It’s simply wrong to assume that the north was the sole beneficiary of the stability and integration afforded by the single currency. Any engineer will tell you that Spain is one of the worlds largest industrial turbine manufacturers and Italy has a GDP equal to the UK, largely founded on some very sound exports. The real issue here is how predatory banks sought fees by lending to countries that ultimately were shown to have fragile economies and bloated government sectors. The irony of Greece is it has large sovereign debts and relatively small private debts. Contrast that with the UK where individuals are living on life support – aka QE – from the Bank of England.

    So. Is Germany really the bad actor in this tragedy? I dont think so. The bad actors are American and British investment banks who saw the EU as a source of easy fees. Remember, banks live in Alice in Wonderland where loans are assets and deposits are liabilities. This simple fact explains why London was used as a beachhead for the likes of Goldman, JPM, Citi etc. They all used the UKs lax regulation to flood Greece and Portugal with loans they couldn’t repay. All backed by collateral that we now know is largely rehypothecated assets in yours and my bank accounts.