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Rupert Cornwell: Germany’s success rests on the euro - now it must save it Eurozone in crisis: Germany’s success rests on the euro - now it must save it
(about 7 hours later)
The latest annual meeting of the IMF was an unusually miserable affair, with its grim forecasts of lower growth worldwide, and the heavy falls in markets unleashed by those forebodings. But few aspects were as disquieting as the current torment of the eurozone that was front and centre in Washington last week.The latest annual meeting of the IMF was an unusually miserable affair, with its grim forecasts of lower growth worldwide, and the heavy falls in markets unleashed by those forebodings. But few aspects were as disquieting as the current torment of the eurozone that was front and centre in Washington last week.
It’s not just that the fund cut its expectations of eurozone growth to 0.8 per cent, with Italy already back in recession, France teetering on the edge of one, and Germany moving in that direction. Europe, which accounts for roughly a third of the world economy, is not the sole contributor to global economic malaise, but the mounting travails of its three largest economies suggest it is the main one.It’s not just that the fund cut its expectations of eurozone growth to 0.8 per cent, with Italy already back in recession, France teetering on the edge of one, and Germany moving in that direction. Europe, which accounts for roughly a third of the world economy, is not the sole contributor to global economic malaise, but the mounting travails of its three largest economies suggest it is the main one.
The bottom line is that the Continent’s third attempt at recovery since the 2008 crisis is on the verge of fizzling out, threatening a European version of Japan’s “lost decade” that will inevitably also drag growth down in the two Western economies that have fared best of late, the UK and above all the US.The bottom line is that the Continent’s third attempt at recovery since the 2008 crisis is on the verge of fizzling out, threatening a European version of Japan’s “lost decade” that will inevitably also drag growth down in the two Western economies that have fared best of late, the UK and above all the US.
 
Most disquieting, however, were the manifest tensions between the European Central Bank and Germany, the bloc’s dominant power, played out in the relationship between Mario Draghi, the ECB president, and Jens Weidmann, head of the historically fiercely independent Bundesbank, and a senior member of the ECB’s council. Right now, by all accounts, Mr Draghi and Mr Weidmann are at the central bankerly equivalent of daggers’ drawn.Most disquieting, however, were the manifest tensions between the European Central Bank and Germany, the bloc’s dominant power, played out in the relationship between Mario Draghi, the ECB president, and Jens Weidmann, head of the historically fiercely independent Bundesbank, and a senior member of the ECB’s council. Right now, by all accounts, Mr Draghi and Mr Weidmann are at the central bankerly equivalent of daggers’ drawn.
According to Germany’s Focus magazine, Mr Draghi now finds it “almost impossible” to work with Mr Weidmann, with whom he no longer consults about his policy plans. “No to everything,” is how Focus describes Mr Draghi’s characterisation of his German colleague. Apart from two regular ECB council meetings, it says, there has been no direct contact between the two men since July.According to Germany’s Focus magazine, Mr Draghi now finds it “almost impossible” to work with Mr Weidmann, with whom he no longer consults about his policy plans. “No to everything,” is how Focus describes Mr Draghi’s characterisation of his German colleague. Apart from two regular ECB council meetings, it says, there has been no direct contact between the two men since July.
The background for the tensions is no secret. Germany opposes Mr Draghi’s plan for an ECB equivalent of “quantitative easing” – massive further purchases of securities, along the lines of the Federal Reserve and Bank of England schemes that have indisputably bolstered recovery in their two countries.The background for the tensions is no secret. Germany opposes Mr Draghi’s plan for an ECB equivalent of “quantitative easing” – massive further purchases of securities, along the lines of the Federal Reserve and Bank of England schemes that have indisputably bolstered recovery in their two countries.
You could argue that the more fragmented underlying structure of the eurozone means a European QE would have lesser impact. The Germans further maintain that, since their country is the biggest contributor to the ECB, such a move would only increase its exposure – in other words that it would be more likely than ever to end up paying for the debts of the zone’s profligate (mainly southern) members.You could argue that the more fragmented underlying structure of the eurozone means a European QE would have lesser impact. The Germans further maintain that, since their country is the biggest contributor to the ECB, such a move would only increase its exposure – in other words that it would be more likely than ever to end up paying for the debts of the zone’s profligate (mainly southern) members.
Up to a point, this position is defensible. Rightly Germany, and for that matter Mr Draghi, insist that countries such as Italy and Spain (and increasingly even France, traditionally Germany’s partner in spearheading moves towards greater European unification) will never get their houses in order without sweeping reforms to loosen labour markets and scale back some benefits. “Austerity”, insist the Germans, is the best way of forcing this to happen.Up to a point, this position is defensible. Rightly Germany, and for that matter Mr Draghi, insist that countries such as Italy and Spain (and increasingly even France, traditionally Germany’s partner in spearheading moves towards greater European unification) will never get their houses in order without sweeping reforms to loosen labour markets and scale back some benefits. “Austerity”, insist the Germans, is the best way of forcing this to happen.
But the top priority for this struggling trio – and also the best way of making the changes palatable to their own citizens – is to get their economies moving again. As noted, there’s no guarantee QE will achieve this. But it’s worth a try, if only Germany would permit it, and provide some quid pro quo of its own. The country has after all room to act, given its relatively strong growth, huge foreign surplus and shrinking budget deficit. But, to judge by the noises emanating from Berlin, no way.But the top priority for this struggling trio – and also the best way of making the changes palatable to their own citizens – is to get their economies moving again. As noted, there’s no guarantee QE will achieve this. But it’s worth a try, if only Germany would permit it, and provide some quid pro quo of its own. The country has after all room to act, given its relatively strong growth, huge foreign surplus and shrinking budget deficit. But, to judge by the noises emanating from Berlin, no way.
The reasons, of course, are no secret. First, there’s Germany’s famous aversion to inflation and inflationary policies, even though inflation is the very last of the eurozone’s worries right now. Second, Chancellor Angela Merkel is determined to maintain her pledge to balance the country’s budget (even Gordon Brown in his pomp as Chancellor pales as a champion of “prudence” beside Mrs Merkel).The reasons, of course, are no secret. First, there’s Germany’s famous aversion to inflation and inflationary policies, even though inflation is the very last of the eurozone’s worries right now. Second, Chancellor Angela Merkel is determined to maintain her pledge to balance the country’s budget (even Gordon Brown in his pomp as Chancellor pales as a champion of “prudence” beside Mrs Merkel).
Finally, she must reckon with the new Alternative for Germany party, which is making significant inroads into the conservative vote commanded by Mrs Merkel’s CDU, thanks above all to its demand that Germany quit the “failed currency” that is the euro. Too accommodating a line towards eurozone stragglers would probably be a further boost for AfD among a citizenry that still mourns the German mark, symbol of its post-war recovery and rediscovered industrial might.Finally, she must reckon with the new Alternative for Germany party, which is making significant inroads into the conservative vote commanded by Mrs Merkel’s CDU, thanks above all to its demand that Germany quit the “failed currency” that is the euro. Too accommodating a line towards eurozone stragglers would probably be a further boost for AfD among a citizenry that still mourns the German mark, symbol of its post-war recovery and rediscovered industrial might.
But a moment of truth has surely arrived. The country is proud to the point of smugness over its export prowess, which has made it Exportweltmeister, overtaking China as the country with the largest trade surplus. However, the model on which Germany has prospered, of growth founded on exports, is tottering.But a moment of truth has surely arrived. The country is proud to the point of smugness over its export prowess, which has made it Exportweltmeister, overtaking China as the country with the largest trade surplus. However, the model on which Germany has prospered, of growth founded on exports, is tottering.
Nothing alarmed markets more than the 5.8 per cent drop in German exports in August, and a simultaneous fall in a key business confidence index. Now Berlin has cut its growth forecast for 2014 to just 1.2 per cent, from 1.8 per cent. Next year, it expects expansion of 1.3, rather than 2 per cent. “External factors”, says the Economics Ministry, are responsible: not just the weakness of its European partners, but of Russia and even China.Nothing alarmed markets more than the 5.8 per cent drop in German exports in August, and a simultaneous fall in a key business confidence index. Now Berlin has cut its growth forecast for 2014 to just 1.2 per cent, from 1.8 per cent. Next year, it expects expansion of 1.3, rather than 2 per cent. “External factors”, says the Economics Ministry, are responsible: not just the weakness of its European partners, but of Russia and even China.
One thing that is not to blame, however, is German membership of the euro. The common currency hugely benefits Germany; a study last year reckoned that if the euro suddenly vanished, a German mark restored to the parity at which it entered the euro in 1999, would be undervalued by more than 20 per cent. Small wonder who’s the export world champion.One thing that is not to blame, however, is German membership of the euro. The common currency hugely benefits Germany; a study last year reckoned that if the euro suddenly vanished, a German mark restored to the parity at which it entered the euro in 1999, would be undervalued by more than 20 per cent. Small wonder who’s the export world champion.
That was why, despite the vitriol heaped by its press on lazy and debt-ridden Greece, Berlin back in 2011 fiercely resisted the notion of a Greek departure from the euro. The entire system almost certainly would have unravelled; Germany would be saddled with a far more expensive currency, threatening its exports amid a global monetary earthquake.That was why, despite the vitriol heaped by its press on lazy and debt-ridden Greece, Berlin back in 2011 fiercely resisted the notion of a Greek departure from the euro. The entire system almost certainly would have unravelled; Germany would be saddled with a far more expensive currency, threatening its exports amid a global monetary earthquake.
Nothing at home need change, declared Sigmar Gabriel, the Economics minister, after the release of the scaled-down growth forecasts. But it must. Postpone the balanced budget: there’s no alternative to a boost in German domestic public spending and investment – a step towards the integrated eurozone fiscal policy without which the euro’s longer term existence may be untenable. It’s also what is called enlightened self-interest.Nothing at home need change, declared Sigmar Gabriel, the Economics minister, after the release of the scaled-down growth forecasts. But it must. Postpone the balanced budget: there’s no alternative to a boost in German domestic public spending and investment – a step towards the integrated eurozone fiscal policy without which the euro’s longer term existence may be untenable. It’s also what is called enlightened self-interest.