Reasons (Not) To Be Cheerful

No stop signs, speed limit
Nobody’s gonna slow me down…I’m on the highway to hell”

When our favourite rock & roller penned the lyrics of AC/DC’s “Highway to hell” it is unlikely he had the travails of the German economy in mind.  After all it is a colossus that has bestrode the continent for half a century, isn’t it?

AEP in the Telegraph points out that this traditional view of the strength of the German economy is misleading.  I made a similar point a bit back.

It is beginning to look, at long last, as though some sort of Brexit is going to take place at some point, and that it is likely to have negative effects for the Germans as much as for the British, with the difference that the latter are much better placed to bounce pack quickly having a more modern flexible and (after Brexit) open economy.

Combine this with what is looking more and more like an incoming global economic downturn which will add pressure to those struggling southern European economies that have never really emerged from the 2008 crash, and an ECB which exhausted its monetary firepower under Draghi (an extremely capable central banker) and has now taken delivery of a new president, the perpetually suntanned french lady, Mrs Lagarde (evidently still capable of landing these top jobs despite a 400 million euro fraud conviction and a track record of grim failure) and the stresses on the Euro really will start to pile up.

As is well understood the German economic wonder in recent years at least has depended on two chief factors.  The first of these is a deliberate policy to hold down wages (the Harz IV reforms).  The second has been a massive export drive of machine tools and cars.  The China machine tool boom is over and the cars were sold mostly to the British or to southern Europeans who bought them using money lent to them by the Germans via the Target 2 Euro area clearing system.

In this way a liability has been built up over the years of around 1 trillion euros which the S. Europeans are obviously never going to pay back.  And equally obviously at some point the Germans are going to want their money back.

The point at which these imbalances will explode is impossible to predict but it is undoubtedly a mightily worrying question.  The Germans have form in taking out their domestic issues on the neighbours.

 

 

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