ANGELA Merkel has no clue about economics. Her silly decision to slap various restrictions on short-sellers, even though shooting the messenger in this way never works, triggered pandemonium in the markets. It even led to capital flight to Switzerland, according to BNP Paribas. Merkel is panicking, trying to prevent her government from imploding and doing what continental politicians always do in such cases: blame Anglo-Saxon speculators for what is in reality the self-inflicted woes of profligate nations such as Greece. The truth is that the whole single currency experiment has failed; Germany spent years allowing weaker members to free ride on its credibility and to cash in on undeservedly low interest rates, fuelling property bubbles in Spain and an irresponsibly generous welfare state in Greece; that game has now ended in tears, with German taxpayers being asked to foot the bill. They are in no mood to do so, hence Merkel’s desperation.
As a fascinating analysis by Charles Dumas, economist at Lombard Street Research, points out, German industry’s much vaunted “competitiveness” is something of a myth. Its growth has been pathetic since the fourth quarter of 2001, the end of the last recession. Italian output has not increased at all (it is down 0.3 per cent, an absolutely horrid performance); Portugal is up by about 2.5 per cent and Germany is up by just 3.6 per cent per cent. Even Japan has done better, let alone France and the UK (both are up by roughly 10 per cent). America and Spain have grown substantially more.
One key reason, as Dumas points out, is that German industry is not competitive in the sense of being able to generate strong annual productivity gains, boosting value added per worker thanks to better management, technology and capital. It has underperformed the UK and the US on that measure. Instead, its competitiveness has been achieved thanks to a decade of keeping labour costs (and hence incomes) from growing, curtailing unit costs and successfully undercutting Eurozone rivals. The result has been strong German exports growth, as the fixed exchange rates within the euro allowed German goods to become increasingly competitive, while complacent producers in Club Med nations suffered, their ever-higher wages increasingly pricing them out. The effect was akin to a devaluation in Germany, while the Club Med exchange rates became structurally overvalued.
Not that Italians or Greeks noticed: they continued to increase their consumption, sucking in imports from Germany, while failing to boost output enough to pay for it. The mechanism was reminiscent of the relationship between China and the US. Italy’s economy shrunk over the cycle but consumer spending rose slightly, by 3.5 per cent after adjusting for inflation, which means that ordinary people feel a little bit better off (it also means that private and public debt levels are up and now totally out of control). Germans, by contrast, have suffered a major squeeze: real consumption is up a trivial 0.5 per cent since late 2001 – in other words, Germans are barely spending any more today than they were 8-9 years ago. They are not better off; their house prices haven’t surged; but the country’s finances are in a much better state than Italy’s or Greece’s.
Merkel’s short-sighted crackdown will do nothing to save Greece – it merely moves us one step closer to the Eurozone’s probably inevitable break-up.