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Jean-Claude Trichet, head of the European Central Bank, last week cited this Wirtschaftswunder [['economic miracle': normxxx]] as evidence of durable recovery in Europe. It is no such thing. The OECD's leading indicators for June rolled over in Italy and France, as well as China and India.
The IMF expects Spain's economy to contract by 0.4% this year. It has lowered its forecast for the eurozone from 1.5% to 1.3% in 2011. "Downside risks to the recovery have risen sharply," it said.
The ECB is barely on speaking terms with the IMF— the "Inflation Maximizing Fund" as it was dubbed in a Bundesbank memo. "The IMF has not caught up to the reality in Europe," said ECB über-hawk Jürgen Stark on Friday. Beware, this is the same insular ECB that raised rates in July 2008 on the eve of the Lehman crisis when half of Europe was already in recession, mistaking the deflationary oil spike for an incipient 1970s inflation spiral. Can one ever trust their judgment again?
Yes, Germany is on the cusp of EMU "outperformance", but that is more curse than cure for Club Med laggards. Germany is benefiting from a currency that is as misaligned as China's yuan, though this mercantilist advantage is disguised within Europe's monetary union. Crudely, Germany is doing to Spain, Italy, and increasingly France, what China has been doing to the rest of the world— but more so— by holding down its exchange rate.
In Europe's case, this captive arrangement is written into EU Treaty law. This is not a German conspiracy. The German people never desired the euro. The countries that are now caught in the EMU trap were the ones that foisted the project onto Berlin.
Be that as it may, we now have an untenable socio-strategic situation in which German unemployment has been falling for 12 months in a row to 7.5%, while Spain's unemployment has vaulted upwards to just under 20%. This immense gap— with everything it implies about the state of a society— has surfaced in little over two years. The delayed effect of German wage discipline over the years has at last hit EMU with volcanic force.
The same time-lag is underway in Spain with opposite effect as the property slump grinds deeper. Wishful thinking lingers, but the harsh truth is that the Spain's housing crash has barely begun. The Madrid consultancy RR de Acuna sees an implicit overhang of 1.6m housing units. It will take six years to clear. By cruel contrast, Hans Werner Sinn from Germany's IFO Institute said his country is on the cusp of a property boom. "Germany is the winner of this crisis," he boasted.
This contrast will become even crueller because Germany is also benefiting from a devalued euro against the dollar, yuan, yen, rouble, and even sterling (lately). The euro has fallen by 20% or so. This has rescued Germany's 80,000 strong solar industry— for example— from annihilation by Chinese competitors. But the EMU effects of a weak euro are asymmetric.
Germany's export machine is highly-geared to Asia and America. Spain has low gearing. With a closed economy, it would require a euro at 80 cents to enjoy much relief. We are seeing a mirror-image of 2008 when ECB hawks drove the euro to $1.60 against the dollar. That episode led to a sharper fall of industrial output in Germany than in Spain or France.
Besides, Germany makes products for the rich, a profitable niche in a world of asset bail-outs. Statistically [[and relatively: normxxx]], the rich are better off now than two years ago. Mercedes enjoyed its best month ever in June. Sales in the US jumped 25% from a month earlier. The S-Class model was up 106%.
Meanwhile, a million people have simply dropped out of the US labour force in the last two months alone. Labour arbitrage under globalisation has not been good for Western workers. The Gini Coefficient measuring income inequality is at or near all-time high in almost every Western country. Democracy will correct this as the political pendulum swings, but for now Germany is the ultimate Gini export play.
A vibrant Germany must, in the end, lift Spain and Italy as German firms source contracts their way, but process will be painfully slow. The risk is that the North-South gap widens further before the stimulus trickles down. Much political mayhem can occur in the meantime.
The ECB's German members are not inclined to do any favours for Club Med. Dr Stark swept aside the IMF's call for "scaling up" ECB bond purchases after buying €59bn (£49bn) of Greek and Iberian bonds so far. "If the situation improves further there is not a reason any more to continue with this programme," he said. If so, he dooms Spain to deeper depression.
The IMF is frankly in a muddle as well on the big picture. Its World Economic Outlook said the surpluses of Germany, China, and Japan, will rise from $586bn (£377bn) last year to $758bn by 2015, perpetuating the imbalances that led to the credit crisis. Brian Reading from Lombard Street Research said that if this occurs, it assures a global slump because the deficit states of the Anglosphere and Club Med cannot keep the game going by adding further debt. They must retrench, and therefore global demand must implode. The IMF evades the conclusions of its own logic.
As for Berlin, it eyes the world through a provincial lens, as a pseudo-morality tale with good imbalances (Germany's surplus) and bad imbalances (the US/ Club Med deficits). This childish view did not matter as long as market forces could impose a currency revaluation on Germany every few years to keep relations with the rest of Europe in kilter. It matters a great deal now. EMU has shut the escape valve.
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Normxxx
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