Steen's Chronicle: Germany must provide a vision for the rudderless ship of Europe

Germany must provide a vision for the rudderless ship of Europe

Steen Jakobsen, Chief Economist & CIO, Saxo Bank

 

Web version: http://www.tradingfloor.com/posts/germany-must-provide-vision-rudderless-ship-europe-1430270853

It may be simplistic to claim that the German elections on September 22 will determine the future of Europe and the euro, but in many ways both are at the end of a very long road. What will Germany's new coalition look like? Will we see a renewed mandate for the alliance between Angela Merkel's Christian Democrats and the Free Democratic Party, or a return to a grand coalition between Merkel's bloc and the Socialists?

Either way, Germany must step up or down to a flurry of vital decisions in the fourth quarter. Both Greece and Cyprus must be addressed, while Portugal will likely need additional financing. We can add to this a business cycle that will reveal further weakness when the apparent "green shoots" seen this summer prove to be a false recovery.

Unavoidable European truth
Europe faces an unavoidable truth. Low growth, rising unemployment and an ageing population can't be escaped easily and certainly not with frozen credit markets, a lack of productivity improvements or structural reforms. Nowhere are Europe's hidden troubles clearer than in Germany, where one of the major focal points in this election has been the 7 million "working poor" – workers who can't cover more than their basic needs.

Germany is the richest country in Europe, yet faces huge social and economic challenges, even if its numbers appear robust in aggregate. The realisation of Germany's predicament is the main change to the nature of this crisis. From 2009 to 2012, it was mostly a Club Med crisis. But since the end of 2012, it has stormed through historically strong northern countries, such as Germany, the Netherlands and Finland. Germany has outperformed, but the ranks of the working poor are a sign of a sluggish economy.

Pressure on euro makes adjustment process tough
The Eurozone is heading towards a record current account surplus since the launch of the euro in early 2002. Sure, German exports have been strong, but the main driver here has been the collapse in demand at the periphery. As long as this trend continues, it puts upward pressure on the euro, making Europe's adjustment process tougher in a world of mostly weaker currencies.

Strong euro hurts periphery
Indeed, looking at the trade-weighted euro, we see that the currency remains strong thanks to the current account trend shown in the chart above and thanks to European Central Bank President Mario Draghi's ability to backstop EU peripheral debt and stave off the "tail risk" of an anticipated EU break-up.

Germany and Europe need to figure out a more effective way to restructure Europe going forward and to get credit flowing again, not to mention reducing the overall debt load. The strong euro is doing the periphery no good as competitiveness can't return except through the brutality of extremely high unemployment - the young can't find work while the shrunken cadres of the already employed defend their wage levels against reform.

This should give further impetus to Germany's need for change. Yet Germany is a reluctant leader. One of Merkel's predecessors, Helmut Kohl, was once proactive in Europe, shedding tears as he held forth on the "House of Europe". But the rot set in when Kohl bent to France's demand to delay the implementation of the Maastricht disciplinary stability and growth pact. Thomas Mann, the German novelist, said after the Second World War that "we want a European Germany, not a German Europe". Now, thanks to Kohl giving in and Merkel's lack of interest in the European vision, we have a Europe that never established a proper foundation.

A question of euros and cents
Europe needs a stronger commitment from Germany, but has a leader that does not want to bear the responsibility for making important decisions. Merkel's relationship with Europe is passionless – a question of euros and cents, with her actions increasingly aimed at domestic considerations. Add to this the fact that she quotes philosopher Karl Popper, who promoted the idea of piecemeal social engineering and dictated that change should only be done a little at a time, and a picture emerges of a chancellor who is more comfortable with economic briefings than defining major change to a political and social agenda.

Merkel's favourite statistics tell us more: Europe is 7 percent of the world population, contributes 25 percent of global output and makes up 50 percent of social welfare. It's not just about how the pie is divided, but about growing that pie. The likely new German government under Merkel will not change its course voluntarily. The fundamental situation will make the change on its behalf. Germany is growing old faster than most countries, it has rising social tensions and an export industry that is facing headwinds as success stories like Asia are coming in for a dramatic slowdown.

Rudderless ship
I would not be surprised to see Germany flirt with zero growth next year and this will be the true test. When a country's tailwind turns to a headwind, it's good to have a plan or a vision, otherwise you become a rudderless ship. It's time for Merkel to realise that former chancellor Helmut Schmidt was wrong when he said: "People with a vision should go see a doctor". Germany needs a vision for Europe as well as for Germany. Otherwise, it will leave the country much worse off – even in Merkel's euros and cents.  

On Friday, September 13, we bring together former Czech president Václav Klaus and Nigel Farage, the leader of the UK Independence Party, as well as business leaders and financial analysts to discuss the future of the Eurozone and the single currency. The event,#TradingDebates - The end of the Euro as we know it, will be hosted at Bloomberg's European Headquarters in London.

I invite everyone to participate or follow the debates via Twitter: http://twitter.com/saxomarkets using the hashtag #TradingDebates.

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Economist

 

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