Cazenove’s European Fund manager Chris Rice writes an open letter to Angela Merkel

Sehr geehrte Frau Merkel, Germany is the problem. You are clearly inundated with advice, much of it poor, and you have shown a diplomacy and statesmanship sadly lacking from some of your European partners, as well as from your Anglo-Saxon friends across the Channel and Atlantic.

But, I repeat, Germany is the problem, and on two counts. First, your political elite has misanalysed the causes of the euro crisis, and as a result is prescribing the wrong solution to the very partners who gave Germany the breathing space to restructure its economy after the fall of the Berlin Wall.

Secondly, Germany is using a misty version of the economic and political history of the 1920s and 1930s in order to justify the current policy stance of requesting deflation of your neighbours. In both cases the policy response is doomed to fail and if the course is not altered, the euro will fail, and Germany will be the major losers.

After the East and West of your country were rightly reunited following the collapse of the Soviet Union, an event which brought you into high office, Germany suffered a decade of anaemic economic growth.

Germany experienced a shift downwards in its famed productivity as the Federal Republic provided Western levels of pay to East German workers who brought with them Soviet levels of productivity.

The ostmark conversion at or above 1:1 with the Deutsche Mark was the primary driver of Germany’s lost decade of competitiveness from 1990.

But this was a political project which brought Germany together again without major political upheaval. After ten years of austerity, your famously cohesive society then pushed through a series of reforms aimed at re-establishing German productivity pre-eminence on the Continent, at the very moment the single currency was born.

Over the subsequent ten years from the birth of the euro, German productivity once again far outstripped your neighbours providing Germany with the only significant current account surplus in the eurozone against varying deficits in your trading partners.

But while you were busy deflating your relative unit labour costs, your partners in France, Italy, Spain, and, yes, Greece, were busy providing the demand and the inflation to allow you to do this without any political or social unrest. Where do you think all those Porsche Cayennes have gone?

Now that we face the largest economic and political crisis since 1945, you are preaching to your partners that the only way out of the crisis is for them to deflate their relative unit labour costs down to Germanic levels of efficiency.



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