Germany doesn’t want the crisis to end yet, suggests SIG’s Watson
Rupert Watson, head of asset allocation at Skandia Investment Group, says that continued crisis in Europe may yet help Germany achieve new ground rules for spending by eurozone members.
While politicians, economists and journalists frequently urge Germany to come up with measures that will bring the debt crisis to an end, it is not clear that it wants the crisis to end just yet. It is only the crisis that is forcing the governance changes and structural reforms that Germany needs.
The eurozone as a region is not uncompetitive, with it roughly in current account balance helped by world leading products from the industrial giants in the north and the fashion and tourism sectors in the south. Its budget deficit is half that of the US, UK and Japan, while its total debt to GDP ratio is likely to peak at a lower rate than in the US, UK and Japan. The problem, of course, is that there is no central government that can control the overall budget and the enforcement mechanism (the Growth and Stability Pact) isn’t worth the paper it was written on. The governance reforms will require Treaty changes which could take up to 10 years.
In addition to the lack of any real enforcement mechanism, many of the eurozone economies have been badly managed over the last decade. Rather than use the security of the eurozone to make their economies more competitive and efficient, they have used it to make them less so. The high unemployment rates across the eurozone are not just the result of weak economies; they are also the result of inefficient labour markets: the Spanish unemployment rate has never been below 8%, which of course is above the current UK rate.
Both of these issues need to be resolved but resolving both of them will take time and without the pressure of a crisis, little progress would be made on either. Indeed it is noticeable that each time tensions abate, less progress is made on governance reform while countries backtrack from domestic structural reforms.
Without substantial progress on both of these issues, Germany could find itself paying for the mistakes of other countries for evermore. The sort of reforms that are the inevitable result of increased integration (such as common Eurobonds) would be very hard to undo and would push the region past the point of no return. Germany needs to ensure that the changes made now will survive the test of time as changes thereafter would be almost impossible.
As a result, Germany’s reluctance to consider things that many think are both necessary and inevitable is understandable. It should be no surprise that Germany wants the rules that govern the use of its ‘credit card’ to be changed to give it more control. When asked whether the French revolution was good for the French, Mao is reported to have replied that it was too early to tell. It is likewise too early to judge Angela Merkel’s performance. However, I suspect that history will treat her kindly and will judge that her determination to regain control of Germany’s credit card compares favourably with Helmut Kohl’s decision to give it away.