Wednesday, 18 July 2018

This lady's not for turning either…

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Germans have experience in reconciling economic divergence, argues SwissInvest strategist Anthony Peters

Anthony Peters, SwissInvest Strategist

WITH FATHER’S DAY bearing down on us, I am reminded of one of the best definitions of father I have seen: a banker, provided by God. Chancellor Angela Merkel seems to have found herself stuck in much the same role vis-a-vis the rest of the eurozone, something for which I have a huge amount of sympathy.

For months now, she has been under constant pressure from her so-called European partners to back off, loosen the purse strings and sort out everybody else’s fiscal problems on the back of her taxpayers. So far she has stoutly resisted the pressure and, although we read at every corner that she is about to cave in, so far she has done nothing of the sort.

Those who remember the reunification of Germany – on October 3 1990, almost a year after the Berlin Wall came down – will understand where she is coming from. After all, the first of Europe’s major post-war currency unions was created with the merging of the Deutsche Mark and the Ostmark.

Informally, on the streets the exchange rate had been something in the region of 3:1 or 4:1, but the East had always insisted on swapping at parity. We all know the story of how Chancellor Helmut Kohl insisted on uniting the two Germanies at the ridiculous fantasy exchange rate of 1:1 and in doing so how he had condemned the utterly uncompetitive East German industrial base to the scrapheap.

The result was that unemployment soared and consumer demand went off the chart. Even the global market price of bananas shot up as “Ossies” chased after the fruit that had been a luxury item to them for so long. Inflation raced ahead and the Bundesbank reacted in the only way it could, namely by tightening monetary policy until the pips squeaked. Who of that generation can’t remember the Bund 9% 10/2000 and the 9% 1/2001 10-year benchmarks at the time?

IF THE POLITICIANS were going to toss the credibility of the Deutsche Mark out of the window, then the Buba was certainly not going to go quietly and would do whatever was needed to haul it back in again. And so it did. The economic pain that followed is not to be underestimated, as pretty much the whole of corporate eastern Germany went to the great scrapheap in the sky with one big bang.

The economic situation in the former GDR – or what was now to be known as the “new federal states” – was dire, as the outdated and outmoded production facilities were trying to compete with the height of Western technology on a playing field levelled by a unified currency. They all lost, bar a few. The Greece scenario has therefore effectively already been played out within Germany and within living memory.

It took the best part of 20 years and all the wit and resources of the old West Germany to bring about proper integration

As the economy struggled to find equilibrium and as unemployment soared in the east, the politicians came banging on the door of the Bundesbank, begging for monetary assistance in digging themselves out of the hole that the 1:1 exchange had created.

In succession, Buba Presidents Karl Otto Poehl, Helmut Schlesinger and Hans Tietmeyer told them to take a running jump. The politicians had created the economic mess and, as far as the Buba was concerned, economic policy was what needed to be addressed and that was for the Ministry of Economics to take care of and not the central bank.

It steadfastly refused to play ball. There was any amount of kicking and screaming, but eventually the monetary authority prevailed. The economy was reformed – albeit at great expense and significant pain – and the Mark was protected. One should not forget that the Growth and Stability Pact was put in place as a sop to the Buba as it feared and foresaw everything that we are now dealing with – or not, as the case may be.

MUTTI MERKEL COMES from the former East Germany and is no doubt well aware of what it takes to bring two divergent economies together. Even with full political and fiscal union and a people of one nation, culturally and historically, it took the best part of 20 years and all the wit and resources of the old West Germany to bring about proper integration.

Now she is surrounded by fly-by-night politicians who expect the ECB to intervene and – overnight – make everything good. Monetary policy is vanity, fiscal policy is sanity. Merkel knows that you can’t cure cancer with pain-killers any more than you can sort out the European fiscal mess with endless monetary accommodation and injections of cheap cash.

Let’s face it, if it took all that West Germany could muster in order to bring order into the East, which was a third of its size, then how would you feel if you were expected to put up the cash to deal with most of the rest of Europe?

Everyone keeps going on about how Germany wishes to slow stimulus because of some ingrained fear of inflation, which is supposed to date back to the 1930s. What rubbish. Germany and the Germans have forgotten that. However, they do have first-hand and living experience of what it takes to reform an economy and what the costs are of establishing and maintaining a currency union between two essentially incompatible economies.

Whoever thinks that a bit of pleading, cajoling or even bullying by her eurozone partners is going to turn this lady has another thing coming. If Margaret Thatcher was the “Iron Lady”, then Frau Doktor Angela Merkel is cast in Krupp’s finest steel, guaranteed not to rust.

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