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Monday, 18 December 2017

Unwilling saviour bridles at the yoke

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Lieber ein Ende mit Schmerzen als Schmerzen ohne Ende, the German proverb goes: Rather a painful ending than endless pain. It would be hard to begrudge any Germans who felt that way about the state of the eurozone, an apparent blob of economic torpor that appears to offer little more than an apparently unending nightmare: a comedy and a tragedy, rolled into one.

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For many Germans the pain is keenly felt. This is a country that carries the weight of history – much of it painful and still willingly fresh in the memory – on its shoulders. For decades, Germans – from politicians in Bonn and Berlin to autoworkers in Munich and Wolfsburg – abjured the role of Europe’s “leader”, a role gladly seized by Paris. 

Yet since the onset first of the financial crisis, then of the eurozone’s ongoing debt crisis, Berlin has been forced to adopt the role of Europe’s financial, political and legislative conductor, a role that requires a judicious mix of the carrot and the stick.

Reluctantly at first, more recently with a sense of grim pragmatism, German institutional bodies, from the Bundesbank to the Bundesverfassungsgericht, the federal constitutional court, have led the charge on various austerity-led bailouts and bail-ins.

Too little praise, too much resentment

Not all were perfectly pitched. Cyprus’s bail-in will go down in history books as a particular stinker. But all were designed to spread the pain without sinking any particular economy, or the eurozone as a whole. And all, ultimately, were well intended and with a single aim in mind: to place all of Europe’s economies, from the lions to the rabbits, back on their feet.

Yet Germany’s efforts have often earned too little praise and too much resentment from their European allies. In return for rescuing them from the brink of oblivion, Berlin’s politicians have been the target of a backlash.

The eurozone’s intermittently rabid reaction to the pressing need to pare back debt in Europe before pressing ahead with macroeconomic expansion programmes is galling to the Teutonic eye in other ways.

Germany may be a relative economic oasis amid the storm: its economy is set to expand by 0.3% this year and 1.5% in 2014, according to Deutsche Bank, while the economies of Italy and Spain continue to contract.

France was also likely to see its economy shrink by 0.6% this year, Deutsche said. IMF chief Christine Lagarde recently spoke germanely about the perils of a three-speed global economic recovery; in the same vein, there must be fears of the emergence of a two-speed eurozone economy: on the one hand Germany; on the other, everyone else.

Yet Germany is not in this situation as a result of mere happenstance, or plain luck: everything, from a meteor strike to a perfectly delivered pas de deux, is the result of a series of cumulative or creative forces, cosmic or otherwise.

Deferred pleasure

In this case, Germany’s current commercial strength stems from a sustained period of weakness in the early 2000s that led many to question whether the country’s much-vaunted export-led economic model was dead or merely resting.

Labour market reforms imposed between 2003 and 2005 were painful, but Germans, for the most part, accepted deferred pleasure, and while salaries rose steadily in Southern Europe, they stagnated or remained static in Hamburg and Hesse.

Indeed, it’s easy to forget how massively Germany has changed over the past decade. Ten years ago the country was running deficits. Outsourcing was hollowing out the country’s Mittelstand, the army of smaller enterprises that keep the German engine ticking over.

Yet since then, said Christian Schulz, senior economist at Berenberg Bank, that trend has been “totally reversed. Germany is running big capital account surpluses. Since 2006, it has created 3m jobs. The government is trimming its debt pile every year, and Germany’s economy as a whole is a lot more sustainable than it was”.

Ready for the chaos

Indeed, it was this set of reforms that prepared Germany for the chaos of recent years. The economy contracted violently in 2009 before rebounding with vigour, thanks to rising demand for competitively priced German-manufactured goods from the emerging economies of China, India and Brazil.

That seemingly insuperable strength made a slight contraction at the end of last year all the more surprising. Few expected Germany’s economy to shrink by 0.5% year on year in the final three months of 2012, and all eyes are now on economic data from the first quarter of this year, to be issued by the finance ministry on May 15.

Even Germany’s manufacturing sector struggled to keep its head above water in 2012, largely because domestic corporates “cut capital spending as a result of rising external risks”, said Greg Fuzesi, a eurozone-focused economist at JP Morgan Chase. Those dangers were not hard to spot: a regressing eurozone, economic uncertainty in China; and a US fiscal cliff that refused to stop looming.

Confidence to pick up

Yet analysts and economists expect the fourth-quarter dip to prove a one-off. Data from the Ifo Business Climate, a widely observed indicator of economic growth, as well as the Purchasing Managers’ Index, signal a “significant upswing” since the turn of the year, Deutsche Bank said in an April 2 report.

Confidence indicators in the first quarter “picked up considerably” versus the same period in 2012, the bank added, thanks largely to an improved economic outlook in the US and Asia.

Most economists now tip Germany’s economy to grow between 0.2% and 0.6% in the first quarter, while full-year gross domestic product, said Barclays’ chief Germany economist, Thomas Harjes, is likely to come in around 1% or slightly lower.

“It would be a surprise if we now saw a prolonged period of weakness,” Harjes said. Berenberg’s Schulz said his bank predicted four successive quarters of expansion this year, with “growing becoming stronger as the year progresses”.

Attention will now likely shift back to Germany and the eurozone, and the increasingly fractious relationship between the two.

There are splashes of light on Europe’s dark canvas, if one looks hard enough. Harjes said that despite the region’s “very subdued” economic outlook, a few encouraging signs could be spotted here and there. These include declining labour costs in some Southern states, narrowing current account deficits, and rising exports in Spain as well as Portugal.

Eurozone must find its mojo

Ten-year bond yields have fallen markedly, while a few economies once left for dead, notably Ireland, have returned to marked, if not yet robust, growth. But these are still early, and perilously fragile, signs of life. Germany still needs the rest of the struggling eurozone, and for reasons that both include, and supersede, the immediate issues of jobs, economics, trade. It’s easy to forget that the eurozone remains Berlin’s most important trading partner, absorbing roughly 43% of all German exports last year.

In short, the eurozone needs to do much more. Germany cannot continue carrying the rest of the continent on its broad shoulders: doing so risks its own economic health and credit rating. And Europe as a whole, said Jacques Cailloux, chief European economist at Nomura, “cannot have a stable, long-term future if only one of its economies is growing at pace”.

Europe needs to find its mojo, and fast. Only then will the struggling eurozone and its exhausted, unwilling leader have the happy ending – freude ohne ende – that everyone wants.

 

 

 

 

 

 

 

 

 

 

 

 

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