It's your fault too,Fritz!

Greece is right down the Sewanee. Cyprus has just joined its fellow Hellenes. Slovenia is almost certainly next. Portugal is not far off. Italy doesn’t even have a government and should change its National Anthem to ‘Bring on the clowns’. Spain borders on civil disturbance, and the French economy needs a spell in intensive care.

 

The German taxpayer is anguished at the mess of the Eurozone domino, seeing endless raids on German money to keep the EMS on life support when a visit to Dignitas might be the kinder option.

 

And it’s all the fault of the improvident, feckless, tax dodging Club Med.

 

Well, up to a point, Lord Copper.

 

The basic cause of the crash has been a conflict between supply-side economics (Germany) and demand-side (Club Med), or, to put it more simply, borrowing German money to buy German goods until the bailiffs moved in.

 

The Germans are not like us. They export furiously. Exports grew by about 115% in 12 years. They make things. They have little truck with nancy-boy stuff like financial services. Their bankers were innocents who would never believe that Wall Street would sell them worthless sub-prime crap, so they were stitched-up.

 

Unlike the British, they have never fallen into the trap of regarding housing as a store of wealth, so they have never had a ruinous housing bubble. Rented housing is about 60% of the stock (in Berlin it is 90%). In Britain, 70% is owner-occupied. Over the past 10years, house prices have only risen by 2 or 3%, whereas they have nearly doubled here. Ironically, Germans are ‘poor’ because property value is a  major item in computing individual wealth.

 

Their success is based on the Euro for the simple reason it is cheap money for them but for the Club Med it is not. Had there been no EMS, the DM would have risen in value to reflect Germany’s economic success. The consequence is a disastrous gap between Germany the producer and Club Med the consumer.

 

Germans buy little from the Club Med in relative terms, and this is yet another factor that leads to distorted trade balances. German domestic consumption is weak. Part of Germany’s economic strength is that following reunification it clamped down on wages, so production costs are very competitive, but the penalty has been that living standards have not risen in 20 years. We all had a ball during the boom years and racked up a huge amount of domestic debt. The Germans didn’t; they don’t do debt - even credit cards are looked upon with some scorn.

 

After a dip at the end of last year when it looked as if the German economy was in trouble, it has started to pick up again, and it is running a budget surplus. Unemployment is amongst the lowest in Europe and 42 million Germans are in work, the highest ever. The imminent closure of Opel seems a minor and temporary glitch.

 

So how to get out of the present Catch 22 situation which demands austerity as the treatment  in the failing economies but which may end up killing the patient?

 

Germany needs a very large increase in domestic consumption; to loosen up, to enjoy themselves more, to spend more. They need to be a bit more like us.

 

And we need to be a bit more like them!