Never one to mince his words, veteran investor George Soros called on Germany to change its policies or withdraw from the currency union for the sake of the rest of Europe according to a Telegraph article last week.
In a hard hitting interview with the German weekly Die Zeit, Mr. Soros is quoted as saying, “Unless Germany changes policy, its withdrawal from the currency union would be helpful for the rest of Europe. At the moment Germany is pushing its neighbors into deflation: this threatens a long phase of stagnation, leading to nationalism, social unrest, and xenophobia. It endangers democracy.”
His point is that horrified by the debts built up in the southern “Club Med Economies. Germany first forced wage cuts and debt reduction on those countries and is now planning to embark on Ã¢â€šÂ¬80bn of its own belt-tightening from next year. When other countries in Europe are at risk themselves to recession by the terms of the debt reduction being forced upon them for Germany to reduce its own growth prospects removes the only prop those economies had. A strongly growing Germany provides a market other European countries desperately need to sell into. Professor Krugman is in agreement saying there is a risk of a domino effect with southern states failing if Germany does not embark on robust growth.
One analyst said that Mr. Axel Weber, head of the Bundesbank and possible future head of the ECB faces an impossible task. “Either they do more QE (quantitative easing), in which case it will set off inflation in Germany and cause Germany to leave EMU: or they don’t do more QE, in which case it will lead to deflation in Southern Europe and force them out of EMU,” By extension many are already predicting the collapse of the single currency.
Interestingly, George Soros went on to say what we have said in these columns before and that is the crisis in the southern states is as much a banking problem as a sovereign debt problem. Having just been saved by ECB loans to southern states from taking massive losses on bonds, banks are not about to go back in and buy bonds from those countries again. They now view this as the European taxpayers problem and are focusing on nursing their damaged balance sheets back to health. This explains their resistance to Spain’s demands earlier this month for more visibility into banks exposures. The major Spanish banks appear in better condition than many French and German ones.
Unfortunately Germany is trapped between its history and the current reality. For reasons that some say go back to the hyper inflation of the Wiemar Republic, Germany’s focus on low inflation and balanced budgets is deeply ingrained in the political and business psyche. They need to maintain a relaxed monetary policy and allow a degree of inflation but they won’t. They will insist on wage cuts and debt reduction to balance the books, risking pushing the rest of Europe into deflation 1930’s style.