John Llewellyn of Llewellyn Consulting in London sent through a very interesting response to our recent summary of ATG|Chartwell’s Breakfast Discussion on the upcoming German Elections with Sir Michael Arthur and Gisela Stuart MP. With his permission, I’ve re-printed what he had to say below:
“Thank you for this. In my judgement it is a useful and credible summary of the German position now, and very likely for several years ahead at least. Certainly, it fits with what I heard recently in Berlin.
For my part, I have always (unusually for someone living in the UK!) taken the view that the German political commitment to Europe was sufficiently strong that the euro area was not in imminent danger of collapse. Indeed, in 2011 Peter Westaway and I argued this case strongly in a long, and at the time hotly disputed, report entitled Europe will Work.
That said, I worry that in the long term the perennial tendency of Germany to run large current account surpluses, and hence the counterpart tendency of other economies, including importantly in Europe, to run large deficits, may impose ultimately intolerable strains on the euro.”
To flesh out the last point, he sent through his recent report, co-written with his colleague Russell Jones. You can view it here. I have briefly summarised the key points below:
- Germany has a fundamentally different economic philosophy to the US, UK and much of Southern Europe.
- The former focuses policy on strengthening the supply side and productive base, and sees external surpluses as a sign of economic success. By contrast, the latter is more pre-occupied by maintaining aggregate demand.
- Germany wants all the Eurozone to adopt its economic philosophy. But the trouble is that not every country in a currency union can run a surplus, as a surplus in one country requires (in all practical probability) that at least one other in the union run a deficit.
- The problem of bloated debt in the Eurozone periphery can therefore only be solved by a joint effort by surplus and deficit countries to address these imbalances.
- But with Germany’s attitude being as it is, this is unlikely happen. This is the euro’s Achilles’ Heel.