Much depends on, gulp, German consumer

January 13, 2011

If the euro is going to survive without a Depression, German consumers are going to have to behave in ways that are, well, distinctly un-German.

While attention is focused on the suffering that the euro zone debt debacle is inflicting on the weak and the political anger the costs of bailouts are engendering among the strong, it is important to understand that the belt-tightening won’t just be a Gaelic and Mediterranean phenomenon.

German consumers will (rightly) regard events as likely to increase their taxes while doing precious little for their incomes and job prospects. If they react to this like Americans and spend like there is no tomorrow, well then, perhaps the euro zone can handle the local recessions in the Austerity Provinces. If, on the other hand, Germans behave anything like the way they have in the past, they will save more and only increase spending marginally, if at all.

“Over the four quarters to 2011 Q4 it is hard to see (German consumer spending) growth exceeding 1 percent, and easy to see it falling short, especially if budgetary rigour, rising food and energy prices, and the need for further Club Med subsidy provoke the normal reaction from German consumers,” Charles Dumas of Lombard Street Research in London wrote in a note to clients.

Against the wider backdrop this is not encouraging; U.S. demand will be weak, China is trying to stomp on inflation and the euro zone periphery will very likely be contracting. That really does leave German consumers as the engine of euro zone growth — a role that is, for them, unusual.

To put this in context, since the fourth quarter of 2001 German consumer spending is only up a bit more than 2 percent in real terms, a truly measly expansion. During the same period the household savings rate has risen from about 9 percent to just above 11 percent.

During this time, you will recall, the world experienced a go-go real estate bubble with seemingly free money, much of it German in origin, available to plough into collateralized debt obligations and the like.

If German consumers reacted soberly to the good times, imagine what they will do in coming years when confronted with the risks and costs of either staying in or exiting the euro.

Part of the reasons for German consumer reserve was a policy that constrained wage growth savagely, but again, to look for strong wage growth to emerge at this stage is wishful.

Much has been made of the fact that Germany’s economy grew strongly last year, rising 3.6 percent, the strongest showing since its east and west were reunified. While this is a fine start, Germany did shrink by 4.7 percent the year before and its economy is still 2 percent smaller in real terms than it was at its peak.

While European, including German, officialdom is absolutely opposed to a euro exit, repeatedly characterising it as disastrous and unthinkable, it might not actually be that bad for German consumers, at least after a while.

Dumas of Lombard Street argues that the hit to competitiveness from a newly risen new-deutschemark would be offset by gains in consumers real income and confidence.

“A higher exchange rate would probably cause a healthy redistribution of income from business to labour, ie, consumers — the lack of which is closely connected to undervaluation and excess savings and net export surpluses in Japan and China, as well as Germany.

“Since Germany is unlikely to follow China’s route of real exchange rate appreciation by means of wage inflation, giving some possibility of a shift to consumption from exports, a break-up of EMU may actually be the only hope for achieving an increase of welfare for ordinary Germans.”

Given the current alignment of opinions that is not the most likely outcome, to put it mildly.

What does seem likely is some combination of the following: a recession among the weak in the euro zone exacerbates and is exacerbated by a failure of German demand in the face of uncertainty and limited global demand.

That will raise the rhetoric of euro zone discord and will weaken the euro, causing a problem for the dollarized world, including China. China’s willingness to spend billions to prop up demand for euro zone debt is in no small part because of this.

Europe will remain a strongly deflationary force in the global economy and the biggest risk in the near term as a force to upset the giddiness that is now dominant in global markets.

(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. Email:


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Germany will have to get used to supporting Greece, Ireland and Portugal for sure with maybe Belgium and Spain thrown in for good measure! The first three are showing no signs of growth and their ability to service their debt is going to be called into question in the long run. They will default unless the Germans dig deep once again and there is another bail out fudge. The problem is that a bail out and domestic cut backs do nothing to get the economies going hence the problem will re occur time and again. These countries need the ability to devalue their currencies and make themselves competitive once again. The German tax payer needs to be free of this albatross and to invest in their own future. The Eurocrats will fight this to the bitter end so expect this story to run and run.

Posted by paulos | Report as abusive

In short, your “solution” is that the Germans should become more Anglo-Saxon or the Euro experiment should be terminated.

I am not convinced by the present Anglo-Saxon examples that this would improve the welfare of ordinary Germans, neither in employment, nor in availability of health care, affordability of college education, or inflation control.

Before giving up on the Euro, let us remember the reasons for creating the Euro and in particular why the British government squandered billions to keep the pound sterling pegged to the Deutsche Mark in 1992:
Attenuate the domination of monetary policy by the Bundesbank as the guardian of the most stable currency in a convincing way.
The lesson was that throwing money at a lack of trust problem is not sustainable – in particular your own money.

Meanwhile, Sarkozy has understood that his voters have little nationalistic qualms to adopt the German economic model in some respects. The Irish are still clinging to their low corporate tax level and will still have to learn the hard way that trust and solidarity needs to be earned. No pain, no gain.

By comparison, quatitative easing is just numbing against the learning from the evidence.
When will the Anglo-Saxon poor including the poor Tea-party voters wake-up and follow the Tunesians?

Posted by MartinInFRA | Report as abusive

Here is another tiresome and biased opinion from an obviously neoliberal economist absolutely convinced that transnational currencies systems can’t work. Of course the author makes it sound like sovereign debtors orbit chiefly around Germany and the entirety of the European Model is at stake. Is this overreaching? I think so. The author overlooks a lot of things. But let’s start with America’s sovereign debt, which is 60% of its GDP. With a pitiful 10% manufacturing sector, its import/export ratio cannot possibly ever hope to diminish our sky high trade deficit (that feeds our debt). While on the other hand France and Germany’s collective sovereign debts are around 67% of their GDP, they have sound austerity measures in the works, whereas we do not. Yet what the author neglects to tell you about export driven countries within the Eurozone is that they are experiencing steadily increasing trade surpluses with Germany, be they still pedestrian. The author is correct that Germany’s massive trade surplus wont shrink adequately in relation to its domestic demand, but not because the Eurozone needs that to happen to survive, it’s because–as crazy as this sounds–Germany’s population, which has stabilized in recent years, shall begin to increase slowly. And a growing population fuels domestic demand better than an aging population. And Germany, as in France, has implemented social welfare programs that are beginning to bear fruit to that extent. This brings me to the ultimate goal of the Eurozone, which has just expanded to 17 countries, which is to politically unite. This is not farfetched or ungainly, as the author would surely disagree. Political unification is the ultimate extension of currency union, anyway, especially enleu of certain states’ straddling debts requiring non other solution. A political unification structure of some kind, perhaps with functionaries in Brussels, Frankfurt, and Strasbourg, probably would probably give the Eurozone the cohesion, if not the coherence, necessary to take hold of the debt problem and begin it’s dissolution within core constituent 400 million citizens. Why would I know that Germany will not abandon the Eurozone? It is too dependent on unsustainable rates of foreign demand for many of its core products, like machinery and airplanes. Once these demands subside, it shall be back to more inter European trade; hence, Germany needs the EU more than the EU needs Germany. But they both need each other too much to not, as the directive of the Lisbon Treaty implies, politically unite [someday].

Posted by fakosek | Report as abusive