It’s all Germany’s fault

July 20, 2010

It is fairly commonplace at the moment for U.S. and UK financial analysts — what continental Europeans call the Anglo-Saxons — to predict the collapse of the euro zone,  a project they were mostly sceptical about in the first place.  MacroScope touched on this on two occasions in March.

The latest foray into this area comes from Alan Brown,  global chief  investment officer at the large UK fund firm  Schroders. But he does it with twist,  blaming what he sees as the eventual  collapse of the euro zone not on the structure itself nor  on the profligacy of peripheral economies, but on Germany’s response to the crisis.

Brown reckons countries like Greece cannot do what is needed.

If Greece does all that it is asked to do, it’s debt/GDP ratio will rise to around 150 percent as debt continues to accumulate and the denominator declines as a result of a renewed recession and deflation. With debt at 150 percent and real interest rates anywhere near today’s level, Greece would have to run a primary surplus of around 8 percent  of GDP just to stabilise its debt ratio.

In the best of worlds, Brown says, German and other northern euro zone countries would solve the problem by stimulating their own economies to offset the deflationary impact of measures to improve public finances in the profligacies.

Increased demand from Germany (and other Northern European countries) would boost demand for goods and services from the South helping to maintain growth in the euro zone region as a whole and to reduce the current chronic current account imbalances.

Brown says the trouble is  that is not likely to happen. Germany has actually done the opposite, launching its own austerity programme.

As a result, Schroders reckons it is highly likely in the media term that Germany will break the euro.

finances in the PIIGS.publicfinances in the PIIGS.

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Since when have the BRITS been pro-German??? Britain ia a joke of a country… Why should its opinion on anything matter??? They WISH they had 1/100 of the chaaracter, backbone, courage, rectitude…. of the Germans/Germany. Britain is the THORN of/in Europe, a country not in decline… it is already as low as low can get and the U.S.A. is fast/furious tracking its path… Thank God their influence is ZERO. For 200 years they have caused nothing but problems/misery in this world…

Posted by loyolarichards | Report as abusive

Nobody is sure how the European problem will be worked out but the economic cost of “breaking” the euro would be very great for Germany and other “stronger” European nations. Their banks have bilions tied up in loans to Greece and the appreciation of their currencies in a break up would holow out their industrial base voer time. Andy Brown is right to discuss a possible euro break up but another possible way to address the problem may be restructuring (20 -50% haircut for Greek debt?)and taking a big hit to the balance sheets of European banks up front, coupled with loans from the European Stabilisation Fund to Greece. Germany is going to end up paying to hlep clear up the mess in one way or the other.

Posted by IanBright | Report as abusive

since when are we talking about the “European” problem? What about the Dollar problem? The anglo-saxon induced crisis/recession?

Posted by pesheff | Report as abusive

The problem is simple enough, if all the advanced nations, every last one, cut back on deficit spending while consumers have already cut back on credit/debt and are saving more, then….simply there is mathematically less spending, and thus, mathematically, less demand for products of businesses, leading to more layoffs and a sharp new downward leg in the world economy.

It’s just math.

Pure and simple.

The result?

An economic “depression.”

The real thing.

Posted by HalHorvath | Report as abusive