It’s all Germany’s fault
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.