Saturday 7 February 2015

A Free Lunch for Europe

In three short years Angela Merkel has gone from being the Superwoman to the Boggiewoman of Europe.  Having faced down the Euro crisis of 2011-12 she became the heroine of the hour – being fated around the world and the re-elected at home in 2014.  Her unwavering commitment to securing the Euro based on secure fiscal framework has made her the Mistress of Austerity.  It was she who enforced the bail-out process and the “Fiscal Pact” that accompanied the money.

Here's looking at you PIIGS



The recipients of the bail-out cash – Portugal, Spain, Cyprus, Ireland and Greece had to sign up to stringent terms associated with fiscal responsibility in order get the bail-out cash.  These fiscal rules have been the great enforcer of austerity and were put in place at the insistence of Merkel and the German courts.  "Fair enough" one might say - as Germany accounted for 27% of contributions to the bail-out fund, paying out 21.7bn euros in cash and providing guarantees worth a further 168.3bn euros and so the permanent bailout fund and its fiscal watch dog (Treaty on Stability, Coordination and Governance in the Economic and Monetary Union; or more plainly the Fiscal Stability Treaty) was born.  You might say that there is no such thing as a free lunch!

The problem for most Europeans is that they actually believe that they are owed a free lunch – they feel that they have a right to Frau Markel’s cash and hard as it may seem I think they have a case. The problem for the Germans is that their over bearing and efficient manufacturing economy is the cause of the European problem – or much of it.  Here is a chart that shows why.
A chart that tells an uncomfortable story for Angela Merkel

The chart (OECD data on trade performance) shows the balance of payments performance of various European countries in the period 1990 -2013, which covers nine years prior to the Euro and fourteen years of the Euro.  It’s not easy to miss the inflection point.   In 2000 there was a dramatic change in direction – Germany’s export performance greatly improved and the other most her European partners suffered as a result.  Between 1990 and 1999 Germany had a manageable trade surplus of between $15-60bn almost immediately after joining the Euro Germany saw its trade surplus balloon to over $200bn annually.  The detrimental effect this has had on the rest of Europe can be seen in the chart also - France and Italy, who had been running surpluses, went into deficit and for other less well developed economies the effects were much more catastrophic!  The total advantage the Germans have gained from the Euro so far has been about $2.5tn – that’s a lot of zeroes!  Now Greece wants to be cut some slack and Frau Merkel should remember that her economy has been exporting cars, pain and unemployment to the southern members of the EuroZone for the last 14 years and its time she got off the PIIGS back!



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