There’s Something About The German Economy That Few People Know. And It’s Time More Of Them Found Out
Martin McCauley writes from Berlin: Angst is in the air here in the German capital. Despite being the most powerful economy in the Eurozone, Germans feel a bit queasy about the future. They have every right to be apprehensive: German industry is slowing down and Berlin is in no position to bail out the weaker brethren on the periphery. Spain, Italy and France ganged up on Angela Merkel last week, to force her to make concessions that weakened her stance on austerity. In backing down she is accepting the inevitable: Germany cannot dictate to the other members of the Eurozone. They have chosen their own route to perdition. There is nothing Merkel can do to persuade them that they are committing economic suicide. She has her own problems at home.
Everyone thinks the German government has engaged in structural reforms and kept labour costs below productivity gains. Actually the Merkel government has not engaged in any such reforms. They were all forced through under Gerhard Schröder’s social democratic government ten years ago. That is why the conservatives (CDU) won the general election. It is remarkable that Schröder, a social democrat, had the foresight and willpower to insist on reforms which were urgently needed to make the country internationally competitive. How did the workers respond? They removed him from office.
It is a common belief that the euro has been a boon for Germany. Actually German national debt since 1999 has risen by 900 billion euros. This means that whereas the national debt was 61 per cent of the Gross Domestic Product (GDP) in 1999, it is now 81 per cent. No wonder Eurozone members regard Merkel’s insistence that national debt should be brought down to 60 per cent of GDP as hypocritical. Even Germany will never achieve that. Germany has also exceeded the guideline of restricting the budget deficit to under 3 per cent in seven of the twelve years of the euro. So Berlin does not have the right to tell any other Eurozone government how to run its economy.
Germany’s budget deficit last year was one per cent. This looks good in comparison to that achieved by Britain and the US which had deficits of over eight per cent. On closer examination, the German achievement is not very impressive. It followed two years of three per cent GDP growth, very low borrowing costs and the lowest unemployment rate in 20 years. Even with these advantages, Germany could not balance its books. This bodes ill for the others.
What happens when the very low interest rates begin to rise? This is absolutely inevitable. It means that sectors of the German economy will be hard hit.
The welfare state is regarded by Germans as their birth right but it is unsustainable in its present form as the population ages. So Deutschland is also slowly going broke. The only difference between it and Spain and Italy is that the latter will go bust first.
France, Italy, Spain and Germany have to fund the stability mechanism. Spain is already out of the picture and Italy may soon follow. France is skating on thin financial ice at present. This leaves Germany as the lender of last resort. It may have to come up with over 200 billion euros. This would increase German national debt by about 5 per cent. Funds are flowing into Germany from the periphery. One estimate is that they amount to over 700 billion euros. Peripheral economies borrow money from the European Central Bank and other EU sources. They then use some of this largesse to buy German bonds.
It all points to Germany being left as the last man standing. Who will bail out Germany? No one. Because the sums would be gigantic. So what should you do to save yourself from the impending catastrophe? Buy gold and silver. That way you will be a king among the ruins.