Dumas: ‘Without euro exit, Germany will soon be in big trouble’
Published: 10:48 BST, 31 August 2012 | Updated: 10:48 BST, 31 August 2012
A new analysis by the totally excellent economist Charles Dumas of Lombard Street Research has just dropped into my inbox. It suggests Germany should not, perhaps cannot, afford the euro.
The report is a meaty 35 pages, so for now I’ll just give you the summary.
According to Dumas:
It is a myth that the German economy has gained from euro membership.Its growth has decelerated. Its growth of productivity has halved.
Should they stay or go? New research suggests Germany, led by Chancellor Angela Merkel, should not, perhaps cannot, afford the euro
Its citizens have accepted severe wage restraint without the former benefit of a rising currency, leading to negligible gains in consumer welfare. The undervaluation granted by their wage restraint has benefited producers artificially, and weakened the incentive to cut out waste – hence lower productivity growth.
It is a myth that Germany can hold the euro together simply by subsidising Club Med, while the Mediterranean countries adjust their finances. Their savage fiscal deflation is slashing spending and income, and hence tax revenues, so that budget deficits scarcely improve.
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Only with reversal of their excessive relative cost build-up vis-à-vis can growth return. But without depression in Club Med that can only occur within the euro if Germany accepts a wage/price inflationary spiral, as well as prolonged subsidy payments.
Recent recovery, dependent on grotesquely distorted Chinese policies, is subsiding, so overheating and inflation (which Germans anyhow hate) could require large budget deficits.
Opinion: Without euro-exit, Germany will soon be in big trouble. With it, growth can return
Alongside major understatement of the unavoidable disasters of keeping the current euro membership goes the myth that leaving the euro would make Germany seriously uncompetitive and unable to grow.
German consumers need the lower import costs that a rising currency would bring, to raise their spending power without wage inflation, and German businesses need the discipline of a higher real exchange rate to enforce productivity gains.
Without euro-exit, Germany will soon be in big trouble. With it, growth can return