Hamish McRae: Successful but grumpy: the German condition

Economic Studies
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The Independent Online

The Germans are confident again. Their consumers are confident, reporting the most positive expectations since the pre-crash days of October 2007. Their industrialists are confident, with the influential Ifo Institute reporting the most optimistic business climate for 42 years. And understandably their economy-watchers are confident too, expecting that Germany's gross domestic product (GDP) grew by 1 per cent (or a 4 per cent annualised rate) in the last quarter of 2010.

Yet the German electorate is fed up. You might imagine that having staged the most impressive recovery of any European country and bringing the budget deficit down to below 3 per cent of GDP, the government would be popular, or at the very least admired for its competence. Yet the coalition government of Chancellor Angela Merkel has suffered a really serious defeat in the first of seven state elections, held last weekend in Hamburg, where it won only 20 per cent of the vote. How can a country be so successful and yet so grumpy?

As it happens, I have been in Germany a couple of times this month and had two conversations that illustrate this contradiction: the sense that Germany really is better than other countries first. We were racing across the countryside near Munich in a BMW at 170km an hour, and I observed to the young Bavarian who was driving that Germany was the only country I knew that did not have speed limits.

"Yes," he replied, in perfect English, "and we are the only country in the world that does not need speed limits. We have the best cars, we have the best drivers and we have the best roads. No other country has all of those."

He was right, of course. Outstanding engineering, strong personal discipline and excellent infrastructure – Germany has those three qualities that other places, even sophisticated European countries, do not have in the same measure.

The other conversation was with a German banker in Frankfurt. We were talking, inevitably, about the need to bail out the weaker eurozone nations, the impact on the euro of a sovereign default and the burden on Germany of the "Club Med" countries. I could not, I said rather cheekily, understand why the Germans put up with it.

"Ah, yes," he replied, glumly. "But you see this is our destiny. We had to pay to rebuild our country. We had to pay for East Germany. And now we have to pay for Greece and Ireland. We just have to accept that we pay our taxes to support everyone else."

Now, the last point is not entirely fair, because there are other countries participating in the eurozone rescue plan and one reason why the Germans have to do so is to protect their own banks, which have huge loans out to Ireland and Greece. But the larger issue – that Germany is the anchor of the eurozone – is beyond dispute. The reputation of the euro depends on Germany's economic policy and performance.

That is why the recently announced resignation of the head of the Bundesbank, Axel Weber, is so serious. He leaves at the end of April, thereby ruling himself out to be the next head of the European Central Bank, a job he would almost certainly have got, had he wanted it. He has been particularly vocal in attacking the way in which the ECB has bought the dodgy debt of weaker eurozone countries, in effect propping up governments that have very high levels of debt and which arguably have been too slow to reform.

The details of the ECB support and the politics of the appointment of its next head are both somewhat Byzantine, so let's not go there. The big point here seem to me that Professor Weber reflects a large body of German opinion that the euro should be run with the same rigour as the Deutsche Mark – that was, after all, what the German people were promised – and that this has not been the case. He has been criticised for the timing and nature of his resignation, but were the euro to collapse, Germany now has a top central banker in reserve: someone who was prepared to resign rather than compromise on his principles. There are not enough people like that in public life, here in Britain or elsewhere in Europe and beyond.

None of us can see how this will play out. There are short-term arguments in favour of the ECB policy of buying the government debt of, for example, Portugal, rather than pushing more countries into the European bailout scheme. But the tensions over that scheme will continue to grow. Ireland will seek to renegotiate its own bailout terms once its new government is installed in a few days' time. Greece will almost certainly be unable to cover its debts and will need some further help. We are not at all through this yet. It is theoretically possible to have weak sovereign borrowers and a strong currency. There are financially weak states in the US but the federal government is still able to borrow at very low rates. But the tension between a self-confident and successful Germany and a weak eurozone fringe can only get worse. You could say that the Germans expect other Europeans to behave in same way as they do. Well, if they had German cars and German driving discipline and German roads... but they don't; and hence they need speed limits.

Addicted to oil, we can't go on like this

The price of Brent crude oil hit a two-and-a-half year high of $109 a barrel yesterday morning, which is not surprising in the light of the dreadful events in Libya. But Libya produces only 1.6 million barrels of oil a day (mbd), not that much larger than the UK's 1.4 mbd, and Opec is estimated to have spare capacity of 5 mbd. So, in theory at least, other Opec producers could offset any decline in Libya's production by agreeing to pump a bit more.

But there are two big qualifications that need to be made. One is that this relatively sanguine outlook assumes the unrest will not spread to Algeria and the Gulf – a reasonable assumption but one we are constantly being forced to question. If the banking crisis has taught us anything, it is the need to accept that shocks can be outside all our settled expectations. The other is just how vulnerable the world economy is to any unrest in petroleum supplies. Oil remains the world's largest source of primary energy; gas is number two. This is not at all ideal for all sorts of reasons, and if the current clouds have any silver lining it would be to nudge us all to greater conservation efforts.



h.mcrae@independent.co.uk

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