Merkel’s See-No-Evil, Hear-No-Evil economic summit

 

Germany’s response to the economic crisis is turning from tragedy to farce – and it is the dominant theme of European news coverage this morning. Back from a lucklustre EU summit, that rubberstamped a stimulus based on fraudulent arithmetic, and that agreed an industry-friendly climate deal, Angela Merkel yesterday collected 32 lobbyists into the chancellery for a seven-hour summit, according to Der Spiegel. The result is that some of the large German companies offered not to dismiss any employees until the general elections. (It is interesting to note that when Ms Merkel faces a macroeconomic problems, she talks to industry representatives and trade unionists, not to economists)

Frankfurter Allgemeine Zeitung is reporting that Merkel is planning another stimulus. SPD Parliamentary leader Peter Struck said the Bundestag will not make a decision until late February at the earliest (which suggests that the package will not become effective until April 1.

There is growing pressure from the Bavarian CSU for a tax cut, and its new leader, Horst Seehofer, is now publicly criticising Merkel for her failure to support the economy. Peer Steinbruck, finance minister, said there will be no decision during the next coalition summit on January 5. He went on to say that Germany will not copy what other countries are doing. (The SPD’s rejection of tax cuts suggest that even if there is an agreement within the Grand Coalition on the principle of a stimulus, it will be very difficult to agree the details, as the SPD rejects tax cuts).

Frankfurter Allgemeine is also reporting from Washington that Obama’s stimulus plan is likely to be even larger than expected – at $1000bn, almost 10% of GDP – mostly in the form of infrastructure investments.

 

Mario Monti on Germany

Writing in Corriere della Sera, Mario Monti writes that without a temporary but forceful German stimulus, Europe could suffer a depression, and in that case, there is a question whether the stability and growth pact, market-oriented European integration, or the independence of the central bank will survive. Germany could reassert its leadership in Europe, if it acted more forcefully.

 

 

Wolfgang Munchau on Steinbruck

In his FT column, Wolfgang Munchau notes that Peer Steinbruck’s lack of diplomacy is nothing new. What will be new is that his populism is likely to backfire next year, when Germany faces an election in times of a depression, and when electorates will start to turn on politicians, and not bankers, and as this crisis turn from a financial crisis into a policy crisis. Munchau forecasts a negative growth rate of 2-4%, a view shared by some of the official forecasters. Germany is extremely sensitive to swings in global demand, which is falling at an unprecedented pace in modern times. German consumption is still holding up, but this too will crack once unemployment starts to rise next year. Hard times ahead, including for Mr Steinbruck.

 

Paul Krugman on Germany

Paul Krugman has posted an interesting short technical article in which he highlights the benefits of a co-ordinated fiscal response for the eurozone. Using a simple model he concludes, as long as there as large intra-eurozone trade flows, the multiplier for a combined European fiscal response is significantly greater than for individual national responses.

 

 

Willem Buiter on Steinbruck

We are not going to reproduce the arguments in Willem Buiter’s very long post entitled Confessions of a crass Keynsian in response to Steinbruck comments. He concludes that Steinbruck’s comments cannot be rational since, if taken to an extreme, would necessitate public default.

 

Thomas Mayer on the global economic outlook

Writing in Frankfurter Allgemeine Zeitung, Thomas Mayer says that economy will be marked by a rise in inflation and a long phase of low economic growth, briefly interrupted by short spurts of growth during times when government fiscal support kicks in. The rise in inflation will be more like it was in the 1960s, rather than the 1970s, but it is inevitable to reduce the pile of debt governments are currently taking on.

 

ECB is considering new programme to kickstart money markets

The Wall Street Journal has the story that the ECB is considering several options to kickstart the money market. One idea is that the ECB acts as a clearinghouse, or broker-dealer in the money market, as part of which it would effectively insure money market transactions directly. Another option is for the ECB to lower the deposit, as banks currently optain funds through repo operations and re-deposit them at the ECB at a discount of only 0.5%. A lower deposit rate would discourage banks to hoard their cast in the ECB.

 

 

Michael Pettis on Asia

Writing in the Financial Times, Michael Pettis says that Asia is facing a very tough year. There are only two ways for Asia to adjust to the new global economic situation, either through an increase in domestic demand, or a fall in domestic production. The latter is far more likely to occur than the former, as Asian’s countries lack the capacity to spend money fast. Before the latter happens, Asia countries will try trade protectionism, export subsidies and the like, but this is going to prevent the eventual collapse of production.

 

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