On Thursday, 17 November, David Marsh CBE, presented a lecture on “The Curse of the Euro: the Blighting of a Beacon”, at Aston Centre for Europe, to around 170 guests. If you missed this event, you can follow the link below to access the podcast of the lecture.
The recent (and highly vocal) criticism of Finance Minister Wolfgang Schäuble over the decision of the US Federal Reserve to launch a new $600bn programme of Quantitative Easing (QE) have raised new questions over the state of German-US relations. Certainly, Mr Schäuble, never one to suffer fools gladly, appears even less willing than usual to hold back – witness the public dressing down he administered to his spokesperson at a press conference last week. And while Chancellor Merkel is far too cautious to make such a direct comment on US policy, Mr Schäuble’s intervention reflects deep-seated unease among German policy-makers over QE. This has three interlinked political reasons:
- Throughout the fallout from the financial crisis, Germany has been reluctant to establish fiscal stimulus packages of the kind put in place by the UK and US. Germany’s two Konjunkturpakete in 2008 and 2009 remained quite modest in their scope. The reason behind this caution is historical: since unification, Germany has seen public debt shoot up, from around 40 per cent of GDP in 1990 to 73 per cent in 2009. Partially as a result of this, the federal government and the Länder agreed what constitutes a practical ban on new public debt (Schuldenbremse) from 2016. Debt-financed growth packages make little sense in this context.
- Linked to this is the spectre of inflation, which is one of the biggest ‘red flags’ in the management of the German economy. The scars of hyperinflation in the early 1920s, when the savings of much of the German population were simply wiped out, are very much to blame for this. In consequence, the overriding aim of German monetary policy since 1945 has been to contain inflation: hence the establishment of a Bundesbank independent of political control and the seamless ‘uploading’ of this position onto EU level in the form of the European Central Bank. The problem is that the risks of inflation with QE are high, even if, as a thoughtful piece in October’s edition of Prospect argues, no-one quite knows how these will manifest themselves in the future.
- Lastly, Germany is also concerned about the impact of any such inflation on exchange rates. The past decade has overall been quite lean in Germany, with, in particular, almost static real wage growth for most of this period. While this has hampered domestic demand and endogenous economic growth in Germany, the upshot has been that labour productivity and hence competitiveness has increased strongly. With Germany’s export-oriented economy once again booming, the federal government is not keen to see its hard-won gains in competitiveness lost through a QE-induced fall in the dollar.