Tuesday, 28 May 2013

German conversion

When George Magnus speaks, the economic world stops to listen.   George Magnus is one of the few economists that saw the financial crash of 2008 coming,  He publicly warned in the first half of 2007 that a credit crunch will come when the US property bubble bursts.  

He is Senior independent economic adviser to UBS, who unfortunately did not follow his warning and took trading positions which caused them much pain and losses when the credit crunch came.

Magnus publishes Economic Insights once a month.   The May edition just published is titled:

Germany, the rest and the Euro: Whatever next?
I think that the crux of the May 2013 Insight is captured by this paragraph:
"If Germany's famed savings excess and external surpluses endure, it will by definition, have to keep lending to debtor countries but this is likely to become increasingly contentious politically, and damaging economically.   The only viable alternative is for Germany to change its economic model, accept important compromises to its economic, budgetary and financial priorities, and accede to a structural system of transfers, which is how all monetary unions work, but which is seemingly anathema to its government and people."
 I don't know if by co-incidence or otherwise but soon after Magnus opinion was published, somehow suddenly there was a change of tone coming from Germany.   Suddenly the need for growth and solidarity started being emphasised, the risk of a lost generation of unemployed in periphery countries came on the agenda and austerity started taking a back seat.
Click the link below to read Der Spiegel's article  published in yesterday edition.
Then today my friend Andreas Dombret, a member of the Executive Board of the Bundesbank, has just been interviewed on CNBC and he spoke only about growth with a positivism that we have not heard for a long time from  any Bundesbank official.
Readers of the Blog know that I have long been arguing that equilibrium in the Euro area can only be reached if adjustment effort is made not only by countries in deficit but also by the countries in surplus.   We cannot have equilibrium with every country in surplus.  The maths just does not add up.
It is never too late for sense to prevail.

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