Angela Merkel’s dilemma

Angela Merkel is between a rock and a hard place.  To be more accurate, between a number of rocks and hard places.  She has painted herself into a corner from which she can only escape with a substantial loss of face.   Now she has her voters at her back insisting that Germany should not pay (having made a handsome profit) while all around the world political stage, the penny has dropped that we need growth much more than austerity and cuts.  Everyone from Hollande to Obama is bending her ear – and she is not listening.

But Merkel must and also see the long term benefit for Germany, the Eurozone and the wider world is there.  Keep on with this austerity business and the world economy will collapse, cash machine stop working, water stop flowing and we will be back in the Stone Age.  It really is stupid.  I thought better of her – as a scientist she really should listen to reason.

The consequences of Merkel demanding continued austerity are disaster and, as former German foreign minister Joschka Fischer  warned recently,it  could be the demise of the Euro, dragging the whole of Europe into poverty and possibly conflict for a third time in 100 years.  Harsh – but fair.

After Hollande’s victory in France, now with a majority in both houses, a narrow and unconvincing victory for New Democracy in Greece with Syriza waiting in the wings ready to pounce, people are asking the simple question – why?

Individuals may have been guilty of flashing the credit card but not everyone has.  The casualties are not profligate profiteers or bankers’ bonuses but ordinary folk in public and private sectors,  health, education, culture, tourism, leisure, or other services.  It really isn’t fair.  And it is also very dangerous.  People power has been demonstrated everywhere from Indian independence to Vietnam protest and more recently on the streets of Athens.  I don’t condone torching your country but you can see why people do it.

For this we are paying – and it won’t get any better.

The way out

This situation has been brought about by two events – massive debt write-downs in banks caused by gigantic errors of judgement by relatively few, and an unworkable Euro design.  Either of these on their own and we could probably muddle through.  But both together are not dynamite – they are nuclear.  We can’t do anything about the past but we can repair the Euro. Maybe.

Whatever we do to the Euro, and there are a number of other things that can be done in finance as well, but the real solution is growth.    And allowing the ECB to recapitalise banks directly, taking them over in the process (as arguably could have been done to RBS here).  And some sort of banking union which will lead to a financial union.  The Eurozone really has to bite the bullet on this one.  The sooner Merkel realises the better.  Her ears must be burning – I don’t envy her position at all.

Everyone knows this with only a few exceptions in Berlin/Frankfurt – and Downing Street.

Why should we care? 

The UK is not in the Euro and there seems little we can do about it, particularly as our politicians seem to be intent on arrogant preaching to go with our hair shirt (not their’s, you notice).

We can shore up our banks (however that will work in reality), cross our fingers and be thankful that the market, which has to put its money somewhere, can invest in the UK.  Which bolsters London house prices, keeps attention from our economy and makes it cheap for us to finance our record debt (actually it isn’t a record – that was in 1825 at 250% of GDP which didn’t stop the Victorians from building a massive economy shorly afterwards).  And at least we can pump some money into the economy, which the Eurozone (aka Merkel) has set its face against.

We should care for a number of reasons. 

  • Our fellow Europeans are suffering for no fault of their own.  Many of us have friends and relations in the affected areas or go there for holidays.  But I really don’t want to be caught in a French farmers strike, fuel or food shortages, Italian airport closure or bricks and boulders in Madrid or Athens.  So I suspect that I will give these countries a miss until it settles down, if ever.  Which won’t help my friends and relations.
  • A lot of our trade is with the Eurozone so there is likely to be a knock-on in the UK economy.  Already our government has been cutting services, health care is rationed, education curtailed as they think the only solution to the problem is austerity.  I fervently hope that the sense seen by some voters overseas and maybe eventually by Frau Dr Merkel herself will cross the channel.  We need growth not cuts.  Keynes woz right, OK?
  • There will be a knock-on effect on the world financial industry and which will affect the UK disproportionately.  Not all bankers and financiers are guilty – most are decent and clever people trying to help.  We need more of those and fewer gamblers and smart-alecs.  But if European finance gets a fever, finance won’t be off to Frankfurt or Geneva – it will go to Shanghai or Singapore.

Churchill said famously in 1940, “I have nothing to offer you but blood, toil, tears and sweat”.  But at least at the end there was the prospect – never the certainty – of victory and freedom.   What prospects are there today for people who lose their jobs?  Not a lot.