View the article online at http://citywire.co.uk/money/article/a559322
Why Germans and Dutch will exit ‘suicide pact’ eurozone
‘What you’re actually dealing with here... is a German population which has had a rotten deal,’ warns Lombard Street Research's top economist.
Germany and the Netherlands are likely to quit the eurozone rather than swallow an indefinite number of ‘unrequited transfers’ to the union’s crisis-stricken nations, according to Charles Dumas, chief economist at Lombard Street Research.
Speaking at an event in central London, he said that before joining the single currency, German incomes had stayed level but their purchasing power had increased as the Deutschmark appreciated.
With the weaker euro, the economist said, they have seen ‘tremendous’ wage restraint, leading to huge growth in German firms’ market share but ‘no serious growth of the economy’ and a squeeze on disposable incomes. Meanwhile, consumption rose elsewhere in the eurozone, he said.
‘So what you’re actually dealing with here... is a German population which has had a rotten deal – and that’s why they’re all so angry’ noted Dumas, who is also chairman of the macroeconomic forecasting consultancy.
Branding the monetary union a ‘suicide pact’, he continued: ‘So what this exercise in uniting Europe has achieved is to divide Europe.’
His remarks came as Reuters reported that German chancellor Angela Merkel reacted with reservation to calls for Germany to increase its contributions to eurozone rescue efforts after Standard & Poor's downgraded the region’s bailout fund.
Dumas noted that for the bloc to survive, it would have to become a ‘fiscal transfer’ union, saying that the ‘Club Med’ nations needed about 5% of gross domestic product in annual debt refinancing ‘more or less indefinitely’.
This would amount to €150 billion a year, of which Germany would have to stump up just over €60 billion, France a little under €50 billion and €15 billion from the Netherlands, he said. And this would be on top of the shortfall in consumer spending, in addition to the fact that wages and consumption may have to be held down in the future, Dumas warned.
The economist dismissed the notion that the region would be able to turn itself around so as to make such support from its ‘core’ unnecessary. Citing the example of the persisting transfers from west to east Germany, he pointed out: ‘The ones that need the money to flow in carry on needing the money to flow in, or just stay poor.’
Dumas also warned that austerity was only worsening Greece’s budget deficit, and that it was ‘difficult to imagine’ the deeply indebted state receiving the four quarterly batches of financing it is due this year.
‘It’s almost impossible to imagine people continuing to stump up the money, because they simply have not actually gone into this thing with the intention of unrequited transfers to Greece ad infinitum,’ he said as the country resumed talks with its creditors over a planned debt swap.
Calling the one-off damage of splitting up the eurozone ‘seriously exaggerated’, Dumas warned that as the crisis deepens, he believes ‘Germany and the Netherlands will actually realise that they had better call it a day and jump out.’
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by Gavin Lumsden on Mar 27, 2015 at 14:45