Bilal Hafeez of Deutsche Bank AG recently spoke at a conference in Germany. He spoke about the Euro and said that he believes one person can save it. The problem is that the person died long ago. Deutsche Bank recently transcripted the speech given at the annual Deutsche Bank Mittelstand (small and medium-sized enterprises) FX conference in Hamburg, Germany on 7 March, 2013. Now some German ‘Brains Turn To Jelly Guten Tag. Ich spreche ein bisschen Deutsch. Zum Beispiel, wie komme ich am besten zum Bahnhof. Heute, werde ich über Währungen sprechen,’ The full speech about the Euro and its savior can be found below:
1. I’ll have to switch to English before I further insult the language of Goethe. As a parent, I’m always on the look-out for parenting tips. So it came as a nice surprise to watch a riveting British documentary called “The Child of Our Time”
2. The documentary has been regularly broadcasting the development of a varied group of children since their births in 1999 (and 2000). The latest showed them entering their teenage years. What I found particularly worrying were the boys. They wore their jeans low revealing their underwear, they seemed addicted to violent computer games and seemed to grunt rather than talk to adults. My son is five, so I have some time before he reaches his teens.
Nevertheless it prompted me to look into how I could raise my son such that he ended up being well-rounded. Research shows that one of the key factors for teenage development is having a positive male role model other than the father. The reason for this is that teenagers are rebelling against authority, which sidelines the father. Boys also go through significant physical changes, not least their pre-frontal cortex in their brain essentially turning into jelly just like their baby years. They therefore need structure to transition into manhood, and a male role model can provide that
3. Europe’s Saviour Who else has entered the terrible teens? The Euro-Area! It was born in 1999, and so is currently fourteen years old. It has all the hallmarks of teenage angst. It is ridden with internal conflicts, it is groping around for structure, and it is suspicious of authority. So who can be a positive role model for the Euro-Area? Well it cannot be the “fathers”: Germany or France. It has to be an external figure that all Europeans respect, and whose motives and character are beyond dispute. That rules out anyone living as even the most competent person will make missteps or have something from their past dredged up to undermine them. That leaves us with historical figures whose lives have been laid bare by history. I can only think of one figure that is respected by most Europeans and has never sinned, Jesus!
Who’s to blame, and who is blameless
If everyone in the Euro-area would adopt the principle of not casting stones unless they were without sin then the constant accusations would stop. And remember, everyone has breached agreements in one way or another, even the stronger countries like Germany and France. How so? Well, all Euro-area countries were supposed to follow the Stability and Growth Pact (SGP), which amongst other things imposed a limit on of fiscal deficits of 3% and of government debt to GDP of 60%. Both Germany and France breached the SGP in the early 2000s and suffered no penalties. I should add that both Ireland and Spain met the SGP rules before 2008. So blaming “weaker” countries for not following agreements rings
hollow.
If everyone held back their accusatory stones and instead focused on the future, then we may have a clearer vision of things to come. The two pressing issues for the Euro-area are the impact of austerity and the survival of the Euro-area in its
current form.
If Everyone Is Saving, Who Is Spending?
This problem was later explored by Adam Smith and popularised by John Maynard Keynes as the “paradox of thrift”
4. Simply put, this suggests that even if it makes sense for an individual to save in bad times, if everyone does that, then the overall savings in an economy may actually fall as overall income falls (and so there is less to save). This is particularly the case when unemployment is high and interest rates have hit the lower bound of zero. Another way of looking at this is that if individuals save, they spend less, which in turn means there is less demand to consume the output of companies. Companies then cut back on employment and stop investing. This further reduces demand in the economy and the vicious cycle continues.
Since 2008, this is precisely what has been happening in the Euro-area. Households, companies and governments have entered austerity mode, unemployment is at record highs and interest rates are close to zero. Growth has fallen to zero. Meanwhile, government debt has actually gone up since 2008 by 25%. This is the paradox of thrift in action. If we compare this to the US, we find a stark difference. There the heavily indebted household sector began to save and deleverage soon after the 2008 crisis, but the government held back from austerity and instead initiated a stimulus.
Now with household deleveraging having run much of its course, the focus has shifted to deleveraging the government’s balance sheet. By staggering the austerity across sectors in a way that would support overall demand, the US has been able to see unemployment rates decline, growth settle around 2% and overall debt levels fall
5. For this reason, we are bullish on the dollar. The US has dealt with its debt problems in a way that promotes growth. This will attract capital inflows and we expect the euro to head to 1.20 by the end of this year.
Neither Lender, Nor Borrower Be
Even though the
