Germany is the problem. You are clearly inundated with advice, much of it poor, and you have shown a diplomacy and statesmanship sadly lacking from some of your European partners as well as from your Anglo-Saxon friends across the Channel and Atlantic. But I repeat Germany is the problem, and on two counts. First, your political elite has misanalysed the causes of the euro crisis, and as a result is prescribing the wrong solution to the very partners who gave Germany the breathing space to restructure its economy after the fall of the Berlin Wall. Secondly, Germany is using a misty version of the economic and political history of the 1920’s and 1930’s in order to justify the current policy stance of requesting deflation of your neighbours. In both cases the policy response is doomed to fail and if the course is not altered, the euro will fail, and Germany will be the major loser.
After the East and West of your country were rightly re-united after the collapse of the Soviet Union, an event which brought you into high office, Germany suffered a decade of anaemic economic growth. Germany experienced a shift downwards in its famed productivity as the Federal Republic provided Western levels of pay to East German workers who brought with them Soviet levels of productivity. The Ostmark conversion at or above 1:1 with the deutschemark was the primary driver of Germany’s lost decade of competitiveness from 1990. But this was a political project which brought together Germany again without major political upheaval. After ten years of austerity your famously cohesive society then pushed through a series of reforms aimed at re-establishing German productivity pre-eminence on the continent, at the very moment the single currency was born. Over the subsequent ten years from the birth of the euro, German productivity once again far outstripped your neighbours providing Germany with the only significant current account surplus in the eurozone against varying deficits in your trading partners. But while you were busy deflating your relative unit labour costs, your partners in France, Italy, Spain, and, yes, Greece were busy providing the demand and the inflation to allow you to do this without any political or social unrest. Where do you think all those Porsche Cayenne’s have gone? Now that we face the largest economic and political crisis since 1945, you are preaching to your partners that the only way out of the crisis is for them to deflate their relative unit labour costs down to Germanic levels of efficiency. But crucially you refuse to return the favour of supplying enough demand and inflation to your European partners that they supplied to you, thereby failing to provide the essential political cover needed to put in place the structural reform you deem necessary.
We can only assume that the German political elite cannot give back what they received owing to a perception that inflation, once let out of the bottle, will never be recorked. And in imagining the worst, are your collective memories being drawn to the hyperinflation that marked the beginning of the end of the Weimar Republic? But was it really this that led to Europe’s darkest moment? Or was it the massive austerity and deflation visited upon the German people by the conditions set down, after World War I, in the Treaty of Versailles, at a time of fixed global exchange rates and the Gold Standard? Unpayable reparations during a time of fixed exchange rates echoes uncannily with today’s crisis, only Germany is now the country demanding austerity.
Notes From Schwarzman, Sternlicht, Robert Smith, Mary Callahan Erdoes, Joseph Tsai And Much More From The 2020 Delivering Alpha Conference
The following are rough notes of Stephen Schwarzman, Steve Mnuchin, and Barry Sternlicht's interview from our coverage of the 2020 CNBC Institutional Investor Delivering Alpha Conference. We are posting much more over the next few hours stay tuned. Q2 2020 hedge fund letters, conferences and more One of the most influential investor conferences every year, Read More
My advice is this; if Germany cannot accept its role as provider of demand and inflation to your partners as they embark on austerity, be decisive and humane in allowing the break-up of a single currency regime before it visits misery on the populations of your near neighbours. Either that or have the vision to accept that Germany must generously pay back through higher demand to its partners what it has taken from them over the last twenty years.