The German economic miracle no longer exists
It is a surreal situation. The ECB continues to apply quantitative easing and hold rates at a historically low level of minus 0.5 pc, which seriously damages the business model of German savings and cooperative banks.
These provide 90% of the total credit to the Mittelstand family businesses, once the bedrock of German society Wirtschaftwunderbut are now under increasing stress.
The German Conservatives’ nightmare scenario is unfolding before their eyes.
“The euro has become the successor to the Italian lira, not the successor to the Deutschmark, as we feared,” said Professor Thomas Mayer, former chief economist at Deutsche Bank and author of Inflationsgespenst (The Ghost of the ‘inflation).
“We were seeing echoes of the 1970s even before the war started in Ukraine. The ECB used models that don’t work and forgot the money supply: the Keynesian paradigm reigns supreme,” he added.
“It succumbed to pure fiscal domination, much like the Banca d’Italia in the 1970s when it was forced to buy Italian government bonds.
Southern Europe is now so indebted – including France – that the ECB cannot raise rates. It’s completely locked up. Of course everyone will blame Putin and claim that none of this could have been planned,” Prof Mayer said.
Otmar Issing, founding chief economist of the ECB and a leading figure in German economic circles, said the central bank had betrayed its stability mandate and now had to bite the bullet before it was too late.
“War is no excuse for delaying the exit from massive bond purchases. The ECB will pay the price for ignoring countless warnings and stopping its ultra-expandive monetary policy a long time ago,” he said.
Evercore ISI said the ECB may have to navigate the reefs in tightening in an economic downturn while creating a “spread protection instrument” to protect Club Med, which some might call a euphemism for an illegal monetary bailout of insolvent states.
The German Institute for Macroeconomic Policy warned this week that the war in Ukraine had stalled the recovery, with the risk of an unpredictable “cascade effect” through supply chains and financial channels.
A complete cut off from Russian coal, gas and oil could cut GDP growth by 6%, leading to a deep recession.
Germany has yet to recover from post-Covid supply disruptions, particularly the shortage of semiconductor chips used in the automotive industry. It is now taking a second hit from Ukraine, a source of automotive component manufacturing and neon gas needed to produce chips.
Unlike France and the UK, Germany has yet to return to pre-pandemic GDP levels.
The longer this protracted crisis goes on, the more it begins to look like a depression, with lasting structure and hysteresis. The last window is slowly closing before the country’s population decline begins in earnest.
The huge gas and energy price differential between the United States and Germany is emptying German industrial sites.
Chemicals, fertilizers, steel and metallurgy companies are shifting production to US-based plants or losing global market share.
Tensions are rising at a time when the German auto industry itself is grappling with the existential threat of electric vehicles, which it has neglected for too long.
Professor Wieland said the debate in Berlin over whether a Russian energy embargo would be costly misses the point. Germany has no choice: it is already in conflict with Russia.
“You have to assume that Vladimir Putin will rush a supply freeze when it will hurt him the most and benefit him the most. Ergo, we need to put all the levers in motion now to prepare for that,” said he declared.