October 16, 2014
What happens in Germany is more important than Irish posturingPosted in Irish Independent · 42 comments ·
The tourist boat ploughs through the fast-flowing Rhine. On either side of us, barges weighed down by tonnes of scrap metal sparkle in the bright autumn sunshine as they cleave upstream towards Cologne. This river has been Germany’s mercantile artery for centuries and the prosperity of cities like Dusseldorf is based on being a massive inland port of this giant European waterway.
Like much of Germany, Dusseldorf has adapted. It has emerged as one of the biggest conference venues in Europe, underpinning the importance of the hospitality industry, and offshoots of this hospitality industry, in keeping modern cities ahead of the pack. Dublin could learn from Dusseldorf in this regard because in the future this type of upscale tourism, driven by festivals and conferences, may well prove to be extremely lucrative for our capital.
Further down river is the Ruhr and access to the Ruhr Valley – the traditional heart of the German economy. This is one of the most densely populated places in Europe with enormous cities mere kilometres from each other. Although the area has been in decline industrially, German manufacturing industry has proven to be one of the most resilient in the world. The Ruhr Valley – unlike post-industrial areas of Britain, which are wastelands – has not only negotiated the decline but has re-invented itself.
It is there, right in the middle of the Ruhr, that the Irish faithful descended for the match yesterday.
Before the match Martin O’Neill urged us to be confident. He was reflecting the new mood, not just in the Irish team, but in the country that we, as a country, are back in the game.
On the basis that our budgetary plans were seen by the Bundestag in Germany before they were seen by the Dail, maybe the fact that I am writing from Germany on budget day is appropriate.
When you stand back, from an economic point of view, the irony is that what happens here in Germany over the coming few months will have more impact on Ireland’s budgetary position than all the posturing of Irish politicians. While the budget is more or less an electioneering document for the next exercise in spectator democracy, the economy in Germany will set the rate of interest at which our debt is priced, the rate of interest for our mortgages, the crucial dollar/euro exchange rate and the attitude of Europe’s elite to our next corporation tax move.
Germany is beginning to show signs of strain. In the past week we have seen every piece of hard data out of the Federal Republic beginning to weaken dramatically and unexpectedly.
German factory orders fell by 5.7pc in September. Industrial production slumped by 4.0pc and export to the rest of the world retrenched by 5.8pc in the past few six week. This is a disaster for a country that bases its prosperity on the willingness of the rest of the world to spend.
And frugality is the flaw in the German model based on fiscal prudence and a current account surplus. Both of these attributes are merely the reflection of Germany not wanting to spend enough. This shortfall in spending has to be made up by the rest of the world, but if the rest of the world stops spending, then the Germans have a problem.
In the past few months, Europe has stopped spending and as Europe is Germany’s biggest trading partner, ultimately the impact on Germany is felt through falling orders for German factories, falling production and falling exports. All this is now happening.
The problem for Europe is that no growth is not just an economic problem; it is a political headache too. As European growth stalls – yet again – the sustainability of the debts of Europe’s periphery governments come back into focus. The ECB wants to save the Euro, so it decides – as it is doing – to print as much money as possible. This angers the Germans who believe that the ECB is risking all its credibility if it prints money.
The Germans are beginning to understand that Mr Draghi, the Italian head of the ECB, is trying to turn the Euro into the Lira behind their backs. But they also know it is too late. They have traded the mighty Deutsche Mark for the Euro and they can’t go back. The Italians and Spanish have a gun to their heads.
All they can do is complain and accept. This is a difficult position for Europe’s premier economy to find itself in.
Germany is following when it should be leading – and there is nothing it can do about it.
Therefore, low Eurozone interest rates are here to stay and they will only rise in the government debt market (including Ireland) if the financial markets believe that Germany will not pay the bill for the rest of Europe.
Up to now the Germans picking up the tab was almost a given, particularly as the economy was so strong. What happens if the economy here weakens as quickly as the latest data from German industry suggests? Will the Germans have the money to bail everyone out? Will they have the stomach?
Ultimately, the answers to these questions will determine the future path of the Irish economy much more than anything announced on the steps of Leinster House.
That’s what happens when you give away sovereignty: national politics becomes practically irrelevant.
At least the Irish football team had its destiny in its own hands last night. In the final minute a flash of brilliance showed Ireland equal to the World Champions.
Maybe its a lesson to the politicians who sit in Dail Eireann.