Rift with Germany is a worrying trend

In: Uncategorized

8 Jun 2009

The following comment by me appeared in the latest Fund Strategy (8 June).

A rift is growing between Germany, on one side, and America and Britain on the other, in relation to economic policy

The latest spat followed comments by Angela Merkel, Germany’s chancellor, on quantitative easing. She reportedly broke an unwritten rule by criticising central banks – including the Bank of England, European Central Bank and the Federal Reserve – for their loose monetary stance.

Her comments precipitated howls of protest from America and Britain. Ben Bernanke, the Fed chairman, reportedly said: “I respectfully disagree with her views.” Coming from a central banker, a species which generally communicates with guarded language and the raising of an eyebrow, this was strong stuff.

Perhaps the harshest comment came from Charles Dumas, a director of Lombard Street Research: “Merkel and the German elite are divorced from the realities of the global economy, as well as flouting received economic wisdom from Keynes to Friedman.”

The Financial Times was not as blunt, but also critical. It suggested Merkel’s comments were motivated by short-term political considerations: “With a general election looming in September, German politicians have competed to sound more hair-shirted than one another, frantically attacking foreign profligacy as a means of depicting themselves as inflationary hawks”. However, The Wall Street Journal went against the trend, praising her anti-inflationary language, with a leader wryly headlined “Merkel for the Fed”.

For an outside observer it is possible to see both?sides of the argument. Germany’s main concern is the?threat of inflation and the re-emergence of asset?bubbles. America and Britain, in contrast, are more?worried about the risk of a deflationary spiral. Each?set of arguments broadly reflects the particular economic?interests of those parties involved.

The row reflects longer-running tensions between Germany – often together with France – and the Anglo-Saxon world. From a German perspective it was financial excess in America and Britain that largely caused the economic crisis. Germany also sees itself as often having to take unilateral action to sort out the mess others have created. Germany’s role in the bail-out of Opel from General Motors is a prime example.

In a sense it does not matter which side, if any, is?right. The opening of an overt rift between such big?players is a serious matter.

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