Germany and the Netherlands are likely to quit the eurozone rather than swallow an indefinite number of ‘unrequited transfers’ to the union’s crisis-stricken nations, according to Charles Dumas, chief economist at Lombard Street Research. Speaking at an event in central London, he said that before joining the single currency, German incomes had stayed level but their purchasing power had increased as the Deutschmark appreciated. With the weaker euro, the economist said, they have seen ‘tremendous’ wage restraint, leading to huge growth in German firms’ market share but ‘no serious growth of the economy’ and a squeeze on disposable incomes. Meanwhile, consumption rose elsewhere in the eurozone, he said.
‘So what you’re actually dealing with here… is a German population which has had a rotten deal – and that’s why they’re all so angry’ noted Dumas, who is also chairman of the macroeconomic forecasting consultancy.
Branding the monetary union a ‘suicide pact’, he continued: ‘So what this exercise in uniting Europe has achieved is to divide Europe.’
…Dumas noted that for the bloc to survive, it would have to become a ‘fiscal transfer’ union, saying that the ‘Club Med’ nations needed about 5% of gross domestic product in annual debt refinancing ‘more or less indefinitely’.
This would amount to €150 billion a year, of which Germany would have to stump up just over €60 billion, France a little under €50 billion and €15 billion from the Netherlands, he said. And this would be on top of the shortfall in consumer spending, in addition to the fact that wages and consumption may have to be held down in the future, Dumas warned.
The economist dismissed the notion that the region would be able to turn itself around so as to make such support from its ‘core’ unnecessary. Citing the example of the persisting transfers from west to east Germany, he pointed out: ‘The ones that need the money to flow in carry on needing the money to flow in, or just stay poor.’
To believe that the Eurozone will be able to function without a massive and long-lasting subsidy regime from north to south is to believe that Portugal, say, will, unassisted, be able to keep pace with Germany. As Bob Dole might say, not gonna happen.
But it’s too soon to predict that the Germans and Dutch are on their way out.