If you ask me, it doesn’t look good for the recovery.
The recent Federal Open Market Committee (FOMC) statement said “financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad (translated: the euro zone is on its way toward a double dip that will impact the United States). Bank lending has continued to contract in recent months.”
That means the Fed fears that the euro zone’s very serious problems could stifle the recovery in the United States.
And if that wasn’t enough, German Chancellor Angela Merkel told the Wall Street Journal that euro-zone countries have merely bought some time to fix the flaws in their monetary union.
Merkel also roundly rebuffed President Barack Obama's call for Germans to aid the global recovery by spending more and relying less on exports, even as she warned that Europe's own financial crisis is far from over.
She countered that Germany's growth and employment are rising — and therefore the world’s fourth-largest economy has no reason to rethink its dependence on its powerhouse industrial sector and large trade surplus.
“German export successes reflect the high competitiveness and innovation strength of our companies,” she said. “Artificially reducing Germany's competitiveness would be of no use to anyone.”
I think it’s not an overstatement to say that Germany's position threatens to isolate it within the G-20, likely making it difficult for it to win support for tougher financial-market regulation and its other priorities.
Germany's very weak consumer spending, which could be further strained as the just-approved budget cuts kick in starting in 2011, is causing frustration in crisis-hit EU “Club Med” countries such as Spain and Greece. Those nations need a boost from Germany as they take drastic measures to repair their public finances.
Meanwhile, the latest opinion polls suggest the euro-zone crisis has hardened Germans' negative view of the euro. Finally, Merkel warned that the euro zone hasn't ended the financial crisis that gripped Greece this spring and threatened to spread to other countries such as Spain and Portugal: “We have calmed down the situation through the rescue facility,” she said. “We now have the possibility, and have won time, to remove structural weaknesses in the euro zone and its framework of rules.”
And this brings us to Georges Soros, who suggests Germans should consider the following thought experiment: withdrawal from the euro.
The restored Deutsche mark would soar, the euro would plummet.
The rest of Europe would become competitive and could grow its way out of its difficulties but Germany would find out how painful it can be to have an overvalued currency. Germany’s trade balance would turn negative, and there would be widespread unemployment.
Banks would suffer severe losses on exchange rates and require large injections of public funds. But the government would find it politically more acceptable to rescue German banks than Greece or Spain. German pensioners could retire to Spain and live like kings, helping Spanish real estate to recover.
Of course, this is purely hypothetical because, if Germany were to leave the euro, the political consequences would be unthinkable.
Of course, as a somewhat worried investor, we could ask ourselves if that “unthinkable” is really that “impossible?”
Albeit the possibility of that “unthinkable” to happen is still very low, it could be possible the Federal Reserve could have to repeat in its future FOMC statements (but let’s hope this won’t be the case) that “financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad.”
We certainly shouldn’t disregard what Soros said this week during a conference at Berlin’s Humboldt University, as he launched a blistering attack on the actual German fiscal policy.
He warned that Germany’s unwavering pursuit of austerity savings is putting the future of the European Union and the euro at risk.
“By insisting on pro-cyclical policies, Germany is endangering the European Union,” Soros said. “I realize that this is a grave accusation, but I am afraid it is justified.”
Soros slammed the German austerity program, calling it “a recipe for disaster because it pushes the debtor countries into a deflation cycle and imposes stagnation and, worse, and that creates resentment.”
I must agree, that doesn’t look good.
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