Ambrose Evans-Pritchard: 2012 could be the year Germany lets the euro die

The Telegraph ^ | 1/2/2012 | Ambrose Evans-Pritchard

[bruinbirdman]

So we enter Year IV of the Long Slump, the cruellest yet though not the most acute.

Since the purpose of New Year predictions is to stick one's neck out.

It will be a global downturn on all fronts, aborting what remains of recovery even before industrial output in the OECD bloc has regained its pre-Lehman peak.

The second wave will hit with youth unemployment already at 45pc in Greece and 49pc in Spain; and with the US labour participation rate already at depression levels of 64pc.

We will hear more about Italy's Red Brigades, Greece's Sect of Revolutionaries, and America's militia groups, and how democracies respond. Proto-fascism in Hungary is our warning.

China's surgical soft-landing will slip control, like Fed tightening in 1929 and 2007, or Japan's squeeze in 1990. Once construction has run amok, bears will have their way.

The European Central Bank has guaranteed trouble by letting M3 money contract. Fiscal tightening into the downward slide will make matters worse. A credit crunch as banks shrink loan books by €1 trillion to meet capital ratios will do the rest. All policy levers are set on deep recession, and deep recession is what Europe will get.

Monetary union is too damaged to parry these blows. The ECB's Mario Draghi will cut interest rates to 0.5pc by February, just to keep pace with passive tightening. Half-hearted purchases of Italian and Spanish bonds will drift on, doing more harm than good. By reducing existing bond-holders to junior status, the ECB will ensure a slow exodus. Draghi knows this. His hands are tied.

The Bundesbank will wage guerrilla war against money printing through the pages of Die Welt and Handelsblatt, paralyzing the ECB's Council until Angela Merkel orders Jens Weidmann to desist. . , .

[ClearCase_guy]

The can has been kicked far enough. Time to do the necessary.

[dynachrome]

“youth unemployment already at 45pc in Greece and 49pc in Spain”

A recipe for revolution.

[BfloGuy]

Pritchard is a good writer -- I enjoy reading his columns because he's a keen observer and they're interesting. Unfortunately, his economics are pedestrian and wrong.

America will look resilient for a few months. The payroll tax deal has averted a fiscal shock

That's just nonsense. The stupid Social Security tax cut (let's call it what it is) has no impact on anything other than putting Social Security into deficit for the second year in a row -- a decade before we expected it.

Spending is not stimulative for anything but spending. Consumer and government spending have returned to pre-recession levels, but still capital expenditures (and thus employment) are at historical lows. This is as it must be. Consumer spending doesn't hire employees, capital does. And business is keeping its capital in a "lockbox".

But Pritchard is a believer in the power of consumer spending and inflation, so it all makes sense to him.

[PGR88]

I’m still not convinced. Expect Central Bankers world-wide, especially the FED and of course the ECB, to bring out the nukes. They will fight to the death to keep the Euro alive and to keep Euro bonds solvent.

[BobL]

“The can has been kicked far enough. Time to do the necessary.”

I’m with you. Ambrose still has that smirk on his face - he knows something’s going down.

[Reverend Wright]

I disagree that germany will leave the euro. The euro-elite is so committed to the single currency that i believe they will repeat a weimar hyperinflation rather than give it up.

I think for the euro-elite, the euro is better understood in terms of idolatry, rather than using traditional economic cost/benefit arguments.

[bruinbirdman]

". . . the ECB, to bring out the nukes"

"Germany will not be able to fudge EMU any longer. It must either immolate itself, accepting a debt union and internal inflation to save a currency it never wanted and doesn't love; or opt instead to uphold fiscal sovereignty and the essence of its own democracy, and let the Project die."

"The shrewd, equivocating, ice-cold Chancellor will quietly oust arch-europhile Wolfgang Schauble and let the Project die, always pretending otherwise."

yitbos

[marktwain]

Ambrose Evans-Pritchard is a good writer. I like his analysis, but he has been pretty bad at predictions.

[fightinJAG]

I wouldn’t call it revolution!

[SunkenCiv]

Thanks bruinbirdman.

'The Consolation of Blogging: The European Union -- a State of hopeful confusion'

[cunning_fish]

>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>
I disagree that germany will leave the euro. The euro-elite is so committed to the single currency that i believe they will repeat a weimar hyperinflation rather than give it up.

I think for the euro-elite, the euro is better understood in terms of idolatry, rather than using traditional economic cost/benefit arguments.
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>

To be honest Euro has more chances than dollar to me. Their main mastake was to let too many socialist freeloaders into it. Kick Greece, Spain, Italy, Bulgaria away and it is alive and well again.