Germany and the coming Greek debt default
The German economy is not in deep depression
In retrospect, 2016 will go down in German political and economic history as a significant game-changer, on the scale of 1989 (fall of the Berlin Wall), 1990 (reunification) and 1999 (the euro) - even 1945 (launch of Deutschemark), 1945 (Third Reich surrenders), 1943 (Stalingrad) and 1933 (Hitler elected). Chancellor Angela Merkel, renamed "Mutti Multi kulti", allowed a million migrants to settle in Germany. The far-right AFD party's support base has tripled in only one year from five to 15 per cent. For now, there is no prospect of an Austrian style far right takeover. (Edelweiss, edelweiss, bless my homeland forever!).
The Christian Democrats still command one-third of the voters and have coalition allies in the Bundestag. The German economy is not in deep depression. The 16 Lander (states) and civil society have embedded democratic political cultures. The "social market economy" of West Germany's Wirtschaftswunder (economic miracle) decades promotes consensus in policy making, even though Finance Minister Wolfgang Schaeuble is a hard-money nationalist. The euro has been a trillion-dollar export windfall for Deutschland. The centre-right will continue to dominate German politics, even if Frau Merkel is no longer Chancellor.
2016 is not 1933. However, as I watch the woes of German banks, I cannot help thinking about the banking dominoes of the early 1930s. The run on the Creditanstalt in Vienna. The fall of Darmstädter Bank. The Nazi takeover that followed the 1932 banking crisis, not the 1922 Weimar Republic hyperinflation. Thankfully, the German elite embraced the single-currency project, despite the fiscal and constitutional compromises of Maastricht and Lisbon. Thankfully, the Bundesbank and the CDU allowed the ECB to depreciate the euro in 2014-15. If Germany had still retained the old Deutschework, it would have surged to epic highs after the twin shocks of Lehman and Cyprus/Greece, akin to the Swiss franc. The German economy, one-third of the eurozone, would have gone into recession and the Elysee Palace would have been haunted by the ghosts of "franc-fort!". Yet despite the euro at 1.12, the migrant crisis has led to the meteoric rise of a xenophobic, anti-EU far right political party. This is bad news.
The ECB's money-printing is anathema to a German elite still traumatised by the horrors of the Weimar Republic hyperinflation and the loss of its beloved Deutschemark, the monetary anchor of the Bundesrepublik Deutschland. Schaeuble is intransigent about debt relief for Greece or a fiscal stimulate to revive EU growth. Germany's policies threaten to plunge Europe into another deflation quagmire, even though first-quarter GDP growth was 0.5 per cent, thanks to the sharp falls in oil and the euro in 2015. German spending on migrants and leniency shown by the Eurocrats in Brussels for President Francois Hollande's labour reforms has also boosted the path of eurozone growth rates. Yet German politics, not just the cold hard money DNA of the Bundesbank, will determine Berlin's response to the latest IMF package for Greece, the Brexit vote, French labour reforms, G7 currency politics or potential fiscal stimulus to boost peripheral economic growth.
While the German DAX index has had a dismal 2016, thanks to the big chill from China on Frankfurt's global exporters, I believe investors should focus on German stocks that benefit from domestic consumption, higher wages and the lowest borrowing rates since the Treaty of Westphalia. IG Metall and the chemical unions have agreed to five per cent pay rises for more than 1.2 million German workers. Berlin has also raised pension payments to their highest levels since the Helmut Kohl era.
I believe the financial markets have not priced in the risk of a sovereign Greek default in July, without an IMF bailout deal. It does not help that the Greek government resists pension overhauls and Berlin (Bruder Wolfgang bitte!) rejects even an iota of debt restructuring. Without German approval, no Troika bailout is possible, let alone credible. As populist parties, an anti-EU backlash and the migrant crisis reshapes Europe, I doubt if Merkel can win a voter "jawohl" for an IMF Greek deal. The IMF must now battles Berlin over a debt relief deal for Greece that is political suicide for Frau Merkel if rejected by the electorate. The IMF proposal to delay Greek debt repayment to 2080 - no typo; 2080 Anno Domini - is nuts. The Bundestag will not vote for Greek debt relief if the IMF does not lead a bailout plan. This is 2008 all over again, only worse. So Achtung baby, Grexit and stay short Deutsche Bank (down 48 per cent)!
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