Germany to decide the fate of the european project.

Markets have always loved a `bogeyman` – someone who gets blamed for movements in exchange rates, or is rumoured to be at the fringes of acceptable behaviour. I remember very well when even Central Banks around the world have been singled out for this dubious title, but I have never known a whole country – and one that has an economic excellence attached to it – to be so labelled. Which sovereign nation is this ……..well Germany of course!

What heinous crime then is laid at their door? They are a prudent nation that produces excellent goods at a price the rest of the world assesses as good value; they find employment for their population; they believe that debts should be repaid, and they believe in economic discipline, with an almost pathological fear of inflation. So what is wrong……nothing of course, BUT they are also a cornerstone of the European project and at the heart of the euro. So, we should deduce that by the evidence, membership of the euro has been great for Germany, and will continue to be so. That is unless several other members of the euro get together and say out loud what has been true for years, namely that the euro has been run with policies that have been set in Germany, for Germany, and the rest have had to cope as best they can!

If, as can be accepted by most, the bulk of euro member countries are continually coping with the wrong exchange rate and the wrong level of interest rates, why isn`t more fuss being made? Basically the answer is fear! Fear that Germany will just walk away from the euro, retreat to prudence, breaking free of the bothersome satellites that have hindered further progress, and form a club with only best buddies such as Holland and Belgium.

We have just seen articles calling on Germany to reflate their economy; to promote balanced growth across the eurozone, and I think that clamour will grow as discussions about deflation widen. Politically, it would be a nightmare should Germany start to enact economic policies slanted towards the needs of the wider eurozone, and away from the specific needs of the German economy. So, who blinks first, and who`s bluff is going to be called here? Will Germany concede that `more needs to be done` and try to push inflation up, or will they continue to do what is successful for Germany? If the latter, how much pressure can realistically be put on Germany from the eurozone, before the people of Germany decide they would be better off out of the system? Alternatively, how much does the rest of the eurozone depend on Germanys membership – how much pressure can they apply before denial breaks something internally?

The answer is of course, in compromise. What is sure, is that unless Germany looks up and is prepared to fulfil its obligations under the European Treaty, things will not improve fast enough to satisfy the population of southern Europe. Within Germany lies the success of the European project as it is currently viewed.