The cure for the ongoing euro crisis lies in that either Germany allows above average inflation or the Club Med countries witness depression in order to adjust for relatively higher costs, says Charles Dumas, Chief Economist and Chairman of Lombard Street Research Ltd.
However, with China slowing down, German inflation is unlikely to go up since German exports depend largely on Chinese demand.
Talking of the Chinese economy, Dumas says a one percent export growth in (not seasonally adjusted) July doesn’t come as a surprise since export growth for May and June were surprisingly buoyant, which has kind of averaged out in July.
Overall, their exports have not done too badly, but it’s the domestic demand that has really gone down with inventories piling up and investments slowing down. China’s domestic demand is unlikely rise shortly because firms are facing a downward pressure on margins, impacting wages. That being said, the slowdown of Chinese domestic investment is a cause for worry since it drives German exports.
China’s recently stated GDP growth target of 7.5 percent seems high, Dumas said, adding their estimates suggest the country’s GDP will grow at an annual rate of less than five percent in 2012, after adjusting for inflation, thus keeping the door open for further stimulus.
On Europe’s growth prospect, Dumas said the situation is not severe in Germany and France (despite French industrial output stagnating in June), and German GDP may still grow by one percent in 2012. While French GDP growth may be lower for the year, they are still better than the Club Med, which is in depression.
Commenting on the ECB’s intervention in the secondary market to bring down Spanish and Italian borrowing costs, Dumas said Draghi is being asked to do a fiscal transfer which essentially, is the prerogative of the national governments.
The eurozone can’t be saved unless they have relatively high inflation going in Germany or a depression in the Club Med, since costs have gone out of line by more than 30 percent. The structural reforms required to bring the costs of Southern Europe in line with the Northern part may take 10 to 20 years, and they need to be done in a democratic manner by elected governments and not imposed by an outside central bank, he noted.
It’s not realistic to expect that Germany will pay up to 40 percent of their GDP just to keep the eurozone in its current form, Dumas said, adding the common currency is a stupid idea and it’s much better broken up. When people say Germany can’t handle euro break up, they forget Italian costs are 30 percent too high. It’s not possible for Spain and Italy to hack their costs by more than 30 percent from the current levels. You can watch the video here.