In response to an FT article by Wolfgang Münchau on 8th May 2016, entitled ‘Draghi, Schäuble and the high cost of Germany’s savings culture’
On monetary union:
“It tells us that Germany, perhaps more so than Greece, is unprepared for membership of a monetary union...the same happened in the exchange rate mechanism, a precursor to the euro created in the late 1970s. But the euro is meant to be forever”
You are right Mr. Münchau - they are both unprepared for membership of a monetary union. I'd go further - so are the other 17 members. For one simple reason: because there isn't a monetary union - the euro is a glorified peg, and pegs always break.
As you point out in an earlier paragraph Mr. Münchau:
“Even in a monetary union, a large imbalance would not matter if the union was politically integrated and had a common fiscal policy. But imbalances matter in the monetary union we have, one without redistribution and reinsurance systems”
It will never work without this Mr. Münchau - you know this, Mario Draghi knows this, Wolfgang Schäuble, knows this and so does anyone else who studies the history of these things. Alexander Hamilton was smart enough to create a fiscal union and a single bond market for US Federal Debt, leaving the individual states to make their own arrangements, but not tying the hands of the centre. The euro is not forever Mr. Münchau - it's a fudge. European states were encouraged to take fiscal union - they said no. Brussels went ahead anyway - so-called monetary union was supposed to work, allowing fiscal union to follow once everyone saw what a wonderful thing it was, AKA federalism by stealth, AKA playing dice with the economy.
It will never work in the current set-up, and the sooner Mario Draghi and Wolfgang Schäuble stop dancing around the handbag the better it will be for everyone.
On the ‘savings glut’:
You’ve covered the topic at national level here. I’d like to add the individual citizen into the debate. Here are some comments made last week by Mario Draghi at the annual meeting of the Asian Development Bank. Notice that Mr. Draghi, fresh from the trauma of having his ‘independence’ challenged by Germany, has recouped his resources for a counter-attack on those greedy, Teutonic rentiers:
“For a start, savers can still earn satisfactory rates of return from diversifying their assets, even when interest rates on deposit and savings accounts are very low. For example, US households allocate about a third of their financial assets to equities, whereas the equivalent figure for French and Italian households is about one fifth, and for German households only one tenth. By contrast, German households keep almost 40% of their assets in cash and deposits, and French and Italian households approximately 30%. The equivalent number is less than 15% for US households”
There you are savers of Germany - the Duke of Demand, the Baron of Banking, has spoken…those of you who are cautious by nature, those of you who are saving for retirement…stop being so selfish. Get out there and load up on stocks. Don’t worry about them going down heavily at some point. Of course they will…but don’t worry…Mr. Draghi’s pals from Goldman will buy them all back from you…eventually.
There is a reason that people are increasingly unwilling to spend, older citizens are unwilling to invest in risk assets, businesses are unwilling to invest in capital projects, and entrepreneurs are unwilling to create start-ups – 8 years of disastrous monetary policy and no end in sight. The central bankers do not have an endgame Mr. Münchau. Unfortunately for them, and despite their attempts to abolish the business cycle - markets always do – this one will not be pretty.