One of the most important attributes to being a portfolio manager is that of the global macroeconomic environments in existence at any one time.
Normally when I write these articles, I refer to potential economic pitfalls, whether it be countries such as Iran or a dispute such as that that we currently have between the United States and China. Normally, countries that are fairly pacifist by their nature and do not get involved in other countries problems do not find much “airtime” in these articles. However, as reading economics reports is part of my work, I find interesting of late as to how many papers I have read that are very critical of one particular country at the heart of Europe – Germany. I also find it quite astounding (at least by economists’ standards) that they all appear to be correct.
I think that what started this off was that Donald Trump suggested a couple of months ago that he may start targeting Europe with tariffs, due to his belief that the European Union treats the US very badly due to tariffs and barriers. It should be noted that Europe does not in fact treat the United States badly, in fact its markets are about as open to US products as the US is to Europe’s – in fact the US exports around three times as much to the EU as it does to China.
The problem stems from the fact that some Europeans and in particular the Germans treat themselves very badly, with an astonishing obsession about the state of their public finances. In 2010 many politicians, again particularly in Europe where there was massive unemployment, demanded spending cuts instead of public expenditure to cut down on this high unemployment.
Having subjected its citizens to austerity fever, Germany forced debt troubled countries in southern Europe (and particularly Greece) into punishing spending cuts, when economics suggests that in terms of high unemployment governments can afford to run deficits. Interestingly Germany eliminated its deficit in 2012 at a time when EU unemployment was more than 11% – since this time they have run ever growing surpluses.
So why is Germany such a problem? Germany has attempted to export its economic agenda to other European nations and in particularly its austerity fever, which in turn has created a shortfall in private demand. Economists will say that there are other culprits such as ageing demographics, in particular Europe has low fertility rates with the knock-on effect of a declining number in adult working years which translates into less demand for new housing and offices etc.
The European Central Bank (ECB) has attempted to fight this European chronic weakness with negative interest rates and in particular, German interest rates, to such an extent that German investors are lending money to their own government with term bonds of up to 30 years that pay a negative interest rate. Pre-2008 such a scenario had never been heard of.
European governments should stimulate their economies by borrowing and increasing spending -government bond markets are begging them to do so and the fact that some countries are offering negative interest rates to savers, must therefore mean that they can afford to do so. Economists will tell you that there is no shortage of things to spend on an and as an example, Germany, like the United States has crumbling infrastructure desperately in need of repair, but they won’t spend the necessary money to put it right.
What about the possibility of a United States v Europe trade war? Well, all of these problems mentioned above contribute to a weak Euro. A weak Euro makes US products less competitive and this is another reason why American manufacturing is in the doldrums. However, America sees this as Europe taking advantage of it, which of course is totally incorrect and is very unhelpful. What would be helpful is if the US could, if its own leadership had any intellectual or policy credibility, create some moral persuasion, but of course, it doesn’t.
Unfortunately, Mr Trump seems to like trade wars and believes that they are easy to win – that is what he said a year ago about China and one has to question whether he is still saying that now. The last thing that either the US or Europe or the World needs is another trade war.
Colin Fogwill –Investment Director
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