Michael Fry: Germany still drives the economic agenda

Not everybody will appreciate the glad tidings but Germany achieved exports of 92 billion euros in March, a record for a single month. Imports amounted to 78 billion euros, to yield a trade surplus of 14 billion euros. Not much sign of a double-dip recession there.

We must await confirmation by further statistics, though they are unlikely to overturn the initial impression: that after a brief blip in the final quarter of 2011 this is an economy powering ahead once again. Just like the new Porsche Boxster going into British showrooms right now, a snip at £37,589. “Greater performance while using less fuel – just how do they do it?” asks one stupefied trade headline.

At least the trade surplus can come as no surprise. If Greece and Spain and the other ailing members of the eurozone are being dragged down by deficits, it follows that some other country or countries must have a surplus.

Germany is the biggest trading partner of those ailing members, and Germany benefits from their inability to live within their means.

The success is not confined to the eurozone, however. A couple of billions of those German exports represent sales to the Chinese, still offering the most buoyant market in the world, if maybe for not much longer.

In Britain we sell only two-thirds as much to China as Germany does, this despite our historic connections to that market and the existence of great companies – HSBC, Jardine Matheson, Swire – which grew out of the connections. But other things being equal, today’s Chinese would rather have a Porsche Boxster than anything we can send them. And who can blame them?

Still, if the Chinese trade balance tips too far in the Germans’ favour, or indeed if the British one does, then devaluation of the renminbi or of the pound sterling is the quickest way to correct it and adjust the respective competitive position of each trading partner. No such remedy is available in the eurozone. Since Germany and its other members are locked within a single currency, the adjustment has to take place by other means. It is taking place by the means of recession, of falling production and of rising unemployment. This only makes the deficits worse, so blocking off the second possible exit from such an unholy mess of problems, the exit through renewed growth.

Everybody is suddenly talking about growth, four years into a global crisis which in most countries has resisted all remedies. It is easier to talk about it than to do it. In Europe the clamour comes not only from people on the streets but also from politicians who have the thankless task of representing their voters’ forlorn hopes, such as the new president of France, François Hollande, and whoever may be persuaded to accept the poisoned chalice of the Greeks.

This is not an atmosphere in which good ideas for growth are likely to emerge. Public expenditure is the usual counsel of despair, but since that caused the crisis in the first place it will have to be public expenditure applied to the problems with rather more care and discrimination than was evident during the first decade of the century.

Pensions for Greeks at the age of 50 are obviously bad. French roads and bridges are presumably good, yet these things were the first to be cut because it is always easier to trim back investment than to pinch money out of people’s pockets.

Above the fray of less fortunate nations the chubby Chancellor of Germany, Angela Merkel, as usual utters soothing noises.

But she also makes clear that the lady is not for turning on the fiscal pact imposing strict limits over public expenditure, and automatic penalties for breaching them, which was accepted by 25 European leaders after a long night in Brussels on 8-9 December last year. It remains to be seen how far her two faces are going to be merged into one.

My own bet is that the basic German intransigence is going to prevail. As a matter of fact the eurozone as a whole is not being battered so hard as certain of its individual member countries.

The desperate condition of some of the parts is not reflecting on the whole. The value of the euro against the other major international currency, the US dollar, has been stable for quite a long time, with one euro worth between $1.20 and $1.40. Even after a rough ride on the markets in the last few days the euro is still trading about the middle of that range.

What does this mean? It means first of all that on the trading current account the present parity of the euro and the dollar represents a fair balance. Americans who buy the Porsche Boxster will not feel they are being ripped off, nor will Germans who buy an American equivalent (a purely theoretical concept, I hasten to add). In that case the German trading surplus is of benefit to the whole eurozone, even if within the eurozone it seems to exert devastating effects on the weaker economies.

There are estimates that an equilibrium exchange rate for Greece (one where trade comes into balance) would require the euro to fall to a value of 31 US cents. For Spain the figure would be 34 cents, for Portugal, Italy and France somewhat higher.

Devaluation on such a scale would no doubt work its benefits in the end, but in the meantime the effects on living standards would be drastic and the threat of imported inflation severe. It could be yet another self-defeating policy.

For Germany, on the other hand, the equilibrium exchange rate may lie at $2.35, getting on for double the present level of the euro. Or to put the whole matter a different way, the strength of German exports protects the deficit countries from the full effects on their living standards of their uncompetitive economies.

In these conditions chancellor Merkel is bound to argue that the solution to the problems of the eurozone is an internal one, and that it must above all involve decisive efforts by the deficit countries to make their economies more competitive, through reforms of the labour market, the end of subsidies, incentives to competition and a host of similar measures.

No amount of extra public expenditure can alter these basic imperatives. In fact extra public expenditure handed out in the wrong way could make the situation still worse and put off the ultimate solution still further.

Even chancellor Merkel will not pretend, I dare say, that this medicine is going to taste nice or that it will make the patients feel better for a long, long time.

But it is the only means by which their economic health is going in the end to be restored.

For all of us looking on from outside the eurozone I will repeat what I have said here before, that nobody should underestimate the determination of Germany, a big strong country, to save the euro, its boldest single gambit in the peaceful exercise of its power.

It would not be going to far to say the future of Germany depends on that. Its measures and its requirements of its neighbours will be correspondingly firm.