Collapse in German growth will add to euro rebellion

News that Germany recorded only marginal, 0.1pc, GDP growth in the second quarter is not just an economic event; it is a political one too, for the German economic “miracle”, with output rebounding from its post Lehman low far more rapidly than any other advanced economy, has been about the only thing that has kept Germans onside on measures to support the euro during the last year and a half of turbulence.

Indeed, in some respects, the crisis has seemed a positive boon for German industry, for it has meant that its exports have enjoyed a far more competitive exchange rate than would have been the case had Germany still had the Deutsche Mark. Trade has boomed accordingly.

But as the world economy slows, even that advantage is beginning to fade. Now of course there are lots of anomolous reasons why the German economy would have slowed in the second quarter, not least the after effects of the Great East Japan Earthquake, which because of the disruptions it caused in the global supply chain would have hurt the German economy, with its high dependence on manufacturing industry, particularly badly.

Even so, there’s much to worry about. Consumption and investment in construction are slowing fast, and most of the forward looking indicators are turning down. If Germany isn’t even deriving a trade benefit from membership of the euro, then its support for further bailouts will begin to look more questionable still.

The European Central Bank’s decision to start tightening policy a couple of months back is looking ever more indefensible. Even in Germany, money has been contracting for some while now, yet the ECB has allowed itself to be persuaded by Bundesbank hawks into an almost suicidal approach to policy. The ECB’s actions have become dictated more by the intractable politics of the eurozone than the interests of sound policy. Thus it is that in order to quell German alarm over the way the euro is being managed, the ECB has thought it necessary to attack an imagined inflationary threat to sacred German principles of sound money.

It’s tempting to mock the piece on saving the euro that Gordon Brown, the UK’s former prime minister, has written in today’s New York Times. Why is he writing for the NYT, for heaven’s sake? Is it because he’s so discredited back here that he has to go to the US for anyone to take him seriously any longer?

The contemptuous way in which he used to treat other European policymakers and leaders certainly means that none of them will be listening to him. Yet it has to be said that this is a surprisingly good piece, which demonstrates a pretty sound understanding of the extreme nature of the threat Europe faces to its continued economic prosperity. Many will vehemently disagree with his solution, which is in essence just the European superstate the euro area seems to be careening towards in any case, but it’s well worth a read anyway.

More QE? Give us a break

A head of steam is building up for more quantitative easing in the US and the UK, though apparently not for the eurozone, which is the one place which really needs it. Here’s the case against more QE, which I was going to put on BBC Radio 4’s Today programme on Friday morning, except that we were diverted by the short selling issue.

I’d never say there are no circumstances in which another dose of it would be needed, but the only real justification is the sort of extreme deleveraging, deflationary threat that we saw post the Lehman Brothers collapse in the autumn of 2008. Things look very serious in the eurozone, but we have not yet had that extreme event. Market closure to a major sovereign such as Italy, with no mechanism in place to prevent default, would certainly be the trigger I’m talking about. But as I say, we are not there yet.

In the meantime, it is very hard to argue that in Britain at least with inflation heading towards 5pc and real interest rates deep in negative territory that anything would be gained from further QE. Bond yields are already as low as low can be. If the purpose of QE, by which is meant the creation of new money by central banks to purchase government bonds or other assets, is to depress bond yields, thereby forcing higher risk investment and spending, well, how much lower can they go? They are already at their lowest level in more than 100 years. There’s nothing to be gained by pushing them even lower.

It’s true that money growth in the UK economy is much lower than is consistent with reasonable growth, but it’s been at that level for a year now and it has not driven us back into recession. Anecdotal evidence is that velocity of money, which is the key indicator of economic activity, has fallen quite steeply recently, but let’s see it in the figures before spraying the economy with newly printed money again. In the US, meanwhile, money growth has picked up quite sharply, pointing to significant recovery a year from now. That doesn’t mean it is going to happen, but it is an encouraging sign.

About the only other piece of good news around at the moment is that commodity and fuel prices are falling again, taking the pressure off inflation and putting a little bit of money back in people’s pockets. Do we really want to stoke these prices up again for some kind of short lived and probably quite marginal boost to growth.

QE is like a drug. The first dose was quite potent, but the more frequently it is used, the less effective it becomes and the more the addict demands. QE2 in the US, launched in response to a soft patch in the recovery similar to the one we are going through today, was almost certainly a mistake. Sure enough, it boosted asset and commodity prices, but it did very little for ordinary people. To the contrary, by raising food and fuel prices, it only made them poorer.

To maintain negative real interest rates over such a sustained period is unfair on savers and therefore morally and socially questionable. It certainly softens the deleveraging process, but only by punishing those who have been prudent with their money. Enough is enough. There’s no case for further QE right now. I’ll tell you when that changes.