As Germany gears up for national elections in September, politicians appear to be making a grab for any bit of economic data that helps their political case. Not surprisingly, the big election issue is the debt crisis affecting the region, and Germany's commitment to bailing out peripheral countries facing fiscal stress. Besides, there is considerable public opinion against the idea of Germany providing more succour.
A new bit of data that helps the anti-bailout case came from the European Central Bank (of all places) and has raised quite a furore. This shows that net median wealth of German households is lower than of its southern neighbours. While Germany's net median wealth is euro 51,400, it is euro 101,970 in Greece, euro 182,700 in Spain and a whopping euro 266,900 in Cyprus. Thus, the anti-bailout hardliners claim that the apparently wealthier southern economies have no business expecting a handout from Germany whenever their government finances or banks go bust.
Of course, there are serious problems with this data as Jennifer Mckeown, a senior economist with think tank Capital Economics, points out in her recent research note ("Is it true that Germany cannot afford bailouts?", May 7). For one, while median wealth may be lower, per capita incomes in Germany are way higher than in the periphery. Second, mean wealth says nothing about the wealth of the richest Germans, and this is significant since the country has a relatively uneven income distribution. In fact, Germany's mean wealth (rather than median) is at euro 195,200 -significantly higher than both the median and mean wealth levels in the periphery. Besides, this wealth calculation does not account for the state or occupational pensions that Germans are entitled to, and this could add significantly to their wealth. The argument that Greece and Spain also have fairly liberal pension schemes that would augment wealth does not hold any more since both these economies have slashed pensions as part of their recent austerity drive. Finally, the wealth estimates take into account the value of houses owned before house prices started plummeting in the periphery. German prices, on the other hand, have gone up marginally after the survey was done.
That said, the fact this data seems to have got a fair share of media and political attention in Germany, perhaps, suggest that German politicians would have to be a little careful in articulating their positions on fiscal support to the region. The European Union taking somewhat of a hard line on Cyprus and forcing bank depositors to take a sharp haircut was, perhaps, the first indication that the German line on fiscal assistance was getting harder in the pre-election build-up. This is likely to continue in the next few months since no German politician can risk sounding too liberal on its stance. This would rule out the possibility of a fiscal boost in the region in the near term.
This is also likely to slow the progress towards a banking and fiscal union. In short, the conditions for another "mini-crisis" in the region, if one of the countries face a fiscal or banking crisis, are falling into place. Another "risk-off" episode coming on the back of bad news from the region combined with a German position that is less willing to play ball is eminently possible. This could not only take the shine off the euro, but all risky assets across the board, including, incidentally, Indian equities and the rupee.
Fortunately, the majority view is that Germany could sing a somewhat different tune once the elections are over. The German government (whichever dispensation is in place) is likely to take a softer line on austerity and possibly speed up institutional reform. That should be good news for this region.
Tailpiece: Abandon hope all ye who bet on a sharp appreciation in the rupee (at least in the near term). Despite soft commodity prices, bullishness in equity markets and better news on inflation, the rupee has shown what analysts call a depreciation bias. A couple of things are happening. Globally, there is a pro-dollar mood as both data (April US retail sales for one) and expert opinion make a stronger case for winding down the QE3 programme. Second, traders who had taken a long position on the rupee after the March trade deficit numbers (that showed unexpected contraction) were caught on the wrong foot when the Reserve Bank of India apparently bought a large amount of dollars as soon as the rupee dipped below 54 to the dollar around mid-April. Some who waited patiently for another round of appreciation seem to have got tired of waiting and are now squaring positions. The trade figures for April that showed a massive surge in gold imports made matters worse. A sharp reversal in the rupee seems unlikely though much depreciation is also unlikely.
The author is with HDFC Bank. These views are personal
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
