Rainy-Day Economics…

Margaret Thatcher might have been the perfect housewife that got Britain off to a good start or at least that’s what she would have liked us all to have believed when she was in power. The prefect Grantham housewife, so simple: never spend more than you earn, the defender of good management of budgetary finances. But that was all part of the ruse, wasn’t it? We all know that what today’s financial markets are failing to realize is that economies can’t be run like households (especially these days!). A country is nothing like a household. When we realize that, we might start agreeing on the real causes of the financial crisis and how to deal with the problems that subsequently arose. The savings of a nation are not the savings that you and I put away in our Post Office accounts for a rainy day. It’s always raining these days and we need more than just an umbrella to keep us dry.

In times of trouble, we are more likely to put money away just in case the economy takes a dive and the horse starts bolting out of the stables. But, keeping the horse at home means increasing investment in a country rather than increasing domestic savings. That’s the only thing that is going to lead us into a wealthier and healthier economy in any country.

Germany’s role in the financial crisis that is currently hitting the EU seems to bring to light the fact that the Germans too made the mistake of mixing up national savings and private savings back in the late 1990s and early 2000s. They had such a level of unprecedented savings that they could not only provide the necessary financing of domestic investment on their own but also export those savings through investment abroad. Wage growth was reduced, leading to increased employment coupled with a reduction in household consumption. Wages fell from a 3.2% growth in the 1990s to just 1.1% in the next decade. This meant that the 1.7% deficit shifted to a staggering 7.5% surplus. It pushed the EU PIGS (Portugal, Italy, Greece and Spain) even deeper into decline. To all intents and purposes, it just shifted the economic decline elsewhere to those countries that didn’t have the foresight to do the same. All of the countries that were drawn into the spiral of the German surplus consequently saw their own economies run deficits. German exports were far more competitive. Money poured into those countries that were economically deficient in a bid to invest and make an extra buck. But, the Spaniards and the Greeks started to save less, believing that they were riding on the crest of the wave. It turns out it was only Germany that was surfing on that. When the economies of the world took a dive, the Germans pulled out and the PIGS were left suffering, wallowing in the cesspit that was left.

But, we all know that Margaret Thatcher was just about as housewifely as a bull in a china shop. Her master art was to make us thing she was just a common housewife. Germany’s savings policies of the past two decades certainly balanced their own economy, but it did little more than push the others in the EU into decline. A strange turn of events, if the Germans actually turn out to be the cause (rather than the possible solution to) EU troubled times!

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