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Ambrose Evans-Pritchard

Ambrose Evans-Pritchard has covered world politics and economics for 25 years, based in Europe, the US, and Latin America. He joined the Telegraph in 1991, serving as Washington correspondent and later Europe correspondent in Brussels. He is now International Business Editor in London.

Germany declares economic war

 

By Ambrose Evans-Pritchard Economics Last updated: September 23rd, 2009

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If there are any German readers of this blog, I would like to know what they think of the latest breath-taking provocations of German finance minister Peer Steinbrück.

Ill-informed belligerence: Peer Steinbrück

Remember that Herr Steinbrück is not a journalist, pundit, or back-bench maverick. He speaks officially for the German government and for the German nation on the international stage.

Every assertion that he made about Britain in his interview with Stern is either factually wrong, or such a serious distortion of events that it amounts to a smear. Furthermore, it was quite threatening.

What he said, in effect, is that Germany will marshal its forces to ensure that a chunk of the British economy is shut down - whatever the social consequences. This is the closest thing I have seen to a declaration of economic warfare in Western Europe in my lifetime.

“There is clearly a lobby in London that wants to defend its competitive advantage tooth and nail.”

Stern said that he sees “dark powers at work” in Britain. He accused the UK government of “doing its best” to sabotage stricter financial regulation at the G20 in Pittsburg.

This resistance will be crushed. “We WILL effectively change the rules on the financial markets. Politics is sometimes like a locomotive which comes slowly up to full speed.”

“The British financial industry gains 15 per cent of the gross domestic product, in Germany is it six per cent.”

Britain is out of step with the rest of Europe in trying to keep this “advantage going.” It must “share the burden” of the financial crisis in the form of a tax on exchanges.

“The central question is who pays the bill? It cannot be that the citizens of Europe should carry the whole cost.”

Britain was having “an especially hard time, to put it politely”, agreeing to tougher regulation of hedge funds.

Now, I understand that this Westphalian bully is fighting an election on Sunday, and may well be forced out of government. But let me state a few points.

1) Britain is not blocking the G20 deal on bonus caps for bankers. It broadly supports the idea. It backs the push for greater transparency.

2) Hedge funds had almost nothing to do with crisis as agreed by the Turner Report and the EU’s Larosiere Report. They are already well regulated by the FSA in London (unlike New York, where they are not regulated). The FSA’s hedge fund code is generally viewed as a model for others.

3) UK financial services are 7.8pc of GDP, not 15pc.

4) German Landesbanken and mortgage lenders got into trouble on their global ventures because they tried to extract extra profit and were badly regulated by BaFin, the Bundesbank, and Mr Steinbrück himself. Their use of Irish SIVs, etc, to conduct off-balance-sheet speculation is the direct result of bad rules (Basel etc) drawn up after earlier crisis - a perfect example of how knee-jerk regulation by ignorant populists backfires.

5) Mr Steinbrück is the arch-cover-up artist himself. He has been resisting - “tooth and nail” - a transparent stress test of the German banks. This comes despite a string of criticisms from the IMF, OECD, and European Commission. It is blindingly obvious that he has swept the problems under the rug until after the election.

6) Britain is in considerable trouble right now - entirely of our own making, and caused by a decade of inept government, fiscal incontinence, and excess debt. Is that a moment to kick us in the teeth? One reason why the budget deficit has exploded to 13pc of GDP is that the collapse of City profits has cut a huge hole in government revenues. There is already a brutal adjustment underway. What is the benefit of further contracting credit in the middle of severe downturn. The man is mad.

7) In terms of morality, I don’t see much to choose between Germany’s car industry (with its stress on high-powered engines that consume scarce resources, and pollute) and the City of London. They are both core national industries, pillars of our respective economies.

Angela Merkel shares the British view that “binding powers” for the EU’s new trio of super-regulators is a step too far, and a breach of Germany’s constitution.

If a British Chancellor gave an interview on behalf of the British nation saying the German car industry should be shrunk massively, it would be viewed as a gross and gratuitous attack on Germany.

Need I add, yet again, that the banks did not cause this global crisis. Governments around the world caused the crisis by forcing down the price of credit (Greenspan, Bank of Japan, and ECB on short rates: China et al on long rates, by flooding the global bond market) far too low for many years, encouraging debt. Banks were the instruments, not the cause. That is an elementary point that many people - including Mr Steinbrück, obviously - still fail to understand.

The Westphalian bully likes taunting Britain. He made waves earlier this year mocking the “crass Keynesianism” of Gordon Brown at the most dangerous moment of the crisis. This prompted a formal protest by the British ambassdor in Berlin.

Mr Steinbrück subsequently engaged in a great deal of crass Keynesianism himself, as well as outright protectionism through the Deutschland Fund. If he remains in office, he will soon have to deal with the second leg of the German banking crisis that he has so artfully dodged until now .

We must resist Schadenfreude when that moment comes.

Tags: Britain, financial crisis, German finance minister, Germany, Peer Steinbrück, Stern interview