Photo: Goldman Sachs
Goldman Sachs Asset Management chair Jim O’Neill tends to look on the cheery side of things, but in his latest weekly letter (.pdf) he’s more bearish than we recall. Just when he thought the economy was turning a corner, he says, there’s been a spurt of bad data, some of it Sandy-related, and some of it Fiscal Cliff-related (a topic on which he sees no progress).His most interesting comments concern Europe. He notes that it won’t be too long before Germany’s export exposure to the rest of the Eurozone is rather small (compared to its BRICs export exposure) and so therefore it won’t be too long before Germany just doesn’t have any economic rationale in saving it.
A Growing Big Picture Threat to EMU?
Despite the tone of my post-Rome trip comment and much of what I often write about EMU, especially my belief that the Euro show will go on, I do find myself worrying more and more about the “big picture” economic rationale for it. I asked James Wrisdale, on my team, to project what 2020 trade patterns might look like for each of the UK and Germany if trends since 2000 broadly continue. You end up with some pretty interesting results as can be seen in the attached table.
Let me just highlight a couple of things. In 2020, Germany will have not much more than one third of its exports with the euro area, and nearly as much with the BRIC countries. Its exports to China would be more than 15%, easily the largest, and nearly double the exports to France. Perhaps Germany will be proposing a monetary union between itself and the BRIC countries by 2020?
For the UK, oddly, they would have more export exposure to the euro area than Germany would, although that is only because of exports to Germany itself. But overall, UK exports to the region would also decline more in significance and I find myself wondering why the UK would want to be so concerned about the Euro area, and dangerously thinking that if the UK isn’t prepared to get more involved in the core Euro issues, then what is the point of being involved in the EU at all?
But most importantly I come again to the conclusion that I did earlier in the year in terms of debt sustainability. This time, because of trade patterns, the window for truly sorting out their organisational issues is quite short as by 2020, it wouldn’t be worth sustaining if it isn’t saved and strengthened. The weeks, months and the year after the 2013 German election seem like the last window of time they might have in my view.
Photo: The Economist
In the short term, he also keys off the controversial Economist cover on France, with the exploding baguettes:
*The bigger issue he refers to is what’s noted above, about trade and the economic justification for saving the Euro.
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