The simplicity of identities and the complexity of reality

The leadership of the two main political parties in Germany have agreed to form a Grand Coalition, meaning a new government should be in place in early January.

It will be formed at a time when Germany has come under criticism from the American Treasury and investigation by the EU Commission for building up sizeable external trade surpluses and not expanding domestic demand sufficiently to support world growth.

The Grand Coalition’s economic programme will provide a mild boost to domestic demand. But Germany will hold to its philosophy that sound public finances are the best foundation for growth, underpinned by copious private sector savings needed to finance a fast-ageing society.

The way forward for the EMU periphery (and the US) is not to appeal to Germany to boost consumption. Instead, it should be to emulate the labour and market reforms necessary to make Europe as a whole more competitive in world markets. German industry has led the way, driving its equity markets to record highs. We remain long German equities.

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