Telegraph 22 Dicembre 2008

The German economy is on the "brink of the abyss", says the IMK institute in Dusseldorf. The country's GDP could contract by 3.5pc next year.

We are reaching depression levels here.

The IFO confidence index published by its sister institute collapsed to a record low of 82.6. This is an industrial melt-down.

It is becoming ever clearer that the surplus countries (angels) will suffer just as much - if not more - than the deficit countries (sinners), even if this offends moral justice. This was ultimately the story in the 1930s, though it did not look like that at the outset.

Germany and China have become addicted to exports. This is not as healthy as it looks. They will bear the brunt of belt-tightening by the Anglosphere Club, and East Europe.

Carsten Brzeski, ING's Europe economist, said Germany's fourth quarter will "very likely make history as the worst collapse of the German industry ever. One thing is evident: The current downturn could behave like a rock that threatens to roll down a hill. Once the boulder has gained momentum, it will simply mow down everything in its path. It should be stopped in time."

Quite. Unfortunately the fractured Left-Right coalition of Peer Steinbruck and Angela Merkel lacks the leadership capable of stopping it in time. They have quite simply lost the plot. Like the hapless Bruning government in 1932.

(Note that the German economy tipped into recession even earlier than Britain's economy and faces an equally bad year in 2009. This is not to gloat, nor is it Schadenfreude. It is merely to put matters in perspective at a time when the British press is in extreme self-flagellation mood.)

IMK may or may not be right in calling for another €50bn (£47bn) stimulus for Germany. But it should clear be now that the German people have been very badly let down by the do-nothing crowd in Berlin.

It should also be clear that the ECB has been asleep at the wheel. The IMK institute took the rare step today of attacking the bank, saying it had been "very late" in responding to the crisis.

Julian Callow at Barclays Capital says the euro's trade-weighted index has risen 10.7pc this month (sterling is a big part of it).

This is equal to a rate rise of 175 basis points. Monetary policy is tightening like a vice, although its awful effects will not be felt until deep into next year. (Never underestimate those killer FX time-lags)

The ECB is taking a big risk by refusing to follow the lead of the Switzerland, Sweden, Norway, the US, Canada, and Britain in slashing rates. The result of going it alone has been to drive its currency to levels that have ensured the now inevitable bankruptcy of scores of companies next year. Many of them might have survived under a more pro-active central bank.

A case can be made that the ECB is better off engaging in "qualitative easing" - to borrow the term from Willem Buiter - rather than cutting rates so far that its paralyzes up the money markets and repo system.

Jean-Claude Trichet has not ruled out the purchase of eurozone government debt. The ECB is banned by the Maastricht Treaty from doing this directly - for fear it would be used as a covert bail-out for EMU's profligate states - but it could in theory do it on the secondary market. This would be a political can of worms, of course.

I am coming round to the view that zero rates may be an error. It may be better to hold at 1pc and do "quantitative easing" instead - ie, printing money.

If the ECB chooses this enlightened - albeit late - course of action, I promise readers to be fulsome in my praise.

by Ambrose Evans-Pritchard

Source >  Telegraph