The Club Med nations (Spain, Greece, Portugal), are in a horrible economic bind. France, hoping to be a white knight, hopped into the fray. France is upset that Germany's export policies will force deflation on the Club Med group. Germany essentially says tough luck.

With that backdrop please consider Angela Merkel defies IMF and France as anger rises over German export surplus.

German Chancellor Angela Merkel has defied France and the IMF, refusing to modify Germany’s strategy of export reliance or boost growth to help alleviate the deep crisis sweeping Southern Europe.

"Where we are strong, we will not give up our strengths just because our exports are perhaps preferred to those of other countries," she told the German Bundestag.

"The problem has to be solved from the Greek side, and everything has to be oriented in that direction rather than thinking of hasty help that does not achieve anything in the long run and merely weakens the euro even more," she said.

Instead she called for EU treaty changes so that serial violators of EMU rules could be expelled from the euro, and insisted Germany would stick to its own path of hairshirt austerity.

The tough words came as the IMF’s chief Dominique Strauss-Kahn said it was time for Berlin to rethink its single-minded pursuit of exports, warning that both Germany and China need to play their part in rebalancing the global system rather than relying on huge structural surpluses. "This must change. Internal demand must be strengthened with more consumption," he told the European Parliament.

French finance minister Christine Lagarde infuriated Berlin earlier this week by suggesting that Germany’s relentlesss wage squeeze was making it impossible for Club Med states to claw back lost competitiveness within monetary union, forcing them into a deflation policy that must ultimately rebound against everybody.

Charles Dumas from Lombard Street Research said the Club Med states and Ireland cannot deflate wages below German levels without causing havoc to their economies, so the EU policy creates a profound bias towards a deflationary slump for the whole system.

"The Germans are not very good at arithmetic. If they want to run surpluses near $200bn (£130bn), others must run deficits near $200bn. It is not appropriate that Germany’s dismal growth performance be exported to the whole of Europe, but that is what is going to happen," he said.

"There has been this massive self-righteousness in Germany. They have been leeching off the demand of countries for the last decade, and now they too are going to suffer until they change their ways.

Who's The Leech?

Are Germany and China the leeches, or did Greece, Spain, and Portugal spend themselves into a mess? I suggest the latter.

The US is in the same boat as well, and is threatening to label China a "currency manipulator". The remedy is not so easy as I explained in Pressure Increasing on China to Revalue Yuan; What Can Go Wrong?

Judging from the arguing, things are starting to go massively wrong in the EU as well. Look no further than German Chancellor Angela Merkel calling for EU treaty changes so that serial violators of EMU rules could be expelled from the euro.

These are signs the global recovery is toast. When this matters to the stock market is anyone's guess.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List