Will 2019 see the Beginning of the End for the Euro?

WHAT are the prospects for the global economy in 2019? First Europe. The German economy, the very beating heart of the eurozone, is slowing palpably, taking the rest of the continental EU with it. In the third quarter of 2018, German output declined, as a result both of a contraction in both exports and in household consumption.

The fall in exports is a result of a drop in Chinese demand, which is probably terminal. This heralds an existential crisis for the German model of exporting high-value machine tools and luxury cars to (now saturated) Asian markets. NB: the rightward swing of countries such as Poland, Hungary and Slovenia – core elements in the German manufacturing chain – represent an attack on workers’ rights geared to depressing wages, the better to offset this contraction in Germany’s international competitiveness.

Decelerating growth in German domestic consumption has been noticeable for several years. This is probably down to the little-known fact that the labour market “reforms” of the early millennium reduced employment security in the manufacturing sector. As a result, employment growth in Germany is largely in the low-income service sector. In addition, the cynical German bourgeoisie is making great efforts to integrate recent immigrants into the work force – a lower wage costs, of course.

But there is a deeper problem for the German ruling class. Germany’s economic dominance of the EU springs from its massive investment of capital in plant and machinery, the better to raise productivity and lower costs. But there is only so much extra productivity you can squeeze out of a given workforce. This barrier is now in sight.

Contrary to popular perceptions, growth in German labour productivity in the past decade was much slower than in most of its industrial competitors. Unless the German bourgeoisie can produce a second productivity miracle – by transferring production to Asia or upskilling immigrant labour to dilute wage costs to Chinese levels – Germany’s economic dominance of the EU will erode.

Germany’s eclipse marks the probable end of the euro itself – because the eurozone is a mechanism specifically designed to force everyone else to lock into the Teutonic supply chain at a fixed exchange rate favourable to German companies. But if a wobbly Volkswagen or Mercedes can’t import Polish widgets, why not return to the Zloty, devalue and export to Asia directly?


In China, the Year of the glutenous Pig 2019 could also prove troublesome. Post 2008, China embarked on a massive economic expansion fuelled through internal debt and foreign investment. This Chinese counter-cyclical boom saved Western capitalism. It did so by (1) lowering global production costs, so boosting the profits of big US high tech companies like Apple; (2) cheapening exported consumer goods, thereby stabilising living standards in depressed Europe and America; and (3) creating a reciprocal Chinese market for Western investment funds and luxury goods. Now the party is over.

In short, China has over-invested and over-produced – a classic pattern of excess which is hardwired into unplanned capitalism, even one with “Chinese characteristics”. The results are dire. Big Chinese companies can’t get sufficient export orders, so are cutting orders to the thousands of smaller suppliers, who in turn have stopped paying wages (causing workers to occupy plants). The larger, bankrupt, private manufacturers are taken over by State-owned enterprises as a temporary expedient.

Desperate to curtail further profligate investment, the Chinese government under President Xi is trying to limit bank lending – naturally exacerbating the economic crisis. Except that much of the lending is channelled via corrupt provincial governments who are a law unto themselves. In some coastal provinces, the old clan system has re-emerged to thwart central Communist Party control. Result: provincial authorities are ignoring central directives and ramping up infrastructure investment, adding to excess production.

Meanwhile, since Trump launched his Russian Roulette trade war, foreign investment has fled China in billions, further destabilising local capitalism. The ruling Communist Party is bitterly divided as to how to respond. Should it placate Trump in order to launch an export offensive in the West? Or protect its domestic internal market?

Either way, China has an unemployment rate of well over 20 per cent and rising – which is a gun pointed at the head of Xi and his regime. The police are already rounding-up young student Maoists who are trying to make common cause with workers occupying factories. Expect social revolution or Xi using nationalism as a safety valve.


Back on Wall Street, the stock market has dropped like a stone over Christmas. This reflects the gloomy international economic picture, Trump’s chaotic lack of leadership, rising interest rates and America’s own over-production crisis. Apple sales in 2018 are off track, indicating the long high-tech boom has finally stalled. Share prices in Apple’s global supply chain have also cratered. Next stop: an international phone price war and squeezed profit margins, leading to an investment collapse.

Hold on to your hat, 2019 is going to be bumpy. And I haven’t even mentioned the B word!

Comments (4)

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  1. Wul says:

    Steadily putting my paltry life savings into the credit union for last decade.

    Current return: 1% per annum, with inflation at 2.4%, so a gradual reduction in what my money will buy as time passes. Slowly bleeding cash to the rentiers, speculators and various other social parasites.

    Is it any wonder that so many middle class people see buy-to-let and landlordism as the only game in town? The better-off skimming money from the less well off. My niece working 50 hour weeks during summer holidays and 16 hrs at weekends term-time (on top of a full-time degree course) just to pay for a 4-way shared student flat.

    You got any investment ideas George?

  2. florian albert says:

    George Kerevan castigates the ‘cynical German bourgeoisie’ for importing immigrants as a source of cheap labour.

    Does he see parallel behaviour by the cynical bourgeoisie in other countries, including Scotland ?

    (For what it is worth, I agree with his analysis of Germany’s economic future though I think it will play out slowly.)

  3. mince'n'tatties says:

    So much food for thought in Mr Kerevans article. It should be obvious by now to anyone with a working brain cell that the Euro has been a disaster for
    large numbers of our fellow Europeans.
    Germany’s monstrous trade surpluses are proof that trade even in Europe far less China, is fast becoming a one way street. ECB loans for little
    other purpose than to buy Teutonic manufactured goods is economically and politically unsustainable. All built on debts and credits. Sadly I think the
    Euro will stagger on; its home base being Frankfurt should provide the clue.
    So George cleverly highlights [has to be intentional] the SNP’s number one conundrum yet again…..what to do about our independent currency.
    Hope no one’s holding their breath.
    The best wishes for 2019 to us all.

  4. Robert says:

    A cold blast of realpolitik here to shake us out of our post New Year fug. But more than the B word (which I am starting to think of as a great big distraction while our pockets are being picked) the missing element here is the C word. How much longer are we going to talk about the economy without a single mention of climate, or more broadly of ecological limits to growth?

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