Germany matters. It matters in a way that the US does and the UK or France don’t, in that its policies and economy shape a region far beyond its own borders. So the first thing to watch for this week will be the shape of the German coalition. There are two political questions here: who will be Angela Merkel’s partner in government? And how strong will her leadership be? And there is one economic one: will Germany continue to pile up current account surpluses for the next five years?
Writing ahead of the election result, it is tempting to assume there will be no significant change in economic policy whatever the outcome. But there is one thing that will prove unsustainable over the next five years. Germany’s current account surplus is the largest in the world, larger even than that of China. It is already equivalent to 8 per cent of GDP. Germany is super-competitive. Were it not for her having replaced the deutschmark with the euro, her currency would have been revalued several years ago. But the euro’s value is held down by the performance and needs of the bloc’s weaker members. Result: Germany lends the rest of the world the money to buy its goods. Some of those loans, in particular to the rest of the Eurozone, may never be repaid.
You can put off resolving underlying economic problems for a long time but eventually the pressures that result cannot be put off forever. That is why the result of the election matters. A strong German Chancellor can prioritise European unity and the integrity of the Eurozone above economic pressure to change for a while yet. A weak one would find that something will give, maybe quite soon.
We cannot know how the problem of the German surpluses will be resolved. It may be through protectionism from the rest of the world. The US may start to lean against German exports. The UK may, if given an unsatisfactory Brexit deal, do the same, though a Trump-inspired anti-German initiative would be much more effective. Or it may be that Germany finds the pressures come from within the EU, from France and Italy. Or, quite possibly, German politics will force a change, particularly if there is a more nationalistic mood across the country after the election. But now the election is over, the new government will have to confront the problems of success.
The next thing to look for will be Janet Yellen’s speech on Tuesday. As always there will be no fireworks but she will presumably make it clear that the Federal Reserve will press on with the return to normal monetary conditions, and the question then will be whether the US and the world are ready for rising interest rates. It seems a bit ridiculous to pay so much attention to one person’s words, particularly since she may no longer be in post next year – her term comes up for review. But the issue behind all this is so huge and anything she says will be chewed over, and if the markets conclude that higher rates will come quicker than previously expected (as they now think will happen in the UK) then the autumn will suddenly look more bumpy. Not necessarily a market crash, but some sharp and unsettling movements could be in store.
Of the rest, there are further estimates of UK second quarter GDP, balance of payments figures, and most important as this tells us about 80 per cent of the economy, the index of services for July. This will give the first solid bit of evidence as to whether the economy is holding up through the autumn. Brexiters will cheer if they suggest it is, while Remainers will say “I told you so” if it isn’t.
The other UK domestic story will be whatever emerges from the Labour Party conference, but that is not really an economic event. Maybe more important will be the popular reaction to the decision to ban Uber from London streets. Will populist pressure influence policy?
Finally there is the real value of Bitcoin. The past few days have seen several prominent people, including Jamie Dimon, head of J P Morgan Chase, say it is a bubble. Some day in the future he and the others will doubtless be proved right. But when? This autumn? This week? Or is the crash a few years away? No-one knows, or can possibly even give a timescale, but this week will be a good time to look for cracks. And once it does there will be a huge rush for the door.