Wednesday, 24 September 2014

Euro as the new Deutsche Mark

Germany practically controls the euro as if it were its own currency but it would gain more being less in charge

Being a big fish in a small pond can have its benefits as Germany is discovering in its dealing with Europe.  Its powerhouse economy means that Germany was one of the few countries left standing after the Eurozone crisis.  Germany has used this position of strength to turn the euro into its own de-facto currency.  It dominates the decisions over monetary policy and has influences spending decisions by politicians outside of its borders.  This level of control is alienating many others in Europe while still being insufficient to keep Germans happy.  As a result, more could be gained by Germany trading away its power to secure a brighter future for Europe as a whole.

Benefits of being the boss

Control over monetary policy is not something that Germany fought for but it came as a by-product of the Eurozone crisis that hobbled the other powers in Europe.  More prudent management of government finances meant that the government has less debt and the economy has been resilient due in part to its exporting prowess.  This left its Chancellor, Angela Merkel, as one of the few politicians who is backed by voters and in a strong position to dominate European politics.

It has allowed Germany to impose its own policy measures over the Eurozone.  Germany has set the tone regarding austerity as well as its concerns over inflation limiting the scope of monetary policy.  Countries such as Spain and Italy would benefit in the short term from more government spending and looser monetary policy.  But Germany has pushed for a range of policies which are a better fit for its own economy than others in Europe where the shortfall in demand is more pronounced.  The aim is to bring others into line in terms of implementing reforms which would improve the outlook for Europe in the future.

Along with setting policies, being the boss of a widely used currency comes with a host of benefits.  For starters, investors looking for the safest place to park their euros will choose Germany over other European countries and this keep down interest rates in Germany.  Worries about a sluggish economy in Europe are a further boost to Germany by keeping the value of the euro weak.  The euro is both too strong considering the economic circumstances of many of the countries in Europe but considerably below what a truly German currency (a new Deutsche Mark) could be valued at. 

Getting more from less

As is often the case, its power has become like a poisoned chalice.  Not only is Germany out of tune with many of its neighbours but the euro is also increasingly unpopular at home.  The rapid rise of an anti-euro party in Germany (called the Alternative for Germany party) suggests that there are many Germans who feel as if they are getting a raw deal from being part of the Eurozone.  This party joins a growing list of populist parties in Europe worried about the level of integration needed to maintain the euro. 

If a position of strength does not come with many rewards, sometimes more can be gained from giving power away.  Germany could soften its strict stance on fiscal and monetary policy as a trade for more reforms in other countries.  This bargain would help deal with the short-term issues of a weak economy needing stimulus as well as concerns about the prospects for Europe over the long term.  Compromise also seems more likely now that deflation is a growing threat and the German economy itself is flagging.  It is time for Germany to cash in now as it may be too late if the situation in Europe gets worse. 

1 comment:

  1. Hi,

    Before I ended up in Asia I worked many years with the Germans. In my opinion they have an extremely fair and accurate view of the world. If you aim for perfection, work hard and adhere to the laws, rules and regulations then you will be rewarded.

    Solid is the word.

    There used to be a strong element of guilt over WWII, but this is, IMO, rapidly diminishing, and there is a growing intolerance towards the indolent southern Europeans and France.

    The question that will always be asked is, why should the Germans work their bollox off, effectively implement the law and tax system, and punish corruption, whilst the rest carry on like banana republics? I think that is the essence of the situation.

    The current level of the EUR is possibly about right for Germany. The problem is it is way too high for Greece, Spain, France, Italy and a few others. Ireland is, for example, now making a recovery at the current EUR level. It seems like they know how to work for a living.

    The feeble countries in the Eurozone are simply paying themselves wages and giving themselves living standards which are way above their productivity level.

    Deflation is not the enemy economists make it to be. If Germany experiences deflation it is due to the cost of living going down and the Germans will experience an improving living standard without wages having to rise. And they would understand that.

    The other countries have grown their economies on a wave of debt based on the premise that wages will always rise to make the debt less in the future. This is a con game and self deception. For two decades this deception has been given to us by the politicians. With the result that the poor and middle classes are worse off now than twenty years ago.