Why, given the crisis across the eurozone, is the euro still so strong? The answer, according to GFC’s Graham Turner, is simple.
The market expects the end game of the current confusion to be the exit of the peripheral countries leaving the euro representing only the seemingly hard currency countries of the zone. The euro then is currently not being valued as what it is now – ie, a European currency – but as what it is expected to become – a ‘pseudo-deutschmark’.
However, this strength is just one more reason why it seems to be unlikely that the eurozone will collapse while Germany still has the means to prevent it.
It isn’t often that one country has a clear and recent example of disaster to work with, but Germany does – Japan. Japan’s extraordinary economic success pre-1990 was based – as China and Germany’s are now – on export-led mercantilism. The only difference is that Germany’s success is even more dependent on exports than Japan’s ever was.
By 1989, Japan’s export to GDP ratio was 11.8%. In the second quarter of this year in Germany, that ratio was over 50%. So, what happened next in Japan should cause officials at the Bundesbank some serious worry. The slide into deflation was, says Turner, “deeply exacerbated” by the constant appreciation of the yen, something that was in turn a symptom of the “persistent current account surplus.”
I’ve written here before about the consequences for the German economy should the euro fail, but the Japanese experience does rather highlight the dangers: a sustained revaluation of the euro would inevitably lead to “a repeat of Japan’s forlorn battle with endaka (strong yen).
How bad would it get? That depends how many countries stay and how many go. But it is worth noting that the surpluses of the core group of four are all higher than that of Japan in 1990 (2.4% of GDP). Germany is currently running a surplus of 5.7%, the Netherlands is on 7.2%, Finland on 3.1% and Austria on 2.8%. The point here, as I have said before, is that Germany can’t afford its own version of endaka.
That’s why it really needs to keep the peripherals on side, why it can’t leave the zone itself or let Greece go, and why those who are betting that the euros they buy today will be a ‘pseudo-deutschmark’ are likely to be disappointed.