Advertisement
Merryn's Blog

Why Germany will never leave the eurozone

Germany may grumble about its eurozone partners. But the truth is, it gains far too much from the single currency to ever quit.

More talk on the Today programme this morning about how Germany should leave the eurozone and either take back its own currency or form a strong currency union with a few other northern European countries. Back in the days when the euro crisis was just coming to public attention, I remember thinking that this might be a workable solution I even wrote a blog on it. And while it might even still be something of a way out, I just can't see the German authorities going for it voluntarily.

Advertisement - Article continues below

Why? They've gained more from the euro than they will ever lose from bailing everyone else out. How? In general, a currency represents the strength of a country's economy. So when the UK is doing well, sterling rises. When it is doing badly, it falls (you will have noticed it mostly does the latter).

But the euro represents a spectrum of countries, connecting Germany's strength with the weakness of the periphery. So it is much weaker than thedeutschmark would have been and much stronger than say the lira would have been. That gives Germany a whopping advantage: it gets to sell its exports abroad at a significant discount to what you might consider to be the 'real' price.

That works for its manufacturers they offer quality anyway, of course, but this lets them offer excellent value to their clients at the same time. The common currency also stops many of the rest of Europe's companies competing with Germany. With no euro, everyone else would devalue their currencies to nick a bit of market share they might not be able to offer German quality but given a free floating national currency they could surely offer the kind of prices that would go some way to compensating.

Advertisement - Article continues below
Advertisement
Advertisement - Article continues below

With the euro they can't. Instead, while Germany basks in the glory of weak currency driven manufacturing success, they have to put up with strong currency driven failure.

That's why Germany, with a mere 1% of the world's population accounts for 9% of its exports. It is probably why German consumer confidence is still better than everyone else's and why its labour market is relatively buoyant. Finally it is why the country has managed to move, as if by some miracle of manufacturing from having a trade deficit in 1999 to having the world's second largest trade surplus now.

Yes, Germany has done a good job at reforming its labour markets and yes, there is much to be said for its innovative and high performance products as well as its core of family owned mid-sized companies. But as all consumers know, price is the thing that makes a difference at the margin. Global politicians and economists spend a great deal of time having a go at China for being mercantilist artificially holding down its currency in order to keep its exports cheap and gain global market share at everyone else's expense. We don't have a go at Germany despite the fact that it is effectively doing exactly the same thing, simply because it is doing so under cover of the euro.

The existence of the common currency allows Germany to have a weak currency at the same time as it gets to bluster away about the importance of a strong currency and be taken seriously as it does so. I can't see its manufacturers or politicians giving that up without one hell of a fight.

Advertisement
Advertisement

Recommended

Visit/519858/how-long-can-the-good-times-roll
Economy

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019
Visit/economy/eu-economy/601422/heres-why-investors-should-care-about-the-eus-plan-to-tackle-covid-19
EU Economy

Here’s why investors should care about the EU’s plan to tackle Covid-19

The EU's €750bn rescue package makes a break-up of the eurozone much less likely. John Stepek explains why the scheme is such a big deal, and what it …
28 May 2020
Visit/economy/eu-economy/601277/germany-throws-a-spanner-in-the-eurozones-works
EU Economy

Germany throws a spanner in the eurozone’s works

A German court has told the ECB to beware of exceeding its mandate with its QE scheme. John Stepek explains what this means, and why it matters.
5 May 2020
Visit/economy/eu-economy/601247/a-battle-for-the-future-of-europe
EU Economy

A battle for the future of Europe

The struggle to pay the costs of the coronavirus crisis has exacerbated long-standing tensions about the EU’s budget. Failure to compromise could be d…
30 Apr 2020

Most Popular

Visit/economy/uk-economy/601427/covid-bounce-back-loans-and-inflation
UK Economy

What bounce back loans can tell us about how we’ll pay for all this

The government will guarantee emergency "bounce back loans" for small businesses hit by Covid-19. Inevitably, many businesses will default. And there'…
1 Jun 2020
Visit/investments/commodities/601433/commodities-possibly-the-biggest-opportunity-in-todays-markets
Commodities

This looks like the biggest opportunity in today’s markets

With low interest rates and constant money-printing, most assets have become expensive. But one major asset class hasn’t. John Stepek explains why com…
2 Jun 2020
Visit/economy/global-economy/601420/james-ferguson-the-virus-the-lockdown-and-what-comes-next
Global Economy

The MoneyWeek Podcast: James Ferguson on the virus, the lockdown, and what comes next

Merryn talks to MoneyWeek regular James Ferguson of Macrostrategy Partnership about what's happened so far with the virus; whether the lockdown was th…
28 May 2020