Germany Reaps the Benefits of a Weak Euro

Germany is looking increasingly like the sole beneficiary of the Euro currency.

Since the introduction of the Euro in the late 1990s, Euro countries have greatly benefited from the convergence of interest rates towards German levels.  This trend cut the cost of funding for governments, corporations and individuals.  Some will argue that it also created the financial laxity which eventually led to the present-day crisis.  With the unfailing clarity of hindsight, it is now obvious that Greek borrowers should have paid a lot more in interest than German ones. For Greece and most Euro countries, the party lasted for several years but the brutal hangover has now set in.  Not so for Germany which has emerged in the last two years not just as a beneficiary of the Euro, but arguably as the sole beneficiary.

As The Economist pointed out recently, the German economy is booming:

“Its (Germany’s) GDP per head has risen by more than any other G7 country’s over the past decade. Unemployment in the troubled euro zone is at its highest since the single currency’s birth; in Germany it is at a record low. In most rich countries manufacturing exports have been hammered by foreign competition; in Germany they remain powerful drivers of growth.”

The Economist identifies several factors in Germany’s success, notably the resilience of Mittelstand manufacturers and the system of apprenticeships and vocational training, but it overlooks the most important factor:  German exports have boomed because the Euro is significantly weaker than the Deutsche Mark would have been.  If the Euro zone was disbanded and the strong Deutsche Mark returned, the competitiveness of German manufacturers and exporters would be adversely impacted.  In a strange irony amid the current turmoil, Germany can find solace in Greece being Greece, and Italy and Portugal, since the inclusion of these countries in the Euro zone has weakened the Euro vs. other leading currencies.

By contrast, the Euro has been too strong for Greece, Portugal and Italy, making their exporters less competitive with foreign counterparts.  Unlike Germany, these countries lack the skill, technology or competitiveness to produce the cutting edge industrial products which are now in high demand in the developing world.

The Economist recognizes that Germany has a serious demographic problem.  As for most European countries, its population is expected to shrink.  Domestic consumption, unlike in the US, has always been moribund, but if the export machine weakens due to a stronger currency or other reasons, there is little hope that the domestic economy can pick up the slack. The structural strengths of the German economy, real or imagined, will then appear of secondary importance.

See also The Economist’s interactive guide to diverging conditions in various European countries.