Back when I was writing on currency trading for Agora Publishing in 2009-2010, I wrote dozens of articles about the Euro.
Something to keep in mind when sorting through the debt problems is these problems are great for the German economy. Germany gets to export with a Euro valued far lower than it would be if there were no debt problems.
This allows them to be competitive in the world market when they should not be competitive.
The idea is pretty simple. If Greece has an unsustainable debt problem, there is a risk of default. Default means you do not get back as many Euros as you lent to Greece. This pushes down the value of the currency to a level where the implied discount is at least as great as the losses.
Since the ECB and Germany are committed to what seems like a 0% inflation target, Germany gets all the benefit of a hard currency for domestic markets, with none of the bad parts of a hard currency.
Usually when you have a hard currency, your exports will be terrible, because the currency retains value against other depreciating currencies. So your low inflation target causes a strong currency, which then causes unemployment in export sectors, and unemployment more generally if you believe in fiscal multipliers.
Germany does not have to face up to this problem. They are able to export their unemployment to other areas of the Eurozone by running a current account surplus with the other Eurozone countries, due to a crazy weak implied labor exchange rate.
Aside: I have lots of German friends. They all – and I mean all – said “when the Euro was adopted, prices seemed to essentially double overnight.” What this means is their labor wages were cut!
The absolute size of this surplus was 217 billion Euros in 2014. Holy smokes that is huge. Imagine the U.S. running a $1T surplus, and what that would do for the U.S. economy.
The surpluses have been 6% or so for the last several years!
There is really only one way Current Account Surpluses of this size can happen in the modern age: The currency is mis-valued through deliberate manipulation.
In a true floating currency environment, there is simply no way a CAS of this size could be sustained. Investment in Germany would boom, and this would push up the value of the currency to bring the CAS more into line.
“This is not a conscious beggar-thy-neighbor policy,” said Carsten Brzeski, chief economist at ING-DiBa AG in Frankfurt. “Germany has the right product mix at the right time, and on top of that it is helped by the lower euro.”
Yes, it is a conscious beggar-thy-neighbor policy. If they are not trying to actually solve the problem in Greece and the rest of the euro area, it is a conscious policy.
Germany could solve the euro area problem with some fiscal transfers, like we in the U.S. do to uncompetitive states like South Carolina and Mississippi. Even better, it could solve the problem with promises of debt reduction if the structural reforms to the Greek economy were actually achieved.
Yet, Germany is not even considering solving the problem in Greece, or Portugal, or Italy, or Ireland.
People have been speculating as to the reasons for German intransigence on the Greek problem. How about the simplest reason – having problems in Greece is worth billions of Euros more to the German economy than solving those problems?