Money Matters: Why Germany Wants to Keep the EU Together

 28 June 2011. 

 The Euro-zone is faltering. Bogged down by the ails of the PIIGS, the Euro-zone is fragile and susceptible to a potential economic meltdown. 

 28 June 2011. 

 The Euro-zone is faltering. Bogged down by the ails of the PIIGS, the Euro-zone is fragile and susceptible to a potential economic meltdown. 

With Greece heading towards an inevitable default, despite the recent announcement of a second bailout in just over a year, the word on the street is not about whether the other Euro-zone countries would once again leap to Greece’s rescue when this happens but rather on whether Greece would eventually be kicked out of the Euro-zone – a potential precursor to a dissolution of the Euro-zone.

But for the moment at least, the Euro-zone is putting on a united front. Speaking on the behalf of the German government, Steffen Seibert told the press that, [quote]“an exit from the euro zone by Greece is not the right way forward. That cannot be the solution.” [/quote] 

Seibert added that a Greek exit was never a consideration for the Euro-zone, even as a “Plan B” option to tackle the debt crisis.

This announcement by the German government does not come as a surprise for political and economic observers in Europe. Alongside France, Germany is one of the strongest advocates of the Euro-zone and has regularly stated its desire to keep the Euro-zone together.

As the largest economy in the Euro-zone, Germany is expected to be among the largest contributors for Greece’s upcoming second bailout, as well as being at the frontlines to tackle any of Europe’s future problems.

In 2010, Germany demonstrated astounding resilience to the global financial crisis – emerging as one of the strongest advanced economies in the world. Germany’s GDP (PPP) grew by 4.49 percent to US$2.81 trillion, while unemployment fell to 6.85 percent in 2010.

Related: Germany Economy

Related: Germany Economic Forecast

However, despite Germany’s strong economic performance, the Euro-zone has been marred by weak Euro-zone nations facing a sovereign debt crisis coupled with high unemployment rates more than double than that of Germany’s.

The German economy has also been affected. Due to the high levels of connectivity among the Euro-zone nations, it is likely that Germany would have seen better economic growth, if not for the weak currency as well as the constant provision of funds from its own taxpayers to bail out other Euro-zone nations.

[quote]According to the New York Times, half of the €35 billion, or US$49 billion, which German Chancellor Angela Merkel pledged in bailout loans to Greece could potentially be lost, in addition to any extra money required to recapitalize German banks exposed to the Greek debt. [/quote]

Faced with the burden of fixing a seemingly unfixable problem, one might wonder why Germany and its policy makers persist in its convictions for the Eurozone, especially when a break-up could potentially solve some of the region’s problems as well lightening the load for the major economies.

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Should Germany Stay in the Euro-Zone?

Yet, things are not often as straightforward as they may seem.

In fact, some economists have placed Germany’s strong economic growth down to the weakened Euro currency. In other words, Germany was growing at the expense of a weak euro and the weak economies in the Euro-zone.

Thanks to a low Euro exchange rate, Germany was the third largest exporter in the world for 2010 – exporting US$1.337 trillion worth of products compared to its 2009 figure of US$1.145 trillion. Germany’s current account balance also received a boost from US$166.968 billion in 2009 to US$176.084 billion the following year.

In the event that the Euro-zone is dissolved and Germany once again returns to the Deutschmark, the appreciation in its currency value would almost certainly have an impact on current competitively priced German exports. 

Another important factor for Germany to consider is the likelihood whereby the demise of the Euro may result in weaker Euro-zone nations converting their current debt to Germany from the Euro to their own currencies such as the drachma, escudo, punt…etc.

While the Deutschmark is likely to appreciate in value via the conversion from the Euro, currencies of the weaker Euro-zone nations may depreciate dramatically upon conversion. This would only result in weaker economies finding it harder to repay their debts, particularly those that they owe to Germany. 

Nevertheless, common sense dictates that Germany cannot continue financing other nations’ debts, especially when these debts appear to be getting worse in spite of the bailout money provided.

The constant provision of funds by the German government to bailout struggling Euro-zone economies will only serve towards creating unnecessary burden and liabilities on the German taxpayer. There will undoubtedly come a day when the German taxpayer gets fed up of paying more taxes to bailout other countries.

[quote]”Politically, it’s not possible to tell voters that they are bailing out another country so that it can avoid painful austerity measures that they themselves have gone through. Such aid, whether conditional, or – even worse – unconditional, is counterproductive,” said Bundesbank chief Axel Weber. [/quote]

And it’s not as though German money has been put to good use. According to a recent European Commission report, the national debts of every single Euro-zone country increased from 2005 to 2011.

Greece and Ireland in particular experienced a 57 percent and 85 percent increase in its Debt/GDP ratio respectively, while prudent Germany saw its national debt to GDP ration increase by 14 percent.

Prominent Economist Nouriel Roubini told the Financial Times that, “Euro-zone debt reduction or ‘reprofiling’ will help to resolve the issue of excessive debt in some insolvent economies. But it will do nothing to restore economic convergence, which requires the restoration of competitiveness convergence. Without this the periphery will simply stagnate.”

Related: Euro-zone Divorce Imminent: Nouriel Roubini

As such, any insistence by Germany to keep the Euro-zone intact may inadvertently create a network of welfare economies heavily depended on German funding for survival.

Ng Ding Neng,

EconomyWatch.com