Though economic unions do much to facilitate the movements of people and goods (and we know that trade leads to growth), it is inevitable that certain union members will always be weaker than others. An unpleasant consequence for the stronger ones is that when dark clouds overshadow parts (or all) of the union, it falls on the strong to carry the weak.
This is currently the situation in the European Union, where Germany (the world’s fourth largest economy by nominal GDP and the strongest in the EU) has been expected to cover for countries such as Greece, Portugal and Spain.
Germany is a powerhouse economy, and it manufactures some of the most well known and respected products in the world. However, growth in Q2 did drop to just 0.1%. This was due to a decline in the trade balance [to 12.7 billion euros ($18.1 billion) from 14.8 billion euros in May], which is of no small importance for a country whose economy is more than a third made up of exports [1] [2].
Nevertheless, one could argue and (many have) that it is in Germany’s best interests to prop up the weaker nations. Indeed, if the Union fails, the results could be disastrous. But, in the interest of discussion, could Germany in some ways be benefitting from the weakened Union, and having its currency tied to it? Could things in fact be worse if Germany was on its own, still using the Deutsche Mark?
First, a quick refresher. When the European Union member countries switched to the euro, it was decided that a fixed amount of each country’s currency would equal one euro (for instance, 1 euro = 6.55957 French franc, 1 euro = 1.95583 Deutsche Mark). This amount was fixed forever, for each country. This means that no matter how the euro fluctuated to other currencies, all of the country’s “old” currencies would be forever pegged to each other in the same proportions.
But what if Germany was still on its own, using the Deutsche Mark? Given how solid its economy has been until recently (and how comparably weak the U.S. dollar and economy have been, along with most of Europe’s), it is reasonable to assume that investors would purchase German Deutsche Marks, causing that currency to appreciate. This, in turn, would push up the value of goods sold to, say, the U.S.; that Porsche, out of reach to many, then becomes even more expensive to own!
By simple supply and demand, when price increases, quantity demanded decreases. We can then affirm that demand for German goods would actually decrease more than it already has (in Europe and the U.S. anyways; it turns out Porsche operating profit grew 59%, with sales growing fastest in China) [1].
Certainly, Germany is carrying a large burden, and if in fact there were no single currency, as some are now calling for, the country could actually be worse off. Every cloud has a silver lining, indeed.
Notes:
- Bloomberg.com
- Wikipedia.com
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
