Germany: The Impediment To The Cure

Includes: FXE
by: Stanley J G Crouch

The major stumbling block now standing between the eurozone's survival and its demise is Germany. The recent events make the size of this massive hurdle even more abundantly clear.

First, we had the Social Democrats in the Bundestag passing resolutions making it easier for eurozone members to leave the unified currency but still maintain their inclusion in the European Union. This seems like a not-so-subtle hint to the countries like Greece in Europe to stop polluting the currency pond and fend for themselves in the big, bad, world of freely traded currencies.

Then Ms Merkel, obviously attentive to her party's wishes, put forth the notion that there needs to be a "new Europe," a not-so-veiled threat clearly aimed at the outlying nations, that they no longer qualify for inclusion in the currency pact. Ms Merkel's recent statements were very consistent with the harsh threats she and Mr Sarkozy of France leveled at George Papandreou, Greece's now former PM, in Cannes, just before the G-20 meetings took place. It certainly sounds as if Ms Merkel is bailing out on some of the seventeen eurozone participants. It is no secret that the Germans now harbor deep resentments toward those nations they deem far less productive and fiscally responsible than themselves.

Finally, there was Jurgen Stark, the ECB official outspoken on his views regarding the crisis to date. Mr. Stark made it crystal clear, in no uncertain terms, that the ECB should not be considered a 'lender of last resort' to any member state that may be encountering severe borrowing difficulties. This, despite the hundreds of billions of euro the ECB has sunk into its futile attempts to shore up Greek and Italian debt these past months and years. There is no doubt Mr Stark is a willing proxy for the German edict that the ECB not 'monetize' the crisis for fear of stoking inflation. This tenet, coming from the ECB's main funding source, cannot be overlooked. Germany has undoubtedly put the ECB in a very tight box, and in doing so, has effectively limited the options the ECB has in dealing with the crisis. This approach has itself exacerbated the crisis.

I believe the Germans are acting in a very dangerous and disingenuous manner. As a founding member of the eurozone and strong advocate for the common currency, the Germans have a great deal of responsibility for the stresses that have now become apparent. It is not as if Germany did not approve all the strictures and guiding principals of the euro. Nor did Germany abstain from approving the expansion of the group to its current seventeen members. Further, Germany had full transparency on the borrowings of member states, such as Greece, particularly relative to their respective GDPs and continued fiscal malfeasance.

The truth is, Germany has been benefiting from an artificially cheap currency since the introduction of the euro. Germany has managed very well throughout the thirteen years of the euro's existence. Its export-driven economic model has thrived, despite some very uncompetitive aspects its economy exhibits. High unit labor costs, high cost benefits, an extensive social welfare system and the tremendous lingering costs of integration of the former East Germany into the nation's economic and social infrastructure, have all been readily handled, in a reasonably fiscally prudent manner. All of this has been accomplished because of a high, externally-driven, positive balance of payments. Only so much of this reality can be explained by Germany's outstanding value-added metrics. Among Germany's economic virtues are its engineering prowess, efficiency and high productivity. The rest is clearly attributable to the euro's composition and the reality of the weaker eurozone members financing their deficiencies via excessive sovereign debt issuance, all right under the watchful gaze of the Germans. Many billions of these now speculative loans are owned by German financial institutions.

Germany may very well find out the hard way just how the now apparent imbalances have actually benefited the nation. Going it alone, or more likely, in the context of some uber-euro, made up of the strongest economies, will bring the inherent competitive disadvantages into the harsh light of reality. Then Germany may regret its obstinance in not biting the bullet in these challenging times. This will not be helped by the world-wide economic slowdown Germany has helped foster by its continued stubborn stance.

The Germans may not appreciate where all the chips, or perhaps chunks, eventually fall.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.