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There are all sorts of reasons I could list to explain why the euro will disintegrate. You have heard a lot of them before. But as this crisis continues to drag on, I think many people still miss the core reason the single currency, and possibly even the European Union itself, will come undone — Germany!
Here’s why …
There is no way the countries of Europe can compete with Germany’s dynamic export-driven economy. That really is the bottom line of the story. But let me add some context …
There are four financial management tools of manipulation that a country needs to properly grow and manage its economy relative to the competition:
- Monetary supply
- Interest rates
- Fiscal balance
- Currency levels
The countries that are part of the single currency system, with the exception of Germany, have control over only one of these four variables — fiscal balance.
Germany, though not completely, has implicit control over the European Central Bank through the Bundesbank (Germany’s central bank). And historically, ECB monetary policy has always reflected a policy of “what is best for Germany” first and foremost, given that Germany is the engine of growth for the entire region.
And now, it appears Germany is in the process of snatching even fiscal authority from the former “sovereign” nations of Europe.
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| Germany runs the EU’s largest trade surplus. |
But wait you say, Germany has contributed so much to the system, it isn’t their fault.
Well, part of that is true.
Germany, through its taxpayers, has contributed a great deal to subsidizing the weaker countries within Europe. But remember, what they give, they get back … and more … in the form of trade i.e. Germany sells to Europe, it is their captive market in some ways. You can easily see this by comparing the current account surplus in Germany to the current account deficit countries in the euro zone.
Germany Is and Will Remain
a Dominant Exporter
Despite calls from many fronts that Germany start doing more buying i.e. consuming more as a country, it is highly unlikely this will ever happen. Consider this excellent summary of Germany as a major export power and its implications from Stratfor.com’s George Friedman:
“The German economy was designed to be export-based. Its industrial plant outstrips domestic consumption; it must therefore export to prosper. A free trade zone built around the world’s second-largest exporter by definition will create tremendous pressures on emerging economies seeking to grow through their own exports.
“The European free trade zone thus systematically undermined the ability of the European periphery to develop because of the presence of an export-dependent economy that both penetrated linked economies and prevented their development.”
Unless the countries of Europe are willing to sit by and effectively become low cost labor markets for German industrialists and satellite branches of Berlin, they will have to find a way to compete against Germany.
And given the massive labor/technological/innovative lead that Germany has, it will be impossible for countries inside the euro zone to catch up.
To catch up, or at least provide a relative level of competition against Germany, countries must regain control of the three variables they forfeited to become a part of the single currency: Money supply, interest rates, and currency level.
This will be impossible under the current structure and straightjacket of a single currency, single monetary policy, and unified fiscal discipline.
Consequently, there is only one way out: Leave the euro and go back to their original currencies.
I think it’s as simple as that.
Best wishes,
Jack
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{ 9 comments }
I am really getting tired and bored of Americans constantly predicting the euro’s demise as if the demise of the euro would in some magical way restore the American economy to greatness. True, the existence of the euro is the prime reason the American economy is weak and the amount of foreign aid into the US is continuing to decline, but getting rid of the euro will not reverse America’s fortunes.
The German economy is strong because of the euro and thus Germany will do everything in its power to assure the euro continues. The so-called euro crisis is all part of the plan. It keeps Germany in control and the euro at a value that is neither too strong or too weak. Recent silence in the media concerning Greece shows that the euro’s value around 1.30 $ is working for Germany.
Creating a crisis to maintain a suitable value for your currency works a lot better than zero percent interest rates.
You would be more accurate if instead of wishing for the euro to collapse, you would instead show how the dollar is really the currency in trouble and how it would be a miracle if the both the US and the US dollar make it through the twenty teen years.
The way you wrote this article is like saying that the pathetic economic state of America is the fault of someone like successful Warren Buffet
Or in other words, it is the fault of hard-training disciplined athletes who win top prizes that junk food-addicted blubber-people cannot achieve the same level of competence.
But you can be forgiven, because we have unwittingly been trained to think of ourselves as whining victims.
Brilliantly written and well thought out. It does not augur well for the world if it turns out to be true.
Jack…interesting opinions. Have you considered that Germany may recognize the concerns you raise and modify their approach? You raise an interesting angle about other countries becoming low-cost labor markets for German industry and these countries becoming satellites of Berlin. Assuming this is by (German) design…won’t they do what’s needed to preserve what they have constructed? After all, you acknowledge German technical superiority…why don’t you think their economic/finance people have similar proficiency? To expand on my question, were similar arguments to yours put forward in Europe about the US when the USD superseded the “Continentals”?
The only one in Europe who will disintegrate will be Germany and together with it will crash the United States. Germany as well as the USA are just a marionette of the UK and have outsourced all their industries and now fighting both it’s last stand as think falling apart.
Hi Jack,
I agree with your analysis and most of your conclusions. But I think the likely outcome is not all or most EU countries going back to their original currencies, although this is what wants, if it cannot get full control over the ECB. (They would in a position of dominance via divide and impera)
I think there is at least a distinct possibility that after a new sellout of European government bonds, this time possibly Spanish and French and Italian, that the ECB has to take sides between Berlin and the rest and will buy again massively bonds from Spain, Italy, France and Belgium. The Germans are in no position to make this impossible. But the statements of the Bundesbank president that this would mean a breach of the treaties underlying the Euro is a clear treat that the Germans could try under this scenario to leave the Euro.
But this would not necessarily mean the breakup of the rest of the Euro. Whether the rest of the Euro zone could survive would depend on decisions made in Washington by FED and IMF, and i Beijing. Without intervention of the Fed, providing several hundreds of billions of swap credit lines to the ECB. Now I doubt whether it would be in US or Chinese interest to have an Europe completely dominated by Germany. So my guess is Germany will leave the Euro, possibly together with Netherlands and Finland and maybe Ireland. But the rest could more or less stick with the Euro, which would devalue sharply. Italy, France, Spain and Greece could build a new industrial infrastructure, based on much more competitive sea transport.
The Euro isn’t going anywhere soon.
The Euro Zone is a huge economic bloc, and the benefits that accrue to each member, commercially, are stupendous. I’m talking about the net benefit, of course. Europe doesn’t need to have a single currency to retain porous econonmic borders, but it sure makes it a lot easier. And the fallout in political confidence from any breakup of the Euro Zone would be nearly deadly.
The bigger problem, though, is Germany, for a different reason. The present Chancellor can chastise the spendthrift ways of her southern neighbors, but…can you imagine what would happen to the Euro if the weaker economic members were no longer in the Euro Zone? Exactly. And what would that do to the economic prospects of Germany?
No, the Chancellor can talk a good game, but she does not want to break up the Euro Zone any time soon.
Jack,
I’m in agreement with most of your analysis. But let’s take it a step further . . . Greece, Portugal, Spain and possibly Italy will seek to leave the Euro Zone (either at once or in staged defaults). They can face full austerity and a 10 to 20 year climb out of the poor house, or they can devalue their new currencies overnight and become competitive with what’s left of the Euro Zone. No one likes austerity, especially Southern Europeans. It runs contrary to culture. Political will of the Southern countries favors a break-up of the Euro in the end. That’s bad news for Northern Europe – one is reminded of the Dutchman with his fingers in the dyke. There’s only ten fingers, but there’s a lot of water behind that dyke. Default is going to happen. Problem is, those defaults will burn the European commercial banks, spook deposit bases (no FDIC insurance over there!), and Northern European central banks will do their own version of Maiden Lane 1, 2 and 3 (Bear Stearns, AIG and AIG’s Credit Default Swap division for those who can remember 2008) and prop up their commercial banks. They have no other choice. Ultimately, the ECB will be forced to reinsure all of the Southern debt. So the North is gonna fight HARD. It’s north vs. south but this time it’s not 1860. Northern Europe’s best move here is to take the pain, reinsure, maintain a strong Northern EuroZone currency and then just buy Southern Europe. ‘Fine, you default, we are going to buy FIAT and every other decent asset they can own at your reduced currency values. Thanks for playing with the big boys Greece, Portugal, Spain and Italy! OWNED!
I think your article and predictions have a good chance of coming true in the near future. The idea of sovereign nations under one common currency was a stupid idea to begin with and doesn’t take someone with a Harvard degree to understand the economics that are destined to fail. It ends up just like it is: those that work hard, play fair and are successful “supporting” those who are lazy, corrupt and expect government to take care and provide for them. The have’s supporting the have nots will only go so far until the have’s get tired of supporting the deadbeats. This is the honest truth and those nations involved just can’t seem to understand this and keep thowing more money at bad.