Germany and the Eurozone

Good piece by Martin Wolf in the Financial Times (article's behind a paywall, but a google search for "Germans are wrong" and Martin's name might see you through) talking about Germany. They aren't too fond of the Euro right now, since they feel like it's forcing them to prop up their European counterparts.

Wolf said that Germany benefits from the Eurozone. It's got loads of captive markets who use the same currency as it does, for example, and it needs them since most of its exports head to European destinations. But take a look at this:

More important, imagine what would have happened, in the absence of the euro. The exchange rate of the D-Mark would have exploded upwards, as currency crises savaged the European economy, as happened in the 1990s. In peripheral Europe, currency depreciations would have been at least as big as, if not bigger than, sterling’s. The absence of such shocks has greatly enhanced the prospects for the German recovery. The creation of the eurozone was, for this reason alone, much more than a favour Germany did for its partners. It was also a big economic (not to mention political) gain for Germany. German industrialists are clear on this, as is the government.

Wolf said that some economists disagree, thinking that investment flowed out of Germany and into the European "periphery". Fine. But what's going on right now isn't a problem of investment, now, is it? The issue is lack of demand, and how much more depressed would the demand for German goods be if their currency was through the stratosphere? Sure, that very lack of demand would probably bring down the value of said currency, but compared to the other countries in Europe it would still be uncompetitive. People would be buying German bonds, but not German goods, and I doubt the average German would be too keen on that.

Meanwhile, everybody else in Europe would arguably be better off than Germany would. Yes, their currency would have depreciated, and their foreign debt loads been much more onerous. But because their currency would have depreciated, their goods would have been amazingly cheap, so much so that demand would have already picked up and stabilized things a bit. That's what floating currencies are FOR, and it's still amazing how many people tend to forget that. That sort of automatic stabilization is what the Euro countries gave up when they joined Germany in their little currency experiment. They counted on the Germans to understand that, and to put the interests of Europe over the interests of their own little corner of it.

Perhaps that was naive. Perhaps Wolf is right, and the Germans aren't as committed to Europe's future as previously thought. Perhaps the Euro is in serious trouble. But we shouldn't pretend that it's Germany that would benefit from its dissolution.