Germany is destroying the Euro!!


It is depressingly ironic that this year is the 60th anniversary of the 1953 London Debts Agreement conference, and Alexis Tsipras, leader of the Greek Syriza Party, is suggesting a similar conference is needed again. In 1953 West German debt was written down by some 60%, and they were given 30 years to pay; today it is Portugal, Italy, Ireland, Greece, Spain and possibly France, who need to write down debt – but the biggest obstacle is Germany!

Understanding the past often helps to understand the present. The history of post-war Europe is about economic solutions to political problems, and the creation of the Euro is no exception.

The initial political problem was the realisation by the United States that large parts of Western Europe might go Communist in the aftermath of the Second World War. This was not because of the Soviets were about to launch a blitzkrieg through the Iron Curtain, but because people were starving, especially in West Germany where American Lucky Strike cigarettes were a more stable currency than the Deutschmark!!1 This was the bad news that U.S. President Harry Truman heard from Secretary of State, General George Marshall after Marshall’s fact-finding trip to Europe in 1947.

The outcome was the European Recovery Programme, otherwise known as Marshall Aid, which was both loan-based and grant-based. One of the economic aims of Marshall Aid was to reduce trade barriers in Europe, which was also one of the main aims of the Common Market, which followed almost seamlessly after the end of Marshall Aid.

The Common Market was an economic union, and once again, was an economic solution to a political problem. By the mid-1950s West Germany’s engineering and heavy industry had been rebuilt with Marshall Aid, and was beginning to boom.  However, the legacy of the war meant that West Germany was an international political pariah.

France, as one of the four victorious powers, was the opposite, and had a permanent seat on the UN Security council. It still had most of its colonies but, unlike Germany, had a large defence budget, and even after its own Marshall Aid, it still had a failing economy awash with small uneconomic farms. The Common Market was intended to give Germany a political voice on the world stage, and the Common Agricultural Policy (CAP) provided the transfer of money from the German taxpayer to those uneconomic farms.

France and Germany were the main players in the original Common Market of 6 countries, and when the Berlin Wall fell in 1989 there were 12 members, including Britain. Today there are 27 members of the European Union, many from the old Eastern Bloc. In the 1990s, the priority for the politicians and European establishment was to forge a Federal Europe – an integrated Europe never again to go to war with each other or to be split by an Iron Curtain. Unfortunately for them, a Federal Europe wasn’t wanted by the citizens of Europe, and the solution to this political problem was the Euro – an economic solution doomed to failure.

It is no secret that Greece cooked the books to join the Euro. But that is not the cause of Greece’s present predicament – rather, it is the practical reality that the disparate countries that formed the Euro did not have enough in common to make the common currency work. The countries were at different stages in the economic cycle, and tax, interest rates, wage rates, and inflation rates, were all different. For a single exchange rate to work for all 17 countries, it would have required a miracle.

Countries like Portugal, Italy, Ireland, Greece and Spain prospered initially when the banks from Germany and other countries offered large loans at what were, for them, historically low interest rates. The banks had decided that they did not need to factor in risk, as all these countries were in the Euro!! Some of the money was used for infrastructure projects but much was squandered, especially on creating property bubbles in Spain and Ireland.

By 2008, the reckless lending was showing that the Euro was just a fair-weather currency. The major flaw was that for countries like Portugal, Italy, Ireland, Greece and Spain, the Euro was vastly overvalued, and they needed to devalue to make their economies competitive, in order to have any chance of surviving the world-wide recession. But being in the Euro precludes an individual country devaluing, so that an internal devaluation, otherwise called ‘cuts’ and ‘austerity’, was the only option!

Just as the Euro is overvalued for some countries it is undervalued for others, especially Germany. As a result, their exports are ultra-competitive, both within the Euro Zone and outside, especially industrial equipment and luxury cars to China.

How much is the Euro undervalued for Germany?  There is no way to answer this, but it may well be 20% – 30% undervalued. It is interesting to note that German unemployment rates have halved since joining the Euro. In fact, if it wasn’t for the Euro, the latest German economic miracle might never have happened.

Keynespointed out that if one country had a surplus, then other countries would have a deficit, and if the country in surplus did not spend the surplus then, after a period of say, 1 year, the surplus should be returned to the countries in deficit. When he wrote this in the 1930s, it was, of course, the USA that was in surplus. Today it is China (US$ 172.5 billion) and Germany (US$ 188.4 billion).2

The question that needs to be asked in the Eurozone is – how does Germany propose to transfer this surplus back? Should it be by the Government, by the individual citizens, or a combination of both?

If the Germans had used their surpluses to buy goods and services from the poorer Euro countries, although the current Euro crisis would not have been averted, it would certainly have been less severe. If the German banks had not been so keen to lend money to all and sundry at low rates, then there would have been a few less property bubbles. Now, it is probably too late for Germans to reform, withdraw their savings and start spending, ideally by going on lots of expensive holidays to Portugal, Italy, Ireland, Greece and Spain!

Another way to return the surplus is for Germany to recognise that the real gains it has made from the Euro will more than offset the costs of writing off the loans to Greece, Portugal, Italy, Ireland, Spain and possibly France.

There is a great amount of political capital tied up in the Euro, but salving the political reputations of nations and individuals will not solve the Euro crises. If Germany will not return the surplus and really wants the Euro to survive, one other possible solution is for Germany itself to leave the Euro. This would immediately create the devaluation that the other countries urgently need.

If the German government stays in the Euro, and doesn’t listen to people like Alexis Tsipras by renegotiating the outstanding loans and halting the austerity sweeping Europe, then there will be an increase in social unrest, and a slow and very painful death of the Euro.

Mike Gold has just started a blog at





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