Home > Main > Euro cannot get weak enough to solve Greece’s problems due to German export machine

Euro cannot get weak enough to solve Greece’s problems due to German export machine

June 18, 2011

If you haven’t seen Warren Moslers comments on the Euro over the last few days, they are a must read.

Greece on the Slippery Slope

Thoughts on the Euro

Germany has built a significant part their economy around exports – this was an industrial policy decision.  When the Euro weakens, Germany grows very rapidly. France also has a significant export sector, even if it is smaller than Germany’s.

We’ve seen this in the recent past when they posted the 9% quarter in Q3 2010. The lowest level of EURUSD was in Q2, so Germany got orders at low EURUSD levels in Q2, and filled them in Q3.

The euro seems to have a “natural” lower limit due to the German export machine.  Once the EURUSD trades below 1.30 or so, German growth becomes attractively large.

I find it difficult to imagine the EURUSD much below 1.20 for extended periods. Simply because if Germany is growing at 10% plus per year, their equity and debt markets become extremely attractive.  This draws capital flows into the euro, pushing up the exchange rate, ect…

Usually, a weaker currency “cures” debt problems through a combination of inflation and export driven economic growth.

But Greece does not have a large export sector – at least not to the same degree that Germany does.  A EUR at 1.2000 does not help Greece to anywhere near the same extent it does Germany.  The euro would need to be much lower to spur export driven growth in Greece or Portugal.

And we’ve seen serious problems with the inflation argument.  There simply does not seem to be that much inflation in the world.  5% inflation in China is not enough to make Greece’s problems disappear.  Greece would need an extended period of 5% inflation in Greece to solve their problems.  The ECB would never allow this level of inflation.

So the usual cure – weakening currency drives inflation AND export driven economic growth – does not apply to Greece.

The euro wont’ get weak enough to spur their economy because Germany is way better at exporting.    Inflation isn’t high enough to make the debt problem smaller on any near term time scale.

So it appears the only way for the problems in Greece to go away is a bailout.

This is what happens when you have a monetary but not fiscal union.  It seems to me like the bailout payments would more accurately be classified as fiscal transfers – as though the economics and accounting dictate there MUST be these fiscal transfers even though there is no fiscal union.

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  1. Tom Hickey
    June 18, 2011 at 11:10 am

    “It seems to me like the bailout payments would more accurately be classified as fiscal transfers – as though the economics and accounting dictate there MUST be these fiscal transfers even though there is no fiscal union.”

    I think that if the EMU is to survive intact, then the core, especially Germany, is going to have start thinking federally like the US, where the rich states (apparently) support the poorer states through federal transfers. Of course, we know that taxes do not fund anything at the federal level, but people believe they do and are OK with it. Taxes do support the states, however, and without federal assistance poor states would be basket cases. Like the US states, which are currency users rather than currency issuers, the EMU nations are dependent on the ECB as currency issuer.

    The EMU is similar to the US states in that they have to fund their own spending with taxes or borrowing instad of currency issuance directly (although there is leeway). There are various ways to arrange this federally, from a formal fiscal union to workarounds. The ECB can theoretically act in this capacity, but there is considerable political opposition to this standing in the way, based on misunderstanding of monetary operations. In the final analysis, this is primarily a political problem rather than chiefly a financial one. Can Europe get its act together before it comes apart at the seams?

    The problem is that the core (banks, voters) don’t feel the same way about the other Europeans nations as Americans do about the states. I have said from the get-go that if the EMU breaks down in will be because of Germany rather than PIIGS, although on the surface it will be “attributable” to PIIGS “lack of fiscal discipline” and social unruliness.

    The way things are proceeding the core is colonizing the periphery (Michael Hudson), and that is resulting in social unrest and political turmoil at the periphery. This is an unstable situation that has to be resolved or the EMU is doomed to failure because they did not start with an optimal currency zone and tried to fit a round peg into a square hole. The architects of the EMU failed to plan sufficiently for contingencies at the outset and now Europeans are paying the price.

    • TC
      June 19, 2011 at 9:45 am

      My long time thinking on the euro is that it would be the first currency to fail from being too strong. That is what is happening for the euro – it cannot get weak enough to solve the problems for Greece, Portugal.

      The political situation is far more dangerous than the actual financial situation. The total amount of money required to solve the Greek crisis is not huge, and it actually would be zero if they fiscally integrated. But the political situation makes this nearly impossible. As you pointed out, there is nowhere near the level of support necessary for other member states.

      And you’re 100% correct about the Germans being the cause of the problem. They integrated at a hugely weak level of the german mark, and then pushed the envelope during the last 10 years. I have a friend who called the euro a gigantic vendor financing scheme. I have other German friends who complained to me about the one off inflation that happened during the change over.

      This says to me that the problem is that Germany is “unfairly” taking business from the periphery due to currency levels. This is similar to how China thinks they are superior to the U.S.. A huge part of the current Chinese “success” isn’t due to competitiveness, its due to keeping the currency 50% cheaper than it would be on the open market. But the Chinese don’t see this part, they just see their country kicking ass.

      It’s the same with the Germans – they see their country kicking ass, and not that they are artificially benefiting from having too weak of a currency compared to the periphery.

      The currency imbalances between the member states are so severe they cannot be resolved without either fiscal integration or dissolution. Not only that, these imbalances feed into a toxic political climate. It’s a situation that feeds on itself in a very negative way.

  2. Tom Hickey
    June 19, 2011 at 10:02 am

    ” This is similar to how China thinks they are superior to the U.S.. A huge part of the current Chinese “success” isn’t due to competitiveness, its due to keeping the currency 50% cheaper than it would be on the open market. But the Chinese don’t see this part, they just see their country kicking ass.”

    Interesting you bring up China, which like Germany is involved in financial repression through collusion between the government and the financial sector, firms and suppressing household wages to gain export advantage. Except in China’s case the difference is stark. Consumer spending was touching ~40% of GDP, which is extraordinarily low in comparison with the developed world, but from there it has recently slipped to an extimated 34%. That’s kicking ass? Whose ass? Obviously, Chinese workers, who support a US advantage in real term of trade.

  3. TC
    June 19, 2011 at 10:28 am

    lol – that’s why I put the quotes around “success”. They have lots of jobs, but not much prosperity.

    Mosler’s idea that exports real costs, imports real benefits, was one of the hardest for me to wrap my mind around. I like it now, but it was very, very difficult for me to see at first.

    I don’t 100% agree with the idea, because the ability to make something has value beyond the immediate economic value. Also, when you do something, then you can do it better, you can improve your technique with effort. That is not captured in economic value, but it is a hugely important part of doing anything.

    For example one of the non-economics benefits is that it is really easy to get a job in China right now. It might be a bad job. It might be unacceptable by U.S. standards. But it is easy to get a job. Having a job is way better than not having a job. When you and all of your neighbors are working and making more money every year, the country “feels” prosperous. Even if you’re being repressed.

    The U.S. is far, far more wealthy than China, but in terms of this kind of momentum – well, they are kicking our ass.

    This same dynamic happening in Germany right now.

    • Tom Hickey
      June 19, 2011 at 12:11 pm

      Right, and as Warren and other MMT economists have pointed out, MMT shows how to fix the employment situation in the US, while also allowing the US to enjoy an advantage in real terms of trade as long as net exports like China desire to save in USD.

  4. JJP
    June 21, 2011 at 10:20 pm

    Germany needs to be more like the US? Yes… a service based economy, with very few mid-range and profitable exports, that has anemic job creation, a shrinking middle class, and is ruled by oligarchs and plutocrats. Gawd, I hope not. Then again, Germany IS full of Germans…

    • TC
      June 21, 2011 at 10:45 pm

      Well, that’s a whole different story….

      Germany made a choice and it can’t be undone in a short time. The euro is suffering because of it.

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