It is an irony that in what is supposed to be a currency union of partners we spend so much time looking for winners and losers! The list changes as there was a time when the current largest loser Greece appeared to be a winner. The onset of the credit crunch reshuffled the pack and led the Euro area into quite a different place. Also the crisis has seen the media often push the view that Germany has been a loser and there have been regular reports of it being defeated at the European Central Bank. Putting it another way we have seen the policies of Mario Draghi pursued rather than the more hardline suggestions of Jens Weidmann who heads the German Bundesbank. Indeed the “whatever it takes (to save the Euro)” speech given by Mario Draghi in the summer of 2012 was seen as a clear victory over Germanic influences. On that road we have seen two trillion Euro projects with the LTROs and now QE as well as the mythical Jedi Mind Tricks of the Outright Monetary Transactions or OMTs.
However life is rarely that simple so let us examine an alternative agenda which is that Germany is in fact a beneficiary out of all this.
The hundred billion Euros issue
Step forwards the Leibniz Institute in Halle who have looked at this subject but as shown below only one aspect of it.
This note shows that the German public sector balance benefited significantly from the European/Greek debt crisis, because of lower interest payments on public sector debt.
They have an explicit and an implicit effect which I shall present in that order.
while the European Central Bank (ECB) monetary policy stance was quite close to an “optimal” monetary policy stance for Germany from 1999 to 2007, during the crisis monetary policy was too accommodating from a German perspective, due to the emerging disparities across the Euro area
in crisis times investors disproportionately seek out safe investments (“flight to safety”), bidding down the returns on safe-haven assets.
So the cost of issuing debt has been much cheaper than would otherwise have been the case for Germany over the Euro area crisis period. Regular readers will know that we have seen more than a few situations where Germany has been paid to issue debt and as I type this stretches almost to the five-year maturity. Who would have thought that not so long ago?
The Leibniz Institute have crunched some numbers as to the benefit from this.
As a result of these two effects, our calculations suggest that the German sovereign saved more than 100 billion Euros in interest expenses between 2010 and mid-2015.
This is an issue that politicians in many countries have avoided because many bond yields have dropped with my own country the UK having a ten-year bond yield of 1.85% which still seems extraordinary. So governments in many places have been given a windfall which of course gets ignored as they rush to take the credit.
Also they point out that this is more than Germany’s explicit exposure to Greece.
That is, Germany benefited from the Greek crisis even in case that Greece defaults on all its debt (a total of 90 billions) owed to the German government via diverse channels (European Stability Mechanism [ESM], International Monetary Fund [IMF], or directly).
I have two thoughts on this. Firstly these are estimates and it is best to consider them as broadly similar. Next we need to take care as this is Germany’s sovereign exposure and does not count what might happen to the banks or the wider economy if Greece defaulted.
What about monetary policy?
The Leibniz Institute hinted at this issue here.
the European Central Bank (ECB) monetary policy stance was quite close to an “optimal” monetary policy stance for Germany from 1999 to 2007.
Another way of putting that was that Germany managed to run monetary policy such as interest-rates up to the credit crunch. So if it had not happened maybe it still would? We know that it certainly did not suit places like Ireland and Spain which saw a housing boom and bust result from it.
Also Germany has seen quite a considerable amount of monetary easing as it’s economy also benefits from the expansionary policies of the ECB. So it has an official interest-rate of -0.2% and has seen all sorts of extraordinary measures including now some 58.3 billion Euros of German government bonds as part of the QE operation. That poses a real question as we consider the ECB buying German bonds at negative yields. To what end?
However we are seeing an extraordinary level of stimulus being applied to the German economy particularly when you consider it has been one of the better performers in the credit crunch era. We await tomorrow’s update on what happened to GDP in the first half of 2015 but Germany’s Council of Economic Experts is fairly sanguine.
The GCEE expects real GDP to grow by 1.8 % this year,
The Exchange Rate
There have been plenty of swings in the value of the Euro currency in its existence but at 93.3 compared to 100 when it started you can see that it is actually not far from it right now and that it is lower. Indeed there has been a larger fall if we compare the peak which was as the Euro was perceived as attractive when the credit crunch first hit and rose to 114.4 in late 2014.
Now imagine when a German Deutschmark would be! I guess those of us who are old enough are singing along to the old Nimble bread advert.
Up, up and away
Up, up and away
Up, up and away
If we do a comparison with how the Swiss Franc has behaved in the credit crunch era then we have a rough ballpark estimate of 1.50 for what a new German Deutschmark would be worth in Euro terms as opposed to the current 1.11 versus the US Dollar. I am sure that some of you are thinking that the “safe haven” craze might have pushed it even higher.
Whilst it did not cause the situation below we can be sure that it has helped Germany maintain it at a time where exporting had to face the credit crunch.
There have been considerable gains for Germany from Euro membership. Contrary to the regular reports of it being defeated it has gained on most fronts. Before the credit crunch monetary policy was set for its benefit but there has been a much larger gain. Over the past few days I am others have accused China of currency manipulation and devaluation. Well what about Germany?! By joining the Euro it sent its currency on a lower path which post credit crunch has turned out to be a much lower path. On that road it has been able to continue its export success and hence boost economic output. If we look back did Germany fire the first salvo in the Currency Wars? Maybe that is going a little far but there is also a grain of truth in it.
If we look wider we see difficulties emerge as if Germany has a lower exchange rate other Euro area countries have a higher one. I think you can easily figure out who they are! Also if we are talking about China exporting deflation well what about Germany with its 214 billion Euro trade surplus in 2014? Whilst for example nobody is forced to buy a German car it is true that even they would find it harder to sell them at a much higher exchange -rate.