Germany’s Secret

When the euro was created in 1999 the original eurozone members joined by exchanging their currencies at an exchange rate that would last forever. This was based on judgement and arm waving. Subsequently we have seen that because these countries have been restricted in exercising exchange rate flexibility, and interest rates their lack of competitiveness with Germany is going to destroy their economies.

Is this real? Is Germany that much better than the rest of Europe? What has it discovered that no one else has?

So far I have come across two facts.

1. Since Germany joined the eurozone in 1999 its trade balance has increased dramatically. When I say dramatically I mean almost 400%. In less than ten years! Incredible. Did Germans suddenly unleash some brilliant economic miracle that no one else had discovered?

2. Germans do have a secret though, no one else has realised. They agreed that the European Central Bank was purely there to maintain price stability; no inflation. Why? Because Germany hates inflation, because it reduces the value of savings and debts. (This is a Good Idea). It also meant that employers and workers, expecting no inflation could agree on small wage rises in exchange for full employment. So Germany’s unit costs would not rise, while the rest of Europe’s would increase by 30%.

So here we have it. Germany has arranged the eurozone to increase its balance of trade by 400% and keep its cost of production to 30% less than its partners. So what do we have? A crisis!


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