The facts about Germany and the eurozone

In my opinion piece this morning I lamented the poor leadership shown by the German Chancellor, Angela Merkel, throughout the eurozone crisis.

Most disappointing has been her failure to spell out to the German people just how much trade Germany does with the eurozone.

The chart below shows Germany exports much more to the eurozone than it does to the rest of the world. If the single currency breaks apart, German exporters will get hit very severely.

And this chart below, from Fathom consulting, puts that trade in figures:

Germany’s trade surplus with the eurozone (described here as EA) has, on average, been significantly larger than its trade surplus with the rest of the world over the past decade.

Also, what I didn’t get into in the column was the extent to which, by bailing out the euro periphery countries, Germany has also been bailing out its own banks. If you run a chronic trade surplus and don’t invest the funds at home (as Germany did for a decade) you inevitably export capital. Germany exported huge amounts of capital to the euro periphery. So if those nations default, Germany, as the creditor, will register a huge loss.

This graphic, from Der Spiegel, shows the exposure of German banks to Greece, Ireland, Portugal and Spain.

Ms Merkel should be explaining these economic realities to the German public so that they can make an informed choice about whether or not they want the single currency to survive.

One way or another, Germany is going to pay up. What they need to decide is whether to do it through inter-country bailouts and higher interest rates (as German interest rates reflect their guarantee of the debts of others), or through bank recapitalisations and a weaker export sector.

Rather than present this difficult choice, Ms Merkel has chosen to play for time. But as George Soros recently pointed out:

“Sometimes time actually works against you if you refuse to face the relevant issues and explain to the public what is at stake.”

The choice has to be made. And the longer Germany prevaricates about making it, the bigger the final bill will be.

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• Suarez from the car park…

  the exchange rate.  The D-mark would be so strong that many export markets would fail.  The short term impact would be huge. 

• Suarez from the car park…

  Ben.
  Most Germans see no problem with the loans they have made and believe it is all the borrowers responsibility.

  What merkel must do is admit what proportion of gdp those countries’ banks had as debts on top of which they loaned all this money.   that is the kicker.

  Without unregulated derivatives, they could never have made the loans, as yields would have been prohibitively high.
  It’s no different to US sub prime loans and china funding US spending.  

  Irresponsible lending by German Banks to the PIIGS to keep it’s export game going.  

• http://www.facebook.com/people/Anthony-Dunn/789893788 Anthony Dunn

  What you don’t appear to understand is that economies such as Germany and Japan have been able to adjust over time (last two words underlined) whereas the UK’s “the treatment is worse than the illness” medicine of 1982-84 was so harsh that there was no way that companies could adjust to the rate (last word underlined) of appreciation in Sterling. 

  The reasons for the failure of the UK to replace its lost manufacturing capacity are as long as your right arm: ever tried finding start up capital for manufacturing in this country.  Just what “venture capital” industry do we have anymore?  And whatever happened to the Industrial and Commercial Finance Corporation/Finance for Industry?  It morphed into 3i, the banks sold out their shares and it’s now off funding hedge funds and has completely turned its back on what lead to its being established in the first place.

• greggf

  More probably the emphasis in Britain changed shortly after that period to focus on liberalizing financial markets. The Big Bang followed and the City became the centre for european time-zone trading in stocks and shares as the English language became the pre-eminent medium for trading world-wide. Other factors including difficult trade unionism helped shift opinion to this new opportunity.
  A (financial) boom followed which eclipsed any re-entry into manufacturing despite the opportunities presented by sterling’s value. Manufacturing became more unfashionable, lacking the glamour of the City it lost engineers, mathematicians and physicists to finance, and significant manufacturers such as GEC and Parsons wound down their activities. Parsons Steam Turbine factory in Heaton, Newcastle upon Tyne was bought out by its erstwhile German rival Siemens! 
  Government was less interested and failed to develop the educational infrastructure that continental rivals had in place. However foreign companies took an interest as lower sterling rendered costs of making things more competitive here; Japan, Korea and Taiwan all invested heavily in the UK.

  Now it may be more apparent that the emphasis on finance was unbalanced, and one example soon to manifest itself may be the need to import all the major components for new central electric power plants including the staff to supervise construction.

• http://www.facebook.com/people/Anthony-Dunn/789893788 Anthony Dunn

  Agree entirely: how the mood music changed in the UK against manufacturing and “getting your hands dirty” to so-called “financial engineering” (sic)…