Germany’s Role in Saving the European Union
Advisors Asset Management
By Matt Lloyd
June 12, 2012
As the talk of supporting, realigning or destroying the European Union (EU) dominates headlines, it appears crucial to us to look at who benefits most from any of these scenarios. Most of the pressure has been on Germany, as it should since it is by far the biggest component of the EU and currently the most prosperous, though it appears so more on a relative basis.
Germany has so far resisted supporting an all-encompassing solution to put the EU on the path toward stabilization. It appears to be a game of cat and mouse. When a solution is proposed and received well by the market, there is hesitation or outright diminishing of the proposal and throwing the European markets and headlines around the world in a bit of disarray. This has been the pattern over the last few years and to think it ends quickly seems naïve and overly optimistic.
Ultimately, the survival of the EU and the benefits of more efficient trading regionally and globally – that has been derived by its adoption – should lead to its survival. We have mentioned several times about the ramifications of Germany going back to its Deutsche Mark (German currency prior to adopting the Euro) or kicking out the more fiscally-challenged countries that would ultimately stifle their export-driven economy. Consider the domestic consumption rates of several countries and the benefit becomes much clearer.
If this didn’t connect the dots, then consider what has happened to the Swiss Franc which saw its value appreciate 38% at the most panicked moment in 2011. This rise basically halted the country’s exports and took some Central Bank intervention to move the currency to a more manageable level. Let’s take a more specific perspective with regard to Germany to see how trade has changed since the introduction of the Euro.
From 1981 to January 1999, Germany’s trade balance averaged quarterly gains of 3.75 billion Euros (converted from Deutsche Mark to Euros for comparison) while after the adoption of the Euro, the quarterly trade balance jumped to 11.98 billion Euros. For a country very dependent upon productivity gains for its export driven goods, the EU has proven to be a boon for the country. Also, prior to Germany adopting the Euro, the average 10-year yield of their government bond (Bund) averaged 6.83% for the decade prior. After the adoption, the 10-Year Bund has averaged 3.89%. Increased exports, lower unemployment and reduced interest costs sure seem like Germany will ultimately and eventually arrive at a solution to maintain the European Union with potential slight changes to oversight.
(c) Advisors Asset Management