Has Germany been the winner of the euro?

Dr. Gunnar Beck

When William Rees-Mogg wrote in the Times on 8th June that he could ‘not see how German policy on the single currency can be defended.  They enjoyed the restaurant meal but they do not want to pay the bill.  Now the bill has been left lying on the table’, the former editor of the Times, with impeccable Eurosceptic credentials, articulated a very familiar view.  Leaving aside the thinly disguised venom of underlying anti-German sentiment, the idea behind it is simple enough: Germany has been the principal beneficiary of the euro.  For this reason Germany ought to show solidarity with those eurozone members in crisis.  In the long run, German generosity could put the eurozone back on its feet, and Germany would be again the main beneficiary.  Moral duty and enlightened self-interest thus both point in the same direction: a German bail-out underwriting ever larger rescue funds and communal government debt instruments, so-called Eurobonds, and the sooner the better.  Like many opinions – true and false, tenable or simply untrue – this view is sustained by a powerful mixture of self-interest, prejudice, habit and mental laziness.  Unfortunately, however, the prevailing view does not appear to fit the facts, which may explain why, though the view be widespread, the economic argument is barely spelled out.

Those that think that Germany has been winner of the euro, almost always rest their case in Germany’s export surpluses.  The euro created stability, it eliminated exchange rate risks, appreciated less than the deutschmark would have done, and thus aided German exports.  But has the euro benefited Germany more than other countries?  Between 1998 and 2011 Germany exports rose from 488,371m  to 1,060,202m euros, an increase of 117%.  If the euro was so vital to Germany’s external trade, then one very probable sign of it would have been a greater than average increase in German exports to its fellow members of the eurozone, compared with its exports to other countries, or at least when compared with its exports to the EU outside the eurozone.  In fact, the reverse is the case.  German exports rose most, by 154%, to the rest of the world, then by 116% to the non-eurozone EU, and least, by only 89%, to other eurozone members.  In 1998 the eurozone still accounted for 45% of all German exports; in 2011 that share had declined to 39%.[1] These trends are continuing.  The eurozone remains very important to Germany’s export trade, but it is hardly the motor of growth. It might be objected that the euro was more important in preventing price appreciation for German exports outside the Eurozone than in promoting trade within the eurozone. But whilst this assertion is often made, its effects are difficult to assess. The euro remained strong against the US dollar until very recently, and the US currency is by far the most important for international trade. Is it not clear whether, until very recently, the deutschmark would have performed much more strongly than the euro. Further, demand elasticity for many German exports is not nearly as simply a function of price as is often assumed. Germany’s exports grew particularly strongly to the non-European economies with the strongest growth and in those industries which are Germany’s particular strengths. And finally, Sweden which is outside the eurozone and thus did not benefit from currency stability within and alleged low price exports to other markets, recorded export growth which, as a percentage of GDP, significantly surpassed the increase in German exports. Sweden also outperformed Germany by a long margin in relation to almost any other important economic indicator.

Between 1995 and 2008, Germany had a markedly higher savings rate than either the US, France, Italy or the Eurozone as a whole. However, by far the largest share of German savings flowed to other countries, instead of being invested at home.  On average, from 1995 to 2008, 76% of aggregate German savings (private, governmental and corporate) were invested abroad, while only 24% were invested at in the domestic economy.  As Hans-Werner Sinn of the Ifo Institute in Munich[2] has demonstrated, Germany bled capital in the years before the euro crisis, capital that fuelled the economies of Europe’s south-western rim, but also the Anglo-Saxon countries and France. This blood transfusion contributed to an unprecedented economic boom in the Southern eurozone, a boom that spread out from their real-estate markets to the general economy. Germany saved more than most, yet she exhibited the lowest net investment rate of all OECD countries, together with the second-lowest growth rate among all European countries.  This is not the performance of a euro-winner.  Rather, Germany was the sick man of Europe.

Between 1995 – the year when the details for monetary union were finalised and the single currency effectively launched – and 2011, Germany has had growth significantly below-average compared to the EU and the Eurozone.  It might be objected that, in the mid-1990’s, Germany was experiencing the immediate and most severe after-shocks of reunification.  However, growth was equally below the European/EU average for the period 1998 – 2011: Germany grew at the average annual rate of 1.4%, compared  to 1.7% for France, 2% for the Netherlands and 1.6% for the eurozone as a whole.  The performance of the German economy seems even less impressive in the wider European and transatlantic context: during the reference period Sweden grew by 2.8%, Britain by 2.1%, and the EU as whole by 1.8%.  Germany also lagged significantly behind the US, which grew at an annualised 2.2%.[3]  Over the period from 1998 to 2011 only Japan, Italy, Portugal and Greece  performed worse than Germany.

Germany’s relative economic performance within the eurozone only began to improve in 2006, when the German economy proved more resilient than many eurozone economies as a result of structural reforms, better management of public finances, and her strength in particular sectors for which world-wide demand was riding high.  Nonetheless, Germany’s annual growth rate between 2006 and 2011 remained below that of a number of other EU member states, most notably Sweden and also Austria, and broadly in line with the Netherlands, Finland and the US.

The recent upturn in Germany’s economic performance is also reflected in a fall in unemployment.  During the first decade of the euro, German unemployment tended to be higher, at times markedly higher, than the eurozone average, let alone for the EU as whole.  It then began to decline to levels well below the eurozone average, although it is rarely noted that it remains significantly higher than the unemployment rate of many countries inside and outside the eurozone, including Austria, the Netherlands, Switzerland and Japan.  It must similarly not be forgotten that Germany has no minimum wage, that there are many very poorly paid jobs, notably in Eastern Germany, and that many immigrants and asylum seekers and their families would not be registered as unemployed although they will always depend on benefits.  Membership of the eurozone also does not affect intra-EU free movement or international immigration and asylum law and thus has had no effect in alleviating Germany’s failure to attract high-skilled foreign migrants.  Finally, German wages and living standards did not rise for a decade and a half from the mid-1990’s, in sharp contrast with Southern Europe, Britain, and indeed most of the world except Japan.

Perhaps most importantly of all, at 82% of GDP, Germany’s public debt is higher than that of most Eurozone countries, although it is slightly lower than France’s debt and significantly lower than that of most PIIGS countries except for Spain. However, except for small adjustments Germany’s guarantees and loans to governments and banks in the Eurozone have not been accounted for as losses. Similarly, no account has been taken of Germany’s potential losses and liabilities, which are likely to result from the ECB’s purchases of bad government debt and 1bn long-term loans to private banks, and of the poor odds of Germany recovering most or all of the more than £350bnthe Bundesbank is currently owed by other central banks in terms of Target2 credits. According to Professor Sinn, Germany’s total exposure currently amounts to over 700bn euros or about one third of Germany total public debt of around 2.09 trillion euros. If and when Germany’s losses have to be realised, Germany’s aggregate public debt could quickly approach Portuguese or Italian levels and rise to over 110% of GDP Not even this debt to GDP ratio, however, includes Germany’s total current exposure to the ECB or various other European institutions including the existing rescue funds, which would increase her actual debt to GDP ratio to around 140%, and rising! This is rather more than a cut above the official figure of slightly under 82% which does NOT include any of these potential liabilities, nor take account of Germany’s potential losses as a result of a inevitable total or partial write off of her TARGET2 claims against other central banks.

The euro, it seems, bled Germany of capital which then fuelled growth in Southern Europe until 2008.  Until then Germany performed worse than any other country in the eurozone and the EU.  From 2008, it began to perform better than the Club Med including France, but for the last fifteen years as a whole Germany has been one of the worst performing economies in Northern and central Europe.  Germany was the loser, not the winner of the euro.  From 2006 Germany then benefited, relatively, from the loss of confidence in Southern Europe, non-European demand for German capital goods and cars, and moderately rising internal demand.  Those benefits, however, are precarious, and will quickly be eroded and reversed by escalating transfer payments to the PIIGS countries, with potentially dramatic knock-on effects for public finances, and internal and external demand.  Germany’s recent relative gains will soon be forgotten, as the country is asked to pay the bill for the meal she never had – a bill she cannot afford, which Germans never incurred and which the German government would be insane to pay.


[1] Source: Statistisches Bundesamt.

[2] Ifo Institute – Leibniz Institute for Economic Research at the University of Munich

[3] Source: Eurostat.

One thought on “Has Germany been the winner of the euro?

  1. Interesting, but the whole analysis depends on the assumption ” If the euro was so vital to Germany’s external trade, then one very probable sign of it would have been a greater than average increase in German exports to its fellow members of the eurozone, compared with its exports to other countries”.

    Agreed, you use the word “probable” not “certainly”. I would stop right there, not drawing conclusions when the base assumption is invalid, or at least not credible.

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