Is Germany Preparing to Exit the Euro?

Hans-Olaf Henkel’s piece in yesterday’s Financial Times is making waves. Okay, Henkel is an odious man, but my view, which was once considered borderline crazy, is now getting more serious consideration. The Germans were willing to go into a currency union because by construction that agreement removed the weapon exchange rate depreciation from its competitors. German real wage discipline, labor productivity gains, and engineering innovation could not be undercut at the stroke of a pen. Recall that there are basically 3 Germanys:

Germany #1 being the Bundesbank and “finanzkapital”, which retains huge phobias about the recurrence of Weimar-style hyperinflation, and retains an almost theological belief in “sound money”. It is the Germany of closet gold bugs and Austrian economists, who believe in hard money, “responsible” fiscal policy and the like, and who were basically always antithetical to the euro as a big and broad union. Then you had the “Europeanists”, led by Kohl who essentially argued that you solve the “German problem” by binding Germany ever more fully into a pan-European framework, the currency union being a key part of that. The swing vote was Germany #3, Industrial Germany which bought into the idea of the currency union precisely because it locked Germany’s industrial competitors at a fixed exchange and removed the expedient of devaluation.

It seems to me, however, that the swing vote is beginning to have 2nd thoughts, as they wrongly consider the “costs” to the country through these repeated bailouts. This concern seems to be overriding the obvious benefits of having “profligate” Mediterranean countries buying yet more German imports. It is striking to me that Henkel, a big player in the German industrial complex, is now leading the charge for withdrawal. It might suggest that an important political dynamic in Germany has shifted. German policy makers would have to conclude there is no plausible exchange rate for the Neuro and the Pseudo (or Soro?) that would cause a problem for their current account surplus and their export led growth strategy. Or they would have to conclude that is the “least worst” option given the political backlash of more subsidized loans to Greece, Portugal, etc.

The other point is this: Multinationals don’t care about where demand comes from as long as it is increasing somewhere and they are allowed to go after it. Labor arbitrage is the additional icing on the cake. So policies that build unsustainable imbalances between countries and have bad social outcomes are fine with them as long as they can roam the globe freely to take advantage of the demand wherever it pops up.

This probably remains true so long as the ultimate price of these polices don’t get shared with the multinational (in the form of taxation or additional regulation). So far the multinationals have it good in that costs are falling disproportionately on others. That could well change if there was a “solidarity” tax imposed on profits instead of the populace.

About Marshall Auerback 37 Articles

Marshall Auerback has 28 years of experience in the investment management business, serving as a global portfolio strategist for RAB Capital Plc, a UK-based fund management group with $2 billion under management, since 2003. He is also co-manager of the RAB Gold Fund. He serves as an economic consultant to PIMCO, the world’s largest bond fund management group, and as a fellow of the Economists for Peace and Security.

From 1983-1987, he was an investment manager at GT Management (Asia) Limited in Hong Kong, where he focused on the markets of Hong Kong, the ASEAN countries (Singapore, Malaysia, the Philippines, Indonesia, and Thailand), New Zealand and Australia. From 1988-91, Mr. Auerback was based in Tokyo, where his Pacific Rim expertise was broadened to include the Japanese stock market. From 1992-95, Mr. Auerback worked in New York for the Tiedemann Investment Group, where he ran an emerging markets hedge fund. From 1996-99, he worked as an international economics strategist for Veneroso Associates, which provided macroeconomic strategy to a number of leading institutional investors. From 1999-2002, he managed the Prudent Global Fixed Income Fund for David W. Tice & Associates, an investment management firm, and assisted with the management of the Prudent Bear Fund.

Mr. Auerback graduated magna cum laude in English and philosophy from Queen’s University in 1981 and received a law degree from Corpus Christi College, Oxford University, in 1983.

Visit: Economic Perspectives

Be the first to comment

Leave a Reply

Your email address will not be published.


*