Currency War Weak Euro, Strong Germany

The monetary policy followed by the European Central Bank, including its embrace of quantitative easing, has created winners and losers in the euro zone. Germany still emerges as the main benefactor.
Mario Draghi is helping Germany, but not Greece.

Monetary policy in the euro zone is a game that 19 countries play, but in the end, the winner is Germany.

This rewording of a favorite saying about Germany's success in European soccer championships can be used to characterize the effects of decisions made in recent months and years by the European Central Bank, the ECB.

Thanks to extremely low interest rates, Germany has balanced its budget without great effort, the nation’s industries are financing themselves more cheaply than ever and, on top of everything else, the German economy has been the main benefactor of the weak euro.

Since the ECB entered into quantitative easing with its purchase of government bonds and securities, the euro’s value has fallen even further, which is logical since monetary policy is being loosened in Europe even as the U.S. Federal Reserve has announced an imminent tightening.

The ECB justifies its monetary policy by citing the danger of deflation, but it can easily be read as a strategy to weaken the euro. Governments of economically failing countries desire a weak euro because it would make it easier for them to achieve price competitiveness for their industries.

A falling euro is also more palatable for the public than lowering actual earnings, yet it’s a double-edged sword. When the euro exchange rate sinks, prices for imported goods from other currency regions rise, diluting the buying power of consumers.

The strategy of a weak euro is stoking a currency war.

A closer look at the foreign trade statistics of European countries illustrates who stands to profit and who will be hurt by a devaluation of the common currency. Nations exporting more goods to countries outside the eurozone than they import will benefit most. Although not all currencies are gaining against the euro, this is certainly happening in the most important markets.

Among ailing countries such as Greece, for example, the situation is different. In 2013, the amount of goods Greece imported from outside Europe exceeded exports to non-euro zone countries by €10 billion ($11.23 billion).  The bottom line, therefore, is that a weak euro is not really helping the country.

Similarly, Spain also imported €10 billion more in goods than it exported to non-euro zone members, while the balance in Portugal is roughly even. In contrast, Ireland is profiting from the weak euro and is clearly in the black with a net €15 billion gain from other currency regions.

Italy and France, two countries currently under great pressure to reform, also benefit from the weak euro because they sell more goods outside the euro zone than they purchase. For Italy, the trade surplus is around €45 billion while for France it’s about €28 billion.

On the losing side is the Netherlands, which imported €65 billion more in goods from outside the euro zone that it exported. The balance is about equal for Belgium, Finland, Slovenia and Slovakia. Austria is a winner with a trade surplus of €12 billion.

But the big winner clearly is Germany, whose exports to countries outside the euro zone has outweighed the imports by a whopping €212 billion, making its trade surplus with the rest of the world eleven times greater than that of the other 18 euro states combined.

The entire economic picture can’t be seen only by considering absolute numbers. The size of the trade balance with non-euro countries relative to the country’s gross domestic product (GDP) is also important.

Here, Ireland profits even more with a trade surplus of around 9 percent of its GDP. That is more even than Germany, which tallies about 8 percent, while Austria, Italy, Slovenia, Slovakia and Estonia come in at 3 to 5 percent. On the down side, the Netherlands faces a towering deficit of 11 percent, with Greece at minus 5 percent.

Clearly, the ECB's effort to aid ailing countries in the euro zone is benefitting Germany, which already is an economic powerhouse. If the euro continues to weaken through quantitative easing, this effect will multiply further.

The effect of the ECB's strategy on countries outside the euro zone remains in question. As a major player on the global market, if the euro zone weakens its own currency - despite having generated a considerable trade surplus primarily because of Germany’s exports - it risks becoming politically vulnerable.

The strategy of a weak euro is stoking a currency war, similar to what Japan is doing now, and what the United States has done in the past.


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