Smaller eurozone will cost Germany, says SIG’s John Ventre

Breaking up the eurozone to consist of a smaller core of members would likely cost Germany more than bailing out the failing eurozone periphery, argues John Ventre, portfolio manager at Skandia Investment Group.

It looks as if Germany is at least considering the option of making the Eurozone smaller by creating a so-called “core” or “northern European” Euro bloc. Many have suggested that this sort of Eurozone break up would be an ideal solution, allowing peripheral countries to devalue to address their debt burdens and saving core Europe from the “costs” associated with bailouts. But what is the “cost” for Germany of not bailing out the periphery?

Germany is the world’s second largest exporter, exporting about 1.3 trillion USD of goods and services each year. To put that in perspective, that’s the same amount of exports as the US, even though the US is over four times bigger in terms of GDP. Germany punches above its weight in the export game competing heavily with China not just in terms of volume of exports but also directly in a number of industries. The Chinese currency remains significantly undervalued, with currency controls in place which do not allow it to reach its fair market value. The Euro-bloc, with its weak members and associated uncertainty is Germany’s version of the Chinese RMB peg: it allows German exporters to flourish.

Moving to a smaller, “core” Europe or breaking up the Eurozone entirely would lead to a much stronger currency for Germany and would hurt Germany economically, much more than the cost of bailouts for weaker European states. Accordingly, bailouts remain significantly the lesser evil and I believe that ultimately German policymakers will reach the same conclusion.

 

John Ventre is portfolio manager at Skandia Investment Group

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