Just how great is the euro for Germany?

I am at a conference in Berlin on sovereign debt. Last night, at one of the many pleasant restaurants serving remarkably good food at reasonable prices, one of our German colleagues held forth with a view I read a lot in the newspapers - that Germany should just bear the cost of endless bailouts since its industry was "benefitting so much" from the euro. Wage and price inflation elsewhere in the Eurozone made countries uncompetitive; Germany's wage restraint paid off, at the expense of the free-spending peripheral countries. The NYT has a story on changes in export shares of European countries in the last 10 years. The allegedly unfair advantage of the euro for German exporters should matter much less with the ROW -- the exchange rate versus the dollar, the pound, the yen can still adjust. What does the chart show? Germany's export share (relative to the rest of the continent) is up -- but it grew no faster within the Eurozone than for exports to the rest of the world. This doesn't prove that exports to the Eurozone wouldn't be lower if we had the DM, and it had appreciated a lot; but it takes the wind out of the sail of those commentators who argue that swapping shiny cars for junk bonds is such a great deal for the Germans that they should happily carry on doing it forever...

Investment bankers discover solution to the Euro debt problems

The solutions spells M-O-N-E-Y. German money. Lots of it.

The American journalist H.L. Mencken once joked that for every difficult problem, there was a solution that was simple, elegant, and wrong. That is what I was reminded of reading the increasingly hysterical comments being issued by various people in the I-banking community. Euro area debt problems? The end is nigh? Let's get a bailout. We have had three years of effective "blackmail" by the markets, where governments have caved in every single time, making bondholders whole at the expense of the public. The German government some weeks ago felt that enough was enough. Now the rise in bond yields is creating a crescendo of voices arguing that a "fiscal union" in the EU will solve this problem. Bloomberg ran a full story composed of nothing but London-based investment bankers sagely advising that this was the only solution. Among the more bizarre suggestions, the idea that some 350 billion of Greek, Portuguese and Irish debt gets transferred to the core countries to bring debt burdens down... I think these people are based in the wrong place.

Anyone with any knowledge of German politics will tell you that a gigantic bailout - much as our underpaid friends in the City would love it - will not happen. The whole Euro experiment was sold to the German public via a million holy oaths that this could not happen; the already weak consensus behind the euro will crumble before we see a fiscal transfer union or massive debt shifts. Some commentators are always advising that the Germans and French are just bailing out their own banks. True, in part. But that used to favor bailouts in the past; it is now becoming much harder as a political sell. Yet more money for bankers? Not the message you want to send as a politician. And don't forget -- Germany's export performance is largely built on selling to the rest of the world. While most of the EU mostly trades with the rest of the EU, Germany does sell in significant amounts to the US, Brazil, China, and the rest of Asia. Compared to that, exports to Portugal, Ireland, and Greece are miniscule. Germany needs Europe much less today than it did 20 years ago. The second mistake that people make when thinking about incentives for a bailout is to say that Germany is benefiting hugely from other EU countries not being able to devalue against a Deutschmark. True, but the point of Germany's export surpluses is to accumulate foreign assets for the day when the population is dominated by pensioners. A stronger Mark will facilitate buying up assets elsewhere, from factories and stocks to holiday homes in the sun. Bottom line - much of the current chatter about Germany having to step up to the plate for sure is, in my view, a bunch of I-bankers whistling in the dark, hoping that their trades will finally turn around...