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Recent Eurozone GDP numbers confirmed that the German economy is the only one showing continued growth (Q1 +1.2% y.o.y.) and helps flatter the overall picture in the common currency bloc (+0%!). The German’s have perhaps been the prime beneficiaries of the introduction of the Euro, in that it enabled consumers in countries such as Greece, Spain and Portugal to borrow more cheaply and buy goods that the Germans are amongst the best in the world at making (cars, electrical goods etc.). Such products priced in the old Deutschemark may have proved far less affordable for many in the Eurozone!
Over the past decade the newly wealthy consumers of Asia, and in particular China, have also developed a penchant for ‘status symbols’ like luxury Mercedes saloons and this has further underpinned German export growth. With China’s economy showing some signs of slowing, combined with problems closer to home, in the short term at least the party seems to be well and truly over!
In the early years of the ‘credit crunch’ the Continental Europeans seemed to stick their heads in the sand and regard the issue as a USA/UK specific problem. Indeed the ECB was, for some time, still raising interest rates rather than cutting and injecting liquidity into the financial system. By not acting much earlier with the other powerhouses of Europe to stem the crisis, the German authorities have now managed to back themselves into a corner.
If Greece leaves the Eurozone, it will default (Drachmas won’t be sufficient to cover Euro-denominated debts!) and perhaps cause a domino effect (Portugal next?) that leaves German banks (who lent a lot of the borrowed money that financed the spending boom in Europe) with huge holes in their balance sheet. To avoid this and keep Greece (and others) inside, will require a huge transfer of wealth from the core (Germany) to the periphery (the PIGS). This will prove a difficult concept for Merkel to sell to her countrymen, who view themselves as ‘prudent’ and their near neighbours as ‘lazy’ and ‘profligate’; happy to ignore the effective ‘vendor financing’ scheme that has benefited their country since 1999.
The choice is not an enviable one to have to make, but by the end of this year we are likely to know the fate of the World’s second reserve currency!
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