Germany derives enormous benefits from the existence of the Euro. As Europe’s most productive major economy, it has a ‘home’ market where currency risks have been eliminated, along with the possibility of competitive devaluations. Its trade with the rest of the world also benefits from the existence of the Euro. This is because the Euro is comprised mainly of economies that are less productive than Germany, and so the Euro is weaker on the currency markets than a Deutschemark would be.
Germany is even deriving immediate benefits from the current crisis. The yield on 2-year German debt (‘Schatz’) offered at the latest auction of government bonds was zero. Germany is able to borrow in the international markets for free as capital is switched away from government bonds in the crisis-hit economies. Some in the financial markets believe this also heralds a renewed fall in the Euro versus the US Dollar, which would provide a further boost to German exporters (although also raising the cost of imported goods and raw materials). In the chart below the US Dollar/Euro exchange rate is shown on the orange line, while the 2-year Schatz yield is shown on the yellow line.
Figure 1
