In Europe’s seemingly endless debt negotiations, Berlin would seem to hold all the cards. It is, after all, Europe’s largest economy, its most powerful and its most financially sound. But in reality, Berlin’s options are highly constrained and require a remarkably delicate policy balance. On the one hand, Berlin, as the eurozone’s pay master, seeks fiscal austerity to ensure that its money and aid go to good purpose, to alleviate future financial strains.
At the same time, it dares not push austerity too hard. Its clear self-interest in preserving the eurozone makes it loathe to risk the departure of any member, much less dissolution. That balance has appeared in past negotiations and almost certainly will in future ones as well. Though the outcome remains uncertain, Berlin’s continuing strong commitment to the zone’s integrity surely increases the probability that in the end, the euro will survive.
The second and third motivations to preserve the zone are more economic and even more profound. The euro area has provided German industry with an almost captive market. Because Germany joined the euro when the deutschmark was cheap compared to German economic fundamentals, the common currency effectively enshrined a competitive pricing edge for German producers within Europe. Especially because the nations of Europe’s periphery generally joined the euro when their respective currencies were dear compared with their economic fundamentals, the common currency gave German industry an almost natural dominance within the zone. International Monetary Fund (IMF) data show that the currency differences initially gave Germans producers a 6% percent pricing advantage over their Greek, Spanish, and Irish competitors. By encouraging greater industry and investment in Germany and discouraging it in the disadvantaged periphery, Germany’s pricing edge has actually expanded to 12%, 20%, and 32% against these countries respectively.
Third, the euro and its zone also helped German industry compete outside Europe. Had the common currency not existed, a rising deutschemark eventually would have erased much or all of Germany’s pricing advantages in global markets. Because the euro encompasses weaker economies, it could never rise as high as a separate German deutschmark surely would have, so it has protected German producers from such competitive pricing disadvantages. For producers in Europe’s periphery, of course, the euro had the opposite effect. The euro, lifted by the zone’s stronger members, has generally priced their exports higher than their individual national currencies would have done or their economic fundamentals could readily support. In this regard, the Germans may have a greater interest in sustaining the eurozone than Greece, Spain, or any of the others.