The present Eurozone crisis is an interesting demonstration of the problems faced by fixed-rate currency systems. Germany’s relationship with the crisis is particularly interesting; it represents a lack of willingness to accept the responsibility that comes with greater European power.

Even setting aside the present narrative around Germany having some mythical strong desire for a united Europe, Germany derives great economic benefits from the Euro. Chancellor Angela Merkel is well aware of how this works, which is why she almost risked her government on September 29th to increase German exposure to the debt crisis to €211 billion, via the European stability fund. German citizens, unlike Greek and Icelandic citizens, do not have sufficient reason to be discontent.

Germany benefits greatly from the Euro. One of the reasons Germany is able to maintain its impressive trade Surplus is not because of fabled German efficiency, but because it benefits from being part of a common currency. Germany’s existing, established industry and economies of scale, when combined with the common currency, reduce the incentives for new industry in other European countries. This benefits German exports, but does not benefit the balance sheets of European countries that are used to using to debt to finance consumption. It also provided Germany with the tax revenue which allowed the German Government to perform minor Keynesian stimulation in the face of the global recession. 

Germany’s export power is largely built on the back of and maintained by the single currency; were Greece or Spain able to set their own interest and exchange rates, they might be able to use monetary policy to support their own industry. This is the fundamental problem with any fixed exchange rate system. In addition, German manufacturing has helped make the Euro very expensive, damaging the Mediterranean nation’s most traditional source of foreign income – tourism.

The so-called ‘PIGS’ states have been weakened in their efforts to affect monetary policy – Germany represents by far the biggest voting bloc in the Eurozone, other big countries are unconcerned, like France, or not involved, like Britain.

Germany’s string of benefits from the Euro however, cannot come for free. As long as Germany’s export markets run trade deficits to buy German goods, they are in essence running up debt, and if Germany intends for them to consume at that rate, it will have to pay for it. The system that has been erected is almost like a bizarre multi-state form of socialism. As long as Germany is willing to pay for the comparative weakness of Mediterranean economies that it is partially responsible for, the system will work.

But how politically feasible it is to constantly ask German taxpayers to do so, is a different story. Rationally speaking, they should have no problem with it; they are effectively paying for consumption which in return gives them their high levels of employment via exports. This not only boosts their economy, it also helps fuel their national mythos.
German taxpayers may whine and complain, but if they wish to continue their privileged position within Europe, as key beneficiaries of the single currency, and wish to foster greater European unity they will need to pay for it. In a more integrated Europe this would happen anyway, Germany would subsidise the public services of say, Poland and Bulgaria, just as West Germany does for East Germany and England does for Wales and Scotland now.