November 4, 2011 / 3:22 PM / 8 years ago

Analysis: Germany cashes in on euro benefits, for now

BERLIN (Reuters) - While European leaders jet from summit to summit to save the euro and some Germans get nostalgic for the Deutsche mark, Europe’s largest economy is still the biggest winner from the single currency, giving it a strong incentive to foot the bailout bill.

“We will get back many times what we are now spending on Europe and the euro,” Chancellor Angela Merkel has said since the debt crisis began, often adding that Germany benefits from the single currency more than any other member state.

Few would dispute that with 40 percent of its exports going to the euro zone, Germany’s trade-dependent economy benefits from sharing a currency with 16 others, which has removed the exchange rate risk, given access to an expanded single market and brought greater price stability than under the D-Mark.

“German politicians always talk about the benefits but they are mixing in broader benefits, such as the European project and the political benefits,” said Greg Fuzesi, an analyst at JP Morgan. “I’d still agree on an economic level, though.”

If it had its own currency, Germany’s economy would probably also be struggling with an exchange rate far higher than the euro’s now, and it would be more expensive for the state to refinance itself.

State bank KfW estimates the German economy would have grown by 50-60 billion euros less in 2009 and 2010 without the euro and last year’s gross domestic product (GDP) growth of 5.6 percent would only have been 3.6 percent.

But with euro gloom dominating the news every day, many Germans are increasingly skeptical about the common currency and are growing weary of bailing out what they see as states that have wantonly lived beyond their means.

Some 54 percent want the D-Mark back, according to a recent poll by Forsa institute of 1,001 people — even though only 43 percent also think Germany’s economy would actually be better off now if it still had the old currency.

German businesses, worrying that the crisis may undo the euro’s larger benefits over time, are also exerting pressure on politicians to get a handle on the crisis quickly.

“In the current situation ... the benefits of the euro don’t outweigh the downsides but if we manage to address the risks in the short term, our companies are happy to stick with the euro,” said Brun-Hagen Hennerkes, head of an association representing internationally-active German family businesses.

Germany is the currency bloc’s economic powerhouse and foots more than a quarter of Europe’s bill. Of the 440 billion euros in the European Financial Stability Facility, Germany vouches for 211 billion and many Germans worry there could be more demands to come.


Unlike elsewhere in Europe — Greece is in turmoil, Ireland and Portugal are under tough aid programs, Italy is trying to keep the wolf from the door and others are feeling the pinch — Germany can actually count the profits of the crisis.

If it still had the D-Mark, a flight to safe havens would have pushed up its currency and interest rates, with the mark up to 20 percent dearer than the euro is now, according to KfW — bad news for a country built on the strength of its export base.

“Germany is larger but it would have been having the same kind of issues that Switzerland is at the moment,” said Fuzesi.

The Swiss franc — also traditionally a haven in times of crisis — rose more than 30 percent in the year before the Swiss National Bank decided to link it to the euro, hammering Swiss exports in the process.

There is some disagreement about the extent to which the D-Mark would have risen, with analysts pointing out that at least some investors would have fled the region altogether.

“There’s no question that they would be struggling with a strong currency. Whether it would have been materially stronger than the euro now is debatable,” said Simon Derrick, head of currency research at BNY Mellon in London.


Consultants McKinsey estimate Germany owes roughly a third of its economic growth since 1999 to the euro, compared with 20 percent for the euro zone as a whole, according to a so far unpublished study seen by Reuters.

Removing transaction and hedging costs contributed 11 billion euros to Germany’s GDP last year, almost a third of the euro zone’s total effect of 37 billion, according to McKinsey.

Higher trade added 30 billion and improved competitiveness helped Germany with another 113 billion last year — while in contrast it had no effect on euro zone growth as a whole, according to McKinsey.

The crisis has added one more plus to the list: a flight to quality in government debt means Germany can refinance itself more cheaply.

Yields on German bonds, considered the safest in the euro zone, have reached record lows, with 10-year bonds now returning less than 2 percent.

Lower yields in the secondary market mean lower coupons on new bonds and lower borrowing costs for the government.

With yields averaging 3.5 percent over the past 10 years, a fall to around 1 percent could cut the government’s interest payments on new issues by 12.5 billion euros a year or by 60 billion by end-2015, according to a recent Unicredit study.

None of this means Germany’s economy is not beginning to feel pain from the crisis, with growth expected to slow sharply and some economists already putting a fall back into recession on the cards.

The risk of Germany’s economic outlook darkening due to lower demand from struggling euro zone partners would be true whether it had the D-Mark or euro.

But the risk of having to pay the guarantees granted under euro zone rescue schemes hangs heavy, economists say.

“Germany benefits from the euro’s existence but faces costs because of the debt crisis,” said Oliver Holtemoeller, head of the macro economics section at IWH economic think tank. “We expect an economic blow and that’s down to the debt crisis.”

Reporting by Annika Breidthardt; Editing by Stephen Brown/Mike Peacock

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