Geman Engineering.

I have been asked to explain why I believe Germany should leave the Euro…A quick note ahead of the ECB QE announcement.

It all started with the re-unification of East and West Germany…at the time, many were flabbergasted at the very generous offer by West Germany of currency conversion terms. The Ost Mark was converted at parity with the Deutsch Mark for the first 4000 marks and at 2:1 for other legitimate savings. This was seen at the time, as a very, very, generous offer and one that seemed economic suicide by the rest of the world. So, Germany was now lumbered with a country full of globally uncompetitive industries in the East. It needed to expand its output and export potential very quickly if this seemingly stupid offer was to succeed. Lets have a currency union with the basket cases of Europe who had traditionally relied on currency devaluation to allow them to continue their imprudent economic models. Of course, these poor economic models had always led to high structural interest rates which had been an impediment to consumer and in most cases government debt. Along comes the Euro. Suddenly, Germany is in bed with these lou lous and the currency falls dramatically. From its launch in 1999, the Euro lost 25% during the first three year’s. Great for Germany trying to re-capitalise an entire country. Around this time, mega investment was taking shape in the Mediterranean Counties. Low interest rates were spurring massive consumption and the big gainer in all this economic activity was construction. For instance, prior to the crash, Spain was the second biggest influence in global growth behind China. Of course, who was the biggest beneficiary of all this debt fuelled consumption and investment…come on you can guess….YES! Well done…Germany. Now, with the Eurozone credit cards maxed out, what does the worlds most prolific exporter need to do…Correct again. Encourage a weak Euro so as to sell its exports under the veil of a tin pot currency. All the prevarication since the crisis began has done little to install confidence in the Eurozone.

So, if Germany were outside the Euro, two things would happen. Firstly, a German currency would be in great demand. I believe vs the Dollar it would be 25% higher than the Euro today. Remember, Germany is in rude economic health. Like Switzerland, only possibly more so, it would have significantly negative interest rates. Secondly, the Euro without Germany would be 25% lower vs the Dollar than it is now. This would allow the strict austerity measures, strongly encouraged by the Germans, to be adhered to whilst giving a dramatic to boost to the industrial potential. It would reverse the deflationary pressures currently exhibited. Yes, interest rates would rise but investment would flow providing this ejection of Germany was linked to not only a continuation of strict austerity but also a complete overhaul of restrictive work practises as seen in places like France. OK, bond holders would get burnt but surely the people of Europe have suffered enough whilst bankers and financiers have grown fat on the spoils of a ridiculous situation.

 

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Thursday, January 22nd, 2015 Consumer Debt, Debt, Euro, National Debt, Predictions, USD

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