Germany and the euro

Many silly things are being said these days about Germany and its relation to the euro, also by usually levelheaded people. One view, which I am hearing increasingly often, is that Germany will or should leave the euro. It is an incredibly silly view. No country, including Germany, can leave the Eurozone without a significant cost. But the Eurozone has not given the sort of boost to German exports that many people, including Commission chief Barroso, is now suggesting.  

The argument is that Germany has benefitted from the Eurozone through a depreciated currency – that is, the Deutsche mark would have fetch a higher fx rate, which would have depressed German export. Hence, the effect of the euro participation by Greeks, Italians and other Club Med countries was to boost German export – often at their own expense.

The same view has been echoed by French finance minister, Christine Lagarde, and others when they have lambasted German export prowess for causing internal Eurozone imbalances. This view fails on two accounts.   

Firstly, in the years up to the crisis German trade grew faster despite the appreciation of the euro against the dollar and a host of other key currencies. The table below demonstrates in simple terms what I mean. As the euro went up (it appreciated by almost 40 percent against the dollar between 2002 and 2007) the trend of German export remained high and above historic trend. The share of Germany’s export that goes to other Eurozone countries also declined with increased speed, exposing Germany to greater sensitivity for nominal exchange rates. Of course, this chart does not prove that export grows faster with an appreciated currency; it only demonstrates that nominal exchange rate fluctuations don’t drive trade.

Secondly, as most economists should know, the nominal exchange rate is not a good indicator of trade volume growth. With a real effective exchange rate approach, taking account of price-level differences, one gets better indicators of competitiveness. The table below shows the unit labour costs for selected countries since the introduction of the euro. It also shows why German has a booming export sector and why Greece has not.