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The Globe and Mail

For Germany, the euro crisis is a mixed curse

German Chancellor Angela Merkel addresses media during a news conference in Berlin on Monday, Sept. 17, 2012. Ms. Merkel said Monday that she hoped to have agreed by the end of the year on a process towards closer political co-ordination and greater accountability within the euro zone.


For Germany, the European crisis (formerly the debt crisis) was always a mixed curse. German taxpayers found themselves on the hook for a string of sovereign bailouts. On the other hand, the crisis sent the euro into the toilet and that was good news for German exports and job creation.

Before the crisis began in earnest in late 2009, with Greece's admission that it had lied about its debt load, the euro was trading at about $1.60 (U.S.). Since then, it has been downhill for Greece, Ireland, Portugal, Spain and France. Ditto the euro. It went from a high of about $1.60 to a low, in July, of about $1.20 – a 25-per-cent fall.

German exports, from BMWs for Russians to machine tools for Chinese factories, duly surged and the jobless rate went in the opposite direction. At one point earlier this year, German unemployment went as low as 5.4 per cent – the best reading in decades. It has been rising in recent months, but, at 6.8 per cent, remains far below 11.2 per cent for the euro zone as a whole and a quarter of Spain's grisly jobless rate of 25 per cent, and rising.

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As a bonus, the capital flight to safety pushed Germany sovereign bond yields into free-money territory. On Monday, the 10-year bond was at 1.7 per cent. Only Japanese yields are lower.

Sadly for German exporters, the euro has been on tear. The rally started in August, when European Central Bank boss Mario Draghi said the ECB "will do whatever it takes" to spare the common currency from oblivion. It gained momentum about 10 days ago, when Mr. Draghi announced the relaunch of the ECB's sovereign bond buying program (with the European bailout funds at the bank's side). It gained even more momentum last week, when Germany's constitutional court rule in favour of the new rescue fund, known as the European Stability Mechanism, Dutch voters endorsed broadly pro-European parties and Greek officials signalled that the European Union might give Greece a bit more time to meet its bailout conditions.

All the good news hit the euro short sellers like a cluster bomb, and they got it again when the U.S. Federal Reserve late last week unveiled its third quantitative easing onslaught, the so-called QE3. The euro went above $1.31 on Friday, though dollar weakness certainly helped to propel the euro's run. Since July, the euro has gained more than 9 per cent. The euro is also at a four-month high against the yen.

On Monday morning, the euro fell marginally and currency strategists were busy wondering whether the euro had temporarily peaked out, was set for a new plunge or might even rise as the open-ended QE3 program weighs on the dollar. To be sure, a renewed euro zone crisis, such as a Spanish sovereign bailout on top of the €100-billion Spanish banking bailout, could send the euro swooning again. But only the bravest currency speculators would ramp up their euro short positions today. The euro could equally rise to $1.33 or higher.

German exporters will be the keenest euro watchers. The weak euro has been a godsend to them. German exports are near their all-time highs of May, 2012 while Japanese exports have plummeted in recent years, thanks to the enormous depreciation of the euro against the yen.

With the euro powering forward, you can bet that German exports will fall somewhat, and that Germany's jobless rate will not. You can also bet that Germany's manufacturers and exporters will put pressure on chancellor Angela Merkel to keep the austerity campaign intact in the weakest countries, all the better to keep the currency tension intact. A de-stressed euro zone that sends the euro soaring might be good news for Japan, not so for its great export rival Germany.

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