by Jack Crooks

Saturday, April 7, 2012 at 7:30am

Jack Crooks

There are all sorts of reasons I could list to explain why the euro will disintegrate. You have heard a lot of them before. But as this crisis continues to drag on, I think many people still miss the core reason the single currency, and possibly even the European Union itself, will come undone — Germany!

Here’s why …

There is no way the countries of Europe can compete with Germany’s dynamic export-driven economy. That really is the bottom line of the story. But let me add some context …

Monetary supply There are four financial management tools of manipulation that a country needs to properly grow and manage its economy relative to the competition:

  1. Monetary Supply
  2. Interest rates
  3. Fiscal balance
  4. Currency levels

The countries that are part of the single currency system, with the exception of Germany, have control over only one of these four variables — fiscal balance.

And now, it appears Germany is in the process of snatching even fiscal authority from the former “sovereign” nations of Europe.Germany, though not completely, has implicit control over the European Central Bank through the Bundesbank (Germany’s central bank). And historically, ECB monetary policy has always reflected a policy of “what is best for Germany” first and foremost, given that Germany is the engine of growth for the entire region.

Germany runs the EU's largest trade surplus.
Germany runs the EU’s largest trade surplus.

But wait you say, Germany has contributed so much to the system, it isn’t their fault.

Well, part of that is true.

Germany, through its taxpayers, has contributed a great deal to subsidizing the weaker countries within Europe. But remember, what they give, they get back … and more … in the form of trade i.e. Germany sells to Europe, it is their captive market in some ways. You can easily see this by comparing the current account surplus in Germany to the current account deficit countries in the euro zone.

Despite calls from many fronts that Germany start doing more buying i.e. consuming more as a country, it is highly unlikely this will ever happen. Consider this excellent summary of Germany as a major export power and its implications from‘s George Friedman:Germany Is and Will Remain
a Dominant Exporter

“The German economy was designed to be export-based. Its industrial plant outstrips domestic consumption; it must therefore export to prosper. A free trade zone built around the world’s second-largest exporter by definition will create tremendous pressures on emerging economies seeking to grow through their own exports.

“The European free trade zone thus systematically undermined the ability of the European periphery to develop because of the presence of an export-dependent economy that both penetrated linked economies and prevented their development.”

Unless the countries of Europe are willing to sit by and effectively become low cost labor markets for German industrialists and satellite branches of Berlin, they will have to find a way to compete against Germany.

And given the massive labor/technological/innovative lead that Germany has, it will be impossible for countries inside the euro zone to catch up.

To catch up, or at least provide a relative level of competition against Germany, countries must regain control of the three variables they forfeited to become a part of the single currency: Money supply, interest rates, and currency level.

This will be impossible under the current structure and straightjacket of a single currency, single monetary policy, and unified fiscal discipline.

Consequently, there is only one way out: Leave the euro and go back to their original currencies.

I think it’s as simple as that.

Best wishes,


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