Germany at Its Rubicon

Wolf Richter's picture

By Wolf Richter

No country is economically more dependent on the survival of the euro than Germany: the export powerhouse—largest exporter in the world until China overtook it last year—thrived because Eurozone countries could borrow unlimited amounts of euros to buy German goods. But now that the gravy train has stopped in front of a mountain of unmanageable sovereign debt, Germany finds itself at war—with itself.

Germany’s heroic insistence on monetary discipline is pushing the over-indebted Eurozone to the brink of breakup—the very event that German exporters fear the most. And they include the vast Mittelstand of family-owned companies. Already, German industrial orders have started to nosedive.

Exporters are panicking: orders fell off a cliff during the financial crisis, leading to the worst quarterly GDP declines in the history of the Federal Republic: -2.1% in the fourth quarter of 2008 and -3.8% in the first quarter of 2009. Annualized, those two quarters printed a double-digit decline in GDP. The German economy lives and dies by its exports.

Ironically—though Germans conveniently don’t remember—it got pulled out of its funk by the Fed which printed and handed out trillions of dollars, a big chunk of which we now know went directly to German banks and indirectly to German exporters. So monetization bailed them out last time though it wasn’t their money that was devalued.

That’s the schizophrenic duality Germany finds itself in. No event brought this out more harshly than Germany’s reaction to the news that the ECB studied using national reserves, including Germany’s gold and Special Drawing Rights (an IMF-issued quasi currency), as a way to increase the firepower of the misbegotten European bailout fund, the EFSF.

France knows no such duality. Yesterday I watched Valéry Giscard d'Estaing, President of France from 1974 - 1981, hold forth on French national TV about the debt crisis and the government’s response to it (fear and belt-tightening ... six months before an election). During the discussion, the center-right politician proudly stated that when he was booted out of office in 1981, France's national debt was a minimal 14% of GDP.

What he didn't say was that the French government at the time had been funding its budget deficits through various government-owned financial institutions and through monetization by the Bank of France. Nor did he mention France’s history of inflation, devaluation, and “currency reform.” The French franc was most recently “reformed” in 1960, when 100 francs were converted to 1 new franc. Alas, in its 40 years of existence until the euro took over, the new franc lost 86% of its value.

Which makes Germans gag. By comparison, Italy, Spain, and other countries had far worse inflation and devaluations.

Monetization as a policy goal has now shown up in French political campaigns. During the primaries, candidates on the left—the winner, François Hollande, has a good chance of dethroning Nicolas Sarkozy—have called for solutions that ranged from greater flexibility by the ECB to outright and automatic monetization of Eurozone sovereign debt, similar to how it was done when Giscard d'Estaing was President. On the far right, Marine Le Pen called for an end to the euro itself.

Their logic is that before the advent of the euro, no one doubted that France and Italy would be able to pay their bills, albeit with increasingly worthless currencies. Sovereign default wasn’t even part of the discussion, though it is today.

But to maintain the sacrosanct value of the euro, Germany resists pressures to monetize troubled sovereign debt though it would save the Eurozone and the very export markets that the German economy depends on. Fear of inflation and devaluation is an integral part of the German soul, formalized by its central bank and constitution. And monetization, a solution that seems so glaringly obvious to other countries, is seen as the threat that it actually is.

Now, as the quixotic war against Eurozone deficit addiction and excessive debt is falling apart, and as affected economies are careening out of control, German industry fears for its export markets. And suddenly, Germany finds itself at war: on one side is its soul, whose spokesperson is the Bundesbank; and on the other is its dependency on exports.

At some point, after all bailout efforts have failed, one side will prevail. Germany will either come around and support “saving” the Eurozone, and thus its industrialists and banks, through monetization of debt—and lose part of its soul in the process. Or it will exit the Eurozone in disgust to revert to the Deutsche Mark or to start a smaller monetary union it can control—and lose crucial export markets in the process.

Marine Le Pen, one of the three top contenders in the French presidential election, said the unspeakable.... 'Let the Euro Die,' Said the Woman Who Could Be the Next French President.

Wolf Richter

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thurstjo63's picture

Wolf, you cannot be serious. By printing money, the ECB can save the euro!?! Hmmm. Isn't that what the Fed is doing? But it's not saving the dollar. How is that going to bailout the Greece? How is going to bailout the banks? There is only one solution. Debt destruction. The only question is what countries it is going to take down with it. Most of the countries (Greece, Italy, Portugal and possibly Spain) are beyond the point of no return.  Many of their banks as well. If Germany is wise, it will focus either reducing the size of the euro to healthy countries or leaving the euro itself. At least that way, it can (if it chooses to) bailout its banks. Otherwise, although bailing out banks is already a waste of funds, trying to bailout countries is even more fruitless!

whirlybird rules's picture

The Germans knew EXACTLY what they were doing with the inception of the Euro.  The gov't intentionally suprressed wage increases in the early years to acquire the competitive advantage in virtually EVERYTHING! ... while the southern europeans gobbled loans to support and expand social programs and gov't jobs.

Bub Ba's picture

war is inevitable...

CTG_Sweden's picture




Monetization as a policy goal has now shown up in French political campaigns. During the primaries, candidates on the left—the winner, François Hollande, has a good chance of dethroning Nicolas Sarkozy—have called for solutions that ranged from greater flexibility by the ECB to outright and automatic monetization of Eurozone sovereign debt, similar to how it was done when Giscard d'Estaing was President. On the far right, Marine Le Pen called for an end to the euro itself.




The problem with printing euros and monetizing debt of the member countries is that some countries would benefit a lot from that will others would only pay.


I think that Greece, Italy, Spain, Portugal, Ireland and perhaps also Belgium would benefit from monetizing a lot of these countries´ debt. Italy´s households, which have more financial assets than most other euro countries, would not benefit from monetizing and the inflation which probably will follow from that. On the other hand Italy has a larger national debt compared to Spain and Belgium, for instance.


German export companies do not need a depreciated currency to the same extent that as other eurozone members. German companies have historically been able to cope with a continuously appreciating D-mark. Furthermore, the Germans are also asked to jeopardize more in case the bailout of other eurozone countries doesn´t work. Moreover, I suppose that Germany could limit the appreciation of the D-mark by printing D-mark. That shouldn´t be a problem. Why not print money and use that as venture capital in high-tech industries, for instance?


If Germany does not leave the eurozone I think that the best option for Germany would be to agree to monetizing debt of countries like Italy and Spain. If the EU would impose regulations that would require payment in euros for imported oil, it would probably be possible to print quite a lot of euros without causing much inflation. This is not an unrealistic idea. The US is currently doing exactly the same. The only problem with monetizing eurozone debt and requiring payment in euros for oil is that this would reduce the ability for the world economy to absorb more printed USD. But if the eurozone would shrink this potential problem would also shrink. Suppose that Greece, Italy, Spain, Portugal and Ireland would be granted a 1 % interest rate for all new loans from the EFSF or the ECB. If the Germans then would have pay higher interest rates than that and at the same time suffer the consequences of inflation, I assume they would find that unfair. So therefore they would perhaps also require low interest loans. But if Germany would leave the eurozone, this wouldn´t be any problem.


I don´t know whether France would also benefit from leaving the eurozone. In any case they would benefit less than Germany from that. I also think the French banks would think that monetizing Greek debt is a great idea.


Another “advantage” of depreciating the euro is the Swedish krona then would appreciate compared to the euro. And since Swedish politicians generally want Sweden to be more closely integrated into the European Union they would probably not allow the Swedish central bank Riksbanken to print money. Instead, they would say that the appreciating krona proves that Sweden has to become a eurozone member. Judging from how Swedish politicians acted in the early 1990s when they pegged the krona to the Ecu and defended the exchange rate with a 500 % interest rate I suppose that they are ready to take any cost for bringing Sweden into the eurozone. They could print money and invest that money in high-tech and infrastructure, but they would most likely choose to let the country suffer, just like in the early 1990s. Unemployment rose by 8 % and the national debt more than doubled. But they thought it was worth it since the campaign leaders thereby could persuade the electorate that we had to join the EU in order to save the Swedish economy. Perhaps some people think that I´m kidding now. Well, check this out for yourselves and try to find out whether I´m kidding or not.


falak pema's picture

marine will never hold le pen in on that!

German schizophrenia mirrors on debt front that of US economy with TRIPLE debt, fiscal and deficit issues. Germany has only one of the three US vices.


steve from virginia's picture

I like this, a good article that reflects a lot of my own thinking about Germany and her 'Vendor financing' and a captive euro-centric market.

An assumption has been that the euro is still as useful -- not necessarily as 'valuable' -- as it was before the crisis. The assumption is that the euro can be swapped on demand for crude oil -- which was a reason for the euro's creation in the first place. The assumption holds the euro will always be preferable to some other 'Brand X' currency such as the Frenchie franc.

With all the political turmoil and a political 'system' that is clearly unable to get any traction, the old assumption falls under scrutiny. Who would want a euro, anyway? Even if the debt problems are 'solved' somehow, what if Europe's oil suppliers consider the euro as worthless as a ... wooden drachma?

The crunch is a bit off into the future but from here that 'hated' dollar looks pretty good if for no other reasons there are so many of them floating around! The Europeans can all scramble around bidding up dollars w/ drachmas, pesetas, lira, etc. while the cost of fuel in these other currencies skyrockets.

Even though the US political system is as dysfunctional as the Greek version, at least the US has a fiscal authority that can issue debt denominated in its own currency.

God bless for small things, right?

kaiserhoff's picture

I think the "value" of the Euro-zone is mostly in the negative - tariffs, taxes, and bizarre regulations that keep American and Japanese cars and other products out.

jhm's picture

At least the drama queens here have 3000 years advance in experience of reflectionism compared to those crazy chicks in th US ;-)

The US will first of all saving themselves. This involves, though unintentionally und rather unwillingly, saving Europe, because if Europe goes kaboom the US will go kaboom-kaboom in exactly that instance. So, no way out of that so well designed scheme, except letting go of all hope and dreams of empire and live on merely in the history books as a failed experiment.

Europeans have one massive advance here, in regards to the inhabitants of the US, in this turmoil: They had it before many times since the dark ages, often it was far worse than it possibly can become now, and they always survived it. This is anchored deeply in the collective european mind.

I very much doubt you'll have the comfort and relaxation for fun and popcorn in the US when tshtf.


ps. Blame game from one side of the ocean to the other is silly. We are all in one boat. The question is more like who's the captain of that boat and who's at the rows.

kaiserhoff's picture

Primary language ooga-booga?

shortus cynicus's picture

In Keynesian mad pseudo economy strong currency is clearly a problem. But if we have sound economy, based on savings, then currency appreciation is positive. And if workers are enough flexible and accept eventual payment "cuts", so where is a problem?

I have no problem with working for "less" money being worth more, when at the same time my savings are going up.

kaiserhoff's picture

No country is economically more dependent on the survival of the euro than Germany:

You don't have to be older than dirt, to remember a strong, stable deutschmark.  There was a name for that period of German history "the virtuous circle."

A strong currency kept import prices low and inflation well under control.  German exports were mostly high tech, high value (medical, aviation, luxury cars, machine tools) that are not particularly price sensitive.

Back to the future, at warp speed, Mr. Spock.

Gavrikon's picture

To a man my age, Marie Le Pen is not bad looking in a Kate Mulgrew sort of way.  And she's WAY better looking than Merkel.

But aside from that, her comment, "Let the Euro Die," gets me all kinds of hot.

bbq on whitehouse lawn's picture

Europe is full of drama queens who are so full of themselves that they cant see anything but their own reflection.

Their plan seems to be wait untill something brakes, crashes, or blows up so they can throw a fit.  This way they are not blamed and may even be seen as heros, saving the world in one of their big kumbya moments.

Either the US is going to save the euro or let them crash or blow somthing up. 

Whatever will happen will drag out and be full of kicking and screeming, its going to be a fun to watch. So get your popcorn ready.

jhm's picture

It is a lot that is done and written these days to shift focus away from the anglo-americans complete and utter bankruptcy, no matter what cost.

In the end it will proove to be in vain, the system will fall and with it the anglo-american empire, leaving half the planet in ruins.

And all that despite, or maybe exactly because of them having the "biggest gun".


Europe, on the other hand, and Germany as part of it, will survive all that turmoil resulting from the inevitable collapse, this way or another.
Would not be the first time, and maybe even not the worst, compared to other downfalls in history, though ...

supermaxedout's picture

its not Germany which is at the brink of a financial catastrophy

nor the other well managed Europeam countries, like Netherlands, Poland, Austria, Czechia, Slowakia, Denmark ?,  France ? -not under Sarkozy for sure - and the rest of Scandinavia.  And dont laugh I regard also Italy having a robust economy. They never had it better past WW2 then now. One can say and think about Berlusconi what he wants but under him Italy had for the first time a stable government since WW2. Much to the dislike of the US which prefers clearly an Italia which is like Greece. Weak, corrupt and easy to handle by Washington.

My opinion is, that at the end the US is opting to act in a way nobody expects now. Th Eurozone is going to be forced to continue beeing the poodle of the US. 

The Eurozone and Europe could very well manage on their own. There are enourmos business opportunities on the Eurasian continent and the attached continent Africa. 

But its not on the agenda of the US and UK to let it happen that these areas will become boom places. Simply because the US would not be part of it because they have little to offer what is of practical use. The profits and the power of the future would be ammassed on the biggest land mass on earth Eurasia. Moving away from the North American Island.

But the US has the bigget gun and that is what they are betting on.  Poor US Americans iliving under such a goverment.

silverscouseparis's picture

or germany does not exit the euro,theres a rapid decline in the euro and then a HUGE export boom in germany,ps im still gagging with

bile over ZH wonderfull cme ZH one huge TROLL?..also what about us debt, the munis etc and all the cds exposure us banks hold?

jeffgroove102's picture

So so true, that has to be the best comment I have seen in a while. Good one.

merchantratereview's picture

Isn't a 1 to 1 parity EUR with USD good for EUR exports???

lolmao500's picture

Let the euro die... the only sane thing said by any possible European leader. France should man up and elect the only nationalist poltician in France, Marine Le Pen... even if she's a little nuts.

But I bet it'll go to second round of election, Socialists VS National Front... and the socialists will win by a big margin.... unless France is forced to bail out another EU country before the elections or they lose their credit rating.

Ethics Gradient's picture

Die? No. Print!

GBTPGR10:IND 6.62500 down 0.03100 0.47%
DoChenRollingBearing's picture

Excellent piece Wolf.

An example of German industry is the rolling bearing business.  Private German company Schaeffler owned "INA" a maker of bearings mostly for industry.  Schaeffler then went on to buy famed bearing manufacturer "FAG" (which had just bought KBC of Korea -- the guys we buy from).  Schaeffler now owns the 2nd biggest bearing manufcaturer in the world (only Sweden's SKF is bigger).

Schaeffler has plants all over the world (including various here in the USA).  So they might not be getting hurt as badly as smaller German companies dependent on selling highly engineered products to other countries.

O/T but perhaps of interest is the fact that the Schaeffler family is on the Forbe's list of billionaires...

Jean's picture

Global diversification will protect the big guys -- it is, as the article states, the small guys who are going to get squeezed.

RafterManFMJ's picture



You and your rolling bearings.  They are starting to fascinate me; how does one get an apprenticeship as a rolling bearing salesman?

Dr. Engali's picture

Why is it that there are only "candidates on the left" and politicians on "the far right". I Guess there is no such thing as "far left" politicians.

DaBernank's picture

Where debt is money there can be no room for soul, shut up and print, Angela... Or should I say Mario.

devo's picture

Great article.

Gunther's picture

The argument that a low or undervalued currency is needed for export success does not hold .
Empirically it was disproved when the Mark gained value between 1971 and 1989 while the German export flourished. Similarly the Ontario industry did not move to Michigan when the Canadian Dollar went from 60 cents to the USD to par in the last few years.

Without a common currency Germany would not subsidize the soft-currency countries; it remains to be seen if the saved subsidy will not compensate for the difficult export with a strong currency.

orgonor's picture

what stops Germany from keeping a strong currency while southern eu states go for a weak one?

my argument is that they could still go into these countries and buy everything for cheap and move their production over there...replacing their exports with in-situ manufacturing..would create a few jobs and also keep their market share up..

looks too good not to be implemented in the long run...

walküre's picture

Exports are fine and dandy but if you devalue your currency to the point where your trade enemies can come in and buy all your assets cheap, the questions surrounding the "export driven" economy hardly matter at all!

I pray Germany keeps strong and continues to build manufacturing facilities of German innovation around the world, ie China, Africa and the former USSR states.

The cost of the Euro does not matter when you produce in a non-Euro denominated economy. Just like the Swiss economy is not dependent on a cheap Franc to keep selling Swiss made goods.

orgonor's picture

excuse tried to make a valid point and i quote "The cost of the Euro does not matter when you produce in a non-Euro denominated economy."

i took it that you mean if you are a German company producing and selling cars in a country like Brazil.i suppose that takes the currency risk off.

however, the part after "just like..." is kind of an irrelevant argument??

i mean the products made in  switzerland do depend on a degree on the currency rates, since if i am a euro buyer and the franc is strong vis-a-vis the euro...well that import is going to cost me more...making the swiss made product less competitive..

would you care to clarify?

Lady Heather...UNCLE's picture

...oh, and thank you. Very good article

Lady Heather...UNCLE's picture

...they will print. Inflate away all debt and then start a new monetary mechanism. What that is is already known by the worlds top financial elite. Hint: they have mega-tonnes of gold

CrazyCooter's picture

Excellent commentary. I like the history and context you put on the issues. I will pay more attention to testosteronepit going forward.



disabledvet's picture

this is a good article but lacks in the simplicity of "compromises." Whatever one thinks "the Germans" were never going to be "going it alone" on this one. Since they refused to really give in on anything they got "the 50% voluntary haircut" which i fail to see how could have possibly been worse for Germany if they'd meant it to be. CATASTROPHE. If Italy ends up "blowing up" as a consequence then clearly the mantle of "Europe" shifts to really where it should be anyways: France. That is "if it should exist at all"--which of course again means..."France." That's the beauty of a "French Europe"--it might not exist at all other than in the minds of Frenchmen! And everyone will be happy either way! With Germany "it must be made real." Ick. Not even the Germans want an "actualized" German-Europe. It's time for some "breathing space" and hopefully...with something other than stiff arming the Americans for a change...something more realistic can be understood as possible.

HD's picture

It's good to know the Fed bailed Germany out the first time. Ol' Ben is so generous with other peoples money. What a sweetheart.

CrazyCooter's picture

You might have missed this back when it was published:

Specifically, take time to try to digest the PDF from the BIS.



disabledvet's picture

the plan was to do it again and but for the IMF not willing to lend to "an entity" instead of Germany itself it would have happened. Germany will never see a deal like that again. BIG mistake in my book.

zorba THE GREEK's picture

No pain, no gain. If they print their way out, nothing is solved, only delayed.

And each time they delay, the problems get harder to solve and more politically untouchable.

Buck Johnson's picture

Germany is most definitely at it's Rubicon.  They wanted their cake and wanted to eat it too, and now they are seeing the result of having it.  What has happened is the elite and the bankers in and out of these countries have spun a web so intricate that even the spider can't get out of it.  We will have pain.

zen0's picture


I need to update my daybook.

Even something encompassing a particular a week will do.