Germans Show No Way to Give Up on Euro Spurring Boom
For Germany, bailing out its neighbors to save the euro is proving a price worth paying.
Rising share prices and foreign sales at Bayerische Motoren Werke AG (BMW) and Siemens AG (SIE) show why it may be worth keeping the single currency even as some voters balk at the cost of rescuing Greece and demand a return to the deutsche mark. As exporters benefit from the lower labor costs and currency stability fostered by the euro’s 1999 introduction, unemployment has dropped close to an 18-year low and the DAX Index (DAX) is the 16-nation bloc’s best performing major benchmark this year.
That’s reinforcing Germany’s status as a pillar of euro stability rather than a weak link as European policy makers scramble to stop the region lurching back into recession. While academics including Martin Feldstein say the Greek crisis could splinter the euro and investor George Soros urges Germany to do more to ease economic tensions in the region, the currency is rebounding. The euro has gained 6.6 percent against the dollar since hitting a four-year low on June 7.
“A break-up would be a big, big problem for the German economy, probably bigger than for most others,” said Julian Callow, chief European economist at Barclays Capital in London. “Industries in Germany have gained so much market share in Europe. For Germany, it’s a lose-lose situation.”
Germany is reaping the rewards of the discipline imposed on its economy over the past decade after reunification in 1990 dragged down growth and saw the country being labeled the “sick man” of Europe. With the euro preventing governments from devaluing their way to growth, Germany squeezed labor costs just as economies from Spain (GDBR10) to Greece allowed employment costs to rise before being forced to run up record budget deficits when the global recession hit.
The result has sharpened Germany’s trading edge over the euro-region economy’s southern periphery. Europe’s largest economy became 13 percent more competitive against its neighbors in the 11 years through 2009, mirroring similar declines in Spain and Greece, according to a wages-based indicator designed by the European Central Bank. (EURR002W)
The pay-off is evident in the performance of Siemens, Europe’s largest engineering company. Since 2001 it has recorded 23.1 billion euros ($29 billion) in restructuring costs, according to estimates by Morgan Stanley. That efficiency-drive helped boost the European share of Siemens’ sales to 41 percent in 2009 from 32 percent in 2004 and pushed its operating margin above those of General Electric Co. (GE), Alstom SA and ABB Ltd.
Exporters have pushed the DAX 3.9 percent higher this year, with Siemens shares increasing 18 percent and BMW, which yesterday raised its earnings forecast, climbing 32 percent. The Spanish (IBEX) and Greek benchmarks have lost 14 percent and 29 percent, respectively, and the U.S. Dow Jones Industrial Average (INDU) has declined 0.6 percent.
“Talking to companies you get the feeling that they are really quite positive about their earnings and expectations,” said Stefan Moeckel, a fund manager at WestLB Mellon Asset Management in Dusseldorf, Germany, which manages about 40 billion euros. He says the DAX may reach 7,000 this year, compared to its level of 6,173 at 2:45 p.m. in Frankfurt today.
Commerzbank AG (CBK) Chief Executive Officer Martin Blessing said July 8 Germany is growing at a faster pace than anticipated. Deutsche Bank AG predicts that the German economy will expand 2 percent this year, more than France, Italy and Spain.
German voters are yet to be convinced about the benefits of the euro as they foot the biggest share of the bailouts agreed by leaders earlier this year to rescue the currency. Fifty-one percent of respondents in a poll published on June 30 by the mass-selling Bild tabloid called for a return to the deutsche mark. That’s up from a third who wanted the euro scrapped in March 2008.
The reason for their irritation is that Greece and other so-called peripheral economies “broke the rules” of the euro by living beyond their means, said Joerg Kraemer, chief economist at Commerzbank in Frankfurt. Of the 610 billion euros pledged by governments, Germany could have to pay as much as 170 billion euros.
While Kraemer says quitting the euro is “not on the agenda,” Morgan Stanley’s co-chief global economist Joachim Fels has said that may change. Inflation expectations may accelerate if investors question governments’ commitment to fiscal discipline, he says, prompting a German rethink of membership.
A German exit is “clearly not a near-term possibility,” Fels said in a May 18 interview on Bloomberg Television. “It is a distinct possibility longer-term.”
There may even be some benefits to Germany from quitting the bloc, said Christopher Smallwood, an associate of London-based investment consultancy Capital Economics Ltd. A new deutsche mark could appreciate enough to cut the country’s trade surplus, depressing prices and forcing the government to stoke demand at home, he said in a July 11 report.
“The huge external surplus, from which German consumers derive no benefit, would be translated across into increased public and consumer spending,” said Smallwood. “The standard of living of German households would rise substantially.”
Germany’s focus on exports and budget discipline has drawn criticism from billionaire investor Soros, who says the country should buy more goods from other countries and labels Germany “the main protagonist” for Europe’s crisis. “Germany is endangering the European Union,” Soros said in Berlin on June 23.
Euro membership has nevertheless sheltered Germany, which relies on exports for 41 percent of gross domestic product, from the ravages of the global financial crisis, said Juergen Pfister, chief economist at Munich-based lender Bayerische Landesbank. Prior to the euro, the mark was a haven in times of turmoil and prone to volatility, surging about 50 percent against the Italian lira in the first half of the 1990s.
“The deutsche mark would have appreciated massively as a result of the financial crisis, harming German exports and making the 2009 recession much worse,” said Pfister. “The euro provides stability.”
Mark Cliffe at ING Bank NV calculates that any splintering of the euro area would mean a deflationary shock in Germany and a slump in output of about 10 percent over two years.
Instead, German companies are cashing in on the euro’s 16 percent decline since November as it makes BMW and Volkswagen AG (VOW)’s Audi cars cheaper abroad and swells their value when the revenue is repatriated. Shares of TUI AG (TUI1), Europe’s largest travel company, have risen 39 percent this year and the company on July 6 raised its forecast for global container shipping, citing a “notable” recovery.
Exporters’ success is filtering into the broader German economy. Unemployment declined for a 12th month in June and the Organization for Economic Cooperation and Development’s standardized measures shows a jobless rate of 7 percent in May, 2.7 percentage points lower than the U.S.’s. Business confidence reached a two-year high in June, according to the Ifo institute.
“In a way, we are the winner because of the high exports,” said Christa Randzio-Plath, the former chairwoman of the European Parliament’s monetary affairs committee and now professor at the University of Hamburg. “We would pay for going out of the euro area.”
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