Merkel Export Machine’s Gains Exceed Bailout Costs
German Chancellor Angela Merkel’s export machine is generating far more in revenue than her anti- bailout voters are committing to euro-crisis fighting as the weakening currency adds to the country’s competitive edge.
German exporters are enjoying a 100 billion-euro ($122 billion) annual advantage amid the turmoil, said Nathan Sheets, chief international economist at Citigroup Inc. (C) in New York. That’s more than 10 times the 8.7 billion euros the country is contributing this year to the rescue fund being set up.
The figures underscore the benefits to Europe’s biggest economy of Merkel’s austerity-first strategy, which channels her voters’ doubts about propping up debt-laden countries. Her approach has drawn criticism from policy makers around the world and pleas for easing from southern Europe, where bond spreads have climbed to euro-era records amid concern about whether the 17-nation currency region can hold together.
“Do they care? I don’t think so,” David Buik, a market strategist at Cantor Index in London, said in a July 13 telephone interview, referring to German policy makers. “It’s dog eat dog out there. It is a question of shore up the dams and do what we can for ourselves.”
The yield on German two-year debt turned negative for the first time last month, meaning investors paid the sovereign to store their cash. The cost of owning two-year bunds reached a record low 0.061 percent today. Investors are also paying to park their money Austrian two-year notes, and bills issued by Belgium and the European Financial Stability Facility bailout fund, as yields for all three turned negative today.
By contrast, two-year Italian bond yields traded as high as 3.8 percent today -- three times more than Germany paid to borrow for 10 years -- and the Spanish government paid 4.8 percent.
Competitiveness gains mean Germany now has a currency that’s about 20 percent weaker than would have been the case if the deutsche mark still existed, said Sheets. He calculates the lower currency lifts Germany’s nominal trade surplus by about 4 percent of gross domestic product, or 100 billion euros. The currency benefit could rise closer to 30 percent due to safe- haven flows, he said.
The euro touched a two-year low last week, giving a further boost to an economy where unit-labor costs have risen more slowly than its neighbors’, translating into increased competitiveness.
“The much lower euro is certainly a big boost to German exports and has increased the economy’s resilience,” said Christian Schulz, an economist at Berenberg Bank in London.
The International Monetary Fund raised its forecast for 2012 economic growth in Germany, predicting an expansion of 1 percent, against a contraction in the euro area. Germany’s unemployment rate of 6.8 percent last month compared with the euro zone’s 11.1 percent in May.
Schulz estimates about 60 percent of German exports are shipped outside the euro area, compared with about 50 percent for France and 42 percent for Spain, based on 2010 data. Since the euro began trading in 1999, German real exports have increased 120 percent, Sheets reported in January. France and Italy have seen their exports grow only 40 percent and Greece’s just 30 percent.
Bank of America Merrill Lynch currency strategists said in a July 10 report that Germany has more to lose from leaving the bloc than any other euro nation. They calculated a new German currency would gain 14 percent at the outset, helping reduce economic output by about 7 percent, or 185 billion euros.
The currency fillip is a “welcome byproduct” of the crisis for Merkel rather than her outright goal, according to Evelyn Herrmann, an economist at BNP Paribas SA (BNP) in London.
“It’s very welcome to the industrial sector and therefore to Merkel, who wants growth,” said Herrmann.
Italian Prime Minister Mario Monti and his Spanish counterpart, Mariano Rajoy, have urged their euro-region colleagues to intervene in the bond market to bring down their borrowing costs or risk splitting the 13-year old currency union. One obstacle to that move is Germany’s constitutional court, which won’t decide until Sept. 12 on allowing Merkel to back the bloc’s permanent financial backstop.
To German executives and policy makers, there’s little to question.
“There may be anger about Germany in other euro-zone nations, but it’s a good thing we Germans are holding up the flag of economic success in Europe,” Philipp Graf von Walderdorff, a Bonn-based lawyer who advises German companies on exports and investment, said in a telephone interview.
“Otherwise, the Chinese and Indians would simply write Europe off,” said Von Walderhoff, former head of international and political affairs at Germany’s DIHK industry and trade association. “My hope is that Germany can be a model for other euro members and coax them into making some of the structural and labor reforms that have helped make us successful.”
Merkel has sought to reassure Germans of the limits on concessions to struggling nations. She has said Germany will have two chances to stop the bailout mechanism funding banks directly, while reiterating her veto on euro bonds.
“There’s a view that all of the positive developments in Germany are simply a mirror image of the pain elsewhere in the euro zone,” said Dominic White, chief European economist at Absolute Strategy Research Ltd. in London. “There’s a lot of truth in that, but it’s not the way the Germans see it.”
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