Monday, May 23, 2011

Why Germany Should Learn to Love the Euro

Have you ever wondered why German politicians are so supportive of the Euro? Besides attaching a great deal of their political currency (and hence careers) on the Euro, there is another more fundamental reason behind supporting the single currency.

Export subsidies. The Euro acts as an export subsidy for German manufacturers and exporters. But one may glance at the forex charts and say the Euro is so expensive! Not really - the Euro is very cheap compared to what the Deutschmark would be trading at now. Remember that Euro trading prices in factors such as deterioration of the peripheral PIIGS countries.

The Euro is also a blessing in another guise. In continental Europe, economic activity has always gravitated towards the center - in particular to Germany. The EU is a 2 engine economy led by Germany and (and to a much lesser extent) France. Wage growth is being kept relatively low by migrant workers from Eastern Europe and the periphery imposed legally per the EU treaties.

The last blessing in disguise is the German consumer and investor's rise in purchasing power. Sure, the EU is in horrid economic shape but the Euro is still trading at a premium relative to the dollar. As a result, things are cheaper for travelers and asset managers who wish to engage in speculative carry trading.

The Bottom Line: German taxpayers may grumble about the Euro but the elites have, ironically, their best interests at heart.
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