Germany is flat-out waging economic war on its fellow EU countries…
The euro’s persistent strength has been bizarre. It does not make a lot of sense in light of Europe’s overall challenging economic conditions. This is partly because the ECB (European Central Bank) is incompetent. As Mark Blythe has observed, the ECB is not a “real” central bank. It is actually a currency board in drag, meaning the ECB can do some of the things a real central bank can do, but not the most important things.
Furthermore, many  assume that a strong currency is a sign of sensible monetary policy. But this is not always the cause. It is a misread of macroeconomics, overly focused on surface level interpretations – like the false idea it is always good to save and cut back on debt. These things are good in general overall terms, but there are certain situations where saving and cutting back on debt can actually shrink the size of your economy, and make your relative debt load even worse! (Macroeconomics can be weird.)


At any rate, Germany is a country unlike any other in the euro zone. The German psyche is historically shaped by two things: A passionate hatred of inflation and a laser-like focus on high-margin exports. (Think high end industrial equipment, BMWs and Mercedes, chemical processes and so on. Germany’s export mix is very similar to Japan’s.) Because Germany is so different from all the other countries in the euro zone, their solution to the financial crisis – “become more like us, be more German” – never actually made sense. When Germany tightens its belt and keeps costs down, this helps the German economy – because lower costs contribute to price competitiveness, which helps Germany pump out high-margin exports. But Greece, Spain, Portugal et al don’t have meaningful exports to speak of.

As Mark Blythe has put it (paraphrase): “What is Greece going to do, start making Audis? And if they did, who would buy them?”

Germany’s low inflation, cost-control economic solutions, in otherwords, are good for Germany specifically, because the Germans are so good at exporting. Low inflation is also a key consideration for a high-margin exporter… because again, it keeps you competitive. But this medicine is absolutely terrible for all the periphery countries. When your economy is saddled with an albatross of debt, and you are flirting with outright deflation – Greece recently posted the most deflationary numbers since records began, back in 1960 or so – German-style policy can kill you.

And this is exactly what is happening. The periphery countries are slowly being killed by creeping deflation and Great-Depression-like unemployment levels…
So on one level, the strong euro is a function of Germany, as the big dog in the mix, running monetary policy that is killing the periphery countries… and the periphery countries simply taking it. “Not our problem,” the Germans might say. “They shouldn’t have borrowed so much in the first place.” But do tell, Germany, who lent them all that money in the first place? And what did the periphery countries do with it? In large part they bought Audis, BMWs, espresso machines and the like… things exported by Germans. In sum, one can argue Germany has waged “war by other means” on its counterparts in the EU via economic dominance and ill-fit monetary policies. The wealthy Germans lent a ton of money to the sad-sack peripheries… took the profits when the periphery countries used that borrowed money to buy a bunch of “stuff” from Germany (via import imbalance)… and now that the periphery countries are choking on the debt, Germany owns them, psychologically and fiscally.

It is a good thing the broad masses do not actually understand macro. If they did, there would be many more riots in the streets. (Europe already has rioting in the streets, of course… but if the extent of this were known it would be worse…)
But wait. As Ron Popeil liked to say, that’s not all. Germany is also waging economic war on the Italians and the French! How so? Because Italy and France actually have competitive manufacturing industries that can export. Unfortunately for the Italians and French, however, these manufacturers are not as competitive as the Germans. Because Italy and France cannot match Germany, they must charge more to make a widget and still show a profit. This means that an expensive currency (the euro) hurts Italy and France’s ability to globally compete. Germany does not mind a strong euro, however, because it is one of the best in the world at what it does. Not only can German exporters tolerate a strong euro… they actually like it, because it lets them take manufacturing business away from the lesser equipped Italians and French!
We do not hate Germans by any means. (Some on the Mercenary team have German roots, and we have colleagues and friends in Berlin.) But the screwed up nature of what is happening in Europe right now nicely illustrates why ill-thought currency union among a wholly disparate group of countries, solely for the idealistic political purpose of avoiding war, was one of the worst ideas ever conceived. Lumping Germany in with all the others is like having a Friesian draft horse on a wagon-pulling team with a bunch of Chihuahuas. And whether it does so intentionally or completely by accident, Germany really is waging economic war on its fellow euro-using countries right now, in ways that will produce dramatic and dire results when things come to a head.

As Charles Gave of research house Gavekal has pointed out, the euro’s uncanny strength can be assigned to Germany too in respect to export foreign exchange impacts. Germany sells a hundred-billion-plus worth of exports to the world, with most of that inventory sold in dollars (the currency of international trade). Germany then trades those dollars for euros (because the Germans have little interest in buying US treasuries, like the oil exporters or China). That inflow from dollars back to euros thus pushes the euro higher… which is just fine by Germany, because it allows yet more manufacturing business to be taken from the Italians and the French, who get priced out of the game.

First and foremost we look at the world through a pragmatic lens, to try and spot where money can be made (or where risk is building). But we are also human beings, and cannot help but note the slow tragedy of what is unfolding. The toll taken on tens of millions of suffering Europeans is not an abstract thing. Suicides have spiked in the periphery countries. Many millions of youth in Greece, Spain and elsewhere – with youth unemployment levels well above 50 percent – are despairing of ever having a good job, ever, possibly assigned to menial labor and/or low value minimum wage type work for the balance of their lifetimes.
Imagine if that were the fate of your own children – not just to clean toilets or some such thing, but to do so in a foreign country where they were looked down on by the locals, because your own country cannot even offer up service jobs. Again from a broader perspective, looking beyond trading, this is the stuff that frightening political uprisings are made of. The ghost of Francisco Franco (a horrible fascist leader) is already stirring in Spain. The Golden Dawn, a neo-Nazi party in Greece, is gaining in popularity. And this is perhaps the greatest irony of all: While the euro was essentially dreamed up to bring Germany into the fold and head off the prospect of future wars, euro-driven policies are doing more to raise the prospect of future hot war – by laying a groundwork of shocking pain and suffering – than anything else has done.