There's a German angle to the Greek tragedy

Jul 3, 2015

- By Vivek Kaul

Vivek Kaul
Most analysis that has been published in the Western media on what is currently happening in Greece tends to paint a one sided picture. In this picture, Greeks are shown as lazy and villains of the piece who borrowed a lot of money to finance socialism and are now having second thoughts about repaying this debt that they had taken on.

While there is no denying that Greeks borrowed more money than they can ever get around to repaying, the reality is a little more complicated than that.

In an earlier column I wrote on Greece I had explained how the interest rate differential between Greece and Germany was very high before the euro came to the fore. As Neil Irwin writes in The Alchemists-Inside the Secret World of Central Bankers: "In 1992, when low-inflation Germany could borrow money for a decade at 8 percent, Greece had to pay 24 percent."

This difference started narrowing down after Greece entered the Eurozone in 2000. Eurozone is a term used to refer to the countries which use the euro as their currency. "In 2007, on the eve of the crisis, German ten-year borrowing costs averaged 4.02 percent. Greek rates were 4.29 percent," writes Irwin.

This allowed the Greek government to borrow almost at the same interest rates as Germany. Once the government was borrowing at a low rate, the interest rates at which the citizens could borrow also fell dramatically.

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And who was lending the Greeks the money? The French and the German banks. The external debt of Greece went up from $263 billion in 2005 to $588 billion by 2009. Also, with the euro becoming the common currency across most of Europe, the exchange rate risk that businesses had to face while exporting goods and services was taken out of the equation totally.

And who did this benefit the most? Germany. Since the beginning of the euro in 1999, Germany became some 30% more productive than Greece. Very roughly, that meant that it cost 30% more to produce the same kind of goods in Greece than in Germany.

Hence, the imports of Greece where many times its exports. The situation peaked in 2008 when the imports at nearly $94billion where 3.2 times the exports and much of this was financed through borrowing.

Of course, while Greece was getting into a huge financial mess, Germany and the German companies were progressing. In fact, data from the World Bank shows how much German exports have benefitted thanks to the euro.

In 1995, German exports made up for 22% of the gross domestic product (GDP). By 1999, this number had run up to 27.1%. In 2004, five years after the euro came into being, the German exports to GDP ratio stood at 35.5%. In 2008, the number reached 43.5%. As the impact of the financial crisis started to spread around the number fell to 37.8% in 2009.

Nevertheless, the German exports to GDP ratio has recovered since then and in 2014 stood at 45.6%.

It would be preposterous to say that the euro is the only reason for German exports going up. As the writer Michael Lewis explained in an interview to the Vanity Fair magazine a few years back: "They glued together a bunch of countries and cultures that didn't really belong together in the same currency. So if you put Germany together with Greece in a single currency, it's a little like watching an Olympic sprinter and a fat old man running a three-legged race. The Greeks will never be as productive as the Germans, and the Germans will never be as unproductive as the Greeks. [italics are mine]."

The italicized part is what I want you to concentrate on, dear reader. The productivity of Germans ensured that their goods were in demand through the Eurozone. At the same time, the common currency euro also had its part to play as well. As explained earlier it took the exchange rate risk totally out of the equation. This meant that the country which had the low labour costs and the best productivity would be able to come up with products that had the most demand in the countries which had the euro as their currency. So, that's how Germany benefited.

Having said that there is more to this story. Since the beginning of 2014 the euro has been losing value against the dollar. At the beginning of 2014 one dollar was worth around 0.74 euros. Currently, one dollar is worth around 0.90 euros. This fall in value of the euro has made German exports more competitive.

As Niels Jensen writes in the Absolute Return Letter for July 2015 titled A Return to the Fundamentals? : "Germany...actually benefit[s] from the damage that Greece has done to the value of the euro. Poor domestic demand as a result of challenging demographics have made exports the most likely way to secure decent economic growth, and a relatively weak euro has been tremendously helpful in that respect. Imagine how much stronger the euro would have been if every member country had the fiscal discipline of Germany!"

News-reports suggest that the German industry is now calling for Greece to leave the Eurozone. A report by news-agency Reuters points out: "German industry is beginning to call for Greece to quit the euro zone, having already pared back what business it had there."

What they need to realise is that it is not just about their business in Greece. It is about German exports as a whole which have benefitted tremendously from the advent of the euro. If Greece decides to leave or is kicked out of the euro, it could start a chain reaction with other bigger economies like Spain, Italy and Portugal, leaving as well.

And if that were to happen, the euro will be in great danger. One view which has bandied around now and then over the last few years is that Germany could exit the euro and go back to the deutschemark, the currency it used before becoming a part of the Eurozone.

The trouble with this argument is that it would hit the Germany exports hard. The deutschemark would be viewed as a stronger currency than the euro (even the dollar perhaps). This would see a lot of money wanting to move into assets in deutschemark and lead to the appreciation in the value of the deutschemark against other currencies. The German exports would be impacted tremendously.

Estimates made by UBS Investment and Research a few years back suggested that in the first year of leaving the euro, the German GDP would fall by 20-25%. And it would fall by half of that in the years to come. While it is difficult to predict the exact trajectory of this, but if Germany does leave the euro, its exports will definitely be impacted big time.

The point being that Germany has a lot to lose if Greece leaves the euro. And are they ready for that?

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

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7 Responses to "There's a German angle to the Greek tragedy"

Bert Gibson

Aug 11, 2015

Unified EU is fine when all the participants perform equally....but German will always produce better and cheaper and make more profit than Greece....and that's fine for Germany. Germany deserve the profits from their expert skills ....but it will always be at the expense of smaller producers like Greece. So economics is not the only way forward. Some industry from biggest EU countries must therefore be moved, lock- stock- and- barrel into Greece so they can learn how to compete/ survive on their production/profits...we need a whole change of unification.....Greece will never, ever, be able to perform the same as Germany...and the void will grow wider each day.........skilled employees and family from the bigger countries must bite the bullet and move to live/work in Greece....



Jul 7, 2015

Its not fair to blame German Productivity for Greek crisis. They should be appreciated for their relentless drive towards quality and productivity which helped them survive all financial crisis so far.



Jul 7, 2015

this is an obsolutely brilliant piece.

Yes unified currency does take the Exchange rate risk out of the equation for those countries participating in it.

And the more productive country stands to gain big (in the absence of exchange rate risk which actually is definitely an additional risk to manage for each country).

Common currency is good as long as we are able to remain most productive within the list of participating nations.



Jul 6, 2015

Germany is largely a finished goods exporter- their products are bought because of their superior quality and not because they are cheap. When the euro is cheap germany's imports of commodities( oil etc) will be higher. So Germany will be thinking what price do they pay for the net benefit of cheaper euro. There is also the other PIGS overburdened with debt salivating to default if greece is bailed out on easy terms.This is far from over.


Tarun Kanti Pal

Jul 3, 2015

Very informative and valuable insights.


Aniket Shah

Jul 3, 2015

Superb read. Please keep the good work on.


Subhash Moharir

Jul 3, 2015

Germany's benefit did not cause the crisis in Greece. The people were never bothered and politicians liked it, businessmen loved it. Berlin wall, breakdown of Soviet Union and now Euro. What next?
Hope India, Mr. Kamath and SAARC bank learn from it. Trade is good but keep your currency unique.

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