Germany loves a strong euro; the new Fiscal Councils can deliver despite the Greek chaos and a wider questioning of austerity

Valdis Dombrovskis, the Vice-President of the European Commission in charge of the Euro participates regularly in the meetings of Eurogroup. (EC Audiovisual Services, Date: 14/08/2015 Location: Brussels - Council/Justus Lipsius).

Valdis Dombrovskis, the Vice-President of the European Commission in charge of the Euro participates regularly in the meetings of Eurogroup. (EC Audiovisual Services, Date: 14/08/2015 Location: Brussels – Council/Justus Lipsius).

Last Saturday, 12 September, Commission Vice President Valdis Dombrovskis made some remarks after the informal meeting of ECOFIN (the EU ministers of Finance Council) in Luxembourg. The main item on the agenda was about completing the European Monetary Union. EMU is the most important EU project after the introduction of the single euro currency. He said that Eurozone should set up “a national network of competitiveness authorities in Member States, with a mandate to follow both wage and non-cost competitiveness developments in Member States” and also “set up an Advisory Fiscal Board that would coordinate the work of National Fiscal Councils and also, as the Minister has outlined, the more effective use of the Macroeconomic Imbalances Procedure”.

Longing for a dearer euro

Undoubtedly these proposals may lead to a centrally imposed strict supervision of certain economic policies of member states, especially regarding budget deficits of the euro area countries. The National Fiscal Councils and the central Advisory Fiscal Board will make sure that primarily the Eurozone countries will strictly adhere to the rules imposed by the fiscal governance principles under the European Semester procedure. In some ways those Fiscal Councils will substitute the Commission in its role as the judge if a fiscal deficit is excessive or not (the Semester procedure). Brussels sources say that the ‘Councils’ are expected to be less politically influenced in this respect than the Commission.

Needless to say, the austere policies are of German inspiration and are aimed at strengthening the foreign value of the euro by zeroing government deficits in the euro area as Berlin does in Germany. But why is Germany so interested in strengthening the foreign value of the euro and more precisely the euro/dollar parity? Don’t the German exporters want to support their foreign sales with a cheaper euro? To answer these questions one needs to have a broader vision of the world economy. Let’s try to do this.

How rich is Germany?

The accumulated financial reserves of Germany from past trade surpluses must, by now, have reached anything between 1.5 and 2 or more trillion euros. The dollar value of those reserves is obviously directly related to the euro/dollar parity and understandably Berlin would have preferred this rate to support the value of this accumulated wealth. It’s not only the dollar value of the accumulated wealth though that makes Germany want badly a dear euro. Very simply any future wealth denominated in euro will have a greater dollar value, if the parity between the two currencies favored the single European money.

That’s why Berlin would have preferred the Eurozone buster Greece to leave the single money zone. It has been revealed that this summer Berlin made a very attractive offer to Athens, if the country decided to abandon the euro area. Greek dignitaries have stated that in such a case Germany was ready to accord Greece a huge bonus and a generous haircut of the debt. Under the same spirit, the German government strongly supports the fiscal austerity and the financial soundness of Eurozone, so that the euro appreciates against the dollar. Of course, France and Italy strongly oppose this strategy. But what about the German exports?

Doesn’t Germany want to increase exports?

Germany can continue exporting its high value added engineering products up to a euro/dollar parity of 1.40 or even higher, as the industry representatives have repeatedly stated. Understandably, the price elasticity of demand for the BMWs, the Mercedes and the German machine tools is rather low. As a result, judging from a wider point of view the strong euro is an asset for Berlin, not a drawback. Imagine that an accumulated wealth of €1.5 trillion can increase its dollar value by 30% just like that, if the single European currency appreciated with the US currency from the present levels of 1.11-1.13 to 1.32.-1.35. Not to forget that the euro/dollar parity has in the past reached even the extreme 1.6 value.

History and geography

History and geography have deprived Germany from colonies and other overseas acquisitions. Then the WWII segregated her even from her bread basket in the plains of Silesia. On top of that, almost all her energy needs are covered by imports. Consequently, the Germans have to work very hard in order to be able to secure a high standard of living and so they do. On the contrary, the British and the French had, and in many ways still have, extended presence in the rest of the world including the oil wealth of Africa and the Middle East.

As for the US their seven war fleets in the oceans of the world tell their own story. During the last decades the foreign value of the dollar is backed by the American political and military presence, to put it mildly, in the oil wealthy kingdoms of the Persian Gulf. Add to it the US ‘insistence’ that all transactions in the world markets of oil and raw materials are being conducted in dollars and you arrive at the secret strength of the dollar. Those who disagree with the Americans are invaded and destroyed as it happened with Iraq and Saddam Hussein.

It’s no surprise then how the US can very successfully sustain their huge ‘double deficit’ in foreign trade and government budget for decades. For the same reasons, the dollar remains the only world reserve currency because its value is guaranteed not by the non existing American trade surpluses, but rather by the political and military supremacy of the US and the oil reserves of the Middle East. The new closest US allies, the Kurds, are there to guarantee that this arrangement will hold well in the foreseeable future.

Longing for a new arrangement

In our brave world, Germany, with its new found economic predominance in mainland Europe now claims a more important place in the world. To achieve this, Berlin uses its accumulated wealth to acquire real assets abroad and why not in the US itself. Berlin has accumulated huge financial means to do that. But a largely appreciated euro vis-à-vis the US currency to the region of 1.35-1.40 can provide some additional hundreds of billion dollars to achieve that. Compared to that, the cost to kick Greece out from Eurozone is negligible.

Under this light, to support the euro parity with the dollar Germany last summer openly proposed to kick Greece out from Eurozone. After the Grexit was averted, at least for the time being, Berlin went so far as to propose to trim the powers of the European Commission. Wolfgang Schäuble the German minister of Finance stated that the fiscal discipline in Eurozone should be bestowed to a private auditing firm. He explained that the Commission while applying the rules of incomes austerity and fiscal discipline is politically influenced and accords exonerations to France and Italy. So, according to Germany, if the euro is to gain in value, Eurozone must apply Teutonic fiscal and financial rules.

Of course this brutal intervention demanding a full rewriting of the EU Treaties triggered chain reaction explosions from Paris and Rome. It was exactly the same in July and August when Berlin pressed to kick Greece out from the Eurozone. On that occasion the position of Washington for Greece to stay firmly anchored in the Eurozone and be accorded a debt rescheduling can be easily explained. Of course Germany fought that as well as the relaxation of austerity. It seems then that Berlin has now settled for something less. And this may be Dombrovskis’ central and national Fiscal Councils.

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