Is the Euro Really the Deutschmark?

As Europe braces itself for a year of political uncertainty, the single market currency is again coming in the spotlight. As Europeans look towards summer vacations, venturing outside the eurozone could be expensive. The market has not yet priced in a Le Pen victory or an Italian referendum on membership of the EU.

Following on the heels of the European Common market, the single currency was conceived out of a need for mortar to cement the bricks of a political institution. The construction of the EU with a central bank that has no ability to be the lender of last resort for the banks was genius of Machiavellian proportions.

The German central bank, the Bundesbank, presided over the economic miracle of a German economy that rose from the ashes of communism after reunification with the East. Etched into the Bundesbank DNA was the vow never again to return to the inflation that ravaged the 1930s when a million Marks bought 1 US Dollar. Germany today has the largest current account surplus of any economy due in no small measure to the credit risk management of the Bundesbank. An independent treasury within the EU with the ability to print government bonds has been strongly opposed by Germany.

During the hot summer of 2010, Germany, together with the IMF and the Troika, unleashed its full fury on the Greek government, demanding severe fiscal austerity in return for a loan. Greece, already bankrupt, was forced to submit to German demands as both an example and deterrent. Deutsche Bank was near insolvency and it had a large loan position with Greece. The Greek government received little. The EU’s first scalp was the resignation of Yanis Varoufakis, the Greek finance minister. He rejected the extend and pretend strategy by refusing to allow the Greek government to guarantee worthless Greek paper so that it could be held as collateral by the IMF to issue credit to pay German banks. Against the German finance minister there could only be one victor. Varoufakis resigned, only to be replaced by someone who would continue the charade.

The German economy has benefitted the most from the single currency. With an export-led economy it makes up 27% of the eurozone and contributes the lion’s share to debt relief within Europe. When Deutsche Bank lent to Greece, along with the French bank Société Générale, they knew that Greece would not be able to repay capital or service the loan. Their subsequent demands were reminiscent of the victorious allies’ retribution on Germany in 1926.

President Trump, with US jobs and wages at the centre of his reform agenda, recently lashed out, disputing the strength of the euro. It is significant that he directed his remarks at Chancellor Merkel. She not only issued a strong rebuttal but added that the ECB’s policy is not geared towards her country and benefits other member states. However, as the eurozone navigates the stormy waters ahead, there will only be one pair of hands at the helm. They may not be those of Frau Merkel, but they will be German.

Jeremy Blatch TEP
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This article was also published in both the online and print editions of the Sur in English