Dan Alpert's Two Cents

On Printing Euros and the Real German Fear (hint, it’s not 1923)

I am convinced that each time the € comes under pressure the Germans start screaming “NEIN, PRINT NICHT!”  They are at it again today.

As far as the German government is concerned, the European Central Bank is not, like other central banks, ever to be considered a lender of last resort.  And in the absence of fiscal union, I suppose that is understandable – however impractical the alternatives.

But there can’t really be many, at senior economic policy levels in Germany, who honestly believe that forced internal devaluation in the Club Med nations will actually happen.  Modern nations typically don’t tolerate austerity other than at the point of a bayonet.

I have therefore concluded that they are planning to shrink the zone and have Greece [and Portugal?] exit (at least initially).  There have been indications for weeks now that planning is commencing along these lines in Berlin.

Here’s the thing.  I do not think that other than with respect to energy, Germany would see much inflation – it is just too hard to generate sustainable inflation in the developed world with the excess global labor and productive capacity (and capital) that will remain with us for years.

The media chalks this all up to Germany’s fear of 1923 (hyperinflation).  But I really don’t think solid German economists really believe that is possible.  I had breakfast with a very influential private sector German economist a couple of weeks ago and it was certainly clear to him that inflation should be the least of Germany’s fears (not mentioning names out of courtesy).

And a cheaper Euro will redound to everyone’s benefit in Europe from a trade standpoint (albeit, the German’s will have to share that trade benefit because the devaluation will be universal across the zone).

No, it’s not inflation. It’s not (that much at least) trade.  I see Germany as being primarily concerned with the global value of their assets and savings.  The fact is that if you are a country of prudent savers, with a 10% savings rate and high levels of equity in real assets, you kind of don’t want to see your currency devalued.

Add to that the fact that austerity-policy-based troika bailouts redound to the benefit of the ECB and core banks (as money injected into Greece, for example, mostly round-trips back to core creditors – with the IMF and other non-EZ money essentially being a freebie), and it’s really “all about me” from the German point of view.  The French banks benefit too, but the French government sees the foolishness in pursuing an unattainable goal.

If austerity and internal devaluation is unrealistic, printing and universal devaluation is “verboten,” and the German taxpayers are certainly not going to start sending money south with no strings attached, the answer can only be default and exit in whatever of the periphery can’t make it.

As for the currency (Euro), either through strengthening internal purchasing power of the $, already underway as disinflation is firmly back in the U.S., through the ECB actually printing € and buying Club Med bonds, and/or through disorderly default/exit – or a combination of the foregoing effects – the Euro will devalue relative to the Dollar.

Essentially, it must do so over the next year or so.

A core “Euro,” like the Swiss franc a completely different currency, should by all rights ultimately be stronger.  But then the European economies of the north – and particularly Germany – will lose the privilege of exporting to their southern neighbors at competitive prices, and there is that small matter of their banking systems after widespread sovereign and private sector debt defaults arising from “drachmaization,” (pesetaization and liraization?).

The result of the foregoing, measured in the strength of a reconstituted Euro, must at least give some pause.

3 Responses to “On Printing Euros and the Real German Fear (hint, it’s not 1923)”

LucernusNovember 22nd, 2011 at 6:32 am

I disagree. The rational saver only cares about exposure to the potential depreciation of currencies that are not his own. German banks, insurance companies and multinationals may have the fear that you are attributing to "the" Germans. The German politicians are fearful because they do not know whether they will rather be whipped out of office when they let the Eurozone break up or when they will save it by allowing massive quantitative easing – which both will have negative repercussions for the German saver/voter/tax payer.

HenryAugust 24th, 2012 at 3:24 am

Devaluing of a certain money of a particular country or nation is indeed not good to its government. Germany is just fearful because it has excellent global value when it comes to assets and savings. Printing money is not just like printing a document from a Bristol printing company. The machines that are used in printing money are different from a normal printer as well as the materials use to make money. This is the reason why printing money is regulated and must depend on the economy's situation and condition.