The rescue package for the euro passed by parliament on Friday is contrary to German interests.
Analysis by the Ifo Institute for Economic Research at the University of Munich concludes that contrary to some contentions there is no systemic crisis of the single currency the euro. In fact, the euro is still overvalued in terms of purchasing power parity. Its true value lies at around $1.14. Also the inflation rate shows no indication that the currency is in danger, since at a current 1.5 percent it is clearly below the average rate of inflation that prevailed for the Deutsche mark.
It was not the euro that was endangered in the crisis but rather the ability of the European debtor states to continue to finance themselves on such favourable terms as Germany. In addition many banks, in particular in France, have great problems because the market value of their claims against the debtor countries were at the risk of falling further. For this reason the French especially pressured Germany to accept the rescue package.
With the euro rescue package becoming German law, Germany will de facto be assuming the liability for the debts of the other euro states. In addition to the direct budgetary risks, this guarantee has further problematic results for the German economy.
The foreign exchange markets have already realised that with the rescue package the risk for the euro has risen on the whole because now all countries are endangered. Since these measures have been announced, the value of the euro has clearly fallen. Before the decision, the market pressure had instead concentrated on the bonds of the debtor countries.
More serious than the possible burdens from German liabilities are the false signals for investments and hence the expected weakening of economic growth in Germany.
After joining the euro the southern Europeans profited from favourable interest rates and were able to finance an artificial economy boom on credit. Higher interest rates in comparison with Germany would have now ended the artificial boom. This effect will be prevented by the rescue package.
For Germany a mirror image of this argument applies. German savings have been flowing for years to southern Europe and to the US. Hardly any investments were made in the domestic economy and Germany slid into the bottom ranks in terms of economic growth.
Then the Greece crisis shook confidence regarding the creditworthiness of the debtor countries, which led to a correction in interest rates. For Germany this correction was advantageous, because it was to be expected that a greater portion of German capital exports – €166 billion as of late – would in future have remained in Germany and would have ensured more domestic growth, as we were accustomed to in the pre-euro era.
The new law will prevent this necessary correction, however, will continue to direct capital abroad and will prevent the so urgently necessary investments in Germany. Even with massive tax reductions for investors, we will not be able to prevent this from happening.
The rescue package is an incalculable risk for Germany and is sure to slow its growth.