Among all the talk of the possible breakup of the European Union, do you see scenarios where Germany could walk away?
It is very clear that the Germans recognize that they have enjoyed huge gains from being part of a Europe-wide fiscal currency. The exchange rate gains for Germany have been huge, disproportionately large. They came into the European Union at an overvalued level, given the cost of production. Germany went through a very painful process through the 1990s with reunification and also went through very significant structural reforms in the labor market after the launch of the euro in 1999, as a result of which the country became profitable again. That was a very creditable adjustment, and they are reaping the gains of this. They are now very much more productive and competitive than their EU neighbors, and every time the euro weakens it boosts German exports still more. Germany provides the highest-quality capital and consumer goods, and this makes them the natural beneficiaries of the strong “animal spirits” in emerging markets, so they are in a very sweet spot right now. It is true that the interbank linkages in the European Union are a deep source of concern for them, but in the global market Germany has never had it so good. So membership of the European Union is a double-edged sword for them. They have to remember that when they were rebuilding and the dollar was weakening steadily against the euro, the United States ceased to be their major export market and Europe filled that gap. Germany would not be in the position it is in today if it were not for Greece, Spain, Portugal, and the rest buying German goods and creating large trade imbalances with Germany. So some help from Germany is in order. Unfortunately, although this is realized in Germany, the moral hazard question stands in the road and has yet to be properly resolved. The next year is going to be very interesting on this question and on just about everything we have touched on. The big danger, however, has to be how gracefully the European Union manages to deal with what looks like an inevitable default of one or more of its members.
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