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Is Germany Benefiting from Euro Crisis?

November 10, 2011

It was reported yesterday that Germany has made an estimated €9 billion (approximately $12 billion) out of the economic crisis.  The logic behind this assertion is rather simple, while Italy was in the news yesterday for having interest rates on its 10-year bonds cross the 7% threshold, Germany has quietly benefited from falling interest rates (see the chart below).  Investors have been flocking to German bonds in recent months, as they see Germany as an island of stability in the rough seas of the Eurozone.  This high demand for German bonds has driven down the price (i.e. its interest rate).  For instance, 10-year bond rates are currently below 2% and 6-month rates recently reached 0.08%.  Investors are allowing Germany to borrow money almost interest free.

Source: European Central Bank, Bloomberg

Relatedly, the BBC economics blog had an interesting point about the euro exchange rate.  As the below graph shows, despite all of the turmoil in Europe and worries about countries exiting the Eurozone, the euro’s value against the dollar is only €0.0154 (1.1%) lower than it was a year ago.  While there had been reasons for a strong euro (see “Why Does the Euro Keep Rising Against the Dollar?” for examples), this is probably less true.  As the BBC wrote, certain people actually want to hold euros right now.  For instance, if you live in Greece, you will want to have a supply of euros, just in case Greece were forced to reintroduce the drachma and then devalue its currency (see “What if Greece Reintroduces the Drachma?” for an explanation).  As a result, demand for euros remains high, and with it the exchange rate.

The BBC article also pointed out that if the Eurozone were to lose some members who had weaker finances, the value of the new euro will probably increase in value compared to the dollar, much like the Swiss franc recently.  This would also hurt Germany, since it is a major exporting country and a more valuable currency makes its exports more expensive on the world market.  The EU Observer article pointed out that €9 billion is roughly equivalent to the amount of money the Greek government spends in three months, and close to the €8 billion that the German government has announced will be tax relief in 2013 and 2014.  As a result, German voters may want to realize that they are in some ways benefiting from the European Debt Crisis.

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