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German Economy Shines As Euro Loses Luster

Workers prepare new Volkswagen Golf cars at a factory in Wolfsburg, Germany.
Sean Gallup
Getty Images
Workers prepare new Volkswagen Golf cars at a factory in Wolfsburg, Germany.

As the debt crisis in Europe deepens, Americans may be feeling sorry for Germany.

They see that Germans, who generally work hard and spend carefully, are now being pushed to bail out their debt-ridden partners in the eurozone.

But there's another side to the story.


Turns out, sharing a common currency with a group of fiscal losers has its benefits. The German economy gained strength over the past two years in large part because the European debt crisis weakened the euro. That made German exports more attractive to customers around the world.

At the same time, investors who started yanking their money out of Greece and Italy then began plowing it into Germany. As a result, German companies had an easier time getting cash to expand.

"Capital is being chased out of peripheral Europe," said Sebastian Mallaby, a senior fellow for international economics at the Council on Foreign Relations. With deposits flowing into Germany, "you can borrow money very, very cheaply there."

Now, as European leaders scramble to find ways to bail out sinking eurozone countries, many Germans are becoming angrier about the financial burdens that may be coming their way. "And one can understand why," Mallaby said.

But to be fair, Germans should recognize the ways this debt crisis has — at least so far — made them richer, he said.


German Exports More Attractive

Here's how the country has benefited:

Germany uses the euro, as do Greece, Italy, Spain, Portugal and Ireland. The fiscal problems in those other countries have depressed the value of the common currency — making German exports all the more attractive in the global marketplace.

Germany has long been a terrific exporter; it's the world's second biggest exporter after China. But when the euro started falling amid the debt crisis, German exports became turbocharged, jumping 18 percent between mid-2009 and mid-2011.

Mallaby said economic studies show that growth over the period would have been only 10 percent if not for the cheap-euro advantage.

That currency edge can be really important in a competitive market. For example, if a U.S. shopper had wanted to buy a German-made product priced at 100 euros in November 2009, he would have needed $150 to complete the transaction. Today, he would need only $138 to make that same purchase, because the euro has fallen in value.

The latest data show German exports hit a record high in September, pushing the country's trade surplus to a three-year high.

VDA, a German automotive industry association, recently said it expected vehicle output to hit record levels this year. "Especially due to the strong demand for exports, assembly in factories has sped up," VDA President Matthias Wissmann said in a statement.

Leaner Factories Spring Back

Of course, it's not just the cheaper currency that explains German export success. For example, in the aftermath of the 2008-2009 global financial crisis, many manufacturers made good use of the government subsidies that help pay to keep skilled workers on the job, but at reduced hours.

When demand returned in 2010, German factories were able to respond quickly by increasing work hours. In addition, many companies have streamlined production and focused on expanding in fast-growing markets in Asia.

Still, if Germany had had its old currency, the deutsche mark, it likely would have had the problems faced by its neighbor Switzerland.

Switzerland, which is not part of the European Union, uses its own Swiss franc. Earlier this year, the value of that franc soared — up about 30 percent against the dollar.

For a U.S. shopper, that meant buying German Limburger became much easier this year, while buying Swiss cheese became more expensive.

Even as the cheaper euro has been helping German exporters, low-interest loans have been helping all businesses, as well as the government. Last week, Germany's six-month bill was issued at an all-time low yield of just 0.08 percent. Because of such low rates, the German government can finance its own debt very, very cheaply.

Still, the cheap euro — combined with low interest rates — may not provide enough of an advantage to keep Germany growing for much longer. As the debt crisis weighs down the rest of Europe, global growth may slow. Some economists even fear the debt problems could trigger a meltdown as severe — or perhaps worse — than the financial crisis in 2008.

Looking ahead to 2012, the German Council of Economic Experts last week predicted the country's growth would slow to just 0.9 percent from 3.0 percent in 2011. "At 3.0 percent, the GDP growth rate for 2011 will be very strong once again, even if it will not quite be able to maintain the momentum seen in 2010," when it exceeded 3.7 percent, the economists wrote. Now, the economic risks are growing because of the "vicious circle of sovereign debt and banking crisis" that has swamped the euro zone, they said.

Mallaby agrees that the outlook is darkening. But he adds that it's only fair for Germans and their sympathizers to recognize that the past two years have been good ones for the country, in no small part because of membership in the euro zone.

"I'm not saying the European crisis has been good for Germany," Mallaby said. "Germany suffers when Europe is in trouble. I'm just saying: The truth is complicated."

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