A lot can happen in a year, but the biggest question facing global investors at the beginning of 2012 is: can the eurozone survive?
Next week, German Chancellor Angela Merkel and French President Nicolas Sarkozy will take the first steps in the New Year towards answering that question, with a meeting set for Monday in Berlin.
The two leaders will have to lay the groundwork for another eurozone summit later in the month. It’s been suggested that Merkel could even be prepared to discuss movements towards a ‘eurobond’, on the back of reports by the Financial Times that the European parliament has been working on a bond proposal that’s more accommodating to Berlin’s wishes. Money printing, however, remains a stretch.
Overnight, France offered investors the latest reminder of the European debt crisis, by auctioning off €7.96 billion in debt. The average yield on €4.02 billion of that auction was 3.29 per cent – higher than the previous auction a little over a month ago.
The spread between German and French 10-year bonds ticked up to 1.49 per cent and while that’s not quite as bad as the levels reached in November, a higher cost of borrowing is all the incentive Sarkozy needs for productive discussions with his German counterpart.
From Merkel’s perspective, Germany doesn’t just stand to benefit from the maintenance of the eurozone. Germany, conceivably, stands to benefit the most.
If the euro were to collapse, the upheaval in global markets would at first distract attention from the reintroduction of a raft of currencies that were dumped a decade ago.
The returning franc would fall as traders bet on the collapse of a French bank or two. The lira would undoubtedly tumble as the market punishes Italy for its economic excesses. The same would happen for the Greek drachma and the Portuguese escudo wouldn’t escape the fracas either.
By contrast, the German deutschmark would rise dramatically.
The problem for Germany is that the first two on that list – France and Italy – are its biggest customers. A simultaneous plunge in the reawakened franc and lira, combined with a surge in the deutschmark, would rapidly make almost 17 per cent of Germany’s exports far more expensive.
Of course, this wouldn’t be without its benefits, as these currency fluctuations would make German imports from its neighbours cheaper. However, it’s often forgotten that with a relatively modest population of 82 million, Germany is the world’s second largest exporter. Germany needs to export Volkswagen Golfs and Miele washing machines more than it needs to import cheap cheese and wine, because of the jobs that these industries provide.
So why, you might ask, is Germany the main reason why the European Central Bank hasn’t printed money?
The common explanation is that the German people have had it drummed into them by their education system that the 1920s should not be repeated. The story of a person pushing a wheelbarrow of money to the bakery was born during this dark period in the wake of World War I and, at some level, the German people have never forgotten that the deutschmark once reached a truly unfathomable exchange rate with the greenback of 4,200,000,000,000 to one.
But it’s not quite that simple. Remember that the Germans are also some of the world’s best savers. Printing euros would devalue their positions and it’s through this prism that we’re reminded this strategy doesn’t come without a price.
So Merkel and Sarkozy will meet on Monday, hoping to ensure that not only does the eurozone take a step towards stability, but also Golfs will still be seen circling the Arc De Triomphe for years to come.