Pity German chancellor Angela Merkel. It must now be painfully clear that the country she leads simply cannot avoid paying dearly in this crisis: one way or the other, whether there are bailouts or not, whether the euro holds together or not. Faced with such a Hobson’s choice, Berlin no doubt realizes that its least costly option is to hold together as broad a Eurozone as possible. But if that is where the cost-benefit analysis leads, it is worth remembering that political calculations often diverge from rational lines.
Germany has good reason to hold the Eurozone intact. When it functioned, it benefited the country greatly. Because Germany joined the euro when the deutschmark was cheap relative to German economic fundamentals, the common currency has effectively enshrined a competitive pricing edge for German producers across the entire zone—especially compared to producers in Europe’s periphery nations, which joined the euro when their respective currencies were expensive. International Monetary Fund (IMF) data shows that these currency differences initially gave German producers a 6 percent pricing advantage over their Greek, Spanish and Irish competitors. But today, by encouraging greater industry and investment in Germany and discouraging it in the disadvantaged periphery, that advantage has actually grown. Recent IMF data put Germany’s current pricing advantage over these countries at 12, 20 and 32 percent respectively.
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