Since the Euro was introduced by the European Central Bank in 1999, Germany has gained competitiveness against not only other developed countries around the globe, but also against all other members of the Eurozone. In this time, they have also managed to transform a slight budget deficit into a strong surplus. A lot of people are starting to wonder what caused this rapid transformation?
International competitiveness is measured by currency movements and changes in labor costs. German competitiveness is nearly 20% higher now than it was in the late 90’s, compared with a decline in competitiveness in major European economies such as France, Italy and Spain. This was helped by the fact that other members of the Eurozone had relatively poor performance during the past decade. This chart shows how German competitiveness has grown since the euro’s inception in 1999. An increase in competitiveness allowed for more German exports and that slight deficit quickly turned into a growing budget surplus. Before the Euro, Germany was running at a slight budget deficit of approximately 1.5% of GDP; the surplus was over 5% in 2009.
There are a few main reasons for the turnaround in the German economy. The first major reason is that adopting the Euro caused a greater stability in Germany than they previously had. Prior to joining the Eurozone, Germany was often labeled the “sick man” of Europe, dragging growth down throughout the area. This is definitely not the case today. Germany is now a pillar of strength rather than a weak link. An increased market share in Europe is a major reason for this added stability.
Reduced interest rates in Europe have caused an influx of capital to the area, including Germany. Economic growth due to increased capital would not have happened if Germany was still using the deutsche mark. Another key reason for trade growth is a lack of exchange rate fluctuations that comes with joining an economic union like the Eurozone. This expands trade and creates stability for companies exporting and importing goods.
Greece leaving the Eurozone or getting bailed out could have a major impact on the German economy as well as the Euro. Only time will tell what the future of the Euro looks like.
Why do you think that Germany’s growth is superior compared to the other Eurozone nations?