A Prize I Won’t Be Winning

A buddy just sent me a link to a BBC story about the youngish owner of a British retail firm offering a £250,000 prize for the best plan to manage one or more countries abandoning the euro currency.

The market took the small hit from this stunt on top of the more seriously negative announcement that the finance ministers of the Euro zone have effectively kicked their problem upstairs by cancelling their 27-hand poker game and letting the unlimited stakes table (the Presidents and Prime Ministers) deal with it.

My reaction (as is often the case) ran counter to most of what I read or hear in the financial press.

I think Germany will step up and pay, on an extended basis, for the Euro currency regime to keep stumbling along.

Why would I think that?

Because I look the benefit that has accrued to Germany over these last couple of decades.  The greatest beneficiaries of a policy are the ones most likely to pay to keep it going, after all.

So where would Germany be without the Euro?  (Bear in mind that the unified currency regime has cost them very little until the recent dust-up.)

The first level answer is fairly obvious — Germany would be sitting with a D-mark anywhere from 20% to 50% higher than a basket of other currencies on the continent, and its manufacturers wouldn’t be nearly as profitable.

Beyond the obvious loss in profitability from selling at lower prices in the home currency, there would be the “tax” of currency translations on all sales, the overhead of customs declarations and duties, and the human cost of doing business in a world with all the old national immigration rules that prevent labor mobility and hinder business travel.

Net net, Germany might be looking at itself with anywhere from a few points to as much as five percent slower growth in its corporate profitability and its GDP.  Try compounding that nineteen times to see what they’ve made by having the Euro in place.

For those who aren’t familiar with the Baron Rothchild’s (Or Einstein’s, or Franklin’s) Eighth Wonder of the World, compounding at just 2% per year since 1992 (the date the Maastricht Treaty created European Currency Unit), 102% raised to the 19th power is 1.457.

Maybe this cool graph of the German GDP will help explain:

So if there is as much as an extra trillion dollars of annual GDP in Germany thanks to market unification, the cost of propping up the Euro starts to sound affordable, especially if Germany doesn’t go it alone (they won’t) and if they spread most of the pain to the citizens in the profligate consumer countries (they will).

So that’s my prediction: The point of multiple political standoffs and mini-crashes in the market is to get the southern Europeans to accept the maximum austerity pain they can handle, and to give Merkel the chance to explain to her comfortable conservative supporters that they have a really good deal going by keeping the Eurozone in place. I look for Europe to keep stumbling forward, its economy just above stall speed, with the Germans footing enough of the bill to keep their excellent continent-wide market open for business.



3 Responses to A Prize I Won’t Be Winning

  1. r3fman says:

    You make too much sense for events to unfold as you have laid out. Somebody, somewhere, is going to mess things up for no good (or at least no discernable good) reason.

    • hhill51 says:

      OK. Now that Act One curtain has fallen, it’s time to see whether the beneficiaries of the redistribution for the last three decades in the US can understand that they need to relieve some of the pressure on the middle class. If not, their puppets on the “Super Committee” will stand firm to protect the redistribution mechanism right through Thanksgiving, and America will lead the world into yet another recession scare.

  2. chinshihtang says:

    You’re right on target, Howard. The lesson for all of us non-Eurovians is that this kind of a thing is a one-way street, so do it right the first time.

    The original Euro countries were crazy to let Greece into their monetary system in 2000 (even more than when they gave Italy a pass at the outset), but having done so, they have no right to back out now. As for the Greeks, they have benefitted (per capita) just as much as the Germans, so they will do whatever they have to do to stay in, restive populace be damned.

    As for the bet, I think the most practical would be to propose something like the introduction of the Monegasque franc–tied to the value of square feet of prime real estate–as an alternative to the Euro in the Mediterranean enclave.

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