Europe is filled with interesting history that provides a frame of reference to understand current economics and financial markets. Germany is no exception. While the Prussian/German people have a long history that should be studied, it is really the modern history that is most relevant to economics and financial markets. It is clear to me from my visit to Germany, that World War II, the Holocaust, the Cold War and the Berlin Wall, and German unification provide the context for understanding economic decision-making.
Germany is prosperous, and this prosperity has come in part from perseverance, innovation, and sound money management. Germany takes pride in the fact that it took its economic medicine when needed, and it is currently enjoying the benefits of discipline and following the rules. It was clear to me that Germany enjoys a culture of industry. Given its history, Germany feels a responsibility for Europe. Memories of Soviet oppression are still fresh in the minds of many Germans. Germany sees a prosperous Europe as one that follows rules, but many in Europe hesitate at a Europe dominated by German rules.
Europe is powerful in the aggregate, but most of Europe is less relevant on a global basis when viewed individually. Germany is a global power, but it is really a mid-sized country. The economics and rules of Monetary Union are completely rational (from Germany’s perspective), but nationalism and politics overwhelm economics.
As we have repeated many times before, countries do not have friends, countries have interests. The Euro has been in Germany’s interest. The example of Switzerland was raised in several discussions while in Germany. While Switzerland is a small economy, it saw its currency continue to strengthen, squeezing out its export competitiveness. Since the 2011 crisis, it essentially capped its currency against the Euro. When it could not maintain the cap, the Swiss France immediately jumped by more than 30%. This is a sobering reminder to export-driven Germany—Germany with a strong Deutschmark instead of a weakening Euro would be a very different economy. Germany will continue to support the Euro as long as its benefits outweigh the costs. This will be worth watching in the coming years.
There is clear fatigue in Germany from the Greek crisis. As was highlighted repeatedly, Greece is a political and governance problem, not a European economic or financial problem. Regardless of how the current Greek crisis or future European Union discussions progress, it seems that Germany will adapt. While demographics are worrisome, Germany has many attractive ingredients to sustain long-term growth.