No country has benefited more – no country has come close to benefiting more – from the creation of the euro as has Germany. The creation of this currency enabled Germany to export its way out of the cost of rebuilding eastern Germany after the fall of the Berlin Wall – they did it with an undervalued currency.
The euro allowed Germany to sell its products (great products by the way), but underpriced due to this currency manipulation around the world. That included the ever increasing membership of the euro zone, many of these members while a German ran the European Central Bank (ECB) and using false data to get into the Eurozone. Make no mistake, the German agenda was clear – let’s lend Euros to countries that can buy our stuff and keep those factories humming.
Even more than China, Germany is dependent on exports and has the largest share of its GDP – more than 45% – coming from exports of any developed or emerging goods producing nation creating a balance of payments surplus in excess of 5%.
So Germany lent everyone the money these countries are now struggling to pay back. But no one has bothered to tell the German people the consequences of a breakup of the euro zone. Or the consequences of the austerity the Germans are imposing in Europe even if the euro survives.
German production has fallen noticeably in the past few weeks as uncertainty and austerity kick in. The European recession, brought on by austerity programs is going to run through 2012 and 2013 and hit the German economy quite hard, combined with a slowdown in China and the US.
That is the best case scenario.
The worst case is an end to the euro. Consider what will happen to Germany if the euro goes away:
- The German currency will revert to the Deutschemark and that will end up being valued at least 40% (my estimate) more than the current euro due to real economic fundamentals and a flight to quality
- German banks – especially the misbegotten Landesbanks so wonderfully spanked by Michael Lewis in Boomerang – will take a massive hit as several nations default – Greece, Portugal, and Italy.
- Businesses will stand back and watch and wait for the financial system and economies to sort things out in a new currency regime. This will take at least a year, perhaps two.
Bottom line: German exports will take a savage hit, as will the average German worker.
Germans are not like Brits or Americans or even the French. They do what they do, and do it very well, but the economy shuns entrepreneurship and risk taking and the country, while having the organic ability to heal itself, does this everything very slowly.
Combine this with an aging and more expensive population, a structural budget deficit no one talks about and Germany and it’s supposed fiscal virtue are going to be thrown out the window by German voter. Except… They cannot according to Germany’s amended constitution.
It is possible voters can get what they want – massive deficit spending – if the government admits there is an economic crisis. A crisis the German government and it’s ill-informed people can stop.
Is there a way to make money in all of this?
Sure – even in the best case scenario, an austerity induced recession, things are going to get close to ugly for the economy and quite ugly for the banks. Take a look at selling short the German stock market (a large, liquid ETF is the MSCI Germany (EWG)) and selling short the largest German bank, Deutsche Bank (DB).
Deutsche Bank (DB) is the big dog in the German banking system and in my opinion, way undercapitalized and exposed to Greek debt that will turn bad, and is also exposed to the sovereign debt of other nations that will suffer from “contagion.” German officials are already talking about a plan to shore up German banks with this kind of exposure – and given the political mood, this capital injection is going to come at the expense of current shareholders.
DB has a totally opaque balance sheet, unknown exposure to lousy private sector and public sector debt and an eventual need for capital that will dilute existing shareholders.
The stock is worth $20, sells for more than $30. Time to start selling short the “big dog.”
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