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The Multiple Nations of the EU and Germany and the Value of the Euro

  • Category: Economics
  • Topic: Euro
  • Pages: 2
  • Words: 753
  • Published: 10 April 2019
  • Downloads: 23
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The Euro and Germany’s Trade Surplus

The euro was introduced in 1999 to facilitate the free movement of labor and goods among the countries inside the European Union. One common currency to be used by its member states allowed European consumers to immediately see the price of a product, as opposed to seeing the price in a different member states’ currency and having to run it through a converter to see the price in local currency. While the euro made it easier to purchase goods across borders, one of the major negatives of the euro is its inability to match the economic conditions of each of the member states of the EU. Germany’s robust economy has resulted in a massive trade surplus and consequently has negatively effected the economies of the rest of the EU. The euro is valued in regards to the majority of the countries in the EU and when one country like Germany is thriving, there are negative consequences to a common currency governing multiple nations.

The euro common currency made it easier to purchase and travel across the EU. Exchanging currencies when traveling to other countries and having to pay a fee to do so were a thing of the past. It made shopping across borders convenient with the price listed in euros whether the retailer was located in France or Portugal. The upside of having one common currency was also its biggest downside. The value of the euro is the same in Germany as it is in Greece, regardless of the economic conditions of each of the countries. Currently, two member states have opted out of the Eurozone and the requirement to adopt the euro currency. Denmark had chosen not to adopt the euro as a condition of the Maastricht Treaty of 1992 and the United Kingdom is in the process of withdrawing from the EU altogether.

The economies of the EU have struggled since the market collapses after the financial crisis of 2007–2008. One major exception has been Germany. A country with a robust economy supported by high-end exports including cars, machinery, electronics, appliances, and pharmaceuticals. Germany has been lauded for their economic success and rightfully so, but has their success been a negative for the rest of the EU? The global economy is healthier when money is being spread around and no one country has a massive trade surplus or deficit. A country like Germany who has a large trade surplus, meaning they export or sell a lot of products to the rest of the world, but they are not spending the money they are making. This means that Germans are not returning the favor by spending that money on fine Italian wines or olive oil from Greece, which would help the economies of those countries. So the answer is that Germany’s trade surplus is bad for the EU, but it is not entirely Germany’s fault. A good portion of it has to do with the value of the euro.

The value of the euro in relation to Germany is undervalued by an estimated 5-15%, according to the International Monetary Fund. When a countries’ economic wellbeing is high as it is in Germany, the value of the local currency should increase to balance out the trade surplus. In this case, if Germany held a local currency as they did before the Euro with the deutschemark, increasing the local currency would balance out the trade surplus by making German goods more expensive, but instead the common euro currency has declined even further due to the faltering economies of the rest of the EU, which only makes German goods even cheaper, further exacerbating the trade surplus, which inevitably hurts the rest of the EU. Additionally, a more valuable local currency in Germany would make products from the rest of the EU cheaper, which would help with increasing imports and balancing out the trade surplus.

Germany’s robust economy is a massive success story, especially in the shadows of the recent global economic crisis. The economies of the rest of the EU has not fared as well and paradoxically, some of the blame does fall on the robustness of the German economy. Although, much of the blame should not fall on the shoulders of Germany’s success and instead on the value of the euro. The value of the euro stays the same for any one country in the EU, regardless of the economic health and conditions of the country.

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