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Germany is a nation that fears inflation for good historical reason, and among the nations of the world, Germany places a particularly high priority on price stability. Yet, so long as Germany remains in the European Economic and Monetary Union (EMU) with the euro as its currency, Germany may not be in control of German inflation. In particular, the current crisis with Greece, and the crises that may follow with other nations such as Portugal, Italy, Spain and Ireland may prove disastrous for German investors and taxpayers. For so long as it is in the EMU, Germany may have no effective choice but to bail out countries that have been running up huge deficits – despite Germany itself not having the economic capacity to do this for all of Europe on an indefinite basis, let alone the political will to do so. These are among the reasons why in a letter to clients late last week, Morgan Stanley warned that Germany may leave the euro and the EMU and that investors should be prepared for this event.
If this event happens, it may create an enormous financial windfall for millions of individual Germans, as well as German companies, not to mention the German government. While leaving the monetary union is still far from certain as Germany also has strong economic and political incentives to stay in the EMU, in this article we will say “what if” and explore some of the startling benefits for nations and individuals of quickly exiting a failing monetary union – as well as the many perils. But while the specifics of this article are about Germany (and France), the implications go far beyond Germans and Germany (although there are very important implications for arbitrage opportunities with German companies). Rather, in this world of financial crisis and sovereign debt crisis, there are powerful related wealth and financial security implications for individuals in every country.
First let's consider the current German government situation. Total outstanding government debt in Germany is equal to about 1.7 trillion euros, and as of 2009, equaled about 77% of the German GDP (according to the CIA World Factbook). Now let's assume that Germany does exit the economic and monetary union, and when it does so, it creates new Deutsche marks that are exchangeable one for one at the valuation for euros as of that exit date. After the exit of Germany, let's make the reasonable assumption that Germany's economy remains strong, at least relative to much of the rest of Europe. Let's also assume that with Germany exiting, and perhaps France exiting behind it, that the European monetary union is left with the weaker members where the world in general and investors in particular are quite unsure about the ability of these nations to repay their debts. So the euro plunges.
For our scenario, we’ll assume an immediate sharp drop of the euro in the neighborhood of 30-40% when Germany exits the EMU, relative to the new Deutsche mark. This value differential is assumed to rapidly increase as an inflation differential builds, and more strong nations leave the euro. After the passage of a period of time – and it could be months or could be years – we'll assume the currency exchange rate is now 10 euros for every Deutsche mark. In other words, we'll assume that the euro loses 90% of its value relative to the Deutsche mark. (This assumption is not a precise projection, there are cases for higher and lower projections, but it does have the virtues of being a round number and reasonable.)
With this scenario, Germany's euro-denominated national debt is now worth 10% of what it was when we look at things in Deutsche mark terms rather than the euro, and keep in mind that the German government income from taxes is in Deutsche marks, rather than euros. Germany is now repaying debt at 10 cents on the dollar (so to speak) and the value of its outstanding debt has fallen from 1.7 trillion euros down to 170 million Deutsche marks – a 90% reduction in net debt. Thus, German national debt (ignoring any new debt issuance) as a percentage of the German economy has dropped from 77% of German GDP down to 7.7% of German GDP.
Originally posted by boondock-saint
it makes sense for Germany.
They can print their own money again
just like the US Dollar.
And they can print all they want.
I t would def kill the Euro
and crash that system, if multiple
countries did this.
Originally posted by ickylevel
Because its the weekend.