Could Germany Break Up the Euro?

Germany now faces its greatest dilemma – should it remain true to its economic ideals and be the cause of the break-up of the monetary union

Jeremy Beckwith 15 December, 2014 | 10:55AM
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Within the Eurozone, Germany is coming under increasing pressure to approve and adopt policies designed to stimulate the Eurozone economy.  This is because Germany is the largest economy in the Eurozone, since the global financial crisis, Germany has enjoyed the strongest performance within the Eurozone based mainly on exports, which has led to a very substantial trade surplus, German public finances are in a very healthy state compared with most in the Eurozone and they are rich and have the policy flexibility to act.

Many in the rest of Europe are calling on the German government to launch a large debt-financed fiscal boost through public investment spending, creating, it is hoped, jobs and demand throughout the Eurozone.  The Germans are resisting this strongly because they have worked very hard in recent years to get their government finances back onto a solid footing, and are expected to get close to a balanced budget in 2014.  German politicians are stoutly resisting European calls for them to spend more and move back into deficit.

It is though in monetary policy where the greater controversy is being generated.  Through his public utterances over the last six months, Mario Draghi has sought, to maintain market confidence by positioning the ECB as about to introduce a US- or UK-style QE programme in its efforts to boost demand and inflation.  However the actual policy steps agreed at ECB meetings have not lived up his words – QE is always just a few months away.  It is clear that, behind the scenes, the Bundesbank and several ECB members are fiercely opposed to such a policy, with many in Germany believing it to be illegal. They are angry at the way that Draghi has sought to bounce them into such a policy by his public statements.

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Jeremy Beckwith  is Director of Manager Research for Morningstar UK