Why Germany should save the Euro and Spain, Italy and Greece should exit

June 13, 2012

FOREX, Global Macro

I saw this chart in a presentation last week and I reckon it summarises the conundrum that is Europe.

What you are looking at on the left hand side is the Real exchange rate (TWI based) adjusted for unit labour costs. It is clear here that even with the fall in the trade weighted RER for SPain, Italy and Greece that Germany is streets ahead in the competitiveness stakes.

What you see in the right hand side is the unemployment rate. When austerity has bitten inside the fixed exchange rate system that is the Euro there was nowhere else for unemployment to go except up. Germany is still doing well but the scary part of this chart is that the rate of increase in Italian unemployment is going vertical as did Spain and Greece before it.

So there we have the conundrum of Europe.

Germany should save the Euro but perversely the Mediterranean periphery should abandon it and try life with their own currency once again – Lira, Peseta, and Drachma’s. Perhaps enlighten self-interest will win out for Germany in the end, indeed it feels like it will but the German populace and its politicians have further concessions to wring out of their southern neighbours yet and that takes time. Time the markets  may not give them.

Have a great day

Greg McKenna

www.twitter.com/gregorymckenna

Please remember these are not recommendations for you to trade these are my views and I have my risk management tools and risk parameters that you do not have access to. Thus, this blog is for information only and does not constitute advice. Neither Greg McKenna nor Lighthouse Securities has taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.

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2 Comments on “Why Germany should save the Euro and Spain, Italy and Greece should exit”

  1. delusionaleconomics Says:

    Actually IMHO, in order for Spain, Italy and the rest of them to be able to afford a post-Germany Euro, the northerners should leave with a new currency. Allowing the southerners to keep their debt denominated in a newly deflated Euro and the northerners with a higher valued currency. Transition is obviously a problem, but the other way around would be a disaster for all involved.

    Reply

    • Gregory McKenna Says:

      If we can engineer that then it would be great. A conversation with an FX dealer mate of mine earlier this after noon who was saying what you have articulated prompted this quick piece. Cheers mate.

      Reply

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