World Business

Germany to stick with euro bailout

By Simon Kennedy (China Daily)
Updated: 2010-07-15 10:35

BERLIN: For Germany, bailing out its neighbors to save the euro is proving a price worth paying.

Rising share prices and foreign sales at Bayerische Motoren Werke AG and Siemens AG show why it may be worth keeping the single currency even as some voters balk at the cost of rescuing Greece and demand a return to the deutsche mark. As exporters benefit from the lower labor costs and currency stability fostered by the euro's 1999 introduction, unemployment has dropped close to an 18-year low and the DAX Index is the 16- nation bloc's best performing major benchmark this year.

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That's reinforcing Germany's status as a pillar of euro stability rather than a weak link as European policy makers scramble to stop the region lurching back into recession. While academics including Martin Feldstein say the Greek crisis could splinter the euro and investor George Soros urges Germany to do more to ease economic tensions in the region, the currency is rebounding. The euro has gained 6.6 percent against the dollar since hitting a four-year low on June 7.

"A break-up would be a big, big problem for the German economy, probably bigger than for most others," said Julian Callow, chief European economist at Barclays Capital in London. "Industries in Germany have gained so much market share in Europe. For Germany, it's a lose-lose situation."

Germany is reaping the rewards of the discipline imposed on its economy over the past decade after reunification in 1990 dragged down growth and saw the country being labeled the "sick man" of Europe.

With the euro preventing governments from devaluing their way to growth, Germany squeezed labor costs just as economies from Spain to Greece chose to run up record budget deficits and allowed employment costs to rise.

The result has sharpened Germany's trading edge over the euro-region economy's southern periphery. Europe's largest economy became 13 percent more competitive against its neighbors in the 11 years through 2009, mirroring similar declines in Spain and Greece, according to a wages-based indicator designed by the European Central Bank.

The pay-off is evident in the performance of Siemens, Europe's largest engineering company. Since 2001 it has recorded 23.1 billion euros ($29 billion) in restructuring costs, according to estimates by Morgan Stanley.

That efficiency-drive helped boost the European share of Siemens' sales to 41 percent in 2009 from 32 percent in 2004 and pushed its operating margin above those of General Electric Co, Alstom SA and ABB Ltd.