On the global economy
So we're in the middle of an economic crisis, the world around. Recently, Ireland's debt concerns have re-sparked fears about Euro-backed bonds and currencies, as speculation mounts that the IMF and Germany will have to step in to rescue the Euro. That begs the natural question: after bailing out Greece, and with the prospects of bailing out Ireland, why isn't Germany seriously thinking about leaving the Euro-zone and re-instating the German Mark? How is it in Germany's interests to continue bailing out the failed fiscal policy of other Euro-zone countries?
Then the answer hit me. A German Mark, traded on the free market, would be in high demand right about now. After all, Germany, other than being apparently the pillar of the Euro at the moment, has all the hallmarks of what current investors are looking for in currency and bonds. High exports, relatively low debt, a thriving industrial base particularly in manufacturing. if the Germans weren't tied to the Euro, the German Mark would probably be the strongest currency in the world right now (excepting, of course, if the Chinese renimbi were valued by free trade, then it would be the renimbi followed by the Mark.)
But that would have a deleterious effect on it's manufacturing base. As the Mark appreciated against other currencies, that would make German-manufactured goods more expensive on the free market. Just as if the Chinese allowed their currency to appreciate according to market demand, Chinese goods would become more expensive around the world and demand for them would wane, meaning a slowing of Chinese economic expansion and perhaps even a shrinking.
In other words, the world's two leading manufacturing exporters enjoy that position precisely because the currency they operate on is under-valued against the dollar, or against other openly-traded currencies like the Pound, and the Yen. The German trick is just to be part of the Euro zone, to have the value of the Euro measured not just against the value of the German economy, but also that of countries like Greece, Spain, Ireland, and the rest of the Euro zone. The devalueing of the Euro on worries about Greek and Irish bond issues actually helps the Germans maintain their export dominance.
To some extent, then, Germany is just paying back the benefits it reaps from these bond crisis. And it's not like the Ireland, Greece, Spain, and some of the other troubled Euro-zone countries didn't reap the benefit of having their currency over-valued against the actual worth of their economies. They were in part able to run up such large debts because the value of the Euro also included the value of the German economy, in addition to the value of more mediocre, but stable, economies in the Eurozone. In Ireland, a couple years ago that currency advantage made them the darling of the 'free-trade' groupies, who trumpeted Ireland's 'free-trade' policies; companies could set up shop in Ireland, operating on the Euro, and with few taxes, operate very profitably, supposedly bringing benefits to the Irish economy. But the flip side of that was that by not taxing at rates similar to the rest of the world, Ireland ran up it's public debt, which it will need to restructure and adapt austerity measures to deal with (which will likely lead to a raise in Irish taxes, including corporate taxes, assuming Ireland adopts the British model, or something like the Greek model). So the benefits to the Irish economy were very short-lived, in relative terms, and were in fact mostly based on the strength of much more socialist economies like Germany, France, Belgium, Finland, etc. who maintained higher tax rates and managed their debt better accordingly.
Which is all well and good for the Eurozone-- but bad for pretty much everyone outside of it. Pre-crisis, it meant that more economic development went to places like Ireland, where companies could operate against the strength of the Euro at bargain-basement prices in poorly-managed economies like Ireland, Greece, and Spain, and post-crisis the Euro effect means that countries like Germany and France enjoy an export advantage over the global market when bad policy in the first countries came to call. The Euro-zone, as a whole, benefits on both sides at the expense of countries operating on freely-traded currencies. The Euro-zone could be thought of as an indirect form of currency manipulation. Effectively, the Euro is a pact between the participating countries that they will rescue each other from profligate debt in order to maintain the currency, of benefit to the weaker economies because it gives them a bigger line of credit, with eventual subsidy, and of benefit to the more prosperous economies because it lets them operate on a currency that is under-valued against the real value of their economies. The deal only breaks when the cost of subsidy to the spenders outweighs the benefit of the devalued currency to the subsidizers. The Germans are no where near that point, so they will continue to subsidize Euro-zone debt with bailouts while reaping the benefits of devalued currency-- and continue to issue statements opposing the revaluation of other currencies. It's a protectionist policy, if you were to look at the member states as a centralized economy.
The difference between that and what the Chinese (and notably other countries) do with the dollar is that the Eurozone countries agreed to it. The dollar is indexed by China without agreement of the United States; elsewhere in the world, indexing against the dollar allows other countries to extend their credit, because the assumption is that the United States will expend the necessary resources to keep the value of the dollar stable, despite deflationary pressures on the dollar due to the indexing of foreign countries fixing their currency value against the dollar. Effectively, the bet of fixed or controlled-indexing countries is that the US will continue to take the pain.
To look at the countries facing the most difficulty in kick-starting their economies, they are the countries with the premiere currencies in the open market-- the Japanese, with the Yen, the British, with the Pound, and the US, with the dollar, because of foreign currencies being indexed against the dollar at non-market rates. In other words, those countries still operating on free-trade principles are mostly taking a reaming from countries operating on protectionist policy.
Which is kind of a recipe for a currency war.