Quote:
Originally Posted by Jesus H Christ
if this were to happen, why would the new Deutschmark appreciate significantly? Good post BTW..
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If the Euro breaks up the new German Deutschmark would rise significantly against the new Italian Lira, Greek Drachma, French Franc, etc. to reflect the fact that the German economy is much stronger. Currently the Euro keeps the weaker economies locked into a stronger currency (the Euro) which is primarily based on German strength. This is why they cannot devalue themselves into economic growth and solvency (by printing more money) as is usually done during an extreme recession (See the US quantitative easing program).
Because they are unable to devalue within the Euro structure the weaker EU states want to to have the ECB buy massive amounts of Eurozone sovereign debt (thereby allowing them to remain solvent until growth returns). Germany is opposed to it because they fear inflation and because they would be the de facto guarantor of all the debts purchased by the ECB (severely harming Germany's credit worthiness). If the Euro breaks up however, Germany will lose the current artificially large export advantage they enjoy in the currency union (they will lose the advantage because of the appreciation of the new Deutschmark)....... hence the two sided problem.
Germany (with the cooperation of the ECB) has been using a mercantilist strategy similar to China (with its artificial Yuan peg to the Dollar) to keep their exports high....... but of course this causes massive disruptions in the import countries like high indebtedness and current account imbalances (as can be seen in the US and the weaker EU nations). This is why currency unions and pegs always fail eventually. They are an artificial construct which create huge economic imbalances that always need to be remedied at some point.