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U.S. President Donald Trump has said the European Union is really a vehicle for Germany, but this advantage might run off a cliff if elections this year favor Brexit-style politicians who could destroy the euro and severely damage the German auto industry, at least in the short-term.
In an interview with The Times of London before the inauguration, Trump dismissed the E.U. as a “vehicle for Germany.”
German industry in general and the automotive industry in particular benefited hugely from the adoption of the euro single currency in 2002.
Before the euro, Germany’s auto industry was forced to price its products in ever stronger deutschmarks. But the adoption of the euro gave it a huge competitive boost as the currency is weakened by much less efficient competitors within the eurozone.
This would come to an end if the euro currency system collapsed.
The first serious test will come in April and early May when France holds its two rounds of presidential elections. There are usually two rounds in France. If no candidate wins more than 50% of the vote in the first round, on April 23, there will be a second vote on May 7 between the two front-runners. Front National candidate Marine Le Pen has pledged to withdraw France from the euro single currency if she wins. Opinion polls show a victory for her as a possibility rather than a probability at the moment. Le Pen currently isn’t the favorite to win, but polling experiences for the Brexit referendum and the U.S. presidential election means that many investors are readying for another surprise in France, and maybe Germany later.
Germany holds federal elections on September 24 which will decide the fate of Chancellor Angela Merkel. Holland has a general election March 15.
If France did withdraw from the Euro this would likely spur other weaker southern members like Portugal, Italy, Greece, and Spain to leave, and readopt their old national currencies. Germany would then effectively return to the old Deutschmark. This would quickly force German auto giants like BMW, Mercedes and Volkswagen to either raise prices of its cars in export markets, or take a big hit on profits.
“There’s no doubt at all that German industry has been hugely helped by the euro,” said Professor Karel Williams of the Manchester Business School.
“The euro’s future depends on massive political uncertainties. If Le Pen wins, unlikely at the moment, that would be the end of the euro and she would reinstate the franc, that’s declared policy,” Williams said.
Williams said the euro has been a disaster for many of those locked into it, apart from Germany.
The South Europeans, collectively known by the acronym PIGS, have suffered badly.
“Breaking up the euro now would bring us a new world of uncertainty, and particularly for the car industry. The future is threatening big changes. We’re at an inflection point. We’re going to have battery electric cars which don’t require high value added engines and gearboxes that internal combustion engine vehicles do. It will be easier for outsiders to muscle in. Volkswagen and Mercedes etc are going to have to divide the profits with the likes of Apple and Google,” Williams said.
“Yes, the euro has been a disaster for weak manufacturing countries and protected Germany. Now we’re in danger of entering a new world of uncertainty that will involve more national production or autarchy that happened in the 1930s. Not because anyone wanted that but just because the international order broke down,” Williams said.
Professor Garel Rhys, Emeritus Professor of Motor Industry Economics at the Cardiff Business School, agrees that German manufacturers would take a big hit if outside the euro, but doesn’t think it would last for long.
“Because German manufacturers are so very, very good. Whenever they make cars they go to the very top, whether they are in mass market products or upmarket ones. That’s the genius of Germany and its managers. They are always pushing into new areas. If they were forced to take on a strong currency again they could drop prices and still make money. There’s plenty of slack; they are so powerful they could cope with that,” Rhys said.
If the euro was about to collapse, probably bringing the E.U.’s nation state ambitions down with it, why wouldn’t Germany, the biggest supporter of the European project, make the ultimate sacrifice and unilaterally pulled out of the euro? That would be great for France, Italy, Spain and the project, wouldn’t it?
Rhys doesn’t think Germany would go that far, but does need to make some serious sacrifices to keep the euro and the E.U. alive. That means Germany must be more generous with its tax revenues with more funds for struggling nations, although he concedes that will be a hard sell domestically, particularly with an election looming.
Professor David Bailey from the Aston Business School doesn’t think the euro is about to topple.
“We underestimate the determination to make the euro project work. It won’t fall apart, but if it were to there would be a big appreciation in the value of a new German currency and that would hit profitability. The Germans have had a 20% boost to competitiveness since adopting the euro,” Bailey said.
“The euro will survive the French and German elections. Obviously we don’t know what will happen and we all know what happened to election projections recently, but I think there is a massive commitment to the euro and I’d put money on it being there by the end of the year,” Bailey said.
Manchester Business School’s Williams doesn’t expect any euro crisis to move the Germans into taking more action by helping struggling nations.
“The Germans will say we can do it why can’t you. The Germans will continue with the sense that they have invested in the technology and done the hard work and the rest are lazy, and that prevents them adopting sensible policy to keep Europe together,” Williams said.
The vehicle may veer towards the cliff edge and scare the passengers, but will probably get back on to the autobahn safely. Probably.
