Monetary policy in the euro zone is a game that 19 countries play, but in the end, the winner is Germany.
This rewording of a favorite saying about Germany’s success in European soccer championships can be used to characterize the effects of decisions made in recent months and years by the European Central Bank, the ECB.
Thanks to extremely low interest rates, Germany has balanced its budget without great effort, the nation’s industries are financing themselves more cheaply than ever and, on top of everything else, the German economy has been the main benefactor of the weak euro.
Since the ECB entered into quantitative easing with its purchase of government bonds and securities, the euro’s value has fallen even further, which is logical since monetary policy is being loosened in Europe even as the U.S. Federal Reserve has announced an imminent tightening.
The ECB justifies its monetary policy by citing the danger of deflation, but it can easily be read as a strategy to weaken the euro. Governments of economically failing countries desire a weak euro because it would make it easier for them to achieve price competitiveness for their industries.
A falling euro is also more palatable for the public than lowering actual earnings, yet it’s a double-edged sword. When the euro exchange rate sinks, prices for imported goods from other currency regions rise, diluting the buying power of consumers.