Can Germany afford eurozone collapse?

Container ship being loaded at a terminal in the harbour of Hamburg

As negotiations on changing the terms of the Greek rescue limp on, there remains a widespread presumption that Germany - the eurozone's paymaster - would always have too much to lose from the collapse of the currency union to allow it to collapse.

Analysis of trade patterns sent to me by Jim O'Neill of Goldman Sachs suggests that may be a slightly naive assumption. What his numbers show is that British exporters would probably be more damaged by a eurozone implosion than German ones: or to put it another way, businesses in the UK - which, to state the stunningly obvious, is not a member of the euro area - are more dependent on the health of the eurozone than German companies.

And - which is the more important trend - German businesses are becoming less and less reliant on selling to eurozone countries and are becoming more and more successful in selling to China and the leading emerging markets.

Here are the relevant stats. In 2000, roughly at the dawn of the eurozone, trade with the euro area represented 45.5% of all Germany's trade. That fell to 38.1% this year - and, according to Goldman's projections, will be under 34% in 2020.

By contrast trade with Mr O'Neill's BRICs (Brazil, Russia, India and China) was 3.9% of German trade in 2000, is just under 12% this year and is forecast to be more than 24% in 2020.

What is particularly striking is that in eight years German trade with China alone is projected to be 15.6% of the total, according to the trends, or not far off double the share represented by Germany's most important eurozone trading partner, France.

This leads Mr O'Neill to the following conclusion:

"If European policymakers cannot get their act together in the year ahead or the year after the German election [in 2013], I think the probability that it [the eurozone] survives might be less than I had previously thought."

Or to put it another way, by 2015 it will be so obvious to the German people that it is business with China that is making them richer that their incentive to show fiscal solidarity with Spain and Italy - to use German wealth to underpin the recovery of weaker eurozone economies - will be even less than it is today (for what it's worth, Goldman believes Germany's trade with Spain will be less than a tenth of its trade with China by 2020).

And what does all this betoken for the UK?

Well it rather implies that British businesses' efforts to reduce their dependence on European markets and increase their sales to emerging economies need to be significantly stepped up.

Right now, some 44.5% of British trade is with the euro area: our dependence on the prosperity of the eurozone is significantly greater than Germany's (which is why I have been banging on for years that although we may be powerless to do much to prevent the eurozone lurching from crisis to crisis, we have a great deal to lose if the lands across the Channel go splat, in an economic sense).

The better news is that our trade with China has been growing: we generated current account credits of £2.7bn in 2002, but that had risen to £13.8bn in 2011, a rise of 411%.

The rise in our sales to China were faster than our sales rise to any other major trading partner. But even so the increase was probably not fast enough.

Trade with China represents 3.5% of the British trade total, or a quarter of the business we do with the US and a third of the business we do with Germany.

Our trade with each of the Netherlands, France, the Irish Republic and Belgium is significantly greater than our trade with China.

British businesses are very dependent on selling to rich but relatively low-growth economies. They are particularly dependent on selling to economies - that like the UK itself - became far too indebted during the boom years (and to labour the point, I am talking here about the aggregate of household, corporate, banking and government debt, not government debt alone).

So it should be no surprise that the UK is struggling to grow at more than a desperately anaemic rate: the scale of the required re-engineering for the British economy will be the work of many years.

Not only does the UK need to become less reliant on debt-fuelled consumer spending, and become more of an investment-led and exporting economy, but it also needs to re-orient its trade away from economies as hobbled as Britain itself.

Robert Peston, economics editor Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 17.

    Is this a case of Germany manufacturing in Germany and selling to China, whereas British companies, design in UK, manufacture in China, selling in China?

    Geography is significant as the US has found, greater profit is made by the wholesale export of Factories to China, impoverishing workers, but creating wealth for Owners, distorting Import/Export figures. UK Jobs should returned here.

  • rate this

    Comment number 16.

    One also needs to know what type of product Germany has been exporting to China and developing countries - I suspect a large percentage is machinery and machine tools (probably the only ones left) that the developing countries can produce goods that compete with EU goods...and increase the surplus of goods in world markets!!

    Surely that only happens once?..

  • rate this

    Comment number 15.

    Germany will be okay whatever happens.

    She makes good quality products which are in demand throughout the world.

    The UK, however, with our "service-oriented" economy - we are going down, whatever happens elsewhere in Europe ;o(

  • rate this

    Comment number 14.

    The Euro will probably not collapse but there will be a two tier system, a North South divide and two Euro currencies.
    As we are in neither we will have to work hard to survive and innovate.
    Time is of the essence and all this posturing and bull from our great leaders both past and present has got us nowhere.
    There is no room for hangers on and each person in the UK needs to be productive.

  • rate this

    Comment number 13.

    The figures quoted for the UK are not comparable with Germany. Almost half of the UK export figure is to the Republic of Ireland and this trade would not be as affected by a Euro collapse as much as exports to the continental mainland. Also, more of our exports are in services, rather than goods, again not necessarily as badly affected.

  • rate this

    Comment number 12.

    "Analysis of trade patterns sent to me by . . . Goldman Sachs"

    and you believed them?

  • rate this

    Comment number 11.

    Currencies are irrelevant, economic activity is governed by price. Germany has the right products at the right price.
    Not all countries can be in surplus, the real question is what do you do about imbalances.
    Germany can get cheap engineers from Spain & Greece. (No education cost).
    Stop being jealous of the Germans, learn how to play the game!
    But Germany can not sell if there are no buyers.

  • rate this

    Comment number 10.

    The only way for the Euro to be "saved" is for Germany to leave the Euro! The Euro could then devalue and the Countries within the Euro would then be more competative.

  • rate this

    Comment number 9.

    EU is China's biggest trading partner… what will happen to German exports if the EU falters… China will go into recession and the pack of cards will collapse.

  • rate this

    Comment number 8.

    The German economy has greatly benefitted from the EURO being UNDERVALUED for them. HSBC has done research that a N Euro would trade at $ 1.80 and a S Euro at 65 cents. Clearly the EXCHANGE RATE that Mr O'Neill has used for his modelling is all-important

  • rate this

    Comment number 7.

    Switching our Economy from debt fuelled consumer spending to export led growth is easy to say but hard to achieve. Especially as we have underinvested in our export industries for generations.
    Study the countries that grew through export lead growth, Japan in the 60's and 70's, Korea in the 80's and 90's, China in the 90's and early 2000's and emulate them. We might not like what that means.

  • rate this

    Comment number 6.

    Interesting points with regards to UK, but picture more complicated for Germany, and Northern Eurozone members. Surely their currencies would instantly appreciate, which in turn would have a severe dampening effect on their exports.

  • rate this

    Comment number 5.

    I thought if the euro collapsed then whatever currency Germany replaced it with would have a strength much more in line with the strength of the german economy. This would then harm competetiveness and damage trade with China, meaning Germany really is quite reliant on the eurozone for its trading success.

  • rate this

    Comment number 4.

    We are told by the Europsceptics that we really do not need European trade, that the rest of the world is more important, and that the EU inhibits us trading with the rest of the world. It appears that Germany is not only the most committed member of the EU but is also much more successful in trading with China than the UK.

    What spurious argument will the Europsceptics now produce?

  • rate this

    Comment number 3.

    Two observations:

    1. It is extremely silly for the dear old duffers in the Conservative Party to celebrate the demise of the euro when British banks and exporters will suffer more than most.

    2. EU citizens will not accept endless austerity until bankers are brought to account. That will not happen until there is a proper investigation of what went wrong and why.

  • rate this

    Comment number 2.

    As there is no option to comment on the article 'Q & A - the Greek Debt Crisis' I will say here that this article particularly the 'CAUSES' section is brilliant and much more surprising UNCORRUPTED by Europhile BIAS.
    It does not actually say that the only viable solution is for the peripheral countries to LEAVE THE EURO but that is the inescapable conclusion.

  • rate this

    Comment number 1.

    Why do journos bang on about the collapse of the Euro - it is as probable as that of US$, Yuan or £.

    You journos are the mouthpieces of the gamblers of the hedge funds and the more outrageous abuses of banking - not normal banking that is there to provided a necessary service.

    You journos are backing the gamblers who fix libor and gas prices - just please understand what you are doing!


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