Germany’s Potential Exit from the Euro Raises Global Reserve Currency Questions
Since the Bretton Woods Agreement in 1944, the dollar has held its position as the world’s preferred reserve currency. However, recent developments in Germany have raised questions about the global status quo.
In the mid-2010s, many speculated that Germany would abandon the euro and reintroduce the deutsche mark. This belief stemmed from Germany’s concerns about being cheated by the European Central Bank (ECB). Germany’s TARGET2 surplus, which represented an excess of German exports to fellow EU members, seemed to be at odds with the exchange of near-worthless government and corporate bonds for newly printed euros from the ECB. Germany had good reasons to quit this arrangement.
Predictions of a German exit from the eurozone were based on the assumption that it would cause the collapse of the euro and make the deutsche mark the preferred unit of trade in Europe. It even threatened the dominance of the US dollar as the global reserve currency. However, these predictions did not come to pass.
One of the main reasons Germany did not leave the eurozone was the fear of the alarm bells it would set off worldwide. Germany’s departure would signal its rise to dominance in Europe, which would cause panic, particularly in France. France would then face a difficult choice between adopting the deutsche mark or reverting to the French franc, knowing that few nations would be willing to hold francs. France’s dependence on internal EU transfer payments, particularly farm subsidies, would also be jeopardized. French farmers, synonymous with the country’s identity, would be forced to reform or face bankruptcy.
Another factor that played a significant role in Germany’s decision to embrace the euro was the absence of independent control over nuclear weapons. Unlike France and the UK, which possessed nuclear arsenals, Germany did not have this crucial leverage in the game for reserve currency dominance. Only nations with large economies that produced a variety of export goods and services desired globally could partake in the reserve currency game. This left the United States as the only contender.
The question arises as to why Germany gave up the deutsche mark and adopted the euro initially. The answer lies in Germany’s desire to reunite East and West Germany. France, who held veto power over German reunification, made adopting the euro a condition for their approval. Germany had to comply.
However, in recent years, why has Germany not attempted to break away from the euro? One theory that applies to all major European nations is the irreplaceable loss of leadership as a result of the two world wars. Germany, along with other European nations, suffered significant military losses, leaving a void in future leadership. The devastation caused by the wars meant that Germany, France, and other major European powers realized the importance of working towards a united and prosperous Europe.
The geopolitical landscape changed when Deng Xiaoping rose to power in China. China’s rise as an economic powerhouse, coupled with its possession of nuclear weapons, posed a challenge to the US dollar’s status as the global reserve currency. Russia, too, saw its future aligning with China after being spurned by Western powers. Both China and Russia sought to break the US’ use of the dollar as a political tool.
The Achilles’ heel of the dollar as a reserve currency lies in the fact that it is a fiat currency, subject to inflation and manipulation by the US political establishment. This vulnerability allows the US to impose sanctions on its adversaries by excluding them from international trade systems.
Russia’s response to US-imposed sanctions has been to develop a new world reserve currency with some backing from gold. The BRICS nations, along with other countries, are determined to break away from the fiat dollar hegemony and establish a gold-backed trading settlement system. These nations plan to announce their first step in pursuing this goal at an upcoming meeting in Johannesburg.
Critics dismiss this development, as the US and the US dollar have been supreme worldwide for 80 years. However, they fail to understand the underlying economics, monetary theory, and international statesmanship. The three destructive concepts that have influenced the US—Keynesian economics, modern monetary theory, and arrogance—will only come to an end when gold returns as the focal point of monetary reform. At that point, the US may start losing friends until it regains its senses and returns to gold-backed trade, honest dealing, and respectful statesmanship.
The transition back to a gold-based system will require new leaders who prioritize these principles. They exist, waiting to be called by the people. This shift will result in a better America and a better world.
The potential exit of Germany from the euro and the rise of alternative reserve currencies mark significant shifts in the global economic landscape. It remains to be seen how these developments will impact the existing order, but they certainly merit further attention and analysis.
