On July 17, German lawmakers gave their blessing for Chancellor Angela Merkel to proceed with negotiations to bail out Greece for the third time in 5 years.

German Sentiment

The decision was not without controversy. Many in the Bundestag along with ordinary citizens have their reservations about giving another rescue package to a country that hasn’t seemed to have learned its lesson when it comes to fiscal responsibility. Merkel’s Finance Minister Wolfgang Schaeuble had even floated the idea that Greece may need to take a break from the eurozone as a possible option to fix their financial woes.

Polls conducted this month show that support for a Greek bailout have reached new lows. Almost half of all Germans demand a “Grexit.” With such anti-Greece sentiment in her country, the Chancellor came down hard on the Greeks both in the media and in the terms of the deal. (For more, see Greece and Germany at Loggerheads as Debt Deadline Nears.)

Many wonder why a country as frugal as Germany allows itself to play safety net for smaller struggling countries in the Europe. Would Germany be better off separate from the European Union?

What's Been Bad for the EU Has Been Good for Germany

The answer is "No," and it has a lot more to do with how the European Union has evolved over the years than anything Germany has done. 

The origins of the EU stem from World War II when it was believed that economic integration among European states would prove as a deterrent for future conflicts. These efforts of coordination finally culminated in 1992 when the European Union was formed. Membership required that “states must ensure inflation below 1.5 percent, budget deficits below 3 percent of GDP, and a debt-to-GDP ratio of less than 60 percent.” With such strict criteria for membership, many countries – like many of those in Southern Europe – needed to tighten their fiscal belts. But that did not happen.

Everything seemed OK in the early to mid-2000s when credit flowed freely from stronger to weaker EU members. However after the financial crisis that hit in 2007, money became less accessible. Those states who benefited from lax EU entry standards found themselves facing unsustainable debt. By the start of this decade, the European Union found itself in a sovereign debt crisis where bailouts – especially Greece  – became the order of the day. Many troubled EU members were also a part of the eurozone which consists of the 19 countries – including Germany  – that share the same euro currency. It's a currency that's built upon the collective economic well-being of all those involved.

Germany, which accounts for about 30 percent of the euro area economy, shares a currency with 18 other countries. Some of these countries' economic failings bring down the overall value of the euro. (For more, see Is Germany Carrying the European Economy?)

These conclusions were documented by the International Monetary Fund (IMF) Staff Report regarding Germany in 2014. The IMF found that for 2013, the value of the euro was not consistent with balanced German trade.

Former Federal Reserve Chairman Ben Bernanke summed up these findings in a piece he wrote for the Brookings Institute this past April:

“First, although the euro… is too weak (given German wages and production costs) to be consistent with balanced German trade. In July 2014, the IMF estimated that Germany’s inflation-adjusted exchange rate was undervalued by 5-15%. Since then, the euro has fallen by an additional 20% relative to the dollar. The comparatively weak euro is an underappreciated benefit to Germany of its participation in the currency union. If Germany were still using the deutschmark, presumably the DM would be much stronger than the euro is today, reducing the cost advantage of German exports substantially.”

Trade Surplus

The euro's weakness in relation to Germany’s economic strength has created a huge trade surplus which benefits the country on two export fronts. First, the currency gives the Germans an advantage in the world's major markets like the U.S. and China by making their products appear cheaper to stronger currencies. Secondly, a weak euro allows German products to be affordable in markets in which their exports priced in deutschmark would be too expensive, for example in some of the smaller markets in the eurozone.

The result is a German trade surplus of about $250 billion in 2014 – which translates to about 7% of its Gross Domestic Product. It's an upward trend since the year 2000 and is one of the world's largest surpluses.

And no one should expect a rebound in the value of the euro anytime soon, as European Central Bank (ECB) President Mario Draghi earlier this year introduced a $70 billion bond buying program that would at least last until September of 2016.

The ECB has entered the world's currency wars, and Germany will be its main beneficiary.

The EU Allows Germany to Be Frugal

Foreign demand is driving the German economy, resulting in an unemployment rate of 4.7%. Exports have allowed Germany to be productive without the need for government spending to spur domestic demand – a policy many outside leaders called for after the financial crisis.

This status quo not only fits into the German fiscal policy belief core but also presents itself as a bully pulpit for the Bundestag in discussing the economic woes or missteps of its fellow eurozone members.

The Bottom Line

Without the EU, Germany would find itself with its own stronger currency and the need to stimulate demand at home. How they would go about this is mere speculation taken from various economic schools of thought. As the past has shown, Germany prefers not to take this path.

In the end, bailouts may just be a necessary evil of a faulty system that's very beneficial to the German economy.

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