Following on recent posts on the Greek balance payments I ‘d like to examine one unintended consequence of the OMT. As long as they are successful, they should be bullish for the Euro exchange rate since they will reduce tail risks of Euro breakup. An appreciated exchange rate would create pressures on export led recovery, especially since during the last 12-months the Eurozone current account has reversed by an amount equal to 1% of Euro GDP. In such a case it is interesting to determine who will be the major winners and losers:

 

The above are Real Effective Exchange Rates with 35 industrial countries (outside the Euro) from the Ameco database, calculated based on ULCs (2000 is the base year). It is clear that most of the periphery, with the exception of Italy, will have returned to 2000 levels by the end of 2013. Compared to 2010, the change is rather impressive for certain countries. As a result, even an appreciation of the Euro will not be catastrophic as long as world demand increases by a healthy amount. On the other hand, Germany will only be able to maintain its current REER.

Furthermore, the brutal internal devaluation in the periphery has led to a structural change in the German foreign trade: Its trade surplus is now only towards the extra-EU world with the intra-EU surplus projected to close completely in 2013:

 

As a result, Germany’s main source of growth is exposed only to world demand and is not insulated through low ULCs. It’s highly possible that an appreciated Euro will hurt its exports and lower its growth during 2013. Its primary budget surplus is projected around 1.5% of GDP while lower interest payments will lower net government demand further (from -0.9% net lending in 2012 to -0.7% GDP). If Draghi is successful, Germany could risk a recession next year.