And there's a political view: what use is mercantilism if it consists in seeing your customers as the opposition, and clubbing them to their knees? (Your mileage may vary there too).

The Germans would have to be damn fools to go back to the costs and hassles of cross-currency activity.  If nothing else, their food prices would rise as there is no chance in hell - AFAIK - that the Danes and Poles would prefer the DM over the Euro, implying the German consumer would end-up paying for the costs of cross-currency transactions for both the importing and exporting companies.  

Politically, European stability, by that I mean "not shooting each other," stems from the Germany/French Post WW2 alliance.  Germany withdrawing from the Euro would certainly cause 'tensions' in that alliance and, to an extent I cannot comment on, put that alliance in doubt.  

Merkel & her band like to pretend they are oh so fiscally responsible but it's been demonstrated elsewhere on ET that's a lot of malarkey.

All of which leads me to suspect Merkel & Co. are playing some kind of Game.  What Game and Who it is directed to/at are questions I defer to those who have greater insight.

No one could have predicted

Appart from Merkel telling the German Parliament that countries which persistently break Eurozone budget rules should be expelled as long as their name is not Germany, Schäuble wants to use hedge funds allegedly bringing down the Euro exchange rate against the dollar as bogiemen to resurrect Stasi 2.0

The brainless should not be in banking -- Willem Buiter

However, what role does "Germany" (as in the German government) really play in this? Did the German government pass laws forcing Germans to build good cars and save money and not spend it all and get all indebted? No! That is what is, IMHO, missing in this whole discussion. The Chinese government greatly influences the economy, but what specifically does "Germany" do or rather what did "Germany" do? Can someone please explain??? Thanks!

1. they run a trade surplus
   
2. they run a budget deficit
   
3. they go to unconstitutional lengths to cut down their welfare state and they keep real wages stagnant

If so, the vaunted "savings" of surplus countries will prove to have been illusory: vendor finance becomes, after the fact, open export subsidies.

That line is worth a thousand words.

Think about it. In a commonsense world, trade requires reciprocation. But, in a multilateral world in which money is treated as a commodity, that disappears. The problem is that the value of money depends upon its ability to be exchanged for items of actual use value. So when the stock of money increases (through "vendor financing") against the stock of items of use value, the real value of money falls.

Now the trick of "vendor financing" is that allows this inflation to be obscured, because it is the source of drops in the price of exported items.  But, in the end, if buyers default, that vendor financing becomes nothing more than export subsidies.  

What the buying states give the exporters in exchange for goods is nothing more than promises, e.g. money.  So that the principal export business of the buying states is making money.  And the way that they do that?  The expansion of the financial sector against the real economy.

Eventually that has to hit a wall, and in the end that means the exporting states end up without their cash surpluses (but have developed the industrial base to make items of value) and the buying states get the goods they bought for "free" (but really at the harsh cost of the destruction of their industrial bases.)

The system is brought into equilibrium.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

This battle of wills is rooted on every front in domestic politics, plus a collective inability to recognize that our current version of globalization is no longer workable. But we appear likely to test the current system to destruction rather than come up with less drastic ways out.

Edward Harrison, who was a national security analysts before he turned to economics, discusses this in a recent article in Credit Writedowns:

Can external pressure precipitate change in a command economy like China?

....

So, as Americans look to threaten to punish China for China's protectionist exchange rate policy, we should all understand that these threats will have no effect.  The Chinese will not do anything because of threats. More likely, they will dig in their heels. The Telegraph's Liam Halligan has it right when he says:

    When it comes to China, the West needs to face the truth. The more America calls for China to revalue the longer Beijing will take to do it. Chinese politicians are as unlikely to buckle in the face of Western pressure as their Western counterparts would be given a tongue-lashing from Beijing.

    China's government is petrified of social unrest. Given the importance of the export sector for continued high growth and jobs, this again makes it impossible to Beijing to be seen yielding to pain imposed by the West.

What is more likely to occur is that American politicians, pressured by the upcoming mid-term elections, will create binding legislation to retaliate against China for their undervalued currency. China will not budge - in part out of pride and in part out of need to prevent a hard landing. As a result, the binding legislation will become operative and a trade war will ensue.

For more on how a trade war would affect the global economy read Michael Pettis' piece How will an RMB revaluation affect China, the US, and the world?. He notes that surplus countries like China have the most to lose and feels that the short-term losses for the U.S. will be less. I agree that surplus nations have the most to lose. But I disagree about the short-term effects on the United States; any economic shock to the United States will tip into a double dip recession, precipitating higher unemployment, a renewed meltdown in the financial sector and the attendant deleveraging. That is very bearish for equities, I should add. Moreover, the Chinese would make their UN Security Council veto work and stymie any efforts the U.S. makes toward controlling Iran. I see a lot more risk in a Chinese trade war for the United States than Pettis.

This is what I have labeled Murder-Suicide in Chimerica. But, I believe this could be where we are headed -  now more than ever.

China, Iran and Fair Trade -- Seeking Alpha

China looks to be the next hurdle on President Obama's busy schedule.

Concerns about China started the market lower this week, before the Fed relief rally eventually stymied the decline Tuesday. The China threat is no surprise to "The Greek," though, as we have been warning about this pending trouble for some time now. Earlier this year we relayed these thoughts in our article entitled "Obama's Financial Regulation...":

My response...

China, Iran and Fair Trade -- Seeking Alpha

It's the Energy, Stupid.

For 100 years the primary aim of US foreign policy has been energy security. Why should we think China is different? It differs only in its methods.The Chinese have always been inward-looking and have despised foreigners: the Chinese Wall indicates the lengths they will go to secure their borders from the barbarians.

In my view a seminal moment in world history - I call it a 'Suez Moment', analogous to the way the US pulled the economic plug on the British Empire - was in or around early 2007 in Iraq.

When I read in the FT in June 2007...

lists.econ.utah.edu/pi...

...that the Chinese had revived a Saddam era contract I knew that the world had changed. That, for me, marked the end of the US empire.

Anyone who thinks that Iran will be attacked by the US or the Israelis does not understand the new bipolar China/US relationship. The Red Line for China is anything that puts their energy supplies at risk - attacking Iran would do just that, in Spades - End of Story.

Otherwise, the Chinese are quite happy to let the US expend thousands of lives and hundreds of billions of dollars to keep the world safe for their mercantile state capitalism. But in truth, both sides know that in a world of finite resources this is not sustainable even in the medium term. They are like two drunks holding each other up.

As for Iran, I've probably had more high level contacts there than most in the last couple of years, including the OPEC rep; heads of state corporations (including NIOC, which equates to Gazprom in terms of importance); leading parliamentarians and so on.

They actually think the US sanctions policy is either dumb or insane. In the aftermath of the Lehman meltdown they were laughing at the fact that US financial sanctions had the perverse side-effect of insulating Iran's economy from contagion.

The last time I was there they couldn't believe that the US was pushing for gasoline sanctions which would enable them to put up gasoline prices, cut their huge subsidies, and blame the Great Satan for it. It would also make fortunes for the IRGC and Bonyads who have a lock on contraband - but they didn't mention that.

Counterintuitively, the best strategy the US could follow is to pour investment into Iran. 70% of Iranians are under 30 and most of them want the lifestyles you have. The current regime is increasingly an oligarchy rather than a theocracy, and is reminiscent of the Russian post-Communist phase. But I doubt whether they are capable of keeping control of a Knowledge economy.

If all the countries in the world were to become net exporters, to whom would we export? The Klingons?

"Ce qui vient au monde pour ne rien troubler ne mérite ni égards ni patience." René Char