Germany’s Chancellor Angela Merkel, excoriated the US Federal Reserve for its latest program of bond buying, dubbed QEII, equating it to a mercantilist monetary policy that attempts to boost exports by devaluing the dollar.  And so it is.

As a mercantilist response to the Fed, she should well love the festering problems of Greece, Ireland, Portugal, Spain and Italy in the EU.  Every time an EU member’s fiscal situation blows up, the Euro plunges relative to the dollar, and every time the Euro plunges relative to the dollar, Germany’s export-driven economy hums.  Greece’s problems in May and June yielded a Euro crash vis-a-vis the dollar, and German economic growth, fueled by cheap Euros, clocked in at a 9% annual pace in the quarter.  9% annual growth is very rarely something that a fully-modernized and mature economy such as Germany’s ever sees.

If the EU and the Euro collapsed, and Germany had to go back to issuing Deutsche marks, it would have to suffer the indignities of having its currency valuation match its economic strength.  Export-led German growth would suffer from a strong Deutsche mark.

As it stands, Germany is weakened a bit by the necessity of helping bail out its cohorts in the EU, but will enjoy another quarter of spectacular growth because of Ireland’s, et al, weakness.

The real loser in all this is the US Federal Reserve’s strategy of trying to cheapen dollars to ignite growth.  So long as the  EU falters, the dollar will remain strong, preventing, or at least substantially muting, the inflation that the Fed so fastidiously believes will provide the answer to US economic doldrums.

But the EU economic dogs suffer as well.  If Ireland, Greece, Spain or Portugal had their own currencies, each would likely have cheapened a good deal more than the Euro.  Relatively strong economies like Germany keep the Euro from declining enough to provide much benefit to the weak, even as the weak economies Germany is tied to through the EU keep the Euro from rising, benefiting the strong economies even more.

In the end, the EU will have to become a fiscal, as well as monetary, union, if the Euro is to have any chance of surviving.  Which, given the amount of sovereignty each EU state would have to yield to Germany,  is hardly likely.   A monetary and fiscal union of European states would accomplish today what the Third Reich never quite could:  German hegemony across the continent.