It is not surprising that in Greek taverns there is agreement that the Germans are the big beneficiaries from the euro and Europe’s South is the loser. To sooth her voters, even Chancellor Angela Merkel never misses a chance to state that Germany benefits from the existence of the euro and that Europe’s fate is tied to the euro.
More surprising is the fact that the FT and its main commentators also propagate that view . This does not make economic sense.
The German reluctance to join EMU was based on the fact that the deutschmark had most of what the other European currencies were lacking: price stability, hence low interest rates, and international currency status. Extending these qualities to the rest of Europe was certainly also a gain for Germany, but the big gainers were countries that never managed on their own to obtain these features.
Interest rates in Italy's financially repressed lira economy, for example, were rarely as low as the current "unbearable" rates. The relative small gain for Germany was, however, matched with the risk that it would not be a smooth ride given that the EU was not an “optimum currency area” by any standard. Hence Germany joined for political reasons and was well aware of the shaky economic side.
Many argue that the Germans gain because they can run a big trade surplus in the euro zone without the large revaluation (like the Swiss) that would have happened if they still used the deutschmark. This misses two points. First, the factual point that the Swiss still operate a current account surplus of 14 per cent of GDP despite the strong revaluation gives them precious terms of trade gains. And Germany before unification had always run current account surpluses despite frequent revaluations.
Second, more importantly, it would be, in fact, desirable for Germany to have a revaluation, as it does not make sense to operate permanent current account surpluses. A real revaluation would help in shifting savings from investment abroad to domestic investment, which clearly would benefit Germany. The savings rate in Germany is not higher than in the rest of the euro zone. Hence a current account surplus of 5 per cent of GDP represents a foreign investment that is not available for domestic uses. One consequence is that German real estate prices have had the lowest Europe-wide increases in the last 40 years. Because of this low domestic investment, Germany's growth has trailed the European average for the past 40 years. The combination of low investment and the integration of East Germany has pushed Germany to ninth in Europe in terms of per capita income.
In the euro zone, Germany is victim to a permanent real revaluation of the deficit countries, due to their higher inflation rates, and German real devaluation. The weakening of the euro due to the precarious situation of its southern member binds Germany into a current account surplus both in and outside of the euro zone. The only way out would be to give up price stability and aim at a domestic inflation rate in Germany above those in the South. This would violate the Maastricht Treaty and German convictions. Hence the euro zone is locked in an unstable equilibrium where surplus countries experience real devaluations producing even higher surpluses next time round.
Another current view is that Germany wins politically by exercising control over indebted countries and dictating their terms. It should be normal that money is not simply transferred without conditionality to any country, and in particular to countries with questionable governments (Berlusconi, Greek family clans). Because it takes time to time to find the right conditions, the real problem of the euro in times of crisis is precisely the lack of leadership. Leadership is more than an open wallet. At best, leadership brings about changes for the better. And this is what Ms. Merkel is trying to achieve.
Germany is not abandoning the euro but let us imagine that it did. Apart from the transition cost what would be the loss? A stronger post-EMU deutschmark? No, on my logic that would be a gain. What about exchange rate uncertainty and currency exchange costs? Why should Germany suffer from these costs if Switzerland, Denmark or Sweden perform without trouble extremely well? Or why, if the euro is such a gain for Germany, has the U.K. not understood that and is pressing to be admitted to the euro zone?
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