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Germany and the Euro

by Metatone
Mon Apr 16th, 2012 at 05:37:44 AM EST

Edward Hugh of AFOE submitted an essay for the Wolfson Prize.
You can access the full version here, it ranges far and wide in an attempt to address the question set by the prize, which is about how a country might leave the Euro.

For me the most interesting part was his assessment of "what did Germany gain from the Euro?" This is something I've had some thoughts about, but didn't have time to investigate. To me it's an essential topic in trying to disentangle the claims of "virtue" and "laziness" that have been bandied around in discussion of the Euro crisis.

front-paged by afew


Starting on p19 of the PDF (accessible from the above link), Hugh first outlines the common viewpoint about Germany and the Euro:

For example Lombard's Chief Economist Alexander Dumas, who says that `what you're actually dealing with here... is a German population which has had a rotten deal - and that's why they're all so angry' (Dumas, 2011).

The key element of a counter-argument is here:

In a couple of recent and highly stimulating essays two Citi economists, Nathan Sheets and Robert Sockin (see Sheets and Sockin 2012a and 2012b) argue that German trade performance since the introduction of the euro has been significantly boosted by having a currency which was valued significantly below the valuation it would have been subjected to had the country still been using the Deutsche Mark. As a result of this systematic undervaluation Germany's external surpluses widened significantly, led by rapid export growth.

Sheets and Sockin use a simple econometric procedure to estimate that that European monetary union, coupled with the country's extraordinary wage restraint, has resulted in a real effective exchange rate for Germany that is currently 15 to 20 percent lower than the one which would have prevailed if Germany had had its own floating currency. And naturally the weaker real exchange rate has provided a significant windfall for Germany's export sector.

They thus find that the lower German real exchange rate has lifted the country's nominal trade surplus by roughly 4 percent of GDP (or €100 billion) annually and the real trade surplus by about 3 percent of GDP annually. In addition, since the outbreak of the Greek crisis, Euro weakness has meant that German exports have been in an almost uniquely privileged position to benefit from strengthening global demand in the emerging market economies.

He continues, with a comparison to Japan and suggests that German policy makers should be very wary of assuming that the currency rise that would follow leaving the Euro would be easily controlled.

To me this is a critical piece of any real discussion of the crisis we are living through. The "magical thinking" about exports as an economic panacea stems from ignoring exchange rates.

(As an aside, this has bothered me deeply in the Euro debate because it is a replication of the mistakes of the UK, where the City of London was subsidised by exchange rate policy at the expense of UK manufacturers... but debates always centre on "competitiveness.")

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For Katrin and others who may wonder. I lived and worked in Germany for a while and I retain a great affection for the society and people that I lived amongst.

But the parallel with the City of London is clear in my mind and it makes me very sad and frustrated. The lack of understanding around this issue is going to be the end of the Euro and has already seen the end of European solidarity...

by Metatone (metatone [a|t] gmail (dot) com) on Sun Apr 15th, 2012 at 10:42:20 AM EST
The dramatic situation of the current predicament is that blame (yes, blame) can be rightfully ascertained to all the participants involved.

There is a grain of truth to accusations against the Germans, but also against the Greeks, the Portuguese, ... . This irrespective of the obvious issues with the finance sector and the EU structure.

My point is: it is very easy to make this a blame game. It is very easy to create an anti-German (or anti-Greek) narrative.

Now: as things are going to get worse before they get better how much time until we get strong populist-nationalist movements? The only thing stopping this is that the moneyed elites are currently interested in the "cosmopolitan" narrative: globalization has been to their favour - therefore there is little money support for rabid nationalism.

Interestingly, until now, I think the PIGS are more keen on accepting their part (especially because of neo-lib propaganda - which is playing this quite well) than the exporting lands. But as the crisis deepens and real despair sets in (we have seen NOTHING yet), this might change: Hunger, death, misery might have such side effect.

The whole thing is panning out for a repeat of the 20th century.

by cagatacos on Sun Apr 15th, 2012 at 01:48:26 PM EST
[ Parent ]
Hugh being Hugh, demographics comes into his essay at many points. I don't know if I agree with his diagnosis of German wage restraint, but I'd be remiss not to post it:

Essentially mature economies become dependent on export expansion for growth either if they are in the aftermath of a credit driven consumer boom (and hence deleveraging, weakening domestic demand) or their population median age rises above a certain point (yet to be adequately calibrated) meaning that the demand for consumer credit no longer expands as the balance between savers and borrowers shifts across cohorts and across the life cycle. Hence Germany's wage adjustment is not something exceptional, or even reversible, but forms part of a natural process to reinforce competitiveness in the export sector of a society with a large elderly population and hence generate GDP growth.
by Metatone (metatone [a|t] gmail (dot) com) on Sun Apr 15th, 2012 at 10:43:26 AM EST
Hugh appears to be convinced that the sun rises in the morning for demographic reasons ...
by Colman (colman at eurotrib.com) on Sun Apr 15th, 2012 at 10:48:09 AM EST
[ Parent ]
Apparently, it's the economic weight of all the old people in Japan that pulls the Earth around in that direction and thus, the Sun rises in the East...
by Metatone (metatone [a|t] gmail (dot) com) on Sun Apr 15th, 2012 at 10:55:38 AM EST
[ Parent ]
West Germany was an export-oriented economy from the 1950s and has not ceased to be. It would be interesting to see the boom-hangover or demographic shift explanation for that.

Further, is Hugh positing that no other Eurozone country is experiencing population ageing, and consequently the "natural process to reinforce competitiveness"? Only Germany?

by afew (afew(a in a circle)eurotrib_dot_com) on Sun Apr 15th, 2012 at 11:09:33 AM EST
[ Parent ]
All european countries are experiencing aging, but Germany is at the forefront.

I don't expect demographics to explain everything, but they have a strong influence, and more so when coupled with social institutions. At a minimum that's how I see the situation in Spain with regards to the regional differences.

res humą m'és alič

by Antoni Jaume on Sun Apr 15th, 2012 at 05:08:33 PM EST
[ Parent ]
Demographics have an influence, but it seems most unlikely that it is the influence claimed by Edward Hugh.

Taking the percentage of over-65s in the total population (Eurostat, 01/01/2011) as a proxy for ageing, the leading Eurozone countries are:

  1. Germany...20.6%
  2. Italy..........20.3%
  3. Greece.....19.3%
  4. Portugal...18.2%

If a "natural" process of pressure on wages caused by ageing were at work, one would expect to see Italy, Greece and Portugal among the most "competitive" Eurozone countries.
by afew (afew(a in a circle)eurotrib_dot_com) on Mon Apr 16th, 2012 at 02:25:05 AM EST
[ Parent ]
And in the longer run, as China's one-child policy results in lots of elderly Chinese, the most competitive countries will be in sub-Saharan Africa (along with Saudi Arabia).....
by gk (g k quattro due due sette "at" gmail.com) on Mon Apr 16th, 2012 at 02:40:23 AM EST
[ Parent ]
It's interesting how he doesn't develop the other factor that he himself mentions: the structure of consumer credit.

He posits that demography changes the balance between savers and borrowers, but doesn't explicate that this balance may be different in different places due to local culture and regulation. Further he doesn't account for the fact that in a Eurozone of free capital movement, savings and borrowings can and did have non-local effects...

by Metatone (metatone [a|t] gmail (dot) com) on Mon Apr 16th, 2012 at 03:00:35 AM EST
[ Parent ]
This excludes by (unmentioned and undiscussed) assumption the option of simply printing money for adequate fiscal policy.

(It's also bogus for a variety of other reasons, but that's the main one.)

- Jake

If you only spend 20 minutes of the rest of your life on economics, go spend them here.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Apr 15th, 2012 at 04:03:34 PM EST
[ Parent ]
I fear by posting the "demographic" aside, I've derailed discussion in that direction...
by Metatone (metatone [a|t] gmail (dot) com) on Mon Apr 16th, 2012 at 05:45:15 AM EST


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