Friday, August 23, 2019

"Germany and the Euro"

Following up on "One Euro, One Europe (One Love)"
From Inference Review:

In response to “One Euro, One Europe” (Vol. 4, No. 2).
To the editors:
In his essay, Gilles Dryancour seeks to identify a sustainable solution so that the European Monetary Union might avoid the sad fate of the many previous currency unions. He begins his analysis with Joseph Stiglitz’s suggestion that, in order to lower the value of the euro, Germany should raise wages and accept a higher inflation rate. Dryancour contrasts this with Philipp Bagus’s unoriginal observation that the Latin countries seem to be trying to circumvent the anti-inflationary pressure exerted by the Bundesbank by simply creating a European Central Bank (ECB) that does the opposite.

Dryancour also examines the mercantilist effects of the monetary union. With the euro undervalued in Germany, it is unsurprising that the most powerful economy in the union regularly achieves huge trade surpluses that are likely to create considerable imbalances within the eurozone. Two well-known correlations are apparent. On the one hand, there is the relationship between Germany’s trade surpluses and a currency that is artificially undervalued in the absence of adjusted exchange rates within the eurozone. And on the other hand, the correlation between the failure to improve the productivity of the southern countries and their artificial purchasing power due to the euro. This root cause of imbalances within the monetary union was highlighted by Hans-Werner Sinn quite early on. He predicted that there would be recurring crises unless an exchange rate adjustment mechanism was instituted. By definition, there is no place for a mechanism of this type in a monetary union.1

Dryancour addresses one of the institutional reasons that the imbalances have, so far, failed to destroy the eurozone. The TARGET payment system, which the ECB instituted without prior consultation at a governmental level, has allowed southern European countries to benefit from unlimited and pledge-free supplier credit from Germany. The Bundesbank’s receivables under this system have increased to almost one trillion euros, despite the growth in the eurozone. This is a huge hidden imbalance. These loans from the Bundesbank are held against the ECB yet are unenforceable. In sum, the TARGET system makes it possible to transform a claim from one national central bank against another into a claim against the ECB, whose funds are insufficient to meet the demand.

In his analysis, Dryancour does not draw what seems to be the only logical conclusion: reform is impossible, death certain. Instead, he flirts with the idea that the German state can compensate financially for the economic imbalance. He neglects to mention that fiscal equalization is a source of agonizing and endless arguments in a federal state. The Bavarians will hesitate to pay for Schleswig-Holstein, just as the Dutch will refuse to pay for Cyprus. The notion that the monetary union could be reformed is an illusion. In the absence of reform, there will be no meaningful changes until the Germans find that the current system is no longer working in their interests....

Here is Herr Doktor Kerber's mini-bio at Chatham House.
Apparently he can't hold onto a job.