Abstract
Is the current Euro crisis an unfortunate accident or the unavoidable consequence of an ill-fated design? Can the Euro overcome the current crises, and can its management/governance mature to acknowledge its limitations and costs to evolve into a monetary system with lesser ambitions and lesser risks? This is the question posed in this paper.
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- 1.
Germany paid a price for sustained price stability: its growth performance was consistently lower than those of France or Italy since the 1960s. It is thus not clear that a German design of EMU was the best for all members—a point that becomes clearer in the present crisis.
- 2.
Some people argue, like Mallaby, Financial Times, 2011 and patrons of Greek or Italian taverns, that Germany was the big winner as it could sell its wares more easily in monetary union. On its own Germany would have had a revaluation like Switzerland and a lesser current account surplus. This is not economics and also ignores the fact that, for example, despite the revaluation of the Swiss franc the Swiss current account surplus represents 14 % of GDP in 2011.
- 3.
In this paper South means Greece, Italy, Spain, Portugal, Malta and Cyprus. Ireland is not part of it and France could be either way.
- 4.
Silvio Berlusconi, then prime minister of Italy, in vain used to calm markets by pointing to the fact that “restaurants across this happy country are always packed”. This is precisely the point. He should have completed the picture by referring to the capacity utilization of factories and to the investment rate.
- 5.
Angela Merkel won much popular applause for her statement: “We must reestablish the primacy of politics over the markets” suggesting that markets caused the trouble and political leaders are the victims.
- 6.
The surplus countries are often criticized and seen as profiting from the South by running surpluses. This mercantilist fallacy fares well with politicians. My point is that surplus countries are prevented from achieving their desired external equilibrium both inside and outside the Euro area by the rules of the Euro. If , say, Germany was on its own its currency would have appreciated and its external surplus would have shrunk. This argument is often used to demonstrate that Germany would lose outside of the Euro, a popular fallacy, already evoked in footnote 2.
- 7.
Of course, for the present crisis management one cannot wait for changing the treaties which is one of the fundamental problems in this crisis. To advance money first and hope for rule changes later would require credible governments.
- 8.
Apparently, because monetization implies higher inflation rates so the real value of the debt repayment is decreased. Any way investors lose.
- 9.
Here it should be noted that Germany is not any longer among the rich countries of Europe, ranking in 9th position in the EU in terms of per capita GDP. Other countries insisted on special guarantees for their financial involvement or argued that their per capita income was too low to pay up.
- 10.
With an income multiplier between 1 and 2, a deficit reduction by 5 % would result in a real GDP decline between 5 and 10 %.
- 11.
Konrad/Zschäpitz, CESifo, 2011, have computed the cost of a transfer union based on 2007 data with the principle of compensating 50 % of the difference with regard to EU average tax revenues and arrive at an annual cost of 445 billion Euros, of which Germany would have to assume 74 billion. They conclude: “It is hard to believe that Europe could survive the political antagonisms that would be created by transfers of this magnitude”.
- 12.
On 23 November 2011 Germany was unable to auction a Euro 6 billion 10 year federal government bond issue and had to accept a Euro 3.64 billion turnout. Admittedly it was tightly priced at 2 % but still source of widespread market declines.
References
De Grauwe P (2011) Managing a fragile Eurozone, CESifo Forum (Summer)
Dornbusch R (1996) Euro fantasies: common currency as Panacea, foreign affairs (September/October)
Juncker J-C, Tremonti G (2010) E-bonds would end the crisis, financial times (5 December)
Konrad KA, Zschäpitz H (2011) The future of the Eurozone, CESifo Forum (Summer)
Mallaby S (2011) Germany is the real winner in a transfer union, financial times (24 November)
Steinherr A (2010) Greece and the Euro: some unpleasant truths, the globalist (12 March)
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Steinherr, A. (2014). Why Germany Should Leave the Euro. In: Hilpold, P., Steinmair, W. (eds) Neue europäische Finanzarchitektur. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-37868-3_10
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DOI: https://doi.org/10.1007/978-3-642-37868-3_10
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