All pain, no gain for Germany

March 7, 2013

By Laurence Copeland. The opinions expressed are his own.

Whenever the question of the future of the euro zone comes up, you can always rely on someone (often a German) to say something like “Yes, of course the Germans don’t like having to foot the bill for the weaklings… but at the same time, they do get enormous benefits from having a fixed exchange rate. I mean, just look at their trade surplus. All those Mercs and BMW’s you see in Milan and Athens and…”

This argument is utter nonsense, and the economists especially ought to know better.

Consider what they are saying. In the end, it is worth the Germans bailing ClubMed out – directly, as it has done whenever Greece faced default, or indirectly with euro bonds, as they are being pressured to do in future – because that will enable the Southern Europeans to carry on “buying” the products churned out by Germany’s redoubtable export industries.

But since the Greeks et al will essentially be buying their Porsches with loans which, to the extent that the debts are nationalised, they can never be made to repay, the cars and equipment supplied by Germany are essentially gifts. They can hardly be called exports at all, since they are not sales to the rest of the world. Whichever way you look at it, they are simply international aid-in-kind. They are not exports any more than the food and medicines distributed as bilateral aid to impoverished African countries.

You may think this argument is some kind of intellectual sleight-of-hand, on the grounds that Daimler-Benz and BMW still get paid for the cars they deliver to Greece. But this is simply pass-the-parcel. Sure enough, the German exporter gets his euros, but the euros come via a Greek bank from the central bank in Athens which in turn has to draw on its so-called Target2 account at the ECB in Frankfurt – which is, of course, overdrawn. The Greeks and other troubled economies are no more likely to repay these overdrafts than the bonds which they have twice “restructured” (i.e. defaulted on).

In the end, therefore, the idea that Germany should preserve the euro zone so as to protect its exports to its neighbours is simply a proposal that its taxpayers and savers should permanently subsidise its export industries – which makes sense only to those who work in one of those industries and, ideally, pay no German taxes, and of course to the Greek Porsche driver.

In any case, economists ought to recall the fundamental truth that fiddling with the value of your currency – keeping it too high or too low relative to its market value – can create all sorts of real effects in the short run, but washes out altogether in the long run of anything over about 5 years. The reason is that, since a country with an undervalued currency is ipso facto overcompetitive, it tends to sell more abroad than it buys, in the process sucking in payments from the rest of the world and swelling its own money supply. The inflow increases demand in the surplus country and tends to push up its price level, thereby eroding its competitive advantage and reducing its trade surplus.

Why has this not happened in the euro zone?

Germany’s trade surplus with its neighbours ought to have increased Germany’s share of the total quantity of euros, but instead of allowing this to happen, the euro zone system effectively blocked this self-equilibrating mechanism, by buffering each country’s surplus or deficit in positive or negative balances at the ECB – the notorious Target2 balances. The result was that Germany’s surplus never translated into domestic inflation and its competitive strength became permanent.

Of course, it makes sense for European politicians to claim that somehow Germany is getting something in return for being the eternal sugar-daddy, and they may well manage to sell this story to the German electorate. I simply worry that the longer it takes for Germans to realise their pockets are being systematically picked, the angrier they’ll be when they do finally wake up to the fact – and their rage won’t necessarily be directed exclusively or even mainly at the guilty politicians.

Emblems of VW Golf VII car are pictured in a production line at the plant of German carmaker Volkswagen in Wolfsburg, February 25, 2013. REUTERS/Fabian Bimmer

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