Germany Reaps the Euro's Reward

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Many German voters have balked at the cost of rescuing Greece and, by extension, the euro. Better, they argue, to return to the old deutsche mark and have thrifty Germany stand on its own than stick with the failed experiment of monetary union, especially union with undisciplined players like Greece, Spain, and Portugal.

Yet rising share prices and foreign sales at such German blue chips as BMW and Siemens (SI) show why it may be worth keeping the single currency even as voters complain. The overall drop in the euro this year has given German exports a nice boost by making them cheaper. Moreover, the introduction of the euro in 1999 forced German companies long ago to lower labor costs and become even more competitive.

The payoff from all this pain is clear: German unemployment has dropped to 7.7 percent, near an 18-year low, and the DAX, up more than 4 percent since January, is the euro zone's best-performing major stock index this year. "Talking to companies, you get the feeling that they are really quite positive about their earnings and expectations," says Stefan Moeckel, a fund manager at WestLB Mellon Asset Management in Düsseldorf, which oversees some $50 billion.

http://www.businessweek.com/magazine/content/10_30/b4188013376148.htm

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It's not entirely clear that an artificial boost to the economy from an undervalued currency is a good thing in the long run though.

People basically said the same thing about Ireland 5 years ago and look how that ended up.

Ireland was running a current account deficit, so the currency obviously wasn't undervalued.

[Beet]

It's not entirely clear that an artificial boost to the economy from an undervalued currency is a good thing in the long run though.

People basically said the same thing about Ireland 5 years ago and look how that ended up.

Ireland was running a current account deficit, so the currency obviously wasn't undervalued.

If you have common currency value and a common interest rate for the entire euro area it is going to be too strong/high for some countries and too weak/low for some countries.

In the short run it will seem nice to be on the weak/low end of things but it isn't necessarily good in the long run.

As regards Ireland specifically, don't you think that the high investment in Ireland would have driven up the value of an independent Irish pound? Though I think I understand your point, I'm not convinced that a current account deficit/surplus in itself proves that a currency is valued one way or another. In the case of Ireland I think the capital account has been the driving force and their capital account surplus, IIRC, was largely an effect of their currency being undervalued.

I suppose the high inflation created by these types of policies would induce lower exports though.

It's hard to guess what would have happened in the 2000s if the Irish pound had been independent. While high capital inflows would certainly have put upward pressure on its exchange rate, it is not clear that its absolute value would have been more than the euro. What is clear is that there were capital inflows into Ireland, that Ireland consumed all of that capital and more (as evidenced by the current account deficit), and that there was a property bubble in Ireland. If what is typical of bubbles followed by currency crises occurred, then artificially cheap consumption and capital inflows both helped to feed the bubble, so that if Ireland's currency had been less valuable, it would have been more difficult for Ireland to consume and more profitable for Ireland to produce.

Regardless, that is not the case in Germany today. A unified currency only means that some countries' currency and interest rate will be wrong in the short run. In the long run the effect is to equalize labor rates and economic competitiveness. I am wondering what you think the disadvantages for Germany are of having a favorable currency situation?

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But didn't Sweden also devalue the krona in 1992? And yet Sweden has never had another crisis as bad as the early 90s.

You are assuming every export induced boom leads to a property bubble. Not so. Some countries just devalue and grow without a bubble for a long time. Other countries might impose austerity and recover that way. In Germany's case, as opebo has pointed out, it is not really facing either inflation or a bubble. If they floated they would end up like Japan. The d-mark would shoot up and the central bank would constantly have to intervene if it wanted to protect exporters. I am not necessarily arguing for a single currency in general, as I agree a free float has its advantages. In the European situation though, since they already have adopted a single currency, in the present situation I do not believe that exiting the currency would be beneficial for any of the parties involved.

[Beet]

But didn't Sweden also devalue the krona in 1992? And yet Sweden has never had another crisis as bad as the early 90s.

You are assuming every export induced boom leads to a property bubble. Not so. Some countries just devalue and grow without a bubble for a long time. Other countries might impose austerity and recover that way. In Germany's case, as opebo has pointed out, it is not really facing either inflation or a bubble. If they floated they would end up like Japan. The d-mark would shoot up and the central bank would constantly have to intervene if it wanted to protect exporters. I am not necessarily arguing for a single currency in general, as I agree a free float has its advantages. In the European situation though, since they already have adopted a single currency, in the present situation I do not believe that exiting the currency would be beneficial for any of the parties involved.

Sweden didn't devalue in 1992 - we let the krona float and it depreciated. It couldn't get under-valued after that since the price was set on the market*

So your argument is that the krona was undervalued before 1992 but as soon as you allowed it to float at the market price it depreciated? Doesn't that suggest the krona was overvalued before 1992?

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There is no 'right' value for a currency. Sure, if West Virginia, for example, had its own currency, it might be worth less than the dollar, but then the same thing could be said of Mingo county, West Virginia, or Williamson, Mingo county. Political entities can always be broken further and further down. This question is inherently subjective. If one could design 'rational economic regions', they would not match countries at all, as your own example demonstrated. The euro is as good as any other. The fact that there are long term economically depressed areas within larger currencies does not prove anything, because there are long term economically depressed areas that have their own currencies. I mean look at Zimbabwe. There are clearly other factors involved. And you haven't really been able to isolate the currency factor as being a negative one.

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And you haven't shown it.

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Well of course a boom created by an undervalued currency will end once the theoretical market value of the currency falls into line with the peg value. But there's nothing wrong or necessarily painful about that-- it's tautological in the definition of the boom that we've defined. If the boom goes on beyond that point, it's another story. But it doesn't have to.

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Well yes, and they might not have had the same incentive to improve competitiveness internally if their currency had just depreciated. Once again, I have no a priori preference between a free float, managed float, or peg. Each has advantages for different situations. But in the long run, a currency is just a measure of exchange. In the long run, it doesn't carry with it any inherent economic force. Overvalued pegs will be met by internal devaluation. Free floats will be met by external depreciation. The end effect is the same.

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I think that's fair enough. I thought you were arguing for a specific monetary policy, but the conclusions here are pretty uncontroversial, as you have said. I didn't mean to appear irritated. It's just being argumentative by nature.

Overall to sum up my position in this discussion it would simply be that there is no one currency solution that fits all situations, and it seems as if this is compatible with what you are saying. One has to look at the particular case. In the case of a pegged currency or currency union, like any policy there are costs and rewards. Market economics tends to be self balancing.

As a bit of a sidenote, before following any policy, the most important thing is that one has to think it through thoroughly and spell out exactly what you expect to happen: A, B, and C, and be accountable for this. Too many people I see these days want to do X policy simply because they think Y policy is not working, and X policy is the opposite of that, or because they feel that X policy is in their short term interests without really thinking through what would eventually happen. But that is beyond this discussion.

By the way Gustaf, are you studying to be an economist?