by Andreas Hoffmann
The euro benefited Germany more than others in the zone. Germany exported and won, the others had to import German goods and lost (link). This seems to be a consensus in the world of politics. The second consensus is that a bail-out package for the euro problem children or even euro bonds are necessary to safe this euro. And obviously without this euro, there would be no EU.
The combination of the two arguments is used to convince the German parliament and public of that the bail-out packages are necessary. Just recently the KfW state bank jumped in to lobby for the bail-out with a study that suggests that Germany benefited a lot more from the euro. Therefore, it shall do whatever to stabilize the other counties and the euro (link). This is the very state bank that transferred 350 million euro to Lehman brothers on September, 15th 2008, when Lehman’s failure was no surprise anymore.
I am sure the bail-out will come, whether the public is convinced or not, unless Richard Sulik’s SAS and the Slovakian parliament blocks it. But I do not want to discuss the problems and necessity of the bail-outs here.
I wonder about the argument that Germany benefited more than others from the euro. Where does this come from? Obviously a perfect ex-post evaluation of whether Germany would have been worse or better off without the euro is not possible. And yes, since the end of the financial crisis and beginning of the European debt drama, the German growth performance has been exceptional. Yes, employment reaches a 19 year peak. And yes, since the introduction of the euro, the German trade balance has been positive (link). But this is not the full story:
Until the mid-90s, Germany’s share of exports in the euro area was a lot bigger. Then the deficit-financed reunification boom caused excessive wage increases and large public deficits. This deteriorated a part of the competitiveness of the German economy (link). The country was in crisis and unemployment soared. From 1996 and 1998, interest rates of the periphery countries converged to German interest rates as the introduction of the euro was anticipated. Given higher wages and the loss of the comparative advantage of being a low risk and interest rate country, investment in Germany was less profitable relative to the rest of the EU.
Now, EU capital market integration resolved the Feldstein-Horioka puzzle: because expected returns were higher in the periphery, German savings were reallocated to these economies. They financed investment booms that contributed to high GDP and wage growth. The euro did not make the German economy competitive but fuelled investment in the economies of the periphery. With sluggish investment, in Germany unemployment rates reached 11 percent. Growth rates were the lowest in the EU.
From Böhm-Bawerk we know: the capital account dictates the current account. Thus, it is no surprise that the reallocation of German savings to the EU periphery was followed by an increase of exports relative to imports. However, while the current account turned positive, the differences in growth rates did not cause a rising share of German exports as percentage of intra-European exports since 1996. Until 2006, the trade surplus was hardly a sign of competitiveness due to the euro – as is suggested by many. Instead, the import share further dropped with sluggish investment in Germany. Therefore, to regain competitiveness, authorities of the Sick Man of Europe tried to cut deficits and employees had to wait for rising real wages for almost 10 years. It is hard to explain why wage austerity and unemployment are benefits from the euro.
Only after a painful internal devaluation restored the competitiveness of the German economy, in 2006 investment picked up and unemployment fell. The export surplus started to narrow and Germany’s lost decade came to an end. But during the financial crisis, German GDP fell more than that of most economies as losses were made in the US and the EU periphery. The savings were mal-invested and capital destroyed.
The events of the debt crisis finally set an end to the excessive private capital exports to the periphery. The risk of investment in these countries is not ignored anymore. Now, politicians have trouble to finance the state budgets that relied on lower interest rates. On the contrary, with the return of the risk premiums, savings are more than before invested in Germany. In a way, the crisis restored the pre-1996 situation when the periphery was seen as risky. Therefore, the German economy booms. Now public transfers shall restore the confidence in the periphery markets. Perhaps Germany is a better position than in the 2000s as wages are more competitive. But transfers may also redirect investment funds to the old beneficiaries and drive the economy back into the crisis.
With the exception of the last two years, the German economy can only be argued to have benefited more than others from the euro if you believe a trade surplus is something fundamentally good. But then, the Japanese economy was doing great in the 1990s.