The Corner

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The Currency Counted


Fists flying, Die Zeit’s editor, Josef Joffe, comes to the defense of Germany (and its chancellor) against the “Anglo-American über-Keynesians” in the FT here. As so often with Mr. Joffe, it’s a terrific read with some strong points to which the likes of Barack Obama would do well to pay attention. He does, however, sidestep a few key issues.

For example, much of the current debate (at least in theory) is not over the size of the deficits (far too high), but the timing of their reduction, particularly in the context of crumbling economies where (thanks to the single currency) a country-specific devaluation is not available as part of the rescue package. There comes a point—already reached in Greece and, quite probably, elsewhere in the euro zone’s periphery—where draining domestic demand will increase rather than decrease the deficit. Whether Germany, the Dutch and others in the euro zone’s virtuous north should be expected to keep funding these deficits is a different question altogether.  

Mr. Joffe also turns his attention to the suggestion (put forward in this case by Niall Ferguson and Nouriel Roubini in an article in the FT last weekend that I discussed here and here) that Germany’s prosperity owed a great deal to monetary union, “the euro having given German exporters “a more competitive exchange rate” than the Deutsche Mark would have.”

 Mr. Joffe prefers to note that:

 “When the euro was born, it fetched $0.85; last year it climbed to $1.49. Yet German exports boomed. The moral of this tale is competitiveness was encouraged at home through labour market, tax and welfare reforms – measures that Club Med refused to implement.”

There’s no doubt that the euro has strengthened against the dollar in recent years, but the foreign-exchange rates cited by Mr. Joffe merit a closer look. The $0.85 dates from the euro’s trough between (roughly) late 2000 and early 2002. That said, at the time of the single currency’s launch (on January 1, 1999, three years before the introduction of euro bills and coins), it bought around $1.19. That contrasts with nearly $1.30 at the end of 2011 or an average (source: Bloomberg) for the whole period of approximately $1.20, a rate only very slightly higher than the euro’s starting point.

It’s also worth pointing out that if Germany’s currency had been the Deutsche Mark rather than the euro, it would likely have been considerably stronger than the euro eventually turned out to be.

Perhaps more importantly still, Mr. Joffe does not address the fact that monetary union has effectively meant a very substantial (if concealed) German devaluation as against its competitors and customers within the euro zone.

None of this is to deny that Germany is also reaping the benefits of the reforms that Mr. Joffe rightly mentions. It is, but the currency helped too . . .