Do you have articles about this "benefiting from the Euro" thing? Being German myself, I still don't understand what they mean - and btw this seems mostly to be an accusation by the struggling European countries, not "most German economists"?
So how does it work - how do we profit from the Euro, on the cost of other EU countries?
1) Cheap currency:
"For German companies, the sinking euro acts as a kind of crisis buffer. While it reduces demand for German products within the euro zone, these make up only around 40 percent of the country's exports. But for the rest of the world, a weak euro means cheaper German products, which means they're more competitive."
2) Cheap credit:
"But recently even interest rates on German bonds with longer maturities have decreased significantly. The federal government is saving a bundle. The reason for the windfall? Amid the ongoing euro crisis, Germany is one of the few borrowers that are still regarded as a safe haven. Many investors would rather lend the government money at bargain-basement rates than risk losses."
3) Inability of other countries to (quickly) adjust given single currency constraints, leading to, for example:
"As mass protests form in Spain due to high unemployment among young people, Germany is benefiting from an influx of new skilled professionals. An increasing number of southern Europeans looking for work are heading north to prosperous Germany."
Germany is and was always a strong export oriented nation with our main-markets being in the direct vicinity. Before the Euro many of those neighbors hadn't had the economic lending power to build up their infrastructure and buy german goods.
With the introduction of the Euro these countries could suddenly lend money on the international markets with the support of the german rating, and spend that borrowed money to a large degree in Germany. (Greece is still buying German tanks...)
tl;dr of the tl;dr:
Germany is rich because other countries bought our stuff with money they could lend because of the trust the Euro had because of Germany.
Does it really make sense to think about Germany as a separate entity from the rest of the Euro Zone? Economically, I think Germany is more like the center of a huge country with Spain and Greece being the poorer provinces... It is a very strange situation caused by too diverse countries having the same currency.
Does that question even make sense? Does it make sense to even consider countries - after all, they are all just provinces in the world? Of course everything is connected. But Germans don't make the politics in Greece or Spain.
OK I get that, but won't that backfire in a big way? It's happening right now, I guess... Still, I don't really think Germany can be blamed. Unless you think of the "weaker" countries as children who can't take responsibility for themselves. But why would Germany be smarter?
I think overall we are just lucky atm (or were lucky for a while...).
"Still, I don't really think Germany can be blamed. Unless you think of
the "weaker" countries as children who can't take responsibility for
themselves."
Well, you can't directly blame Germany, that's right.
But someone had to lend all that money, and I don't believe, that no one
could see the real financial situation in these countries.
So, what did the banks wrong, and why nobody looked after the banks?
The banks are very well looked after, billions after billions of tax payer money are used to bail them out of their problems. I think for the banks just lending as much as they can makes perfect sense. They have no risk in this modern age.
Thats why i said, the euro put Germany in a very fortunate situation. I can't imagine Ex-Chancellor Kohl expecting it to play out this way.
Its not that Germany is in any way smarter, Germany would probably have done the same, even if it were just on a governmental or banking level, as private lending is very conservative in Germany.
It's a strawman. In every country, you will find sectors (and the associated people) who have a net gain from the EUR and some with a net loss. It doesn't really matter and would be impossible to figure out who benefits and loses more, both on the micro and the macro level.
I myself think about it in this (admittedly broad stroke) way:
1) The EUR is not just an economic project. It is a political instrument. That's why it exists, and that's what will determine its future. The economics is only a constraint (alas, now binding) not the objective.
2) No matter the history, a breakup now would be incredibly costly for everybody. Bob Rubin, US treasury secretary under Clinton, aptly described it as "Lehman times x". That's why a complete reversal is highly unlikely.
3) There is a solution: Peripheral states must accept a German-dominated external voice in their fiscal affairs; Germany must let the ECB monetize the debt. Neither of which is politically realistic.
4) In the absence of a conventional political solution, the continent "needs" a holy-shit-moment, something that will scare enough people sufficiently s.th. politicians can reach the costly compromise (3). So I expect one to happen.
5) What journalists, economists, and whoever writes about the success of a country ex post does not matter, it's just noise. Think about what people wrote about Japan in the 80s, the "Asian tigers" in the 90s, the "Washington consensus", etc etc. Until just a few months ago, it was China's state-dominated model, now it's Germany's social-consensus-based turn. Or, to stay with Germany, remember the Economist cover about "the sick man of europe"? It's quite similar to the attribution bias when successful people write autobiographies (or have biographies written about themselves). People like "the illusion of control", and a nice story with a neat, understandable "explanation" with max three identifiable causes or "factors" that led to the observation supports it.
Personally, I think the best way to test your understanding of how the world works is to make predictions and bet on them, preferably money, less preferably your reputation or your ego. So yeah, this article is probably blah but I will read it anyway because it will probably make me feel good, having grown up in and thus having links to the successful system du jour ;-)
1) The EUR is not just an economic project. It is a political instrument. That's why it exists, and that's what will determine its future. The economics is only a constraint (alas, now binding) not the objective.
This can not be repeated often enough. All the gloom and doom commentators making break-up predictions are highly underestimating this aspect. EU behavior can not be explained by rational/economic factors based logic.
People like "the illusion of control", and a nice story with a neat, understandable "explanation" with max three identifiable causes or "factors" that led to the observation supports it.
Hmm. Reminds of a comment I just read here on HN. Trying to put my finger on it... :)
Flood the debt with inflation ;) That means the ECB buys the debt basically, but of course it creates the Euros out of nothing, so that creates more Euros for the same economical situation.
The reason behind that is that if the ECB buys the debt, it can keep the rates under a certain level, buying everything that's above with its - theoretically - unlimited buying power. Of course that has a few flaws. The Euro is then less valued, so that's a reason more for wanting even more return on bonds.
Because Germany is an export-oriented economy with a huge trade surplus, primarily trading with other EU countries.
If the Euro didn't exist, the natural course of events would be for countries at the receiving end (who are running a trade deficit) to devalue their currencies. That would cut into German exports. But with a unified currency, devaluation to counter trade or current account imbalances is impossible.
I have to admit, I never understood the point of devaluing your currency, except maybe for sneaking taxes by your citizens.
Say you want to buy a German car that costs 20000€, and your country uses Drachme, not Euro. How does devaluing Drachme help you afford the car? if you say "no, a Drachme is not worth 0.5 Euros anymore, it is only worth 0.05Euros", it only means you have to 10 times more Drachmes for the car than before?
Say you produce olives, and one pound of olives goes for 1 Eur. So you need to sell 20000 pounds of olives to afford the car. How does the valuation of Drachme enter into that?
Why is it cheaper to build the factory in your country? Instead of paying with a devalued currency, you could simply pay less Euros? Same for buying local vs foreign cars - I just don't see how the currency makes a difference (or the possibility to devalue the currency).
Let's stick to olives: either you get x Euros for a pound of olives, or y Drachmes. In the end, if you want to buy a car, you have to exchange the Drachmes into Euros. You should get exactly x Euros for y Drachmes. Otherwise there would be an opportunity to get infinite olives for free. So it doesn't matter how much you devalue the Drachmes, you'll always get the same amount of Euros per pound of olives.
If Drachmes are devalued, labour in Greece is cheaper than labour in Germany - workers get paid the same number of Drachmes as before devaluation, but they're paid less Euros.
So it is mainly just cheating your citizens. I can't believe economists seriously put this forward as a problem. They should seek to educate the population, not defraud them.
That is kind of a "milk maid" equation, as we call it in Germany. If the Greeks wouldn't have the Euro, perhaps nobody would have lent them money to begin with. So at least if you advocate countries having their own currencies, you should be aware of that aspect. It's not as if problems (debts) just evaporate with control over the currency. You would have other problems instead.
Yes, but it's much better to have a problem you can actually solve by taking responsibility yourself, rather than a problem whose solution relies on someone else being nice to you against their own interest (Southern Europe being on the same currency as Germany).
But maybe those states would have been bankrupt much sooner, not being able to borrow without the Euro. That is what I mean - no problem would have been solved by not being on the Euro.
Ok, let's talk two scenarios. First one: real world. We know how this one turns out.
Second one: Greece was never allowed into the Euro and off the Drachma. So what happens? Well, the lack of productivity in the Greek economy means the drachma stays and goes continually down in relation to the Euro, which we'll presume is the dominant currency-zone Greece wants to import from. The result is that Greece is forced to take responsibility for its own behavior much earlier-on, and without damaging impact on anyone else. At some point, the Greeks, in this scenario, simply cannot import much anything from Northern Europe, but their land, labor and capital become very cheap for external investors. Then, if the Greeks are at all smart, they get exploited for a little while to make foreign capital spend itself improving their productivity, until they can either become self-sufficient or balance their trade via cheap exports.
As Greek productivity improves, the drachma becomes more expensive, allowing the Greeks to then import more on the strength of their own economy rather than by borrowing from someone else.
It's simply a known fact in economics that separate macroeconomic policies and environments demand separate currencies, or else you get a financial crisis of some sort.
I think it is a psychological issue. If salaries get cut by 30% across the country, people go to the streets. If you devalue their currency, most people don't even realize it and just accept that the prices for certain imported goods went up.
I can understand the psychological aspects, but I can't accept that economists see that as a serious issue. It is like "oh dear, we can not cheat our citizens anymore", like saying "governments need the ability to defraud the population". They should instead seek to educate the population.
It's not just that, while devaluation alters import prices local prices like rent and service costs don't fluctuate. So a 30% devaluation doesn't make people 30% poorer.
Of course it would: in your example, the landlords would be poorer because they would collect less rent. Likewise for service providers. Perhaps you could argue for public services, but for those the government could just lower the fees instead of devaluing the currency.
But thanks to your example I see it has more subtleties: it is also a question who to take the money from. Making landlords poorer might be an easy sell to the majority of the population - if the population would have any idea of what is going on, which I doubt.
Services might just go away if they make less money.
No, landlords would NOT be poorer, they're taking in exactly the same as before devaluation. Devaluation directly effects ONLY imports (more expensive) and exports (cheaper): it effects the local economy only based on how much it depends on each.
I am being paid a number of arbitrary denominators of value per time period.
Government declares that the arbitrary denominators of value now buy half the number of a different arbitrary denominators of value they did previously.
Because I am a locovore Luddite (for the sake of the argument), everything I buy is made in the country, with materials produced in the country.
Devaluing your currency makes foreign products more expensive relative to yours and makes your products cheaper relative to foreign ones. That means that it is less attractive to export goods to your country and more attractive to import from your country.
That does not mean that devaluation is a sinecure; for example, if you heavily depend on imported goods, it will drive prices for those goods up. But it can help correct trade and current account imbalances.
Also, devaluation is, more often than not, something that happens simply due to trading and market pressure and not because of government action. If a country keeps having a trade surplus, then its currency will automatically appreciate, unless there are countervailing forces.
Let's say you're Greece and you're a trillion Drachmes in debt. You can't pay the interest anymore, your deficit is too high. Greece uses INFLATION, it's super effective! Prices double, but wages double also. Tax income doubles. What stays the same is the debt, and suddenly Greece can afford to pay its lenders. National crisis averted. Only the lenders are screwed, and those who had their savings in Drachmes. That's also the reason why it's very popular to have savings accounts in "hard" currency in these countries.
That's how it has been for decades, but now with the Euro that's not possible anymore, leading to the Euro crisis.
>How does devaluing Drachme help you afford the car
It doesn't. On the contrary, it helps you export your home made Pallas Athene car.
Suppose it costs you 25000 GRD to build that car and that's 12500 € at 1 € = 2 GRD. You can sell it internationally for 15000 € for a profit of 2500 €.
Now the GRD plunges to 1 € = 4 GRD. Your costs stay at 25000 GRD but that is now only 6250 €. You either can continue to sell internationally for 15000 € and earn an extra 6250 € profit or reduce the price and sell a lot more thereby also raking in more cash.
Since you probably have to procure parts from abroad, the extra profit will be a lot less, but still it helps you _sell_.
Who pays the bill? Of course the general population if it continues to buy imported goods, because the price of those goes up. If only a part of the gen pop switches to buying domestic goods - hey even better for the domestic producers. Apart from making more on the international market, they gain on the domestic market.
Nope, it's the opposite, in fact. You confuse devaluation with depreciation. What should really happen is that Germany's currency should devaluate (via inflation).
I think of it as this: GIPS have massive debts in "German"-Euros. They also have prices too high in "Gypsy"-Euros, which is equivalent to say that GIPS have also salaries too low in "German"-Euros. They just can't pay that debt, because Gypsy salaries are too low, the prices are proportionately too high, and the debts are also too big.
What you do is, you create inflation only in Germany. Now German Euros are valued less, so wages and revenues grow. Gipsy Euros are valued the same as they were, so prices stay the same, and wages and revenues stay the same.
Now, this means that Germans want to buy more cheap Gypsy stuff and services, so there's now a trade deficit for Germany, and a trade surplus for the Gypsies. Which means an increase in wages and revenues for the GIPS, which is allocated to paying German debt.
The result is that the Gypsies get German jobs and German capital, and the Germans get their debt paid. This debt is, of course, of less value now for the Germans, they have to pay more for everything German, and there's less jobs on Germany, so they are pissed off. The thing is, they still win on the long term, because now they can buy cheaper Gypsy stuff, like Spanish-built German-designed cars. They can concentrate on more capital-intensive production, to offset lost jobs. Also, at least, they got back some of their debt.
To devalue a currency is not a solution - the opposite. It may look attractive, but its effects are bad over long term. It for example makes imports more expensive.
The general idea is that Germany, since 2000 or so, did what is essentially an internal devaluation, by freezing salaries. This only works because Germany was the only big economy within the Eurozone to follow this policy. Note that GDP increase was not especially high in Germany compared to other countries with a similar size within the Euro (e.g. France did better in the 1999-2011 period: http://fatasmihov.blogspot.co.uk/2011/12/internal-devaluatio...). This policy cannot possibly work if other countries follow it within the Euro zone.
What does that have to do with the Euro? And why can such a policy not work if "other countries follow it within the Euro" zone?
Also I wasn't aware that the government determines the salaries here in Germany. You are aware that the cold war is over and capitalism won, even here in Germany? We don't have a communist/socialist regime that can simply set salaries. Although the government can of course affect salaries by raising taxes (less net salary for everyone).
If everybody decreases their labour cost everything else being equal, then obviously you don't get a competitive advantage from it. You just made everyone poorer. See also http://seekerblog.com/2012/01/17/euro-crisis-german-unit-lab... for the same line of arguments. Germany essentially gained market shares at the expense of other eurozone countries (0-sum game) instead of actual increases in productivity (which is not a 0-sum game).
As far as pressure for decreasing labour cost, this is pretty much uncontroversial. I did not say that Germany had a gvt authority setting salaries, but various factors such a pressure from high unemployment in the early 2000, and lower-than-eurozone inflation helped it (see e.g. http://www.voxeu.org/article/how-restore-competitiveness-eu - even though that article argues something closer to the opposite of what I am arguing here).
So how does it work - how do we profit from the Euro, on the cost of other EU countries?