Monday, 22 March 2010
I am traveling in Germany visiting Frankfurt and Berlin. I felt sad in finding in the local newspapers a common theme with our Blog: leaving the Euro.
Economists and policy makers knew from the beginning that a pan-european euro area would be an imperfect currency area. Still they went ahead. It was coherent with the idea of continuing the European economic integration started after World War II. The economic advantages of increasing trade by reducing transaction costs and exchange rate uncertainty was judged sufficient to offset the loss of instruments to face asymmetric shocks. A large number of economists thought that the implicit adoption of the Bundesbank low inflation and his super-credible monetary policy would also be welfare enhancing. A smaller number thought that the Euro area was not Germany and that the Bundesbank monetary policy might not have been adequate. What was needed was a Euro monetary policy. On the correct level of inflation the IMF has recently published an interesting piece. But I digress.
In any case in many euro countries inflation was lower than it had been in the past. Still it was lower in Germany. Why? In the past days, French authorities have pointed the finger to wage agreements in Germany. Surely this is part of the story. My current travel across Germany inspires me another factor: the large supply of east German workers that flooded the federal republic after the reunification (any feedback?).
The matter of the fact is that all members, including France, lost competitiveness against Germany, and this helped in sustaining or creating the trade imbalances within the Euro. Then the financial crisis precipitated the fiscal positions of all euro states, and an increasing nervousness helped in creating an atmosphere of uncertainty around the viability of the Euro. We could say ex-post that the deficit countries should have adopted better supply policies to increase their competitiveness: further liberalize the goods market, the labor market, etc. True, all true, but again the German reunification teaches us that real convergence, even in the presence of labor mobility and fiscal redistribution (in this case truly massive) takes time. 20 years have passed since the fall of the wall and wages in east Germany are still around 75% of wages in the West. Supply is long run stuff.
We have avoided a currency crisis in Portugal, Greece and other EMU countries. This should teach us that the Euro brought important advantages to its members in the World stage. The World stage, remember? Yes the outside World is absent from the Euro discussion. Should it be so? Now we have to decide: accept the euro area, study her imperfections and create the economic mechanisms to overcome those imperfections and continue the European integration process. Or what?
I'll be back to my desk Tuesday, and get back to more analytical blogging.
Posted by Francesco Franco at 15:10