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Thread: Germany Should Quit the Euro: The Economist (in jest)

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    Kidicious
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    Germany Should Quit the Euro: The Economist (in jest)

    The Economist

    Germany's euro test

    Jun 12th 2003
    From The Economist print edition

    A half-serious proposition

    THE interminable debate in Britain over whether to join the euro reached a new peak this week, when Gordon Brown, the chancellor of the exchequer, delivered his verdict. Mr Brown based his judgment on five economic tests, of which Britain, he announced, had failed four. Yet perhaps this is the wrong debate about euro membership. Only partly in jest, The Economist suggests that a better question is not whether Britain should join the currency zone, but whether Germany should leave.

    Take Mr Brown's five tests and apply them to Germany. The first is convergence: are business cycles and economic structures sufficiently in step that Germany can live comfortably with euro-area interest rates? The clear answer is No. Since the euro was launched in 1999, Germany's GDP growth has been by far the slowest in the euro zone, causing its output gap (the difference between actual and potential GDP) to widen by more than anywhere else. Real domestic demand has barely risen at all in Germany since the start of 1999; in the rest of the euro area it has gone up by 9% (see chart). Germany is technically back in recession: many economists think that it is now in its third consecutive quarter of shrinking GDP.

    Indeed, a study by HSBC finds that, although Britain's growth rate and output gap have converged with the euro zone in recent years, Germany's economy has diverged from other members. This suggests that Germany may be worse suited than Britain to live with a one-size-fits-all monetary policy. Since Germany has the biggest output gap within the euro area, it needs lower interest rates than its fellows. Instead, Germany has the highest real interest rates, because it has the lowest inflation rate. This, in turn, further depresses growth. Moreover, Germany's lower inflation rate is not just cyclical. Differences in productivity and price levels within the euro zone mean that inflation is structurally lower in Germany. This implies that real interest rates may be permanently too high.

    The IMF has information on Germany. The EU's Stability and Growth Pact comprises this EU resolution and two regulations (1466/97 and 1467/97). See also the European Central Bank.

    The second test asks whether the economy is sufficiently flexible to deal with “asymmetric shocks”, changes in the economic environment that affect some countries more than others. Flexibility matters because members of the euro zone cannot adjust national exchange rates or interest rates to cushion their economies, and fiscal policy is also constrained. Again, the answer is No. Look, for example, at Germany's struggle to cope with the effects of reunification. For all the recent talk of reform, the labour market remains sclerotic. Levies on wages to finance social security, health care and pensions are painfully high. There are strict laws controlling the firing of workers, and wages are rigid.

    Test three is: will the euro encourage companies, especially foreign ones, to invest, by eliminating exchange-rate risk within the zone? If Germany's economy remains weak, it should surely fail this test too, because firms will be wary of expansion. Mr Brown's fourth test, the impact of the euro on the financial-services industry, may be less important in Germany than in Britain. However, foreign banks have slimmed down in Frankfurt, even though the city is home to the European Central Bank.

    A failing economy
    The fifth test is whether the euro will boost growth and jobs. Over the past couple of years, unemployment has increased by far more in Germany than in the rest of the euro area. Worse still, a recent study by the IMF warns that the country faces a serious risk of deflation, which could further depress output and jobs. Inflation is running at only 0.7% (well below the euro-area average of 1.9%), and increasing excess capacity and a stronger euro will push it lower still.

    Deflation would be dangerous in Germany, given firms' heavy burden of debt and the fragile state of the financial system. Bank credit has already ground to a halt. Yet Germany cannot cut interest rates, because these are set by the ECB according to economic conditions across the whole euro area. Europe's stability and growth pact is forcing the German government to tighten fiscal policy too. Ironically, the rules for both the ECB and the stability pact were designed largely by Germany.

    The IMF argues that monetary policy can prevent deflation, if it is pre-emptive and forceful. Those are not words that describe the ECB. At his May press conference, Wim Duisenberg, the bank's president, said: “In the 16 years that I was the governor of the central bank of the Netherlands, there were two years in which we had deflation of ½%. I publicly declared then that I lived in a central bankers' paradise.”

    Whatever the economic arguments for Britain's joining the euro, the case for Germany's quitting looks stronger. The idea that Germany will do it is, of course, the stuff of fairy tales. However, the country's present predicament also has a fairy-tale feel, with the ECB in the role of the wicked witch who lured Hansel and Gretel into her gingerbread home with the aim of eating them. In the story by the Brothers Grimm, Gretel pushes the witch into the oven. In the real world, Germany is being roasted, and risks living unhappily ever after.

    I thought this was interesting. They aren't suggesting the real possibility of Germany quiting the euro, but they point out that their euro membership is damaging their economy.

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    Kidicious
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    Here's a graph
    Attached Images Attached Images

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    Solly
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    This shows the folly of joining too soon, the lack of good economic thinking among politicians east of the UK, and why the Euro is doomed to failure in the next decade.

    As far as I am aware, there has never been a majority in favour of the Euro in Germany.

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    I think all of Europe should adopt the pound.
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    HershOstropoler
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    "Germany's economy has diverged from other members."

    Did Austria's economy diverge from the rest? To the same amount as Germany's?

    Maybe it is about a certain german peculiarity, not some OCA blah.
    “Now we declare… that the law-making power or the first and real effective source of law is the people or the body of citizens or the prevailing part of the people according to its election or its will expressed in general convention by vote, commanding or deciding that something be done or omitted in regard to human civil acts under penalty or temporal punishment….” (Marsilius of Padua, „Defensor Pacis“, AD 1324)

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    Solly
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    Maybe it is about a certain german peculiarity, not some OCA blah.
    No wonder the Eurozone is experiencing such problem if its pro-Euro inhabitants and politicians dismiss one of the theories surrounding shared currencies so casually and flippantly.

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    Kidicious
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    Originally posted by HershOstropoler
    "Germany's economy has diverged from other members."

    Did Austria's economy diverge from the rest? To the same amount as Germany's?

    Maybe it is about a certain german peculiarity, not some OCA blah.
    Do you believe the money supply in Germany is adequate?

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    HershOstropoler
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    What money supply "in germany"?
    “Now we declare… that the law-making power or the first and real effective source of law is the people or the body of citizens or the prevailing part of the people according to its election or its will expressed in general convention by vote, commanding or deciding that something be done or omitted in regard to human civil acts under penalty or temporal punishment….” (Marsilius of Padua, „Defensor Pacis“, AD 1324)

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    Kidicious
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    Originally posted by HershOstropoler
    What money supply "in germany"?
    What do you mean?

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    Imran Siddiqui
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    They use Euros in Germany, Kid... money supply is for the full Euroland, not Germany. You really can't seperate it.
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    Kidicious
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    Originally posted by Imran Siddiqui
    They use Euros in Germany, Kid... money supply is for the full Euroland, not Germany. You really can't seperate it.
    Are you telling me that there is no money supply in Germany? I choose not to debate that one.

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    Dauphin
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    Think about it.

    Would you debate the money supply in just California, or would you debate the supply for the country as a whole?

    Edit- Nevermind, I need some sleep.
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    Spiffor
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    Originally posted by Kidicious
    Are you telling me that there is no money supply in Germany? I choose not to debate that one.
    Indeed, the German Bundesbank issues coins on its own, one face with the common drawing, the other face with an exclusively German drawing (just like any country in the Euro Zone).
    However, by doing so, it increases money supply in the whole Euro-zone. That's why the Bundesbank's money supply depends on ECB's orders.

    Edit : so that you can see :
    Last edited by Spiffor; June 14, 2003 at 18:50.
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    DinoDoc
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    How is France doing based on these tests anyway?
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