Mon Apr 16th, 2012 at 05:37:44 AM EST
Edward Hugh of AFOE submitted an essay for the Wolfson Prize.
You can access the full version here, it ranges far and wide in an attempt to address the question set by the prize, which is about how a country might leave the Euro.
For me the most interesting part was his assessment of "what did Germany gain from the Euro?" This is something I've had some thoughts about, but didn't have time to investigate. To me it's an essential topic in trying to disentangle the claims of "virtue" and "laziness" that have been bandied around in discussion of the Euro crisis.
front-paged by afew
Starting on p19 of the PDF (accessible from the above link), Hugh first outlines the common viewpoint about Germany and the Euro:
For example Lombard's Chief Economist Alexander Dumas, who says that `what you're actually dealing with here... is a German population which has had a rotten deal - and that's why they're all so angry' (Dumas, 2011).
The key element of a counter-argument is here:
In a couple of recent and highly stimulating essays two Citi economists, Nathan Sheets and Robert Sockin (see Sheets and Sockin 2012a and 2012b) argue that German trade performance since the introduction of the euro has been significantly boosted by having a currency which was valued significantly below the valuation it would have been subjected to had the country still been using the Deutsche Mark. As a result of this systematic undervaluation Germany's external surpluses widened significantly, led by rapid export growth.
Sheets and Sockin use a simple econometric procedure to estimate that that European monetary union, coupled with the country's extraordinary wage restraint, has resulted in a real effective exchange rate for Germany that is currently 15 to 20 percent lower than the one which would have prevailed if Germany had had its own floating currency. And naturally the weaker real exchange rate has provided a significant windfall for Germany's export sector.
They thus find that the lower German real exchange rate has lifted the country's nominal trade surplus by roughly 4 percent of GDP (or 100 billion) annually and the real trade surplus by about 3 percent of GDP annually. In addition, since the outbreak of the Greek crisis, Euro weakness has meant that German exports have been in an almost uniquely privileged position to benefit from strengthening global demand in the emerging market economies.
He continues, with a comparison to Japan and suggests that German policy makers should be very wary of assuming that the currency rise that would follow leaving the Euro would be easily controlled.
To me this is a critical piece of any real discussion of the crisis we are living through. The "magical thinking" about exports as an economic panacea stems from ignoring exchange rates.
(As an aside, this has bothered me deeply in the Euro debate because it is a replication of the mistakes of the UK, where the City of London was subsidised by exchange rate policy at the expense of UK manufacturers... but debates always centre on "competitiveness.")