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Germany has resisted efforts by other countries to extract even more money from the German taxpayers.

When you have an agreement to keep exchange rates pegged to each other, each side should be responsible from defending its own currency from appreciation, because trying to defend your own currency from depreciation is an untenable position. This is because you can always print more of your own currency to buy foreign currency, thereby devaluing your currency ("defending your currency from appreciation") but you cannot always buy your own currency with your foreign currency reserves, thereby increasing the value of your currency ("defending your currency from depreciation"). The recently established one-sided bound on the Swiss Franc's exchange rate is an example of this - the Swiss bound is unassailable if the Swiss Central Bank chooses to defend it. It will never run out of reserves, rather it will accumulate reserves, trying to enforce its stated policy.

Bundesbank refusal to hold its end of a stable exchange rate deal (granted: nobody made it explicit that it was everyone's obligation to defend their own currency from appreciation) ejected the Pound and the Lira form the European Exchange Rate Mechanism 20 years ago. The EU should have recognised that this made stable exchange rates within it unsustainable and stopped pursuing them as a policy goal. The Euro project should have been abandoned by the French side. Unfortunately for us all, the Bundesbank did defend the DM from appreciation when it looked like it was the French Franc that would be ejected next.

Therefore, contra your claim I quote at the start, the Euro is a huge wealth transfer mechanism towards intra-EU net exporters (notably Germany, but also the Netherlands and Finland) because it put all the economic burden of the fixed exchange rate regime on the shoulders of the deficit countries (which would naturally see their currency depreciate if if were allowed to float).

Keynes recognised that devaluation, deteriorating terms of trade and indebtedness are in themselves a penalty that deficit countries have to pay, so at Bretton Woods he proposed that, in order to restore a sustainable fixed-exchange-rate system (then the Gold Standard) this system would have to impose some sort of penalty on surplus countries. The US, then the world's exporter of last resort, "took the position of absolutely no". This is typical of exporters of last resort in international trade crises (see China and Germany at the G20 in 2009).

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker

by Migeru (migeru at eurotrib dot com) on Tue Feb 14th, 2012 at 05:21:02 PM EST
[ Parent ]
IIRC the Euro was set up so that there should not be "deficit countries". It was stressed quite loudly that it needed a coherent fiscal policy by all its members. Thus the deficit and debt criteria.

So the case you describe should just not happen because all countries run the same deficits.

by cris0 on Tue Feb 14th, 2012 at 06:32:25 PM EST
[ Parent ]
No, the Euro was set up so that there was no constraint on the creation of current accounts deficit countries. Specifically, there was no mechanism by which current account surplus countries would be forced to repatriate that surplus.

Current accounts is the surplus/deficit that actually matters. This pathological obsession with inflation, government bonds and government spending is an Austrian-school cargo cult, not any form of economics conventionally recognised in the social sciences.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Feb 14th, 2012 at 06:37:44 PM EST
[ Parent ]
The 3% deficit limit is macroeconomic nonsense, as demostrated by the fact that in 2009 because of the depth of the recession the average Eurozone deficit was well above that just form "automatic fiscal stabilizers" (the social safety net).

You cannot legislate recessions deeper than 3% out of existence.

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker

by Migeru (migeru at eurotrib dot com) on Tue Feb 14th, 2012 at 06:38:57 PM EST
[ Parent ]
In the case of Spain, the government kept to the 3% deficit limit "impeccably, impeccably". Too bad that this implied the country's trade deficit had to be financed by private debt. The EU's asymmetric concept of debt (public debt: toxic; private debt: okay) coupled with the refusal to acknowledge you cannot have a surplus without someone else having a deficit, caused the current crisis. And, by the looks of the policy response, will cause the next crisis, too.

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Tue Feb 14th, 2012 at 06:43:04 PM EST
[ Parent ]

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