A Tale of Two Currencies

The Euro crisis resembles a Shakespearean tragedy: Despite the obvious deficiencies of the monetary union, all alternatives are decidedly worse for Germany.

The German idea of an exit from the Euro is gaining popular support. According to an “Emnid-Institut” poll, 56% of Germans would favor a return to the “Deutsche Mark,” the country’s old currency. The poll was ordered by “Bild,” a populist newspaper that periodically chastens (with bold headlines) politicians for helping out other EU countries in dire straits – hence, some may suspect the poll to be biased. But other prominent voices have also started to come out of the closet and now speak against the Euro. Among them is Wolfgang Reitzle, head of the gas and engineering company Linde, who expressed his worries about staying within the monetary union and about attempts to fix it.

Much can be said about the disadvantages of the Euro. In the case of the PIIGS (Portugal, Italy, Ireland, Greece and Spain), they are sufficiently obvious: Forcing the whole continent, with a patchwork of different business cultures and industrial development stages, to work with the same reference interest rate is an economist’s nightmare. The timid Mondrian patchwork of business cultures becomes a Pollock painting of inflation, speculation, real estate bubbles, export records, rising inequality, and continental political jittering. Shakespeare 2.0, if you will, a true drama.

But, as in all dramas (or tragedies), someone prevails in the end, someone succumbs, someone dies and someone survives. People like Reitzle and the scores of avid “Bild” readers are convinced that they will prevail. They argue that Germany must return to its national currency. Instead of being the queen of Europe, Germany must be the king of its own affairs. But not all that glitters is gold. Returning to the Mark would not save Germans from the economic duty (and I am talking about interest, not “ethical” duty) to continue feeding its neighbors with cash. Around 60% of German exports still go to other European countries, although Asia’s share is increasing. Germany might also be happy to avoid being placed in the middle of a geopolitical wasteland ridden by mafias in the South and in the East, and by unemployed youngsters (and not only youngsters) in the West. In the North, as usual, people will sip tea and talk about bad weather.

Overall, Germany would be a “safer” haven for people’s savings. Foreign money would start flooding the German banks to prevent savings from being sucked up by spiraling inflation in the newly independent PIIGS. This matters greatly, and it is exactly what has happened in Switzerland since the beginning of the European drama. In November 2008, one Euro could buy you more than 1.5 Swiss Francs. But after a three-and-a-half year declining curve, now one Euro gets you less than 1.2 Francs. Switzerland is the calm spot at the center of the European storm. It is a storm that has the unique characteristic of pushing things to the center, rather than projecting them up and outward. Mainly, it pushes around a thing called “money.” Money is flowing to Switzerland in all forms, from all the countries rampaged by the tax mayhem of Monti and his PIIGS pals.

Right after its introduction, the Mark would thus gain value. In part, this would be due to “normal” circumstances: export surpluses push national currencies up, making German products more expensive for outside purchasers. The introduction of the Euro prevented this from happening to Germany (since most exports stayed within the Eurozone) and thus fostered German economic growth. On top of this, the influx of money – as capital flees from the inflation-tax apocalypse abroad – would also lead to an appreciation of the Mark currency.

Such a skyrocketing Mark would exert an adverse effect on exports: German goods would become more expensive, and sales abroad would slow down. And this is not the end of the story. Imports would become more profitable, since a fixed amount of German Mark would allow you to purchase more goods abroad. Cars produced in countries with an undervalued currency would be a better deal than the (extraordinary) German-built models. The new German Mark would be therefore an incentive to de-industrialization.

In effect, returning to the Mark would make Germany the “big loser” of the Euro tragedy. Berlin would have a very expensive national currency, export problems, problems of international competition – and therefore problems with economic growth and with employment. Moreover, Germany would still have to provide money to fix up foreign imbalances, be it for market or padrino reasons.

If the Euro has to break, the only exit strategy (or “exit tragedy”) for Germany would be that of creating a new monetary union smaller than the Eurozone but larger than Germany alone. This would still not save the new currency from the appreciation effect due to the booming exports, but it would partially limit the appreciation due to capital inflow because the monetary base would be bigger. It would still be worse than the Euro, but certainly better than a new Mark. In real tragedies, there’s no true winner.

Read more in this column Stefano Casertano: Steady as she goes

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