15 November 2010 12:49 PM
Der Euro: as ever, the D-Mark by other means
This is Marsh's point to remember: 'In pre-EMU days, if the German economy were growing at an estimated 3.7% as it is this year, the German currency and interest rates would both come under upward pressure – damping exporters’ performance and the growth outlook.'
The Germans designed the euro to make sure that couldn't happen.
By the way, I'd tell you who the forum's members are, except the membership is kept secret. Apparently it is made up of central banks, sovereign funds, financial regulators, that sort of thing. Prof Lord Desai, Emeritus Professor at the London School of Economics, heads the advisory board, and members meet in private everywhere from Frankfurt to Kuala Lumpur.
Beyond that I know little, except I've met Marsh and have his book on the Euro. All of which means he sends over his commentaries. The one out today is particularly worthwhile, given the upheavels in the eurozone.
And don't think the upheavals have nothing to do with Britain and sterling, because as you will see by yesterday's post, Britain has already been sucked into this chaos on the periphery of the EU -- meaning, the economic disasters in Ireland, Portugal and Greece. Stand by for disasters in Spain and Italy.
The source of the pain -- other than the fundamental stupidity of any country joining the euro at all -- is the fact that the single currency has been from the start a way of keeping the German currency at an artificially low exchange rate.
On the one hand the euro is making the peripheral countries suffer because the dominance of the Germans in the currency make their exchange rate too high; at the same time, Germany has seen its exports surge because the euro keeps its exchange rate too low.
And this was the point of the whole thing for the Germans even more than 30 years ago, as Marsh points out. He starts out with a 1970s quote from a senior German official in the German government:
”The key principle of German economic policy was to persuade the French and Italians to lower the value of the D-Mark so as to make Germany more competitive.” As the euro area enters a new period of anguish, caused by a gut-wrenching rise in Irish bond yields, these words from more than three decades back should rightly be haunting the treasuries and central banks of myriad European nations.
The schism in the euro area between creditor and debtor countries entered a new phase last week with a war of words pitting Angela Merkel, the German chancellor, against representatives of the smaller debt-laden states that now have their backs against the wall.
Germany is apparently paying little heed to the fact that monetary union has been massively helpful to the German economy by underpinning a sizable boost to export competitiveness in the last decade.
Lahnstein’s words to Healey – over a glass of beer in Hamburg in 1977 or 1978 – were passed on to Jim Callaghan, then Labour prime minister. The UK leader reasoned that the EMS would harm British exports by keeping the pound unduly high on the foreign exchanges.
This sealed the British government’s decision to keep sterling out of the exchange rate mechanism (ERM) of the EMS when it started in early 1979.
Bizarrely, the UK did join 11 years later in 1990, shortly after German unification.This was an experience that shackled the pound at too high a rate against the D-Mark before the UK left in ignominy in September 1992. The episode has been responsible for turning the UK for at least a generation – and probably for much longer - against membership of any kind of fixed currency scheme with the other Europeans....
...The Berlin government’s intransigence [now] over the debt issue, while politically understandable from a German point of view, seemingly pays little note of the realities of the euro economy which are currently heavily tilted towards Germany.
In pre-EMU days, if the German economy were growing at an estimated 3.7% as it is this year, the German currency and interest rates would both come under upward pressure – damping exporters’ performance and the growth outlook.
Now, however, with all EMU economies shackled together, and devaluation an impossibility for the peripheral countries, the hard-up states have nowhere to hide.
Germany continues to profit from excellent export performance – and it can self-righteously point the finger of blame for the euro area’s woes at those debt-ridden peripheral states.
Other countries in Europe may be wishing that they had received a similar message before they entered the euro.
Posts
I also agree that the EU and the EMU are best suited for the German economic model, and I am pretty sure most EU countries (not only the 'PIIGS') will not measure up to Germany's competitiveness in any foreseeable future.
This country is the biggest economic power in Europe, therefore it's somewhat 'natural' that it got the chance to set the rules of the game in their favour. I know it's frustrating, both for a big country like the UK and for smaller countries in Europe, but shouldn't we acknowledge Germany's superiority?
By all means, this is an inconvenient truth, and I dare asking people engaged in a very interesting discussion here: don't any of you see any good aspects in the fact that Germany is more or less 'contained' within the EU?
I see Merkel's words "If the euro fails, then Europe fails" more like a 'threat' than like a disappointment from Berlin's part. Without the euro, Germany will change the course of its politics dramatically, and I don't know how 'convenient' that will be for the rest of the Old Continent.
Let loose from EU's 'chains', Berlin will probably press for closer ties to Russia, and the 'attraction' between the two powers will squeeze Eastern Europe...
Obviously, the fate of Eastern Europe may be of little concern to the Perfidious Albion, but as being part of the EU has surely not brought 'milk & honey' for Britain, the demise of the Union surely won't bring only good things.
Please, believe me, I am far from being a brainwashed euroenthusiast, but I can't wonder about how comfortable a 'post-euro' (or worse still, 'post-EU') future would look like!
A view from a 'fan of Britain' from Romania.
Posted by: MunteanUK | 19/11/2010 at 10:03 AM
D. Bunker, we call it Berlin time because it is the time in Berlin. ie at noon CET (in the winter) the sun is at its highest point in Berlin. And Berlin is the only major city in Europe on that degree of longitude.
At this time of year in the UK, the sun is at its highest point over Greenwich Naval College. Hence Greenwich Mean Time.
Basic schoolboy stuff.
Regards
Posted by: Nick Rose | 18/11/2010 at 04:03 PM
I thought that the reason we joined the EMS at an artificially high rate was that Mrs Thatcher was convinced that this was the best guarantee against inflation (which is the inevitable consequence of devaluation, and which she saw as the greatest evil). She was also convinced that the German economic model had had its day, and the new UK model she had introduced was the way of the future. She had not reckoned on Germany continuing to outperform everyone else.
Posted by: Idle Curiosity | 17/11/2010 at 08:39 AM
Rich - in case the penny hasn't dropped yet, please note that Central European Time has nothing to do with Berlin, nor with Paris or Rome either.
One can only speculate as to the motive behind calling it "Berlin time". - Honi soit ...
Incidentally, Berlin, a delightful city built on water and sand, with trees everywhere and more bridges than Venice, is well worth a visit.
Perhaps you should do a little more EU research and take a vacation there. You might be pleasantly surprised.
Posted by: D. Bunker | 16/11/2010 at 10:10 PM
Posted by: Minstrel Boy | 16/11/2010 at 10:09 PM
Denise - are you seriously asking why the UK should be involved in contributing to the EFSF - or what you call bailing out the Eurozone?
Do you know how much debt our own banks have staked in the Eurozone? RBS alone has nearly £5bn in Irish government debt. The British taxpayer more or less owns RBS!
Posted by: sameold | 16/11/2010 at 07:01 PM
Given the turmoil surrounding the Euro I must wonder who will now be the first to leave the single currency? I notice the currency rose again on the latest German economic data, adding to the (avoidable) miseries in Ireland and now Portugal.
Tidal forces are tearing this foolish idea apart, but my heart aches for all the ordinary people who will be hurt. The longer it lasts, the worse the fallout will be.
Regards
Posted by: Nick Rose | 16/11/2010 at 04:03 PM
Thanks, very interesting.
Three points.
Firstly, the only time that the British people have been allowed a direct say on any of this was in 1975, the referendum on whether to stay in the "Common Market".
The Labour government had a pamphlet delivered to every household urging a "yes" vote, and among the falsehoods in that pamphlet this one is particularly relevant:
"There was a threat to employment in Britain from the movement in the Common Market towards an Economic & Monetary Union. This could have forced us to accept fixed exchange rates for the pound, restricting industrial growth and putting jobs at risk. This threat has been removed."
Secondly, if the Labour Chancellor Denis Healey was aware that the Germans were aiming to fix themselves an excessively low exchange rate then it's difficult to believe that it didn't become common knowledge amongst senior Treasury officials, and it's difficult to believe that this knowledge was not transmitted to his Tory successor Geoffrey Howe.
Why then did the Tories allow the Germans to get what they wanted, when Major agreed at Maastricht that the EU could issue its own currency, and moreover agreed that henceforth all new EU member states would become legally obliged to eventually adopt it?
The UK and Denmark are the only two member states which are not under a treaty obligation to join the euro; all the member states which joined subsequently, including Sweden, are under that formal obligation through their treaties of accession to the EU.
If Major had said "no", rather than "yes, but I have to be able to convince my party that we won't necessarily join it, or at least not straightaway", then he could have forestalled most of the present problems.
Thirdly, why is Cameron now willing not only to help save the eurozone with our money, but also to wave through whatever treaty amendments Merkel and Sarkozy may want to consolidate it, without demanding anything in return?
For a start, that the treaty amendments must relieve member states which are not yet in the eurozone of any obligation to join it, and must create a mechanism for member states which are already in the eurozone to leave it.
Posted by: Denis Cooper | 16/11/2010 at 03:14 PM
Thank you for being one of the few journalists who actually speak the truth!
Everything I research regarding the EU, leads to Germany.
Have you read Peter Hitchens' comments about GMT going to Berlin time?
The old saying 'all roads lead to rome', should now read ALL ROADS LEAD TO BERLIN!
Is the EU the Fourth Reich? It certainly smells like it............
Posted by: Rich | 16/11/2010 at 02:54 AM
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