June 20, 2012

The latest bestseller by German economist Thilo Sarrazin, a former member of the Bundesbank executive board, is a rambling critique of the eurozone. His book Deutschland braucht den Euro nicht (Germany does not need the euro) tells you everything you might want to know about why the eurozone is collapsing.

The countries that formed the eurozone did not show the same monetary restraints or the same willingness to keep state expenditures within 60% of their annual gross national product, as was the practice in Sarrazin’s homeland. Given these circumstances, the only way that the eurozone would have worked is if all its members were integrated into a political as well as monetary union.

Since this did not happen, perhaps contrary to the present German government’s wishes, the signatories of 1992’s Maastricht Treaty gave their countrymen a deadly combination. Sovereign states were free to do with the euro what they wanted without having to submit to enforced monetary discipline. This freedom included raising state and private loans at low interest rates thanks to an originally solid currency.

“€œWhat’s inevitable is for the delinquent nations to declare bankruptcy and then return to their national currencies.”€

This disastrous monetary union’s worst victims were the “€œsouth lands”€: Spain, Portugal, Italy, and most egregiously Greece, which reaped disaster with the transition to a unitary currency. All of these countries depended on low production costs in their own currencies to maintain and expand exports. But once they began doing business in the same currency as their northern neighbors, they were at a disadvantage. As production costs have risen, poorer or less efficient countries have shown an increasing imbalance of trade in favor of their richer currency partners.

Sarrazin discusses the partial truth, that Germany benefited enormously from the declining balance of trade among the poorer members of the Eurozone. He show that the favorable effects for Germany of this growing imbalance of trade were particularly evident from 2005 to 2009. Nonetheless, in the same time period German foreign trade became increasingly dependent on countries outside the Eurozone, so that the effects of the imblance with the South lands became less and less significant for German commerce. Moreover, the growth of the German economy after the monetary conversion (except during the year 2009) was more sluggish than it had generally been under the D-Mark; and it was far less impressive than the growth rate in England, Sweden, Switzerland and other Northern European countries that resisted the siren call of a unitary currency.

Almost all the southern states have gone into debt as they have taken advantage of what were initially low-interest loans in a onetime stable currency. Sarrazin argues that if these countries returned to their national currencies, they might be able to reduce their trade imbalance by selling cheaply on the international market. As a further advantage, they would be able to make a dent in their mountain of internal debts by paying off domestic creditors in an indigenous currency. Trying to improve their competitiveness with the euro has been a disaster for the eurozone’s less economically disciplined members.

According to Sarrazin, his initial willingness to go along with the eurozone stemmed from the fact that at least on paper it appeared to be as sound as the Bundesbank. Like the German central bank, the European Central Bank, which would help manage the monetary union under Maastricht, was forbidden to provide loans to governments to pay for their debts. The bank could, however, make money available to private ventures if they met certain standards. All member states were committed to keeping government costs within an annual growth rate of 2% and to avoid carrying a national debt exceeding 60%. The US carries a huge public debt, but the US has had little trouble thus far selling its bonds overseas, most notably to the Chinese, because of the prestige and power associated with our country.


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