The euro and the pound

1. Double-dip in Germany?
22 August 2002

Before the euro was launched, German policymakers fretted that the European Central Bank, influenced by countries with high jobless rates, such as France and Italy, would pursue a laxer monetary policy than would the old Bundesbank, and so hold interest rates too low. The opposite has happened. Interest rates are currently higher than if monetary policy had been set according to conditions in Germany alone. As a result, Germany’s economy has been squeezed.

. . . Europe’s stability and growth pact does not allow euro-area governments to borrow more than 3% of GDP . . . On current policies, Germany’s budget deficit may breach 3% of GDP this year. . . Corporate bankruptcies in Germany are running at three times their level in the early 1990s; in France they are half their level of a decade ago . . . Many German companies, in other words, look as stretched as do their American counterparts. But, unlike companies in America, German ones have no monetary guardian to rescue them by cutting interest rates. The risk of a double-dip recession, and perhaps even of deflation, might therefore be higher in Germany than it is in the United States.

2. Clive Lord, “A Citizens Income”, Jon Carpenter Publishing, 2003.

The size of the unit on which the Citizens Income is based can be whatever people want it to be. I have assumed that . . . Britain in our case . . . would be the simplest choice, certainly until people have got used to the idea. The larger the unit however, the greater the consistency and sharing of resources. . . It could even be . . . introduced Europe-wide. . . Alison Marshall has suggested in correspondence that the unit for the Citizens Income should include all areas that share the same currency, on the grounds that exchange rates, interest rates, etc. cannot be used to manage differences in local economies, so wealth should be redistributed within the currency area to reduce the differences instead.

3. Roger Bootle, The Daily Telegraph, 26 April 2010.

While sterling has rallied in recent weeks, it remains about 25pc below its 2006 trade-weighted peak. As a result of the depreciation, the UK has become highly cost competitive.

. . . if necessary, the pound could fall further. And since we run our own monetary policy, if necessary, we can expand the QE programme. Where would we be now if we had joined the euro, as so many of our politicians wanted? The answer is somewhere in Club Med – but without the sunshine.

4. The Short View. James Mackintosh, Financial Times, 21 January 2011.

Germany . . . may be Europe’s biggest economy, but it has underperformed for two decades, recording total growth in output per person seven percentage points lower than in the UK from reunification in 1990 until the financial crisis.

That changed last year. German growth was at its highest since 1991. Unemployment fell to its lowest since 1992. . . . After a decade of austerity and saving, there are signs that Germans are ready to spend.

In fact, the scene is set for a consumer boom. European Central Bank interest rates reflect the troubles of the periphery, leaving Germany with the lowest real rates (adjusted for inflation) since 1976.

5. Gavin McCrone, The Scotsman, 28 October 2011.

It is impossible to exaggerate the significance of the crisis . . . this week. It is by far the most serious to afflict Europe since the Treaty of Rome that set up the Common Market in 1957.

. . . The epicentre of the problem in Europe is Greece, but Portugal and Ireland have also needed bail-out loans from the EU and IMF, because the interest they would have to pay on new government bonds was so high that they could no longer afford to raise the money without help. Attention has shifted to Spain and Italy which now also find themselves under pressure from the markets.

As a condition for aid, Greece is being forced to adopt austerity measures so severe that they threaten social stability. . . The chances of Greece being able to get its public finances into order by this means are poor to say the least. These are the sort of conditions that cause electorates to turn to extremists offering quack solutions, as Germany did between the wars.

.. . The measures now proposed include a 50 percent write-off of Greek public debt to banks and financial institutions (in effect a managed default) . . . recapitalisation of European banks . . . and a substantial increase . . . in . . . the bail-out fund. . . I think the measures proposed will probably be sufficient to . . . buy more time . . .

But . . . since the euro was started . . . Greece, Italy, Spain, Portugal and Ireland became increasingly uncompetitive . . . Countries can regain competitiveness for their exports in several ways. They can devalue, as Britain has done by some 20 per cent against other currencies since the crisis began. But this option is not available to countries in a monetary union. For them the only option is . . . to cut . . . wages and other costs of production. . . I do not think Greece can do it. . . therefore . . . sooner or later Greece will have to leave the eurozone.

. . . Had the UK been a member of the eurozone, we could have been faced by the same problems . . . we have to thank first John Major and then Gordon Brown, the two politicians who kept us out of the eurozone.

6. John Rentoul, 13 November 2011.

. . . in 1983 . . . Bryan Gould, a rising star, was working for the doomed campaign of Peter Shore. . . they were both Eurosceptics, a strand of Labour thinking that was just at that time going suddenly out of fashion. . . . I found it increasingly awkward to talk to them as they became – in my naive view – obsessed by anti-Europeanism.

Gould resigned suddenly from the shadow cabinet . . . during the 1992 Labour Party conference, when John Smith responded to Britain’s ejection from the exchange rate mechanism by issuing a statement saying that it strengthened the case for European Monetary Union. . . Gould . . . gave up British politics to return to New Zealand in 1994. . . The plan for the currency, which did not yet have a name, had been agreed – although John Major secured Britain’s right to opt out – in the Maastricht Treaty the year before.

. . . We knew that there were good reasons for keeping floating currencies so that European economies could adjust to shocks without, er, everything that has just happened, and is happening, to Greece, Ireland, Portugal, Spain and Italy since 2008. But we thought (a) that bringing in the euro would itself force the pace of integration and (b) that the Germans would make it work.

How wrong both those assumptions turned out to be.

. . . So, yes, the pro-Europeans ought to offer belated apologies to Peter Shore, Bryan Gould and the rebel Tory MPs . . . But Major did secure Britain’s opt-out and Blair never came remotely close to fulfilling his . . . ambition to hold . . . a referendum on the euro. And the case for not adopting the euro is no use to us now. Surely someone, somewhere, ought to be working out how to take the euro apart again without plunging the whole of Europe into Depression?

7. Gavyn Davies, Financial Times, 29 November 2011.

. . . When the euro was created, the process took many years of careful planning. The European Currency Unit, a basket of fixed amounts of national currencies, traded for several years before its name was changed to the euro on January 1 1999.

This movie cannot be run backwards. It is hard to imagine the 17 members of the eurozone going through a decade-long process in which national currencies would first be reintroduced, then gradually allowed to deviate against each other within narrow bands, then ultimately allowed to float freely.

. . . a disorderly break-up of the euro could be much worse . . . Losers would likely cut their spending by more than gainers would increase their spending, so aggregate demand could plummet . . . a . . . stampede out of euro-denominated assets could become self-fulfilling.

8. Martin Wolf, Financial Times, 7 December 2011.

. . . look at the average fiscal deficits of 12 significant . . . eurozone members from 1999 to 2007, inclusive.

Every country, except Greece, fell below the famous limit of 3 per cent of gross domestic product.

. . . Now consider public debt . . . Estonia, Ireland and Spain had vastly better public debt positions than Germany.

. . . Now consider average current account deficits over 1999-2007. On this measure, the most vulnerable countries were Estonia, Portugal, Greece, Spain, Ireland and Italy. So we have a useful indicator, at last. This then is a balance of payments crisis.

9. Definitions,

Balance of payments: A statistical compilation formulated by a sovereign nation of all economic transactions between residents of that nation and residents of all other nations during a stipulated period of time, usually a calendar year.

Current account: Net flow of goods, services, and unilateral transactions (gifts) between countries.

Deficit: a deficit occurs when a government, company, or individual spends more than he/she/it receives in a given period of time, usually a year.

Fiscal: relating to government finances, esp tax revenues.

Public debt: Issues of debt by governments to compensate for a lack of tax revenues.

10. Richard Ehrman, 12 December 2011.

. . . when asked at his press conference why they had refused to give ground on the fairly modest protections Cameron had sought for the City, Sarkozy said . . . any concession on financial services . . . was out of the question because the markets, in his view, were the root cause of the euro’s problems.
. . . It was not the City or Wall Street that set up a currency without either a fiscal union or a proper central bank to underpin it. If the French and Germans really believe the euro’s problems are down to . . . ‘Anglo-Saxon’ capitalism, the divide could be . . . harder to resolve . . . than previous European spats.

11. Sean O’Grady, 3 August 2012.

On Wednesday the Bundesbank celebrated its 55th birthday . . . it developed an enviable reputation as the world’s pre-eminent central bank. It presided over first the Wirtschaftswunder (“economic miracle”) . . . then came a long period of steady, strong growth . . . The political independence of the Bundesbank was vital. Three times in the previous half century . . . German currency savings had been shredded by politicians generating hyper-inflations. . . So when Chancellor Kohl decided in 1989 that Germany’s destiny was in a United States of Europe with one currency, with economic integration running ahead of political union, there was no institution more sceptical than the Bundesbank. . . there were severe misgivings about giving up the Mark when the euro was created and the demotion of the Bundesbank to . . . one of . . . a committee of . . . central banks in the European Central Bank.

. . .The reality is . . . for so long as the Germans have to pay the lion’s share of the bailouts, the Bundesbank and the German government maintain a veto. . . My understanding is that, even now, there is as yet no final, definitive policy that has been developed in Frankfurt or Berlin, but the predilections of German policy-makers are plain; they will not “print money” and endanger price stability. . . The German authorities seem to have developed a taste for economic management by crisis . . . Crises exert pressure on recalcitrant governments to institute deflation to get costs lower and render their economies more competitive. They are also pushed towards reforming their labour markets, liberalising other markets, breaking up inefficient state monopolies and pulling back on unaffordable welfare.

12. The Times, 13 August 2013.

The eurozone . . . imbalances . . . are immense. . . Currency union made it, by definition, impossible for high-cost economies to gain competitiveness through devaluation. Yet the architecture of the eurozone lacked a mechanism for fiscal transfers across national boundaries to deal with economic shocks. Nor is labour mobile enough in the eurozone for its economies to adjust easily.

13. Andrew Black, BBC Scotland, 29 January 2014.

The Bank of England governor . . . Mark Carney said . . . “. . . the economics of currency unions suggest . . . necessary foundations for a durable union . . . risks have been demonstrated clearly in the euro area over recent years, with sovereign debt crises, financial fragmentation and large divergences in economic performance . . . The euro area is now beginning to rectify its institutional shortcomings, but further, very significant steps must be taken to expand the sharing of risks and pooling of fiscal resources . . . a durable, successful currency union requires some ceding of national sovereignty. It is likely that similar institutional arrangements would be necessary to support a monetary union between an independent Scotland and the rest of the UK.”

14. Martyn Brown, Daily Express, 26 January 2015.

Greece delivered a defiant message to the EU last night after radical Left-wing party Syriza claimed victory in the country’s general election. . . Led by Alexis Tsipras, . . . Syriza wants to renegotiate Greek debt and end the EU’s austerity measures.

. . . The Greek government was forced to undertake deep budget cuts and fiscal reforms as a condition for a £180 billion bailout in 2010 from the “Troika” – the trio of creditors . . . the European Union, the International Monetary Fund and the European Central Bank.

Many in Greece feel slashed public spending has hit the vulnerable hardest while leaving the tax evasion and corruption of the elites untouched.

Mr Tsipras has committed to working with the ECB to renegotiate the terms of the bailout before July when Greece will no longer be able to pay its debts without a further injection of funds.

Success for Syriza in renegotiating would represent another turning point for Europe after last week’s announcement by the European Central Bank of a massive injection of cash into the bloc’s flagging economy after years of trying to clamp down on budgets.

15. Financial Times, 26 January 2015, Emiliano Brancaccio and Giuseppe Fontana.

A typical response to the programme of quantitative easing announced by the European Central Bank is to ask whether . . . it will work. But . . . last Thursday . . . Mario Draghi repeated . . . that the mandate of the ECB is price stability. The primary goal is to bring inflation close to its 2 per cent target, not to boost growth and employment or bring about greater financial stability.

The average inflation in the eurozone for 2014 has been 0.4 per cent. . . According to the ECB, QE will “work” if it brings inflation . . . towards the target . . . whatever happens to the growth rate or . . . unemployment in the eurozone. This is not what many people in Europe hope for when thinking of a successful euro-wide macroeconomic policy.

16. Financial Times, 26 January 2015, Ferdinando Giugliano.

Greece’s . . . public debt . . . stands at about 175 per cent of gross domestic product.

Eurozone governments have already committed to further debt relief for Athens, as long as it sticks to reform and austerity. Alexis Tsipras, leader of the left wing, anti-austerity Syriza, wants to go much further and cut Greece’s debt . . . by a third, arguing that the burden is unsustainable.

. . . “A ratio of 170 per cent does not mean anything,” said Lorenzo Bini Smaghi, a former executive board member of the European Central Bank. “The debt has a very low interest rate and a maturity of over 15 years. Its impact on the economy is much lower than in Portugal or Italy.”

17. What was good for Germany in 1953 is good for Greece in 2015.
Larry Elliott, 6 July 2015.

Lessons had been learned from the mistakes made after the first world war. Then, the victorious Allied powers had imposed a punitive peace on Germany, demanding heavy reparations . . . Marshall tried a different approach . . . direct transfers of money were only part of the help Germany received through the Marshall plan. Far more important . . . was the granting of debt relief at the London conference of 1953.

. . . in 2012, Albrecht Ritschl, a professor of economic history at LSE, said: “While western Europe in the 1950s struggled with debt/GDP ratios close to 200%, the new West German state enjoyed debt/GDP ratios of less than 20%. This and its forced re-entry into Europe’s markets was Germany’s true benefit from the Marshall plan.”

18. What now, asks Germany after Greek voters reject further austerity.
Kate Connolly, 6 July 2015.

The Dithmarscher Landeszeitung . . . said . . . that Greece’s only option now was to introduce a parallel currency or borrower’s notes.

. . . the German government was left with its usual dilemma: whether to take the lead . . . or to . . . wait for a consensus . . . Günter Verheugen, a . . . former EU commissioner, said the European project threatened to fall apart if Berlin did not overcome its fear that to make concessions to Greece would mean other countries would be lining up to receive similar conditions.

19. David Charter, The Times, 17 July 2015.

Wolfgang Schauble, German . . . finance minister, who proposed a temporary exit from the euro as one option during bailout talks at the weekend, also admitted publicly for the first time that Greece might need a debt write-off.

His words put him in a similar position to Alexis Tsipras, the Greek prime minister, because both men seem to believe that the proposed 86 billion euro bailout cannot save Greece and yet both have recommended that their parliaments pass it.

. . . Mr Schauble said . . . it would be hard to make Greece’s debt sustainable without writing off some of it, an idea that he considered illegal inside the eurozone.

. . . Mario Draghi, the head of the European Central Bank, . . . said . . . “The issue is, what is the best form of debt relief . . . within our legal institutional framework? I think we should focus on this point in the coming weeks . . . The future now should see decisive steps on further integration.”

20. Ferdinando Giugliano, Sam Fleming, Claire Jones. Financial Times, 9 November 2015. Data from the IMF.

Since 2007 . . . following the purchase of vast amounts of government bonds in “quantitative easing” schemes. . . central banks have increased their assets by 400 percent in the UK and the US, by more than 200 percent in Japan, and by more than 100 percent in Europe.

21. Paul Marshall, Financial Times, 29 February 2016.

Even shortly after . . . the 2008 financial crisis . . . there was widespread agreement . . .about its origins: an overleveraged US property market and overleveraged banks.

. . . while European bank leverage has come down from the heights of 2007-8, it is still on average higher than in the US, roughly 18 times bank equity capital versus 12. Some European banks . . . are still on leverage ratios of 25-30 times, enough to put fear about their stability at the heart of the recent market sell-off.

22. “Brexit”, , June-July 2016.

Britain votes to leave EU in stunning blow to Europe . . . more people voted for Brexit than for anything else in the history of British democracy.

. . . Brexit is Britain’s great gift to the world: a giant . . . excuse for absolutely everything . . . when the single currency finally implodes or the broader European project disintegrates . . . easier to blame it on the Brexit.

23. “Schauble blames ECB . . . “, Patrick McGee, Financial Times, 6 February 2017.

Wolgang Schauble, German finance minister, has blamed the European Central Bank for an exchange rate that is “too low” for Germany, following criticism last week from the US president’s top trade adviser.

. . . Last week Peter Navarro, head of Donald Trump’s new National Trade Council, told the Financial Times that Germany was exploiting the US and its EU partners by using a “grossly undervalued” euro to create a vast trade surplus.

The comments appeared to place Germany in a category of countries the new US administration has accused of currency manipulation.

Mr Schauble pointed out that Germany could not set exchange rate policy and pinned responsibility for the euro’s weakness against the dollar on the ECB. The German finance ministry was “not an ardent fan” of the ECB’s policy of quantitative easing, which had helped to weaken the single currency, he added.

According to the Ifo Institute, Germany recorded the world’s biggest trade surplus of nearly $300bn last year, out-pacing China by more than $50bn. Critics in Brussels and Washington have called for Germany to reframe fiscal policy and stimulate domestic demand to lift imports.

Last month Mr Trump called the EU a vehicle for Germany and said Nato was obsolete.

. . . Mr Schauble and others on the conservative wing of Chancellor Angela Merkel’s ruling CDU/CSU bloc are concerned that the Eurosceptic AfD, which wants an end to the euro bloc in its present form, is winning support from voters worried about the currency’s stability and low interest, as well as profiting from the refugee crisis.

24. “. . . Germany and the euro”, Wolfgang Munchau, Financial Times, 6 February 2017.

Is Germany a currency manipulator? . . . Why is Germany running such a large surplus? The superficial answer is that it no longer has a currency of its own . . . This fails to acknowledge the underlying dynamics. During the eurozone crisis, Germany insisted on fiscal austerity for the bloc as a whole. It also gave itself a constitutional balanced budget rule. This stops the German public sector from running a deficit that could offset the surplus of the private sector.

. . . Peter Navarro, head of President Donald Trump’s National Trade Council, says the “implicit Deutsche Mark . . . is grossly undervalued . . . the German structural imbalance in trade with the rest of the EU and the US underscores the economic heterogeneity within the EU”.

. . . US criticism will get louder. Unlike the European Commission, the US has leverage.


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