_ Yuri Kofner, economist, MIWI Institute for Market Integration and Economic Policy. Munich, 16 January 2022. First published in the konflikt Magazin.
On January 1, 2022, exactly 20 years have passed since the full introduction of the euro in Germany. Pro-European federalists from the entire spectrum of the old German parties from the FDP to the Greens celebrated this event to underline the supposedly great success story of the euro and thus support the discursive overtone for the transformation of the EU into a fiscal, debt and social union.
A good reason to take another critical but fair look at monetary union from a liberal-conservative standpoint. Criticism of the euro was one of the most important founding demands of the AfD, which is not shared so passionately by other European patriotic democratic parties such as the FPÖ, Lega or Rassemblement National.
More than economic reasons, the introduction of a single European currency was motivated by ideological and political considerations. On the one hand, the euro was presented as the culmination of the peace project of European integration. On the other hand, the idea of monetary union was largely promoted by francophone statesmen Pierre Werner and Jacques Delors in order to reduce the influence of the Bundesbank and bring the powerful German economy under the control of a common monetary policy. It was not for nothing that French President Mitterand called the Deutschmark Germany’s “atomic bomb”, and it is an open secret that Chancellor Kohl had to give it up in return for German reunification.[1]
But that doesn’t mean the euro didn’t also have good economic reasons… and implications. There are.
First, the introduction of the euro eliminated the transaction and uncertainty costs of exchanging currencies within the eurozone. According to a recent study by the well-known Austrian economist Gabriel Felbermayr, the euro increased trade between member states by 2.8 percent and German GDP by 0.4 percent. However, this is relatively small compared to the benefit of the European single market, which increases intra-EU trade by 35.5 percent and contributes 4 percent of Germany’s gross domestic product.[2] It is precisely this single market that the AfD wants to focus on again in the form of the “European Economic Community 2.0”.
On the other hand, the ultra-lax monetary policy that the European Central Bank introduced in 2014 – officially to boost consumption through cheaper bank loans – made it easier for the member states to take on debt – and not just for southern European ones. Studies by the DZ-Bank and the Bundesbank show that the federal government saves almost 50 billion euros in interest payments every year.[3]
Third, in 1996 the Deutsche Mark accounted for 13.6 percent of world foreign exchange reserves. The euro peaked at 23 percent in the years leading up to the global financial crisis, but declined to around 19 percent by 2020.[4] Nevertheless, the euro is the second-largest international reserve currency after the dollar, which gives the EU, and thus indirectly Germany, considerable influence on the world political stage. Just think of the power of extraterritorial US sanctions, which Washington can enforce thanks to the dominant role of the US dollar.
This is an example in favour of economic integration: together we are stronger than apart. In times of geopolitical rivalry and the rise of influential global megacorporations, the political conservatives should not ignore this fact. Depending on their structure and intention, regional integration blocs can not only tie up the sovereignty of the nation state, but also strengthen it. The conservative historian David Engels, for example, also advocates this logic.[5]
However, the wrong and asymmetrical design of both the EU and the euro area has led to considerable economic costs – both for Germany and for the other member states. As opposed to being Europe’s olive branch of peace, the monetary union could become its ultimate gravedigger.
First, the negative interest rate policy costs German private savers over 35.5 billion euros every year. Analysis by the renowned economist Hans-Werner Sinn shows that Germany’s sizeable foreign assets could be EUR 60.4 billion higher each year without the negative interest rates.[6]
Secondly, the massive flood of money and credit that the expansive monetary policy made possible led to a zombification of the German economy. According to economist Markus Krall, between 15 and 20 percent of German companies are ineffective, uncompetitive and non-innovative zombie companies that are only kept alive by “cheap” loans.[7] As a result, Germany’s annual economic growth will be slowed down to less than 1 percent per annum in the current decade.
Third, the euro has created significant trade imbalances in Europe. On the one hand, it tripled Germany’s trade surplus with the euro countries from around 24 billion euros in 1996 to 72 billion euros in the last few years before Corona.[8] The usual exchange rate effect should have made German exports more expensive, but the fixed exchange rate between the euro countries meant that German products abroad became relatively cheaper than they should have been. In contrast, the export sectors of other member states, e.g. Italy, have become less competitive in relative terms. In the Mezzogiorno in particular, this has led to a sometimes staggering level of unemployment. Contrary to popular belief of German liberals and conservatives, Italy has actually lost more to the euro than Germany. According to a study by the Freiburg think tank “cep”, since its introduction the euro has made every Italian poorer by almost 8,800 euros by 2017.[9] And speaking of prejudices: Yes, the euro has made it much easier for the Banka d’Italia to take on government debt, but no: Italy is not a recipient of German handouts, but actually the third largest net contributor to the EU budget. (approx. EUR 4.7 billion annually). [10]
Yet isn’t the export surplus beneficial for the German economy? Well, not necessarily. Firstly, the euro makes imports to Germany of (pre)products more expensive. Chancellor Schröder’s labour market reform (Hartz IV) of 2005 counteracted this by keeping wages low and thus German companies competitive abroad. Second, the single and “cheap” currency made it easier for southern European governments and companies to take on the debt that fuelled their large trade deficit with Germany. By the end of 2021, this resulted in unsecured Bundesbank claims of over 1.2 trillion euros – the notorious TARGET II balance.[11] This is comparable to when a landlord (i.e. the Bundesbank) writes every beer order on the tab of an unemployed alcoholic. At the end of the month, the innkeeper sold a hundred beers – but without ever having made a penny in sales.
So what to do? The first option would be the good old AfD demand that Germany leave the euro and reintroduce the D-Mark. Modelling by the MIWI Institute shows that Germany’s GDP would increase by 1 to 1.3 percent thanks to changes in exchange rates and interest rates.[12] However, this would not go smoothly. The Federal Republic would most likely lose its TARGET II claims, which are as large as a third of the German economy.
The second option could be the reform of the euro area into a two-tier European currency community and the introduction of parallel currencies, as the AfD founding professors Bernd Lucke and Dirk Mayer demanded in 2013 and the Lega leader Matteo Salvini threatened in 2019.[13] However, a structural reform of the Eurosystem seems just as unlikely as that the ECB would reconsider its monetary policy at the kind request of a potential future AfD federal government. Third, the Bundesbank could replace TARGET II claims with gold assets, as economist Philipp Bagus suggests[14], or fourth, these claims could at least be used as guarantees for government investments in domestic infrastructure. Each option has its downsides, but any of them could still be better than the current slow monetary death of Europe.
Notes
[1] Sinn H.W. (2014). The Euro Trap. Oxford Press.
[2] Felbermayr G. et al. (2019). Die (Handels-)Kosten einer Nicht-EU. IfW Kiel. URL: https://www.ifw-kiel.de/fileadmin/Dateiverwaltung/IfW-Publications/-ifw/Kiel_Policy_Brief/2019/Kiel_Policy_Brief_125.pdf
[3] Bundesbank (2017). Zur Entwicklung der staatlichen Zinsausgaben in Deutschland und anderen Ländern des Euroraums. URL: https://www.bundesbank.de/resource/blob/665400/8ab6760c121a26feb297c6d6216768a0/mL/2017-07-zinsausgaben-data.pdf
[4] Bundesbank (1997). Die Rolle der D-Mark als internationale Anlage- und Reservewährung. URL: https://www.bundesbank.de/resource/blob/691414/4fc9f0a56d44a730e2a5134a92b9f326/mL/1997-04-dmark-data.pdf | Lagarde C. (2021). The international role of the euro, June 2021. ECB. URL: https://www.ecb.europa.eu/pub/ire/html/ecb.ire202106~a058f84c61.en.html
[5] David Engels D. (2019). Renovatio Europae. Plädoyer für einen hesperialistischen Neubau Europas. Manuscriptum. Lüdinghausen – Berlin.
[6] Sinn H.W. (2018). Kosten der Niedrigzinspolitik. URL: https://www.hanswernersinn.de/de/themen/niedrigzinspolitik
[7] Krall M. (2020). Die bürgerliche Revolution. Kopp Verlag. Rottenbutg am Neckar.
[8] Eigene Berechnungen anhand von: BMWi (2021). Facts about German foreign trade. URL: https://www.bmwi.de/Redaktion/EN/Publikationen/Aussenwirtschaft/facts-about-german-foreign-trade.pdf?__blob=publicationFile&v=6 | WITS (2021). Germany trade balance 1996. URL: https://wits.worldbank.org/CountryProfile/en/Country/DEU/Year/1996/TradeFlow/EXPIMP/Partner/by-country#
[9] Gasparotti A., Kullas M. (2019). 20 Jahre Euro: Verlierer und Gewinner. cep. URL: https://www.cep.eu/fileadmin/user_upload/cep.eu/Studien/20_Jahre_Euro_-_Gewinner_und_Verlierer/cepStudie_20_Jahre_Euro_Verlierer_und_Gewinner.pdf
[10] Kullas M. et al. (2019). 10 Jahre Umverteilung zwischen den EU-Mitgliedstaaten. Centrum für Europäische Politik (cep). URL: https://www.cep.eu/eu-themen/details/cep/10-jahre-umverteilung-zwischen-den-eu-mitgliedstaaten-cepstudie.html
[11] Bundesbank (2021). TARGRT 2 Balance. URL: https://www.bundesbank.de/en/tasks/payment-systems/target2/target2-balance/target2-balance-626782
[12] Kofner Y. (2021). Welfare effects of DEXIT: Deutschmark and European Economic Community 2.0. MIWI Institute. URL: https://miwi-institut.de/archives/1060 | Kofner Y. (2021). Blue Deal: Fiscal and economic effects of the AfD’s economic program. MIWI Institute. URL: https://miwi-institut.de/archives/1284
[13] Mayer D. (2013). Parallelwährungen als Weg aus der Euro-Krise. Universität Hamburg. URL: https://www.hsu-hh.de/ordnung/wp-content/uploads/sites/549/2017/08/EWUA_Parallelw%C3%A4hrung-als-Krisenl%C3%B6sung_Orientierungen_0313.pdf | Lucke B. (2017). Warum die Auflösung der Eurozone mit dem Austritt Griechenlands beginnen muss. URL: https://bernd-lucke.de/wp-content/uploads/2017/10/2017-10-23-Warum-Deutschland-nicht-aus-dem-Euro-austreten-sollte.pdf | Scharpf F.W. (2018). There is an alternative: A two-tier European currency community. Max-Planck-Institut. URL: https://www.mpifg.de/pu/mpifg_dp/2018/dp18-7.pdf
[14] Bagus P. (2021). Solving the Target 2 problem with haircuts and gold. MIWI Institute. URL: https://miwi-institut.de/archives/1230
*Translated from the original publication in: Kofner J. (2022). 20 Jahre Euro – eine Betrachtung von rechts. konflikt Magazin. URL: https://konfliktmag.de/20-jahre-euro-eine-betrachtung-von-rechts/
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