Germany is the real winner in a transfer union

by Sebastian Mallaby

Financial Times
November 24, 2011

Over the past 18 months, Germany has tried every trick to limit its contribution to the euro bailouts. It has pushed self-defeating austerity onto bankrupt countries. It has called in the International Monetary Fund. It has tried to pass the hat to China. It has discovered an improbable and futile taste for leveraging up the European Financial Stability Facility. But now these tricks have uniformly failed, and the continent approaches the abyss – with Germany itself suffering the humiliation of a failed bond auction. It is time for Germany to decide once and for all: how much will it pay to save Europe?

Germans can reach the sensible answer only if they discard the myth, widely cherished in northern Europe, that peripheral southern countries are the undeserving beneficiaries of a charitable transfer union. You can see whence this myth comes: the Greeks do retire in their fifties; they did lie about their budget deficit; and it is galling when they demand serial bailouts. But despite those aerial photographs of untaxed Athenian swimming pools, the north’s resentment of lazy southerners is overdone. The truth is that Germany derives myriad benefits from the currency union. It should pay more to save it.

Start with a simple point about exchange rates. Since 2009, stable open economies from Brazil to Switzerland have seen hot inflows of money and upward pressure on their currencies. If Germany had not been tethered to the euro, its money would have behaved like the Swiss franc, spoiling the recent party in its manufacturing heartland. Between August 2009 and May 2011, German exports jumped by 18 per cent. A reasonable estimate suggests they would have risen only 10 per cent if Germany had been outside the euro.

Conversely, if peripheral Europe had not been tethered to the euro, its currencies would have fallen over the same period. Rather than facing a financial shock and a crisis of competitiveness, they would have faced the first without the second. Of course, the currency union that makes adjustment in the periphery so excruciating is the very same currency union that handed Germany its export boom. Rather than condemning lazy southerners, the Germans should share the loot.

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