Financial Times
September 25, 2012
Should Germany leave the euro? It is, after all, the big country with an obvious exit option. The question becomes more pertinent after the decision by Angela Merkel, Germany’s conservative chancellor, to support Mario Draghi, president of the European Central Bank, against Jens Weidmann, her appointee as head of the Bundesbank, over plans to buy bonds of governments in difficulty. The president of the Bundesbank, Germany’s most respected institution, has now become a spokesman for conservative German eurosceptics. The ECB, Germans realise, will not remain a reincarnated Bundesbank. Once again, we are reminded that the eurozone is set to be a miserable marriage. Might a separation, however disruptive, be better?
If we are to address that question from a German perspective, we must distinguish false arguments from valid ones. As Paul de Grauwe, the Belgian economist, now at the London School of Economics, shows in a recent co-authored article, it is easy to find examples of the former.
This paper asks whether the accumulation of net claims within the European System of Central Banks means that Germany would lose a great deal if the eurozone were to break up. Its response is: no.
First, Germany has accumulated net claims on the rest of the world – and on other members of the eurozone – not because of internal central bank accounting, but because it has large current account surpluses. Germans have been running two businesses: exporting goods, at which they are excellent, and importing financial claims, at which they are not. In brief, Germany’s surpluses have exposed Germans to financial risk. But balances inside the eurosystem are not a good indicator of that risk. They have exploded, argues the paper, because of speculative financial flows, not current account imbalances (see chart).
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