Financial Times
June 29, 2011
Yesterday’s vote in Greece may have gained the leaders of the European Union a bit more time, but it has certainly put up the eventual cost of the crisis, not least to Germany. More than 20 years ago, Nicholas Ridley was forced to resign from the British cabinet for describing economic and monetary union as a “German racket”. The assertion was unfair to Germany but, even today, there is a consensus that it reaps huge benefits from Emu. This was only ever partially true; it is no longer true at all.
German manufacturing has certainly benefited from Emu and earlier from the exchange rate mechanism, both of which were used to maintain the competitiveness of its manufactures. However, this was at the expense of German consumers and taxpayers. In so far as Mr Ridley’s “racket” had substance, it reflected an implicit collusion between German manufacturers, bankers and politicians. Certainly, outside Emu, the likely appreciation of the Deutschmark would have made German manufacturers less competitive, but this would have stimulated the expansion of other (underdeveloped) sectors of the economy, raising economic growth and living standards.
German export success is reflected in its current account surplus, but this has been recycled into other countries within Emu, including Greece. Emu replaced exchange rate risk with credit risk but, encouraged by pro-Emu disinformation markets, mispriced credit risk. Emu was, above everything, a credit bubble. Well, the credit bubble burst and, when that happens, usually creditors get hurt – but not within Emu where taxpayers are, in effect, bailing out German and other EU banks.
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