by Adam S. Posen, Peterson Institute for International Economics
Op-ed in Die Welt
February 19, 2010
English language version © Peterson Institute for International Economics.
Listening to the current hue and cry over Germany's role in backstopping Greek restructuring, one might be duped into thinking that having the euro extend beyond the core economies was a great mistake. Whatever the balance of economic costs and benefits of euro adoption for other countries, for Germany itself, widespread euro adoption has been a boon. There are many advantages to being the anchor economy for a currency zone from which Germany has benefited over the last 11 years. None of those advantages are imperiled by the Greek situation and all of those advantages increase with the size of the euro area.
First of these advantages to Germany is seigniorage: the public revenues generated when actual currency issued is used outside of the originating area. Throughout Eastern Europe and the Med, as well as in some forms of illicit commerce globally, cash euros are in wide usage—and that translates into hard cash for the German government budget, as much as 0.2 percent of GDP (or 5 billion euros) a year, every year. That usage abroad is much greater, and has more potential for growth in usage, than deutsche mark (DM) usage ever had.
Second, companies doing business in the euro area get to price and invoice most of their transactions in euros without having to worry about exchange rate fluctuations. That applies to both German companies exporting to other euro area members and foreign companies doing business in Germany. Greater certainty reduces transaction costs, lowering costs to the consumer. It also expands trade, creating more variety and competition, also of benefit to the economy's productivity growth. Germany, as the Euroexportmeister, benefits most from this network of stability—and again has a wider and deeper range of trade in its own currency now than it did under the DM. And that means more transactions with producers outside of the euro area are denominated in euros as well, reducing costs and risks there, too.
Third, interest rates for businesses to borrow have been reduced on average. Some of this benefit was felt much more in other euro area economies than in Germany, since Germany already had the lowest risk premia on its borrowing. Still, the significant deepening of euro-denominated bond markets has paid off for many German businesses and households as well by expanding access to credit. That deepening of bond markets is a direct result of the euro's wide adoption including by Germany. This attracts inflows of capital to Europe beyond what came in to just the DM-denominated debt market, which increases liquidity. These gains dwarf any risk premia on overall euro debt that are feared, and may not even come to pass.
Fourth, at least still in prospect, the euro provides a platform for Germany to stand with the Americans, Chinese, Japanese, and now other rising economic powers in international negotiations. Yes, Germany was an original member of the G-5 then G-7, and had often spoken for continental Europe in the late 20th century. Increasingly, however, it will require the weight and legitimacy of the euro area as a whole to have a major voice at the table. In fact, that is an argument for the German political discussion to favor greater European integration in German self-interest. And that begins with how Greece and other "peripheral" economies—including in Eastern Europe outside the euro area—are treated.
Finally, and most importantly for the present situation, Germany benefits directly from the stability that the euro provides to surrounding countries—and that includes from having southern membership of the euro area. Germany gets to run a trade surplus with member countries that otherwise would not be able to afford so many of its exports. People should remember what happened in 1992 and 1995, the last time that other European economies found their combination of demand growth and real exchange rates against the German economy unsustainable: massive abrupt nominal depreciations against the DM, which hammered German export competitiveness and then shocked the depreciating economies. Those were lose-lose situations, and a repeat of such is what the euro prevents.
So the current fevered debate in Germany over a potential contribution to a strictly conditional loan to Greece—which will in any event be fully repaid—is misplaced. The German economy is a beneficiary of being able to run a sustained trade surplus with its European neighbors, particularly in a time of global contraction. It is in the Germans' own enlightened self-interest to provide financing to ease the process of real adjustment in those euro area economies that have overstretched on spending on German goods. That will not only keep the markets open and prevent contraction in growth on both sides of the trade——it will be an investment in the continued attractiveness of the euro area to future members. An expanded euro area remains so much in Germany's direct interest that it is worth financing, if not paying for.
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