Who Really Gains from the Euro?

Prior to the introduction of the euro, the European Commission estimated that the common currency would result in economic gains of close to 2.5% of the members’ GDP each year — and possibly much more. Needless to say, these studies didn’t take into account the possibility of a fiscal crisis like the one now roiling the eurozone.

It is this crisis that has renewed interest in the question of whether eurozone countries have realized gains from the euro’s introduction — and, if so, who has gained the most.

Not surprisingly, the Southern members do not tire of arguing that Germany gains the most, obviously to the South’s detriment. As proof, they contend that Germany (and other Northern members) are running sustained and increasing trade surpluses with the Southern members. In effect, Europe’s South argues, it not only creates jobs in Germany but also transfers jobs from South to North.

More surprisingly, this is also what German Chancellor Angela Merkel argues in order to convince her citizens to support a risky rescue plan. The Financial Times adds the twist that, if the German mark were still in existence, the deutschmark would have appreciated like the Swiss franc and made German exports more expensive.

These arguments are perhaps good for a coffeehouse conversation or for political convenience, but they are wrong in economic terms. Obviously, if the Germans still had the mark and the Southerners their currencies, we would not find ourselves in the current situation because there would be no euro crisis.

Germany had an appreciating currency since the 1960s (except for a few years after unification) and lived well with it. The export surplus with the South is not a factor specific to the eurozone, as German exports to countries outside the eurozone have risen substantially more than those to the South of the eurozone.

It is true that German competitiveness has increased over the last ten years in relation to Europe’s South. But this gain in competitiveness is not due to anything the Germans have done, but rather stems from the South not playing by the rules of a stability-oriented monetary zone.

Sustained competitiveness requires cost controls in line with productivity increases. This is what Germany did during the first five years of the euro. Unit labor costs were out of line and, in the absence of devaluation as a policy tool, Germany restrained wages. While a painful process, it was necessary to avoid job losses.

Does Germany gain from trade surpluses in general and with the South in particular? If there were no long-run alternative to the existing economic structure, then one could argue that surpluses maintain or create jobs. But surely it is possible to shift export activity to satisfy domestic demand and maintain domestic employment. This would represent a gain to Germany, and a revaluation would have triggered such a switch.

Why would it be a net gain for Germany? In economic terms, the counterpart to a trade surplus (more precisely, a current account surplus) is net lending abroad. Germany has a savings rate of 21% of GDP on average, of which it currently uses about one-third, or 6% of GDP, to finance the current account surplus.

Accordingly, with a balanced current account and unchanged savings (saving decisions are independent of the uses of savings), Germany could invest 6% of GDP more at home and generate additional jobs. Of course, this is a problem of German economic policy, but the point is that Germany does not need, and does not gain, from its surpluses.

Is the conclusion of all this truly surprising? The real devaluation of Germany in the eurozone (higher inflation in the South means the Southern countries had a real revaluation and Germany a real devaluation) is not what Germany engineered. Nor does it suit Germany (although it suits the country’s exporters) — and it causes losses in terms of less investment and employment in the country.

Abstracting from the risk premium, which was just a few basis points before the crisis, the South has lower real interest rates than the North due to the former’s higher inflation rates. The South loved it, but the increasing level of indebtedness of governments and households was also due to that privilege.

Germans were reluctant to join the European Monetary Union — not for lack of solidarity with Europe, but for the fact that the expected gains were the lowest among all participants and the risk for Germany the highest. Germans already had what a currency can deliver: price stability and international acceptance. The euro added scale, but surely not quality.

Southern countries, in contrast, gained international acceptance with the euro, as well as price stability and low interest rates, in real terms even lower than in the North. The Northern partners of Germany, meanwhile, gained independence from the Bundesbank and co-responsibility in managing the euro.

Had the South responsibly used the advantages it gained from the euro’s introduction, the gains would have been much larger for the South than for Germany. As these countries’ politicians have chosen to squander these advantages by not just postponing the day of fiscal and economic reckoning, but by adding a large negative load to it by going deeper into debt, there is now a big crisis for all members (quite an extraordinary turn of events, imposed by the South on the North!).

The North is obviously not blameless: It glossed over the risks in an excessively sloppy Maastricht Treaty, tolerated the abuses without action until the crisis exploded and failed to provide leadership during the crisis.

The cost of the crisis turns the potential benefit for the South into a substantial loss for everybody (exceptionally even for banks), at least as far as the first decade of the monetary union is concerned.

The key question today is not who is gaining and who is losing, as all of the eurozone is in a serious mess. The key questions are rather: Will there ever be strong leadership in the eurozone, leadership that is based neither on myth, nor improper economic analysis — nor a combination of both? Will the Southern governments and institutions undergo the reforms under discussion not only on paper, but also in reality?

If there are strong doubts about either answer, then it would be better to search for a currency regime separating the Northern and Southern currency spheres.