Why the euro is good for Germany

Adam Posen is always worth reading; his account of why a large, diverse eurozone is in Germany’s interests is available here.

10 thoughts on “Why the euro is good for Germany”

  1. Would it be possible to express this in 6 sound-bites that could be communicated by the German red-tops?

  2. My understanding is that Axel Weber will be resigning from the ECB and his term as Bundesbank chief is due to expire next year.
    Has he not lost the inflation-only policy on the ECB board and is that not the reason for his resignation?
    I am not clear why his opinions should therefore be essential reading.
    He also sat on the board of a dysfunctional institution and the only European Institution that virtually publicly defaulted on its responsibility as lender of last resort in mid 2010. Why should he now be listened to?
    He is now yesterday’s man. No longer part of the problem or thankfully no longer part of the solution.

  3. @ Joseph Ryan

    Prof Weber departs next month: April 30th

    @ All

    The German establishment would likely endorse most of the points made by Posen.

    There is however a political side to this and the necessity of having a two-way bargain.

    Not one where the peripheral countries are crushed but where they introduce reforms that would benefit themselves – – and show a seriousness about their situations to electorates elsewhere.

    Without the IMF involvement in Greece and Ireland, the prospects for reform and the end of rent-seeking by vested interests, would be very low.

    The powerful vested interests call the shots and the poor are the one’s who are the biggest losers.

    The rich evade tax and can bribe their way to the top of hospital waiting lists etc

    Why has Spain such a huge temporary workforce?

    It’s because it has a system of socialism for the powerful and we can see in Ireland, that there is not a constituency for change on the Left and Right because the status quo is fine for the insiders.

    Some of course would like to have a FREE LUNCH with default rather than reform and expect Dr. Merkel to sell the advantages of seigniorage to her electorate!

  4. @ Joseph Ryan Do you think the implications of such articles would be any different if Jens Weidmann co-signed it instead? Any comment on the nuts and bolts implications for restructuring of debt, as a consequence of the ideas in this paper (and others)?

  5. Interesting to discover that Finland (which borders non euro Sweden and Norway while trading heavily with Russia ,Baltic states and Denmark) is a “hard core” Euro country.

  6. @Ciaran O’Hagan.
    Forgive me if my response to Axel Weber being recommended as suggested reading was a little raw.
    But that is now my initial reaction to anything coming from the old ECB guard. It may not be a rational response and the ECB were not the most culpable in this whole mess but they were a central part of it.
    If they were not capable of or had not the tools to run a currency union, then they should have had the intellectual honesty to admit this and resign their posts before the mess hit the fan. Not when the damage was done.
    On the issue of the debt restructuring both banking and sovereign I am no more than an interested outsider with a small knowledge of finance. But here goes. [I am depending on Thompsons news agency for a report on Weber’s suggestions.]

    1. The proposal to automatically extend bond maturities, while continuing to service the bonds, is simply the equivalent of going interest only on a loan about to mature. It is ok in itself but is only a short term mechanism until the business, either bank or sovereign, can recover. If the patient does not or is not capable of recovery, what then?

    2. I suspect too that bond buyers would shift to buying shorter terms and eschew longer bonds for all but the most financially sound.

    A. There are a number of things that must be done to restore stability.
    1. The ECB must act like a central bank and “close down” ailing or bust banks. The capital to set this up could easily be raised from a euro banking transaction tax.
    2. When the bank is deemed ‘bust’ and taken over, bondholders should suffer an automatic significant loss (up to 50%). Any further shortfall would be made up from the banking transaction tax, a euro tax collected only by the ECB and levied if possible only on short term speculative transactions.
    3. There should be no question of any private banking debt or other private debt contaminating sovereign debt.

    Sovereign debts problems should be dealt with differently, but again controlled by a revamped ECB. Weber’s proposal may be useful here as a short term mechanism but he is nationalistic in his interpretation of moral hazard.
    1. The debt should be partially written off (say 30%) as a bad debt on the country’s book and the bad portion transferred to the ECB books for that country.
    2. The ECB should then recoup that bad debt directly with a levy through the national parliament of that country, imposing a surtax on the top 25% income earners to recover the funds directly to the ECB. This would ensure that the better off paid directly for the failure of the State and not the less well off.
    3. All government bonds would be issued under these strict conditions. .
    4. The above would get away from the position at present whereby banks debts whereever arising are nationalised on the country of origin of the offending bank and socialised on the poorest sections of that society.
    5. It would also incentivise the elites in the various countries to run the affairs of each country in a more prudent fashion, knowing that they would ultimately pay for the destruction they caused.
    6. Both moral and hazard would thus begin to edge a little closer together in confronting the rampant immoral hazard that exists in modern banking and State financial affairs.

    Forgive the length of the post.

  7. One has to admire how Germany has managed re-unification. It is a truly magnificent achievement. The Euro has been central to this success …. and the process is ongoing.

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