Thursday, May 07, 2020

Germany benefits from Euro but would also have thrived with D-Mark

Germany benefits from the euro in common with other member countries and it would pay a hefty price if the Euro System collapsed.

In 2012 the German finance ministry carried out a breakup analysis according to the Der Spiegel magazine and found that the breakup costs and the re-introduction of the D-Mark would lead to an up to 10% fall in GDP in the first year. Unemployment would rise again to its record high of over 5m in 2005.

2012 was the 180th anniversary of the death of Johann Wolfgang von Goethe (1749-1832), the renowned German writer.Faust, his most famous creation which was based on a centuries-old legend, was deployed against modern-day money printing, known as quantitative easing (QA), in Goethe's hometown of Frankfurt, host to two central banks in modern times — the Deutsche Bundesbank and the European Central Bank.

The experience of Frederick the Great's money shenanigans and that of 1790s France may have influenced Goethe.

Jens Weidmann (pictured above), president of the Bundesbank presented a well-known German parable to an audience of bankers in September 2012: "Let me remind you briefly of the “money creation” scene in Act One of the Second Part of Faust. Mephistopheles (the spirit of the Devil), disguised as a fool, talks to the Emperor, who is in severe financial distress."

German court's "declaration of war" on Euro

In 2018 the European Court of Justice of the European Union (ECJ) ruled that bond-buying by the European Central Bank (ECB) was legal. However, on Tuesday the Federal Constitutional Court of Germany sitting in Karlsruhe called the ECJ's ruling “incomprehensible” and ultra vires (Latin phrase meaning "beyond the powers"). The Karlsruhe court said the bond-buying partially contravenes the law as neither the German government or parliament officially approves it.

The Financial Times reports today that four ECB council members told the newspaper that they were determined that the ECB should not respond directly to the German court, saying such a move would damage the central bank’s independence and expose it to pressure from other national courts. A majority of ECB governing council members oppose giving a response, they said.

The Bundesverfassungsgericht ordered the German government and the Bundestag (parliament) to ensure that the ECB carried out a “proportionality assessment” of its quantitative easing (QE) programme of the purchase of government and other bonds, to ensure their “economic and fiscal policy effects” did not outweigh its policy objectives. The justices said they would block new bond-buying unless the ECB responded within three months. See ruling summary here.

For a national court to reject the ruling of the top court of the EU is a challenge to the legitimacy of EU law.

“If every constitutional court of every member state starts giving its own interpretation of what Europe can and cannot do, it’s the beginning of the end,” said Guy Verhofstadt, MEP and former Belgian prime minister.

Clemens Fuest, president of the Ifo economic institute at the University of Munich, said the German court’s dismissal of the earlier ECJ ruling “reads like a declaration of war.”

Fuest added that the ruling restricts the scope for the ECB to support highly indebted Euro Area countries through bond purchases. “In turn, this puts increasing pressure on Euro-Area governments to provide assistance to individual member states in the form of fiscal policy instead of relying on the ECB.”

Olaf Scholz, Germany’s finance minister, said: “It appears that we must strengthen European co-operation, and today’s verdict boosts our efforts to do this because it concedes to the ECB the fundamental right to carry out such bond-buying programmes.”

Germany's benefit from Euro and Skills

It's often argued that German exports would be seriously hit by a high valued Deutsche Mark compared with the benefit of a low valued Euro. However, it's the net trade that counts. About two-thirds of the value of German imports are from Europe and these would benefit from falls in supplier currencies.

Every Euro System country benefits from lower transaction costs in the single currency area.

Bruegel, the Brussels-based think-tank, says in a paper: "the evidence indicates that the main differences across countries are dictated by the industrial structure. Similar firms behave similarly across countries, but Germany has a structure which favours the internationalisation of its economy much more than Spain and Italy. In particular, the greater presence of medium and large size firms dictates greater involvement in international activities."

In addition, "What explains Germany’s exceptional export performance relative to other European countries? We find that Germany is a world champion in exporting because it is a world champion in organizing. The export superstars of Germany base their export business model on quality by operating with a decentralized less hierarchical organization which empowers workers at lower levels of the firm hierarchy. As a result 40% of German exporters sell top-quality export goods. Decentralized management has been effective to increase the export market share of top quality goods in Germany which demonstrates that decentralizing the organization may actually work to improve the product quality of exporters. Austria shares many of these features with Germany, while the superstars of all other European countries base their export business model mainly on price with or without a care for quality. The focus on quality may explain why export growth in Germany and Austria rebounded quickly after 2009 in spite of rapid rising nominal wages."

In another post, the economists note that "the rapid modernization of China may have favoured particularly Germany’s exports with its comparative advantage in machinery, transport equipment and other manufactured goods. The data seem to support this. However, other European countries, such as France and Italy, also have a large base in transport and manufacturing goods. Therefore, the question remains: why have the Chinese such a love for German goods?"

In a survey of 15,000 manufacturing firms based in Austria, France, Germany, Hungary, Italy, Spain and the UK, companies on average were 40% smaller than in Germany.

In Italy and Spain, only 5% of firms had more than 250 employees compared to 11% in Germany. The average firm size by employment was 43 in Italy, 49 in Spain and 76 on average in Germany.

Germany has about 300,000 exporters compared with France's 120,000.

The Fortune Global 500 is an annual list of the top 500 global companies by total revenues – public and private included.

The 2019 Fortune Global 500 companies generated aggregate revenues of $32.7tn and aggregate profits of $2.15tn: The US has 121 companies in the rankings followed by China at 119; Japan 52; Germany has 28 firms; France 31; Switzerland  14; Spain 9 and Italy 6. Sweden, Denmark and Ireland have 1 each.

The German-based Centre for European Policy (CEP) concluded in 2019 that Germany has gained most from the introduction of the Euro: almost €1.9tn between 1999 and 2017. This amounts to around €23,000 per inhabitant. Otherwise, only the Netherlands has gained substantial benefits from the introduction of the euro. In most of the other countries analysed, the euro has resulted in a drop in prosperity: €3.6tn in France and as much as €4.3tn in Italy. In France, this amounts to €56,000 per capita and in Italy €74,000.

The CEP took down a statement in response to reactions to its methodology.

The authors argued that other members lost competitiveness because they had lost the devaluation option. However persistent devaluations never made a country rich.

Economic research shows that a 53% fall in the value of the Italian Lira against the German Mark in 1979-1999, had no impact on Italian employment.

How German innovation in manufacturing beats United States counterparts.

Irish data not reliable due to multinational firm tax distortions