Saturday, March 12, 2011

The Euro Payoff: Germany's Economic Advantages from a Large and Diverse Euro Area

by Adam S. Posen

Peterson Institute for International Economics
March 3, 2011

The ongoing euro crisis has led Germany's political leadership, as well as many citizens of Germany and neighboring countries, to feel that Germany is once again sacrificing its economic interests in service of European unity. In reality, however, Germany has reaped great economic benefits over the last dozen years from being the anchor economy of the Euro Area, and has done so especially during the crisis. The federal treasury gets a direct payoff through seigniorage; German businesses enjoy lower transaction costs, deeper trade, and lower interest rates; and consumers benefit from lower prices and greater variety—all of these benefits increase with the size of the Euro Area. More importantly, the monetary union shields Germany from currency shocks abroad and enables the country to run a sustained trade surplus with its European neighbors, both of which are particularly beneficial during global contraction. These advantages only increase with diversity of the Euro Area. Posen argues that Germany is losing sight of how diversity in the Euro Area leads to the advantages it enjoys, and thus is pursuing a self-defeating policy approach to force countries to be more like Germany that will not increase the euro's long-term resilience or attractiveness. The situation is analogous to the transfer problem Germany suffered from the other side in the 1920s—increasing austerity on over-indebted economies will just lead to losses, and the lenders must restructure the debt and allow the borrowers to export. The best German long-term response to the euro crisis in its own economic self-interest is to pursue greater fiscal integration and stricter bank regulation within the Euro Area, and thereby finance Euro Area adjustment over the long term, not to impose additional macro rules and austerity.


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