Back to the Deutschmark

The debt crisis has upended lots of my assumptions about European politics, so it’s perhaps not surprising that I find myself agreeing with just about everything in this piece from The Telegraph by Mehreen Khan, advocating a German exit from the euro. Less surprisingly, I also agree in general with this NY Times article by Shahin Vallee, who also concludes that the (virtually inevitable) breakup of the euro would be better achieved by an orderly German departure.

One point made clear by the Greek disaster is that the mechanics of exit from a currency union are feasible only if the new (or, in this case, revived) currency is stronger than the old one. So, the appropriate way to break up the euro is for Germany, and other countries that want to remain in a German currency union, to switch to the Deutschmark. That way, existing euro-denominated contracts and accounts stay in euros, which can be freely exchanged for marks. Since the mark is expected to appreciate, there’s no reason for a run on banks in advance of the switch.

All this assumes that a breakup of the euro is desirable. In my view, the euro has failed on every count.

* The euro has failed in the aim of creating an Europe-wide currency union. The countries still outside are counting their blessings, and will almost certainly never join.

* The fallback position, based on the idea of the eurozone as the core of “two-speed” Europe has also failed. This idea was always based on the assumption of a vision shared between France and Germany, an assumption that has been destroyed, in large measure, by the euro. Far from being a unifying force, the euro has gone a fair way to reviving the demons the EU was created to keep at bay

* Economically, the euro has been a disaster, producing a deep depression in most of Europe and not even doing much for Germany. It’s an open question whether this was an inevitable consequence of a common currency, or the result of ECB mismanagement in the crucial years after the crisis, but either way, this is a failed experiment.

86 thoughts on “Back to the Deutschmark

  1. @Ikonoclast

    Wikipedia is a double edged sword in many respects. On the one hand one can get basic information on say medicine or law. On the other hand one can’t do much with it. It is not only Wikipedia which is a double edged sword, but so are many other data sources, including the one I linked to.

    The information regarding the NIIP concept (as distinct from measurement problems) is identical to what I wrote twice, the first time in short hand, the second time in a longer hand to answer your question on direct foreign investment.

    Please accept that a negative NIIP for ‘country A’ is NOT debt owed by ‘country A’ to ‘foreigners’. National accounting data does not include banking and finance data. You cannot find in the data in these accounts which is not in it.

    The banking and finance data is partially collected by monetary authorities, national as well as international.

    As can be seen from the following paper by the Bank of International Settlement (BIS), there is no satisfactory data collection system even after the global financial crisis, although some efforts are being made to improve the data collection system.

    http://www.bis.org/publ/qtrpdf/r_qt1212h.pdf

    There is no need for me to summarise this paper. It should be read in one piece. I draw particular attention to the difference between the English law on debt and the Greek law on debt. It was the former which prevented a write-down of privately held debt.

    So, why did I introduce a link which caused great consternation for you? There are several reasons. The most important being my hope it would raise questions in the minds of those who were so sure as to what is the nature of the problem with Greece and the EUROzone. I do hope the paper by the BIS challenges pre-conceived ideas and the uselessness of debates based on these ideas.

    The link to the Eurostat data surely should raise questions in the minds of the same people who were so sure as to what the nature of the problem with Greece and the EUROzone is. The arguments directed toward Germany (not only by blog commenters but also by a quite vocal Nobel Laureate would seem to pertain more to Luxemburg. No? May I suggest you look up the current account data for Luxemburg. You’ll find tiny numbers, relative to those of other EU countries. So, what is going on?

    The ‘global economy’ is now very different to what is was during the Bretton-Woods international monetary system. IMO, the entire discussion of Keynesian stimulus policy vs Austerity is caught up in an outdated mental model. Why? Because the relevant data is not recorded in the national accounting data framework that evolved during the Bretton-Woods era. The relevant data I am talking about are financial contracts, called financial securities. There are many types. Who issues which type under which juristiction and in which currency unit and bought by whom in which juristiction at what price in which currency unit, traded where and redeemed under which conditions are questions that cannot be answered satisfactorily as yet, as per the experts, the BIS. We live in a partially segmented global economy with multinational firms, including banks, and an incredibly fast communication system. And the problem is, there is no natural limit on the amount of financial securities that can be generated (as per Radner’s mid-1970s theoretical model)

  2. Ikonoclast, my reply to your last post is in moderation. I’ll copy it below to overcome the apparent 2-links restriction.

    Wikipedia is a double edged sword in many respects. On the one hand one can get basic information on say medicine or law. On the other hand one can’t do much with it. It is not only Wikipedia which is a double edged sword, but so are many other data sources, including the one I linked to.

    The information regarding the NIIP concept (as distinct from measurement problems) is identical to what I wrote twice, the first time in short hand, the second time in a longer hand to answer your question on direct foreign investment.

    Please accept that a negative NIIP for ‘country A’ is NOT debt owed by ‘country A’ to ‘foreigners’. National accounting data does not include banking and finance data. You cannot find in the data in these accounts which is not in it.

    The banking and finance data is partially collected by monetary authorities, national as well as international.

    As can be seen from the following paper by the Bank of International Settlement (BIS), there is no satisfactory data collection system even after the global financial crisis, although some efforts are being made to improve the data collection system.

    http://www.bis.org/publ/qtrpdf/r_qt1212h.pdf

    There is no need for me to summarise this paper. It should be read in one piece. I draw particular attention to the difference between the English law on debt and the Greek law on debt. It was the former which prevented a write-down of privately held debt.

    So, why did I introduce a link which caused great consternation for you? There are several reasons. The most important being my hope it would raise questions in the minds of those who were so sure as to what is the nature of the problem with Greece and the EUROzone. I do hope the paper by the BIS challenges pre-conceived ideas and the uselessness of debates based on these ideas.

    The link to the Eurostat data surely should raise questions in the minds of the same people who were so sure as to what the nature of the problem with Greece and the EUROzone is. The arguments directed toward Germany (not only by blog commenters but also by a quite vocal Nobel Laureate would seem to pertain more to Luxemburg. No? May I suggest you look up the current account data for Luxemburg. You’ll find tiny numbers, relative to those of other EU countries. So, what is going on?

    The ‘global economy’ is now very different to what is was during the Bretton-Woods international monetary system. IMO, the entire discussion of Keynesian stimulus policy vs Austerity is caught up in an outdated mental model. Why? Because the relevant data is not recorded in the national accounting data framework that evolved during the Bretton-Woods era. The relevant data I am talking about are financial contracts, called financial securities. There are many types. Who issues which type under which juristiction and in which currency unit and bought by whom in which juristiction at what price in which currency unit, traded where and redeemed under which conditions are questions that cannot be answered satisfactorily as yet, as per the experts, the BIS. We live in a partially segmented global economy with multinational firms, including banks, and an incredibly fast communication system. And the problem is, there is no natural limit on the amount of financial securities that can be generated (as per Radner’s mid-1970s theoretical model).

  3. @Ernestine Gross

    Thank you for your patience and long replies for a blog. I am now going to publicly eat crow. I mean at least as public as this blog gets. I didn’t know and I don’t know what I am talking about in this debate. I have displayed an egregious lack of knowledge and an outrageous smug certainty which existed in inverse proportion to my level of knowledge.

    “A little learning is a dangerous thing;
    Drink deep, or taste not the Pierian spring:
    There shallow draughts intoxicate the brain,
    And drinking largely sobers us again.” – Alexander Pope.

    I don’t understand all of what you put before me but I do understand enough from it to understand that I really know next to nothing on this topic.

    This raises some quasi-philosophical issues which I will touch on briefly and then bow out.

    1. It seems to me that the pace of innovation that is going on in this sphere is so great and the data collection issues so great that perhaps nobody really knows what is going on. This a slight over-statement perhaps. Some specialist economists and researchers (not to much the leading-edge innovators themselves) do perhaps know a portion of what is going on.

    2. The average layperson-citizen has not a hope in Hades of understanding anything about this. He must give up like a modern Candide (forsaking not the optimism illusion like Candide, for in the self-honest modern mind optimism is already dead, but rather forsaking even the knowledge illusion). The image of Candide “cultivating his garden suggests his engaging in only necessary occupations, such as feeding oneself and fighting boredom.”(*) To attempt more is the epitome of self-delusion.

    * Wikipedia.

  4. @Jordan from Croatia

    Asking of Germany to exit EU is akin to asking UK to exit India or South Africa.
    Isn’t it much easier to change the ECB to become a real Central Bank and solve EU and EZ issues?

    Not from the EU, only from the Eurozone.

    AFAICT, the main reason the ECB cannot be changed is Germany.

  5. Below is a link to an English translation of an article by Hans Werner Sinn, a German economist and head of a research organisation in Munich. The article is a reply to an article by Jeffrey Sachs. Jeffrey Sachs is a US economist who is well known and respected in general and specifically in the area of development economics including environmental and financial matters.

    I found the historical and institutional detail interesting and helpful.

    http://international.sueddeutsche.de/post/125998423130/exit-devaluation-and-haircut-for-greece

  6. @Ernestine Gross

    That raises some interesting points. But let me backtrack a little. Clearly, I admitted in post number 78 that I don’t know what I am talking about when it comes to the current Greek economic crisis.

    However, a backtrack and admission that I don’t know something is not the same as an admission that I think others know. All I can honestly say now is that I don’t know what the causes and cures of Greece’s economic crisis are and that I don’t know if others know. My general scepticism leads me to think nobody else knows either.

    It sometimes seems a reasonable assumption that if we know what is going with something then on we can fix it. This however is not always the case. Medical doctors can know someone has a certain kind cancer and how it is progressing but it may be untreatable with current knowledge.

    Roughly similar analogies may be applied to the Greek crisis. Do we;

    (A) Not know what is going on and thus not know how to fix it?;
    (B) Know what is going but still not know how to fix it?; or
    (C) Ignore and maginalise those who do know?

    One could pose other questions.

    The only consistent position I feel I can take now is the overall position that we do not understand our economy. We have generated it but we don’t understand it. I mean that in the sense that we don’t know enough. One does not need perfect knowledge, just good enough knowledge, for knowledge to be effective in practice. The evidence is that our knowledge about our own global economy is not sufficient to be effective in certain kinds of crises of which the Greek Crisis is one. Or if some economists have the right theories (meaning right enough) they are not recognised and/or these prescriptions are not put into practice by the mainstream. However, any prescription must be just a theory. Until the theory is fully tested we could not be sure the theory was correct.

    Short version of above? I now tend to the view that there is a high probability that nobody knows what is going on nor how to correct it.

  7. @John Quiggin

    I would have thought that there is only benefit if currency depreciation is relative. If many countries depreciate there is no benefit.

    This could set off a race to the bottom. Why would Germany (an exporter) maintain its currency value if all around them are collapsing theirs?

    If contracts are written in US dollars, it makes it harder for depreciating currencies to pay off US dollar debts. It also makes it easier for foreigners to compete for local housing assets.

    It seems to me that depreciation is only good for exporters as a quick hit.

  8. @Ikonoclast

    IMHO, Jeffrey Sachs is the economist among the big name US economists whose writings on Greece is informed by economic theories (not schools of thought and not limited to macro-economics) and by empirical observations as well as practical experience. To the best of my knowledge Jeffrey Sachs is not a political economist. Given your interest in environmental matters, his work may be of interest to you beyond matters concerning Greece.

    There are many EU economists, not known in the Anglo-Saxon press, who nevertheless have the same theoretical knowledge as their US counterparts, but much more detailed empirical and institutional knowledge about the Eurozone and the EU.

  9. @Ernestine Gross

    Second reply…

    I have some questions though. In a post some way above, you mentioned that Keynesian economics no longer applied to the world economy (or words to that effect). I assume you mean, in total or in part, that Keynesian stimulus economics no longer apply due to the different ways the currencies and finances work post Bretton Woods and post financial deregulation.

    This is an interesting thought. I wonder if you are referring to the difference that (rampant) credit money creation makes to the system? Now don’t stop reading. I am going to mention MMT in a critical way not a credulous way.

    MMT makes a big song and dance about national accounting identities or axioms. You know what I mean. One thing it says is the government must print money (create money ex nihilo) for the private sector to be able to net save in the fiat currency. This is perhaps technically true but to my mind it does not take account of credit money creation in the time dimension. Whilst creation of credit money does not technically increase the overall net savings (the debt equals the credit and they cancel out in accounting terms), the creation of credit money does increase the extant circulating money supply. I mean, so far as I can see it does.

    The thing about debt money creation is the time lag between when the money is created (loaned) and when it is extinguished (paid back). In the time space of that lag it increases money supply so far as I can see. And if loans are growing over time (expanding economy and/or expanding loan books) then the money creation from loan making will expand faster and faster compared to money destruction from loan extinguishment. This could go on for decades at least one would think or even until a GFC style recession in a long-ish cycle.

    Thus my questions are: Does this form of relatively uncontrolled and deregulated money supply expansion obviate the standard considerations of, and assumptions behind, Keynesian stimulus? Is the credit money expansion something that now outstrips Keynesian stimulus even if Keynesian stimulus is supplied? If this is true, how do we explain continued capacity under-utilisation (unemployment, some idle capital equipment etc.)? In particular, how do we explain this capacity under-utilisation running parallel to excessive asset inflation while on the third track, so to speak, goods and services inflation (outside of certain asset inflations) is very mild?

    It seems to me there are number of conundrums here. I honestly can’t figure it out. Are there any explanations extant which cover this particular conglomerate of economic phenomena?

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