Table of contents
List of abbreviations
List of figures
2 Germany in the monetary union
3 Consequences of a withdrawal
List of references
List of abbreviations
illustration not visible in this excerpt
List of figures
Fig 1.: The Evolution of public debt
Fig. 2: Simulated difference of the short-term interest rate in Germany with it's own currency and while retaining the euro
Fig 3: External position of the Bundesbank since the beginning of the European Monetary Union
The euro is the currency of the European Union. However to date, only 19 of the 28 members of the union have established the common currency. The euro was introduced on January 1st 1999 as book money and on January 1st 2002 as hard cash. The founding members of the currency union were Belgium, Germany, Finland, France, Ireland, Italy, Luxembourg, Netherlands, Austria, Portugal and Spain. In the following 16 years it was complemented by Greece, Slovenia, Malta, Cyprus, Slovakia, Estonia, Latvia and Lithuania. Great Britain, Denmark and Sweden refused to introduce the euro in their countries. The remaining members of the union haven't fulfilled the admission criteria yet.1 The launch of the euro was a major achievement in the on-going story of European integration since the end of the Second World War, in order to strengthen cooperation between countries, especially in terms of free trade. It is now the most important currency in the world after the US dollar. The vision of the euro was to prove a stable and growth-friendly economic environment within the European union. Responsible for ensuring price stability is the independent European Central Bank (ECB) with its monetary policy, including the printing of money for the euro area. The single currency simplified and reduced costs of trade, made prices more transparent and comparable and put an end to the cost and hassle of exchanging currencies for travellers within the 19 euro area countries.
But next to all these benefits, the monetary union has also some fundamental flaws. In particular the option for national currency devaluations, a typical adjustment mechanism between national economies to stimulate their economies was eliminated. In contrast to the monetary union of the United States, the euro area was not linked to a fiscal union. This means that the responsibility of financial regulations and fiscal policy remains with the national countries.2
Nevertheless, the euro led to a harmonisation of the interest rates that the euro countries had to pay for their debts. The rates for Spanish, Portuguese and Italian 10-year government bonds were about 5 percent higher than the German rate in 1995. In the following 5 years this gap decreased down to a level of under 0,5 percent, due to the expectation of a new stable currency and the disappearance of exchange risks. This new opportunity to acquire capital on historically favourable terms led to an investment boom in these respective countries. The German GDP increased from 1995 to 2009 by 16 percent whereas the overall average of the European Union was 27 percent. Over in the same period the economy of Ireland increased by 105 percent, Greece by 56 percent, and Spain by 50 percent.3 As long as the economies grew faster than the debt burden, this boom continued. The turnaround came with the financial crisis in 2008, when cross-border financial flows dried up and investors repatriated their funds back to their home markets.4 As a result the economies collapsed and the interest rates increased dramatically (cf. fig. 1).
Fig 1.: The Evolution of public debt, 1982-2011 (Source: Lane (2012), P. 51)
In the course of trying to rescue the highly indebted euro states such as Greece, Ireland, Portugal, Spain and Italy and to stabilise the euro, the remaining euro countries granted large-scale financial assistance and interest guarantees. Especially Germany, being the most economically powerful country, shouldered large burdens, but also because German banks had invested about 400 billion euro within these countries by June 2010.5
In the meantime, voices were becoming louder that the euro costs Germany more than the benefits it gains. On the other hand, economists such as George Soros remarked that a euro withdrawal of Germany would be advantageous for the crisis- stricken countries, since the euro would depreciate in value and thus promote their exports substantially.6 However Soros added that the political impact of such an exit would be fatal.
The purpose of this assignment is to analyse the advantages and disadvantages of the monetary union for Germany and to evaluate which consequences an exit would have.
2 Germany and the monetary union
The membership of the euro brought Germany some benefits in costs and growth.
Reduction of transaction and hedging costs: Until the introduction of the common currency, trading in Europe was much more expensive. On the one hand the exchange and the transaction of currency is always linked to additional costs including the storage of the different foreign currencies. On the other hand, numerous companies had to hedge the currency risks, especially if they did forward transactions. On the basis of a McKinsey study Germany’s benefit amounted in 2010 to 0.4 percent of GDP, which is equivalent to 11 billion euro.7
Exchange Rate Risks: Because of the wide disparity in the stability of the economies and the fiscal policies of the different countries, some currencies showed a very high volatility. Many companies employed hedging instruments to safeguard themselves against losses, but depending on the industry and the
1 see European Commission, Directorate-General for Communication (2014), P. 4.
2 see Lane, P. (2012), P. 49.
3 see Sinn,H.-W.(2010),P.7.
4 see Lane, P. (2012), P. 55.
5 Bank for International Settlement (ed.) (2010), P. A72 ff, Tab. 9A.
6 see Soros,G.(2013),P.9.
7 see Mattern et. al (2012), P.9.
- Quote paper
- Erik Somssich (Author), 2016, Should Germany leave the European Monetary Union?, Munich, GRIN Verlag, https://www.grin.com/document/356694