Posted by: Dirk | July 12, 2011

Wolfgang Kladen on the euro, not a year ago

By accident, I found an old article I wanted to comment on and then forgot. Wolfgang Kladen, former chief editor of economics at the SPIEGEL and chief editor of the Manager Magazin in the 1990s, wrote on December 20th 2010 on the euro. Here is the appetizer (those lines on top that should make you want to read more):

Deutschland ergeht sich in Euro-Pessimismus, Untergangspropheten warnen vor dem Zusammenbruch der gesamten EU. Ist die Lage wirklich so dramatisch? Keineswegs – unser Geld steht mindestens so gut da wie der Dollar: Der Wechselkurs ist stabil, die Inflation gering.

In English, it translates more or less like this:

Germany drowns in euro-pessimism, the prophets of doom warn of a breakdown of the whole European Union (sic!). Is it really that dramatic?  Not remotely – our money is at least as good as the dollar: the exchange rate is stable, inflation low.

Well, I found it astonishing back then how you could write this in a magazine like the SPIEGEL, which is supposed to have some quality. The problem was inside the euro zone, not outside, so mentioning the exchange rate of the euro completely misses the point. It is like pointing out that your roof is in excellent condition, keeping the rain out, when the water problem comes from a flood.

As to inflation, again this is not the problem. The economic imbalances have turned some euro zone members into net importers and therefore, net debtors. These now find it difficult to change their position. In order to repay foreign debt, they should export more and import less. Hence, a lower price level would be of advantage. However, on the monetary side a higher price level would be of advantage so that the real burden of debt is lower. These countries are between a rock and a hard place, and it is unclear whether they can get out of this position at all.

Sorry for picking on Wolfgang Kladen in this one, but the fact remains that the media reporting is strongly biased towards those who later turn out to be wrong. The piece by Mr Kladen written to start a debate, but the outcome of the debate was inconclusive, and politicians got away with “saving Greece” until this day while those that point out that it is saving banks, and actually harming Greeks, get almost no coverage. This, I believe, is the price that Europe pays for not researching the reasons of the financial crisis. Somehow, the politicians find it unnecessary to find the flaws in the economic system and correct them. Possibly they shy away from it because it is politically nasty. If politics does not touch the problem, speculators will by selling everything from the periphery short in expectation of a euro zone break-up.

Oh, and by the way: the introduction of euro bonds would solve the monetary problem and kick the can further down the road, but it doesn’t solve the problem of price levels being too high in the periphery and/or too low in the core. A more comprehensive solution is needed than just euro bonds, which I would support if, and that is a big if, they buy time which is used to work out proposals to fix the financial mess of Europe. Re-introducing old currencies must be on the table as an option as well, as this is about economics, and not wishful thinking.


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