What would Berlin gain and lose in exiting euro?
The fact that Germany might exit without suffering some of the damage that people fear makes exit an option, writes MARTIN WOLF
SHOULD GERMANY leave the euro? It is, after all, the big country with an obvious exit option. The question becomes more pertinent after the decision by Angela Merkel, Germany’s conservative chancellor, to support Mario Draghi, president of the European Central Bank, against Jens Weidmann, her appointee as head of the Bundesbank, over plans to buy bonds of governments in difficulty. The president of the Bundesbank, Germany’s most respected institution, has now become a spokesman for conservative German Eurosceptics. The ECB, Germans realise, will not remain a reincarnated Bundesbank. Once again, we are reminded that the euro zone is set to be a miserable marriage. Might a separation, however disruptive, be better?
If we are to address that question from a German perspective, we must distinguish false arguments from valid ones. As Paul de Grauwe, the Belgian economist, now at the London School of Economics, shows in a co-authored article, it is easy to find examples of the former. (What Germany should Fear most is its own Fear, available at voxeu.org)
This paper asks whether the accumulation of net claims within the European System of Central Banks means that Germany would lose a great deal if the euro zone were to break up. Its response is: no.
First, Germany has accumulated net claims on the rest of the world – and on other members of the euro zone – not because of internal central bank accounting but because it has large current account surpluses. Germans have been running two businesses: exporting goods, at which they are excellent; and importing financial claims, at which they are not. In brief, Germany’s surpluses have exposed Germans to financial risk. But balances inside the euro system are not a good indicator. They have exploded, argues the paper, because of speculative financial flows, not current account imbalances.
These flows do not alter the net cross-border claims. Suppose that owners of a Spanish bank account were to transfer money to a German bank. This would increase the liabilities of the Spanish central bank and the assets of the Bundesbank, inside the euro system. Meanwhile, the German bank would have a liability to the Spanish depositor and a reserve position at the Bundesbank. The net position of Germany would be unchanged. But the net claims of the Bundesbank would rise, while those of Germany’s private sector would shrink.
Second, this does not expose the German taxpayer to huge losses. The value of the liabilities of the Bundesbank – the monetary base – does not depend on the value of its assets. The value of money depends on its purchasing power. In a fiat (unbacked) monetary system, central banks do not need assets other than for monetary control. They are able to create money. What makes money valuable is not its backing but that people are prepared to settle transactions, and the state to settle tax obligations, in return for it.