23 November 2011

Germany and the Eurozone

Is Germany becoming part of the Eurozone periphery? Not quite but as Andrew Watt reports, the recent weak Bond Auction (35% of its 10 years bonds failed to get bids) is worrying on a number of counts.

An optimistic perspective would suggest that this may lead to the realisation that some structural changes are required thereby giving the impetus to long awaited regulatory changes and necessary reflationary policies.

Current austerity policies have been severely misguided not only because of their regressive impacts but also because of their self-defeating logic.

Periphery countries have in any case few tools at their disposal to address the crisis. The difficulties this entails is nothing new as Germany faced similar problems in 1931.

Of course there is a more fundamental problem a common monetary union which is that the Eurozone wide nominal interest rate will have different real values in differet Eurozone members (Hancke and Rhodes, 2005). Where inflation is high (e.g.: Greece) the real rate of interest rate will be comparatively lower than where inflation is low (e.g.: Germany).

Faced with different real interest rates, these countries will further deviate. Even with the heroic assumption that the Periphery would become as productive as the core of EMU, divergence in inflationary dynamics would ensure that competitiveness is not forthcoming in the Periphery. In other words, the institutional set up of the European Monetary Union is systemically unstable and this has nothing to do with the presumed inability of the Periphery to sort out their budget (on this point, note that whether Greece has taken some liberty with its statistics has recently been contested).

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