So how does it work - how do we profit from the Euro, on the cost of other EU countries?
I myself think about it in this (admittedly broad stroke) way:
1) The EUR is not just an economic project. It is a political instrument. That's why it exists, and that's what will determine its future. The economics is only a constraint (alas, now binding) not the objective.
2) No matter the history, a breakup now would be incredibly costly for everybody. Bob Rubin, US treasury secretary under Clinton, aptly described it as "Lehman times x". That's why a complete reversal is highly unlikely.
3) There is a solution: Peripheral states must accept a German-dominated external voice in their fiscal affairs; Germany must let the ECB monetize the debt. Neither of which is politically realistic.
4) In the absence of a conventional political solution, the continent "needs" a holy-shit-moment, something that will scare enough people sufficiently s.th. politicians can reach the costly compromise (3). So I expect one to happen.
5) What journalists, economists, and whoever writes about the success of a country ex post does not matter, it's just noise. Think about what people wrote about Japan in the 80s, the "Asian tigers" in the 90s, the "Washington consensus", etc etc. Until just a few months ago, it was China's state-dominated model, now it's Germany's social-consensus-based turn. Or, to stay with Germany, remember the Economist cover about "the sick man of europe"? It's quite similar to the attribution bias when successful people write autobiographies (or have biographies written about themselves). People like "the illusion of control", and a nice story with a neat, understandable "explanation" with max three identifiable causes or "factors" that led to the observation supports it.
Personally, I think the best way to test your understanding of how the world works is to make predictions and bet on them, preferably money, less preferably your reputation or your ego. So yeah, this article is probably blah but I will read it anyway because it will probably make me feel good, having grown up in and thus having links to the successful system du jour ;-)
This can not be repeated often enough. All the gloom and doom commentators making break-up predictions are highly underestimating this aspect. EU behavior can not be explained by rational/economic factors based logic.
The reason behind that is that if the ECB buys the debt, it can keep the rates under a certain level, buying everything that's above with its - theoretically - unlimited buying power. Of course that has a few flaws. The Euro is then less valued, so that's a reason more for wanting even more return on bonds.
Hmm. Reminds of a comment I just read here on HN. Trying to put my finger on it... :)
2) Cheap credit: "But recently even interest rates on German bonds with longer maturities have decreased significantly. The federal government is saving a bundle. The reason for the windfall? Amid the ongoing euro crisis, Germany is one of the few borrowers that are still regarded as a safe haven. Many investors would rather lend the government money at bargain-basement rates than risk losses."
3) Inability of other countries to (quickly) adjust given single currency constraints, leading to, for example: "As mass protests form in Spain due to high unemployment among young people, Germany is benefiting from an influx of new skilled professionals. An increasing number of southern Europeans looking for work are heading north to prosperous Germany."
http://www.spiegel.de/international/europe/profiting-from-pa...
the tl;dr:
Germany is and was always a strong export oriented nation with our main-markets being in the direct vicinity. Before the Euro many of those neighbors hadn't had the economic lending power to build up their infrastructure and buy german goods.
With the introduction of the Euro these countries could suddenly lend money on the international markets with the support of the german rating, and spend that borrowed money to a large degree in Germany. (Greece is still buying German tanks...)
tl;dr of the tl;dr:
Germany is rich because other countries bought our stuff with money they could lend because of the trust the Euro had because of Germany.
I think overall we are just lucky atm (or were lucky for a while...).
Its not that Germany is in any way smarter, Germany would probably have done the same, even if it were just on a governmental or banking level, as private lending is very conservative in Germany.
Well, you can't directly blame Germany, that's right.
But someone had to lend all that money, and I don't believe, that no one could see the real financial situation in these countries.
So, what did the banks wrong, and why nobody looked after the banks?
If the Euro didn't exist, the natural course of events would be for countries at the receiving end (who are running a trade deficit) to devalue their currencies. That would cut into German exports. But with a unified currency, devaluation to counter trade or current account imbalances is impossible.
Say you want to buy a German car that costs 20000€, and your country uses Drachme, not Euro. How does devaluing Drachme help you afford the car? if you say "no, a Drachme is not worth 0.5 Euros anymore, it is only worth 0.05Euros", it only means you have to 10 times more Drachmes for the car than before?
Say you produce olives, and one pound of olives goes for 1 Eur. So you need to sell 20000 pounds of olives to afford the car. How does the valuation of Drachme enter into that?
1) You buy a local car because the foreign ones are all too expensive
2) BMW decides to build a plant in your country because it is so much cheaper.
Both of those things help grow your economy, growth leads to a stronger currency, and then you buy a nice new BMW.
Let's stick to olives: either you get x Euros for a pound of olives, or y Drachmes. In the end, if you want to buy a car, you have to exchange the Drachmes into Euros. You should get exactly x Euros for y Drachmes. Otherwise there would be an opportunity to get infinite olives for free. So it doesn't matter how much you devalue the Drachmes, you'll always get the same amount of Euros per pound of olives.
Inflation has been called "austerity done right".
Second one: Greece was never allowed into the Euro and off the Drachma. So what happens? Well, the lack of productivity in the Greek economy means the drachma stays and goes continually down in relation to the Euro, which we'll presume is the dominant currency-zone Greece wants to import from. The result is that Greece is forced to take responsibility for its own behavior much earlier-on, and without damaging impact on anyone else. At some point, the Greeks, in this scenario, simply cannot import much anything from Northern Europe, but their land, labor and capital become very cheap for external investors. Then, if the Greeks are at all smart, they get exploited for a little while to make foreign capital spend itself improving their productivity, until they can either become self-sufficient or balance their trade via cheap exports.
As Greek productivity improves, the drachma becomes more expensive, allowing the Greeks to then import more on the strength of their own economy rather than by borrowing from someone else.
It's simply a known fact in economics that separate macroeconomic policies and environments demand separate currencies, or else you get a financial crisis of some sort.
<em>The currency only matters at the border</em>, so if the thing or person under consideration doesn't cross the border, devaluation doesn't matter.
But thanks to your example I see it has more subtleties: it is also a question who to take the money from. Making landlords poorer might be an easy sell to the majority of the population - if the population would have any idea of what is going on, which I doubt.
Services might just go away if they make less money.
Government declares that the arbitrary denominators of value now buy half the number of a different arbitrary denominators of value they did previously.
Because I am a locovore Luddite (for the sake of the argument), everything I buy is made in the country, with materials produced in the country.
How does the devaluation effect me?
Suppose it costs you 25000 GRD to build that car and that's 12500 € at 1 € = 2 GRD. You can sell it internationally for 15000 € for a profit of 2500 €.
Now the GRD plunges to 1 € = 4 GRD. Your costs stay at 25000 GRD but that is now only 6250 €. You either can continue to sell internationally for 15000 € and earn an extra 6250 € profit or reduce the price and sell a lot more thereby also raking in more cash.
Since you probably have to procure parts from abroad, the extra profit will be a lot less, but still it helps you _sell_.
Who pays the bill? Of course the general population if it continues to buy imported goods, because the price of those goes up. If only a part of the gen pop switches to buying domestic goods - hey even better for the domestic producers. Apart from making more on the international market, they gain on the domestic market.
That does not mean that devaluation is a sinecure; for example, if you heavily depend on imported goods, it will drive prices for those goods up. But it can help correct trade and current account imbalances.
Also, devaluation is, more often than not, something that happens simply due to trading and market pressure and not because of government action. If a country keeps having a trade surplus, then its currency will automatically appreciate, unless there are countervailing forces.
That's how it has been for decades, but now with the Euro that's not possible anymore, leading to the Euro crisis.
To devalue a currency is not a solution - the opposite. It may look attractive, but its effects are bad over long term. It for example makes imports more expensive.
It correlates too well with the introduction of the Euro to be just random.
The issue is exactly that the Euro constantly devalues the German output - thus not slowing its increase in a natural way.
I think of it as this: GIPS have massive debts in "German"-Euros. They also have prices too high in "Gypsy"-Euros, which is equivalent to say that GIPS have also salaries too low in "German"-Euros. They just can't pay that debt, because Gypsy salaries are too low, the prices are proportionately too high, and the debts are also too big.
What you do is, you create inflation only in Germany. Now German Euros are valued less, so wages and revenues grow. Gipsy Euros are valued the same as they were, so prices stay the same, and wages and revenues stay the same.
Now, this means that Germans want to buy more cheap Gypsy stuff and services, so there's now a trade deficit for Germany, and a trade surplus for the Gypsies. Which means an increase in wages and revenues for the GIPS, which is allocated to paying German debt.
The result is that the Gypsies get German jobs and German capital, and the Germans get their debt paid. This debt is, of course, of less value now for the Germans, they have to pay more for everything German, and there's less jobs on Germany, so they are pissed off. The thing is, they still win on the long term, because now they can buy cheaper Gypsy stuff, like Spanish-built German-designed cars. They can concentrate on more capital-intensive production, to offset lost jobs. Also, at least, they got back some of their debt.
Also I wasn't aware that the government determines the salaries here in Germany. You are aware that the cold war is over and capitalism won, even here in Germany? We don't have a communist/socialist regime that can simply set salaries. Although the government can of course affect salaries by raising taxes (less net salary for everyone).
As far as pressure for decreasing labour cost, this is pretty much uncontroversial. I did not say that Germany had a gvt authority setting salaries, but various factors such a pressure from high unemployment in the early 2000, and lower-than-eurozone inflation helped it (see e.g. http://www.voxeu.org/article/how-restore-competitiveness-eu - even though that article argues something closer to the opposite of what I am arguing here).