In memory of Dr. Andreas Höfert

Thilo’s euro and the German model

| Tags: Andreas Höfert

The new bestseller Europe doesn’t need the euro by Thilo Sarrazin is piled high in bookstores. A former member of the Executive Board of the Deutsche Bundesbank, he has wide populist appeal in Germany. His controversial Germany Is Abolishing Itself sold over 1.5 million copies. This new opus may top that.

German Chancellor Angela Merkel’s famous remark, “If the euro fails, Europe fails,” prompted this new work. Sarrazin replies with the central thesis “that Europe has done well for several decades before the introduction of the euro, without a common currency. The euro is not a necessary condition for the European Union.”

Sarrazin argues a few points that we have also addressed. The euro, for example, was never an economic project but a political one. Since its introduction, the euro lacked the institutions which would make it the currency of an optimal currency area – a first step towards fiscal integration and federalism. The euro crisis runs deeper than a sovereign debt crisis because it is first and foremost a crisis of imbalances between the members of the Eurozone subsequent to the introduction of the euro.

Some theses are less convincing. For example, Sarrazin asserts that European countries without the euro have done better than those with it. Citing the ongoing recession and inflation pressures in the UK, or Switzerland’s choice of a peg at 1.20 francs for one euro, a de facto integration to avoid a bleaker fate, contradicts or relativizes Sarrazin’s claim.

Also unconvincing is the argument that Germany did not really profit from the euro because its exports to emerging markets rose more than those to the rest of the Eurozone. Here he fails to mention that emerging market growth was significantly higher than that of European countries, and that German export growth to emerging markets was probably also boosted by taking market share from less competitive European countries.

The book’s conclusion is rather unnerving. While Sarrazin rightfully argues that abandoning the euro would also bear costs for Germany, thus implicitly contradicting his assertion that Germany did not benefit from the euro, he states that “if the Eurozone is to function, then all its members should behave according to German standards.”

This is a prime example of a lack of economic and historical depth. If a model such as the present German one is successful now, this does not necessarily mean it would have been successful in the past or will be in the future. In the late 1980s, we were all supposed to behave like Japanese. In the late 1990s and early 2000s, the Anglo-American model was the benchmark. Germany then was obsolete.

Europe has always been characterized by its diversity of economic models. Here, in my view, lies its ultimate strength. With its low inflation/strong currency environment, Germany did achieve a Wirtschaftswunder (economic miracle) after World War II. But so did Italy, whose miracolo economico was based upon a higher inflation/weaker currency mix. If the euro is to survive, we certainly need more integration, but we also need critical debate of the form that integration should take.