Sunday, March 10, 2013

The Franco-German Divorce

Common sense on the euro and ECB’s policy can be found occasionally in the media … but mostly on the other side of the Channel or of the Atlantic.

“The German insistence on austerity and strong euro is in direct contrast to the usual avenue that the French have employed throughout their history to boost their economy - the printing and weakening of the franc. The French economy has suffered dramatically as a result.”

That’s how Stephen Aniston sees the current situation in a Seeking Alpha analysis posted today. There is hope however:

“Fortunately for the French, the Germans are losing the argument as austerity has brought on massive instability in the countries where it has been successfully implemented and the strong euro is exacerbating already flagging exports for the Eurozone as a whole. It is now clear more than ever that austerity and strong currency is not the answer that fits the European population.”

“Recent elections in France and Italy have been a direct vote of no-confidence against austerity and we should expect more and more government bonds to be issued in Europe over the summer to pay for expansion of government cradle-to-grave programs, infrastructure, green energy and other spending programs. Mario Draghi and the Germans have been cornered and they will ultimately have to acquiesce to a massive increase in the monetary base and the money supply at the ECB. It will not happen today and it will not happen tomorrow, but the September 22nd election in Germany will provide plenty of opportunity to discuss this issue and we will be provided with significant headlines over yet another summer of discontent in Europe. There is only one way out for Draghi and as the lessons from the Weimar Republic get slowly unlearned during the course of the summer, the value of the euro has only way to go and it is down. The question is how far down.”

And a side benefit will be that a euro exit will become much easier in that case for individual member states, as I explained in my recent book. In the case a “southern euro” was to be adopted in the first place it thus wouldn’t last for long as the disparities between these economies also make the southern group of Mediterranean economies a non-optimal monetary zone.

The equilibrium level of the euro versus dollar exchange rate is seen by Aniston to be in the range of $ 1.15 and $ 1.05. I agree, but a further franc-mark readjustment will also prove necessary.  

Still, such a radical policy reversal will have to wait for the next German election in September, as I previously wrote, but it will prove a boon for the French and other Southern economies.

Aniston also provides an excellent summary of the Weimar economic policy in one paragraph. Read more here.

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