Germany’s current account surplus has been a subject of heated debate for some time… () …If Germany can take steps to lift domestic demand and investment, while France embraces reforms to its labour market, business environment and pension system to support competitiveness, they will together do a great service to the entire eurozone providing stronger growth, creating more jobs and reducing social tensions.
Olli Rehn, 11-11-2013
Eight European nations agreed today to realign their currencies after West Germany accepted French demands and agreed to a set of currency values that avoided the possible collapse of the European Monetary System…()...German officials said Mr. Delors had given assurances that France would reduce its budget deficit by cutting spending on social programs and welfare payments. Mr. Delors also reportedly said that France would try to reduce the deficits of its nationalized industries, another cause of inflation. The devaluation itself would cut the trade deficit by making imports more expensive and exports less costly to others.
New York Times, 21-3-1983
The EC will likely start an in-depth review of the German economy in the framework of the EU's Macroeconomic Imbalance Procedure. The persistent current account surplus of Germany stands above 6% of GDP since 2006 (according both to Eurostat and the IMF, see figure below) and is a serious imbalance that might have warranted a more timely identification than waiting for the US Treasury wake up call. (click to enlarge)
You could think better later than never, but the timing is not on Europe side. As the commissioner underlines in his piece, a government must still be formed in Germany. Let me add that the European elections are 6 months away (how optimistic I was ...). What I want to convey is that the publication of an official EC document that basically prescribes to Germany inflation must be well prepared and timed. Especially after the votes against the decrease in the ECB key interest rate last Thursday by the three central bankers of what was de facto the old mark block.
That takes me to the initial quotes.
There is narrative that says that going back to national currencies (and the ERM) could simplify realignments when they are needed. This narrative pleases the anti-euro fraction of society and UK civil servants. In the not too distant past, to have realignments, everybody had to agree. That was the case during the episode reported by the NYT in the introductory quote. Shortly after the realignment, Mitterrand initiated "Le Tournant de la Rigeur" (or was it the "Virage"?). At that time France started a process of internal devaluation that lasted a decade and was helped by a second realignment in 1986. It was tough on unemployment. In another occurrence, post Berlin Wall, agreement on realignment was not reached (click).
There is another narrative that says that the euro countries have reached a level of integration (for example the level of the external assets and liabilities, think of the underlying contracts, but also trade in services, supply chains, etc) that makes strengthening the architecture of the euro-zone a superior solution. Moreover, while the flaws in the euro architecture have helped the creation of imbalances, the global shocks and processes occurred during the last decade cannot be ignored. This narrative pleases the pro-european fraction of society.
I would suggest to both groups to abandon the narrative approach, useful, but prone to drama, and start a conversation with the objective to give a reasoned and detailed description of what are the outcomes and choices that the people will have to vote for or against in the next elections. The review could be an opportunity. In the trade-off between further integration and decentralisation I restricted my thoughts to the economic sphere as I believe that economic integration is compatible and subordinated both with cultural diversity and "decentrism" to use a word from my sharp follower uberwomen who deserves a better answer. But I need some time to articulate it.