04 March 2012

Wolfgang Münchau: The Bundesbank has no right at all to be baffled

It is hard to understand why everybody feigns surprise at the fact that current account imbalances can be financed indefinitely in a monetary union. Is this not one of the characteristics that distinguish it from a fixed-exchange rate system? As long as banks have access to the central bank, and can provide good collateral, countries can run current account deficits for an infinite period.

The presence of unlimited funding does not mean imbalances are irrelevant. On the contrary, they have highly negative economic effects, as the crisis shows. The point is that in a monetary union, imbalances do not adjust automatically. If you want them to adjust, you need to do it yourself.

One would assume that the best policies would be those that attack the root of the problem – the imbalances themselves. One of the deep causes behind this problem is, of course, Germany’s persistent current account surplus. The problem can thus easily be solved through policies to encourage Germany to raise its imports relative to its exports. You need policies that provide eurozone-wide backstops to the banking sector, and also policies to insure against asymmetric shocks. And you need to harmonise many aspects of structural policy to ensure imbalances do not become entrenched.

But there is no appetite for any of this in Germany. Instead, the Bundesbank prefers to solve the problem by addressing the funding side. Mr Weidmann proposed last week that Germany’s Target 2 claims should be securitised. Just think about this for a second. He demands contingent access to Greek and Spanish property and other assets to a value of €500 billion in case the eurozone should collapse. He might as well have suggested sending in the Luftwaffe to solve the eurozone crisis. The proposal is unbelievably extreme.

It also tells us something else: by seeking insurance against a collapse of the euro, the Bundesbank tells us it no longer regards the demise of the euro as a zero-probability event. If the Bundesbank seeks insurance, so should everybody else.

The Target 2 debate is important because it goes to the root of the problem. But Germany’s economic establishment is disingenuous. What people are really saying is that they no longer want a monetary union. They want a looser single currency regime.

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