14 April 2013

Wolfgang Münchau: The riddle of Europe's single currency with many values

If mean German net wealth is €200,000 per household and mean Spanish net wealth is €300,000, and if I further believe that the Germans are not really less wealthy as a nation, measured per household, then this gap tells me the minimum extent by which Germany and Spain would need to adjust their real exchange rates.

In truth, the gap is likely to be larger. I happen to believe that your average German household is richer than the average Spanish household. If my assumption is right, then the imbalance between Germany and Spain, as expressed by those figures, would be even higher.

In a monetary union, adjustment can only occur through real movements in wages and prices. Since Germany is not inflating, and is not likely to inflate in the future, I see no chance of that happening, even in the long run. My conclusion is that, in the long run, this adjustment will eventually happen through a nominal change in the exchange rates – which means that somebody has to quit the eurozone or resort to a parallel currency.

To put it another way: if the same unit of account gives us a higher wealth figure for Spain than for Germany, and when you also know that this cannot be true, then there must be something wrong with the unit of account. The other potential solution is that there could be a problem with the data, but I see no fault with the statistical techniques used by the ECB. Maybe they got the house prices wrong. Statisticians do have difficulty capturing the declines of house prices after bubbles. But this type of discrepancy could not account for such a wide gap.

Indeed, this view also ties in with anecdotal evidence. Looking back to 1999, my own experience was that restaurants and taxis in Berlin were cheaper than restaurants or taxis in Brussels or Paris, but the differences have now become extreme. Curiously, the price gap also affects tradeable goods: European cross-border retail markets are not working efficiently.

This leaves me to conclude that the unit of account is not really the same across the eurozone – that Spain and Germany have a different euro. This is also the reason why I believe southern Europeans have a rational reason to shift their savings to bank accounts in the north – because this would present the only way to preserve the value of their euros in the long run.

Of course, I would not expect the ECB or any other European institution to conclude that the euro is not the same in Germany as in Spain. It is their job to deny this. But the imposition of capital controls in Cyprus has set a precedent. It now has a new currency. I call it the Cypriot euro. According to the ECB’s study, Germany also has its own currency – the German euro – and it is massively undervalued.

© Financial Times