Comments of EES President Dr. Ingo Friedrich,
April 2013

1. From a present-day perspective, the introduction of the EURO was both too early and too many countries participated. Today however, cutting back actions are practically impossible. As a result, the discernible deficiencies have to be treated and remedied in the currently existing monetary area.

2. The present EURO discussion is not considering any of the problems we would have had if we had kept the German Mark. Not only would the continuous revaluations have been a disturbing factor in the long run - the unavoidable dictate of the Deutsche Bundesbank in Frankfurt would not have been a good platform so as to gain the sympathies of our neighbours.
The problem is our geographically central position and that we, as the leading country in the centre of Europe, continuously give rise to jealousy and envy due to our successful economy. The riches are very fast classified as having achieved their richness at the expense of others, even if – as in the case at hand – it were rather industriousness and relative good policies (courtesy of Schröder’s reforms) that brought Germany into this position.

3. The crisis during the last years is the result of real estate bubbles (Spain and USA), banks going bankrupt (Lehmann Brothers), insufficient competitive abilities of the southern countries, over-indebtedness of these countries as well as high current account deficits – with low EURO interests stimulating the borrowings of these countries even more.

4. The crisis management must therefore address all aspects. Quite a number of measures in terms of bank control, reduction of property bubbles and restriction of national indebtedness have been initiated. What remains to be dealt with is a central problem - the differences in competitive abilities.

5. Before the introduction of the EURO competitiveness could be re-established and/or ‘simulated’ by ‘normal’ currency devaluations. After the EURO introduction however, countries had to seek analogous competitive effects on the basis of an INTERNAL DEVALUATION instead of using normal devaluation measures. This is much more difficult but – as some of the countries have proven – not vain, in fact, it is unavoidable even though such measures are very unpopular.

6. Internal devaluation means painful cuts in terms of costs, wages, salaries and pensions. These would be similar as in the case of a normal devaluation but now it is much harder, sharply visible and palpable.

7. The EU countries are facing difficult years of adjustment. Huge targets such as the creation of a new central factor within international politics with the intention to globally represent European values in a trustworthy manner obviously require huge efforts for their implementation.

8. When Prof. Sinn was asked how the European world in terms of economy and currency will look like in the next 10 years, he gave the following answer: the EURO will remain. But we will have to deal with a little bit more of inflation in Europe and in Germany, slightly increased transfer payments of surplus countries and significantly higher internal devaluations in peripheral countries associated with a series of acceptance problems on the domestic front as well as, from time to time, debt cuts and rescue operations à la Greece, Cyprus and Ireland. To a large extent, I also support this opinion.

9. Of course, the speed and the extend of internal devaluations is always discussion-worthy. Nevertheless, there can be no doubt as to the principal unavoidability of such measures.

10.Coming to an end with a philosophical wisdom:
Obviously, we all would prefer to live in a safe, assessable, equitable world but we have not yet fully managed to do so. If compared to former centuries or other countries, life in Germany may be a little bit easier but it’s a far cry from being idyllic. Still the biblical quotation according to which ‘Life ......, even though it was precious, it is full of toil and trouble (adapted to Luther’s translation)’ is imperative.