Sapir, A., (2014), “France and Germany must both change economic strategy”, Bruegel Blog, 13 February.
The euro was first and foremost a Franco-German project, not only politically but also economically. Thanks to its stability culture, Germany had a strong currency. At times, when the dollar was weak, the D-mark was even too strong, penalizing German exporters in favor of their European competitors. Germany was therefore keen to have France and other EU countries peg their currencies to the D-mark. For its part, France was keen to also have a strong currency (a ‘franc fort’), but it lacked the necessary stability culture. The way to import it was to peg the franc to the D-mark, but politically it was difficult for France to surrender its monetary sovereignty to the Bundesbank. Monetary union was the way to give both countries what they wanted by transferring monetary sovereignty to a European central bank and give it a price stability mandate. And so the euro was born.
Unfortunately right before the creation of the euro, Germany suffered an unexpected shock. Reunification led to massive public expenditures and deficits, to which the Bundesbank reacted by tightening monetary policy to maintain price stability. Thus, when Germany joined the euro its currency was strongly overvalued. The early years of the euro were painful for the ‘sick man of Europe’: unemployment, which had traditionally been low (and always lower than in France), rose steadily, reaching a post-war high of more than 11 per cent (2 points higher than in France) in 2005; public deficits remained persistently above the 3 per cent limit between 2001 and 2005; and public debt reached a record of 68 per cent in 2005.
Relevant Posts
- Dustmann, Chr., Fitzenberger, B., Schönberg, U., Spitz-Oener, Al., “From sick man of Europe to economic superstar: Germany’s resurgence and the lessons for Europe”, www.voxeu.org, 3 February.
- Cohen-Setton, J., (2013), “Blogs review: The deflationary bias of Germany’s current account”,Bruegel, 06 November.
- Coppola, F., (2013), “The ECB rate cut was driven by the needs of Germany, not the needs of the Eurozone”, LSE European Politics and Policy Blog, 19 November.