Back to the deutschemark ?

May 28, 2019 0 By Michel Santi


Martin Feldstein, a Harvard economist, wrote premonitorily in 1997 that the euro’s introduction “would exacerbate economic cycles by worsening unemployment in certain member states. Such economic woes would contribute to a crisis of confidence in the Union”. In fact, those who were convinced that the Union’s crisis since 2009 would only be a one-off and would blow over have had to revise their copy, to now understand that the crisis was written into the very genes of the euro, this common currency that requires a common monetary policy – that is to say a common interest rate – for a zone with disparate economic cycles. These structural deficiencies and chronic problems went unspoken of when the euro was being hatched. In its current form, it has been reduced to a vector of economic contradictions and a machine that creates deflation, unemployment and inequality. So much so that the only avenue that would now allow for the implementation of a policy to actively stimulate the economy in European nations (such as Italy) that have been hit hard by unemployment and recession would be to reintroduce the deutschemark!

It is in fact a matter of squaring the circle, of implementing indispensable structural reforms in peripheral Europe, without further putting its population to the sword of austerity by avoiding an inflationary push in Germany. Contrary to the reintroduction of the Italian lira (or other European currencies), only the return of the deutschemark would avoid bringing abouta phenomenon of financial contamination or systemic crisis. It would, conversely, slowly relieve the burden of debt for the peripheral nations because a euro relieved of its German domination would see a large dip in its value, and would thus circumvent the onerous partial failure of certain nations, the seizing of certain banking assets and confiscatory taxation. The only obstacle to overcome would be the inevitable take-off of the deutschemark,which would fundamentally harm German exports and cause a recession in Germany because of a global run on the national currency, which would have (again) become a global security of refuge at a time when the central bank, the Bundesbank, would be incapable of weakening it due to the interest rate already being at zero.

But this doesn’t account for the return of the deutschemark happening in very precise conditions that would allow the Bundesbank to maintain control of its value, all the while enshrining a change of paradigm for the whole world’s monetary system. This return of the German currency, but only in electronic form and strictly limited to internal fiduciary transactions, would happen based on a clearly-defined bracket of fluctuation between the completely electronic German currency and the paper euro. Secondly, a gradual appreciation of the deutschemark – with no negative effect on the country’s trade – would be tolerated and even managed. No one could make a run on banknotes in deutschemarks for the simple reason that they wouldn’t exist, and the Bundesbank would then be in a position to make unlimited usage of its strike force on a purely electronic deutschemark whose value it would easily be able to control. The consequence of this would be that while interest rates would stay close to zero on the euro, they would be largely negative for the deutschemark, with naturally positive ramifications for all economic activity revolving around a rekindled German currency. At the same time, the sharp fall of the euro would immediately boost competitivity among European goods.

Additionally, the planned price increase of German goods based on a well-defined calendar for the electronic deutschemark’s appreciation would encourage buyers not to delay too much their imports of German goods. These anticipations would serve to neutralise the harmful effects of the deutschemark’s appreciation. Reintroducing the deutschemark – in electronic form – would therefore signal the return of the kind of flexibility the European Union needs badly right now, in terms of both monetary policy and the premeditated devaluation of its currency. So what is stopping Europe from coming up with a nuanced monetary policy that could adapt to the diverse economic cycles of its markedly diverse nations? On this front, an electronic currency – indeed several electronic European currencies – under the ECB’s guidance would be without doubt an ideal instrument to tame the fundamentals of a country or group of countries, with the central bank maintaining strict control over them.

This comes at a time when it is most likely Jens Weidmann who will take over the reins of the European Central Bank from Mario Draghi, he who has recently openly and audibly brought attention to the need for Germany to “stop all stimulus measures because pressure on prices is being felt”. It comes at a time when it is vital to act in a nuanced fashion and with analytical sophistication. May the euro be adapted to the diverse macroeconomic imperatives of the Union and to its technological progress, in the sole interest of its citizens, who would greatly appreciate the intellectual innovation and flexibility that their new decision-makers would champion.

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