German Economists and the Euro

German academic economists are a strange pack. After having experienced a terrible end of specific German approaches towards Nationaloekonomie during Nazi time, the profession never recovered and instead accepted in a submissive way all the turns that were started in the US and the UK. With a brief intermezzo of Hydraulic Keynesianism it was the Neoclassical paradigm that students had to internalize. Textbooks in economics speak volumes. When it comes to policy advice, though, the mainstream was diligently willing to add elements of Ordoliberalism to its brew. The way neoclassical orthodoxy and Ordoliberalism are getting paired is truly unique but then it is also rather ideological. It goes without exaggeration, that since WW II not a single German economist has come up with a pathbreaking contribution in the field. Out of 101 German Nobel Prize , there is exactly one economist, Reinhard Selten, and he played in the area of Game Theory, hardly a field in economics that was invented or even strongly populated by Germans.

And yet, German economists are a proud pack, and this is played out nicely when it comes to the Euro. There are not too many economists out there who do believe the Euro was a good idea. There are many more German economists out there who proudly refer to an ‘Memorandum of Leading German Economists’ (self-proclamation) from June 11, 1992, that , as it is argued, provided a uninformed audience with theory-grounded arguments why they Euro at this point is a bad idea. If one takes the time to re-read the eleven points on the Maastricht Treaty for a Economic and Monetary Union, then such a pride seems to be a version of an alternative fact. Let me walk you through the main arguments. I summarized the Memorandum arguments in italic.


(i) The convergence criteria are too soft, and this holds in particular for the inflation rate which should be defined in an absolute value rather then in a relative value range. As a matter of fact, the Euro came with a price stability criteria that was not absolute. However, with the announcement of the Euro we saw a weak convergence of price levels. Differences in nominal price levels had no significant negative impact as such.

(ii) The ECB will not be able – despite its relative independence- to secure a low inflation rate because the governors are not independent and monetary policy will be influenced by national interests. As a matter of fact, the ECB enjoyed the highest level of political independence across central banks, and followed in sometimes brutal ways through its mandate to secure a low price level. The inflation rate ion the Euro was on a regular base below the target range.

(iii) Due to the lack of authority in exchange rate policy, the ECB’s monetary policy will run into problems because national governments will impose political interest on exchange rates and thus make monetary policy less efficient. As a matter of fact, the ECB has some limited authority when it comes to exchange rates, and actually used its leeway. Now, the movement of the exchange rate can indeed be influenced by national governments,. at least indirectly, but this comes with a price for governments, and has its own limits. The idea that national governments of the Eurozone can act as kind of currency manipulators is definitely an exaggeration as it would require that the main players all act in the same direction. Foreign exchange markets are strange beasts who listen carefully to all uttering and often also to noise. Governments of a common currency have a hard time to display a coherent story that worked move markets.

(iv) The relatively weaker economies of the Eurozone will experience strong competitiveness pressures: The lower levels of productivity will eventually increase unemployment rates. The result is a huge transfer union. A common currency implies that economic policy is losing a critical variable, namely the exchange rate. Given that depreciation is no longer a way out and given that the Stability and Growth Pact required relatively strict fiscal discipline, it is up to the direct and indirect wage variable to work as adjustment mechanism. Rather then becoming a transfer union, the catch-up economies of the Eurozone actually enjoyed an enormous growth spurt and a strong inflow of capital plus an increase in private debt. Only when the long boom came to a burst, the Eurozone had to develop elements of an transfer union.


It does not need too much of economic knowledge to recognize that the memorandum of leading German economists was and still is not worth the paper it is printed on. Yes, the Euro is in deep trouble. Yes, the Euro may have been a bad idea. And yet, the list of arguments of leading economists does not at all give correct and theoretically acknowledged arguments why the Euro came into trouble. When one reads the whole memorandum, then it becomes obvious that not economic but political reasons dominate the piece. The economists were fans of the Krönungstheorie, i.e. a view where the introduction of a common currency can only be justified when monetary and fiscal policies are highly integrated and the common economic space reached a high level of homogeneity. Now, this is a prominent view, as Jens Weidman summarized in regards to the German Bundesbank:” Die Bundesbank – zum Beispiel – vertrat die sogenannte Krönungstheorie: Danach sollte die Währungsunion erst am Ende des europäischen Integrationsprozesses stehen: Denn wenn die Volkswirtschaften nur unzureichend integriert und angeglichen seien, passe eine gemeinsame Geldpolitik nicht für alle Staaten und die Währungsunion würde krisenanfällig. Dass diese Befürchtung nicht ganz unrealistisch war, hat die Krise im Euro-Raum dann gezeigt.“ In others words, the Bundesbank as a prominent supporter of the Krönungstheorie feared that the incomplete integration and incomplete convergence of member economies adds to the problem of a one-size-fits all monetary policy, and thus creates problems that may result in crises. It seems to me that this is a line of reasoning one can include in a proper crisis analysis.The Memorandum of Leading German economists, however, does not at all provide any helpful insight into those processes and developments. Why then some still make the argument that they warned us years ago of the disaster, can only be understood by the hunger for reputation and the pride of academics who seem to feel to stand on the right side of history.