GM folks. Charlemagne
Don't play politics with the euro
Mar 6th 2008
From The Economist print edition
The lessons of German history haunt the single currency
Illustration by Peter Schrank
IN THE heart of the Money Museum, a shrine to economic rigour in the grounds of the Bundesbank in Frankfurt, a large machine allows visitors to see what would happen if French populists took control of Europe's single currency. In truth, the simulator is not labelled in quite that way—museum-goers are merely invited to grab a lever, and choose how much money to supply to a slowing economy.
But for anyone seduced by French complaints over an overvalued euro, and the need for the European Central Bank (ECB) to concentrate more on pursuing growth, the lesson is plain. If you ignore the post-1945 German focus on fighting inflation and pour in easy money, then disaster follows.
The machine shows prices running out of control, warning lights come on and the game ends. “Sorry, but you've failed,” reads an illuminated rebuke. “Go back and review the basics of money again.” The real-life costs are spelled out, a few metres away, by sombre displays and newsreels describing the miseries of currency instability. They show Germany's hyperinflation in 1923, when it became cheaper to burn banknotes than to buy fuel. Then came deflation and mass unemployment in the early 1930s, triggering despair that—the museum commentary suggests—helped the Nazis to power.
Other sections explain how post-war Germany was saved by the strict policies of the Bundesbank. A display marked “conflicts” describes how politicians from Konrad Adenauer to Helmut Schmidt all failed to browbeat the bank into bending the rules on inflation. Each time, visitors are told, the bank was ultimately proved right. Students looking round the museum agree that experts, rather than politicians, should be in charge of currencies. Thies Bach (looking quite cheerful, considering he won his visit as third prize in a school contest) said: “It is very important to have a stable currency. If the economy hadn't been so bad, Hitler might not have had a chance.”
A trip to Frankfurt helps to make sense of the deep divisions that the strong euro has exposed among the 15 European Union members of the single currency. In countries like France, placing economic decision-making in the hands of politicians, rather than unelected bureaucrats, sounds like a defence of democracy. But even among Germans too young to remember the D-mark, any hint of political meddling raises fears of unstable prices that have, in the past, destroyed democracy.
French complaints about the strength of the single currency have been rumbling for some time, as the euro has climbed in value against the dollar and Asian currencies. They became louder than ever when the currency recently broke through what a French minister called the “psychological” barrier of $1.50 to the euro.
But what precisely do the French want? It is unclear, given that their comments are mostly couched in code. French business leaders have asked the EU to “wake up”. In an interview with Le Monde, Dominique Strauss-Kahn, a former finance minister who runs the International Monetary Fund, said the euro was overvalued and blamed the “excessive power” of the ECB. On the one hand, Mr Strauss-Kahn said, the ECB had done well in controlling inflation (its mandate, to focus on medium-term price stability, was inherited from the Bundesbank). On the other, he said, the ECB lacked a “political” counterbalance in the form of a “finance minister for Europe” to promote growth.
President Nicolas Sarkozy has been attacking the strong euro for months, saying that the currency should be put “at the service” of growth and jobs. Yet he also insists that he does not question the independence of the ECB. More recently, he has preferred to hint at dark dealing by America and other rivals with weaker currencies, saying that European industry must not be “penalised” out of existence by “monetary dumping”.
The euro's strength was debated at this week's meeting of the “Eurogroup”, the club that brings together euro-area finance ministers with the ECB head, Jean-Claude Trichet, and Joaquín Almunia from the European Commission. France was clearly “hoping for a depreciation of the euro”, comments one minister. But he adds that “what France says outside is a lot stronger than what they say inside.” Still, there are deep differences of opinion. Germany pulled off an export boom last year, despite the strong euro. Other countries whose trade is mostly within the euro area point to the inflation-controlling benefits of a strong currency, when it comes to buying imports and above all oil (which is priced in dollars).
The economics of charcuterie
It has not escaped EU ministers that France (like so many others) is in the grip of a big row about rising prices. Domestic political debate in France is dominated by talk of households' falling “purchasing power”, down to a startling level of detail (both Mr Sarkozy and his prime minister, François Fillon, have denounced prices of supermarket sliced ham).
Within the Eurogroup, there is irritation at the incoherence of calling for a depreciation of the euro, which risks fuelling inflation, but at the same time worrying about purchasing power. Most charitably, it is suggested that French politicians are trying to woo special interests by denouncing the strong euro. Less charitably, some say there is no real strategy behind the criticism—merely a calculation that talking of political action and bashing central bankers sounds good to French voters.
Such attacks are meaningless in practical terms: the treaties guaranteeing the ECB's independence can be changed only with the unanimous agreement of all 27 EU members (which many, starting with Germany, will never give). In short, if French politicians want to play at being European central bankers, their best hope may be a trip to Frankfurt to play on the Money Museum's machine. Even then, they may not like its stern lessons.
