The euro was supposed to put an end to competitive currency devaluations, and with it ‘unfair competition’. But this has not been the case. Germany was often portrayed (wrongly) as the victim of other countries’ competitive devaluations before the introduction of the euro. But contrary to received wisdom, Germany’s real exchange rate – which takes into account differing inflation trends in Germany and its trading partners – did not rise in the run-up to the introduction of the single currency. And it has fallen steeply during the 15 years of the euro’s existence. This has handed German firms a competitive advantage of the kind the euro was supposed to eradicate. What is more, Germany is not under pressure to do anything about it. In fact, other eurozone countries are being encouraged to follow suit.
The European Commission compiles so-called ‘harmonised competitiveness indices’ for eurozone economies (see chart one). These are the member-states’ real exchange rates in anything but name. They show that Germany’s fell by almost 20 per cent between the beginning of 1999 and the end of 2011, before edging up a bit in 2012-13. The main reason for the decline in the country’s real exchange rate was very low wage increases and hence weak inflation. Spain’s (and to a lesser extent) Italy’s real exchange rates rose rapidly over the early part of the 2000s but have fallen sharply since 2008: Italy’s is now barely higher than in 1999, whereas Spain’s is up around 9 per cent. France’s real exchange rate is actually lower now than in 1999 (or in terms of the Commission’s analysis), its ‘competitiveness’ has improved. In short, the eurozone’s imbalances have less to do with its Latin members allowing costs to get out of hand than they do with Germany engineering a beggar-thy-neighbour cut in costs.
