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The riddle of Europe’s single currency with many values - FT.pdf

The riddle of Europe’s single currency with many values - FT.pdf

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The riddle of Europe’s single currency with many values - FT.pdf
The riddle of Europe’s single currency with many values - FT.pdf

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Categories:Types, Business/Law
Published by: Saif Musabah Saif Al-Mutairi on Apr 15, 2013
Copyright:Attribution Non-commercial


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4/15/13The riddle of Europes single currency with many values - FT.comwww.ft.com/cms/s/0/67f9afde-a2c5-11e2-bd45-00144feabdc0.html#axzz2QSPrLbgy1/3
 April 14, 2013 6:36 pm
The riddle of Europe’ssingle currency with many  values
By Wolfgang Münchau
The euro is not worth the same across the region – Spain andGermany have different currencies
European Central Bank survey shows that households in northern Europe have a muchlower net wealth than those in southern Europe. Average German net assets perhousehold are just under €200,000, while they are €300,000 in Spain and €670,000 inCyprus. No, this not a typo.German newspapers screamed that poor Germans are bailing out rich Cypriots. Thisinterpretation is wrong but the truth behind these counter-intuitive findings is even moredisturbing. What the survey shows is not wealth differentials but the de facto exchange rates between the eurozone economies. They are not measures of net wealth but of imbalances. And they are enormous.Since the start of the eurozone, wages and consumer prices have remained broadly constantin Germany. In southern Europe, the general level of wages and prices has increased year in, year out. Over the period, this persistent inflation gap has led to a large discrepancy in assetprices. This is why an apartment in Milan costs much more than one in Munich, the city with
4/15/13The riddle of Europes single currency with many values - FT.comwww.ft.com/cms/s/0/67f9afde-a2c5-11e2-bd45-00144feabdc0.html#axzz2QSPrLbgy2/3
the highest property prices in Germany. A German euro buys more real estate in Munichthan an Italian euro buys in Milan.In the frantic German debate about these figures, the focus is on median wealth – thestatistic that pinpoints the exact middle if one were to rank households by wealth. Looking atthe median, the gap becomes even more extreme. In countries with extremely large wealthdifferentials such as Germany, where a few super-rich people own a large share of the landand real estate, the median is significantly lower than the mean.Measured in terms of the median, German households occupy the last place among alleurozone countries, with net wealth of a mere €51,000, while the median Cypriot householdhas net wealth of €267,000. The explanation for this gap is the low property ownership ratein Germany – well under 50 per cent. This means that the median German does not own ahouse, while the median Cypriot or Spaniard does.The median is the statistic to quote when you want to say that your typical German is poorerthan your typical Spaniard. But that is a meaningless statement because it is based ondistributions within countries. If you want to compare across countries, it is better to takethe mean. The gap is not quite as dramatic but it is still very large.If mean German net wealth is €200,000 per household and mean Spanish net wealth is€300,000, and if I further believe that the Germans are not really less wealthy as a nation,measured per household, then this gap tells me the minimum extent by which Germany andSpain would need to adjust their real exchange rates.In truth, the gap is likely to be larger. I happen to believe that your average Germanhousehold is richer than the average Spanish household. If my assumption is right, then theimbalance between Germany and Spain, as expressed by those figures, would be evenhigher.In a monetary union, adjustment can only occur through real movements in wages andprices. Since Germany is not inflating, and is not likely to inflate in the future, I see no chanceof that happening, even in the long run. My conclusion is that, in the long run, thisadjustment will eventually happen through a nominal change in the exchange rates – whichmeans that somebody has to quit the eurozone or resort to a parallel currency.To put it another way: if the same unit of account gives us a higher wealth figure for Spainthan for Germany, and when you also know that this cannot be true, then there must besomething wrong with the unit of account. The other potential solution is that there could bea problem with the data, but I see no fault with the statistical techniques used by the ECB.Maybe they got the house prices wrong. Statisticians do have difficulty capturing the declinesof house prices after bubbles. But this type of discrepancy could not account for such a widegap.Indeed, this view also ties in with anecdotal evidence. Looking back to 1999, my own

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