The 1948 German Currency and Economic Reform: Lessons for European Monetary Policy

• Published in: The Cato journal 2019-09, Vol.39 (3), p.607-634
• Main Author: Schnabl, Gunther
• Format: Article
• Language: English
• Subjects: Asset acquisitions; Assets; Banking industry; Banking system; Cartels; Central banks; Competition; Criteria; Debt; Depreciation; Economic aspects; Economic models; Economic policy; Economic reform; Economists; Euro; European integration; European Monetary Union; Eurozone; Foreign exchange rates; Government bonds; Insurance; Interest rates; Loans; Market economies; Markets; Monetary policy; Monetary unions; Money; Payments; Policy making; Political change; Premiums; Price regulations; Principles; Profits; Small & medium sized enterprises-SME; Small business; Transformation; Uncertainty; Wage & price controls; Wages & salaries; Wealth
• ISSN: 0273-3072; 1943-3468
• DOI: 10.36009/CJ.39.3.7

Twenty years after the introduction of the euro, the European Monetary Union (EMU) is at its crossroads. Following the outbreak of the European financial and debt crisis in 2008, the European Central Bank (ECB) took comprehensive measures to stabilize the common currency. Interest rates were cut to and below zero and several asset purchase programs have inflated the ECB balance sheet (Riet 2018). Within the European System of Central Banks, large imbalances have emerged via the TARGET2 payments system, which can be seen as quasi-unconditional credit in favor of the southern euro area countries (Sinn 2018). While the ECB terminated its asset purchase program at the end of 2018 and is expected to increase interest rates in late 2019, financial instability is reemerging. Growing uncertainty about the fiscal discipline of the Italian government has triggered a significant increase in risk premiums on Italian government bonds. In particular, in Italy and Greece, but also in Germany, bad loans and assets remain stuck in the banking systems. In the face of the upcoming downswing, European banks do not seem ready for new financial turmoil. In this fragile environment, the future path of the EMU is uncertain. To enhance the stability of the EMU, a group of German and French economists has called for a common euro area budget, for a strengthening of the European Stability Mechanism as lender of last resort for euro area countries and banks, as well as for a common European deposit insurance scheme (Bénassy-Quéré et al. 2018). In response, 154 German economists have warned against transforming the EMU into what they call a "liablity union," which systematically undermines market principles and wealth (Mayer et al. 2018). In 2018, a French-German initative to introduce a common euro area budget faced strong opposition from a group of northern European countries as well as from Italy, symbolizing the political deadlock concerning reforms of the EMU. This article explains the different views on the institutional setting of monetary policymaking in Europe from a historical perspective. It begins with a description of the economic and monetary order in postwar Germany. It then discusses the positive implications for the European integration process and the economic consequences of the transformation of postwar German monetary order. The final section offers some economic policy recommendations.