April 14, 2013 6:36 pm
The riddle of Europe’s single currency with many values
The euro is not worth the same amount across the region – Spain and Germany have different currencies
A European Central Bank survey shows that households in northern Europe have a much lower net wealth than those in southern Europe. Average German net assets per household are just under €200,000, while they are €300,000 in Spain and €670,000 in Cyprus. No, this not a typo.
German newspapers screamed that poor Germans are bailing out rich Cypriots. This interpretation is wrong but the truth behind these counter-intuitive findings is even more disturbing. 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 constant in 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 asset prices. This is why an apartment in Milan costs much more than one in Munich, the city with the highest property prices in Germany. A German euro buys more real estate in Munich than an Italian euro buys in Milan.
In the frantic German debate about these figures, the focus is on median wealth – the statistic that pinpoints the exact middle if one was to rank households by wealth. Looking at the median, the gap becomes even more extreme. In countries with extremely large wealth differentials such as Germany, where a few super-rich people own a large share of the land and real estate, the median is significantly lower than the mean.
Measured in terms of the median, German households occupy the last place among all eurozone countries, with net wealth of a mere €51,000, while the median Cypriot household has net wealth of €267,000. The explanation for this gap is the low property ownership rate in Germany – well under 50 per cent. This means that the median German does not own a house, while the median Cypriot or Spaniard does.
The median is the statistic to quote when you want to say that your typical German is poorer than your typical Spaniard. But that is a meaningless statement because it is based on distributions within countries. If you want to compare across countries, it is better to take the 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 and Spain would need to adjust their real exchange rates.
In truth, the gap is likely to be larger. I happen to believe that your average German household is richer than the average Spanish household. If my assumption is right, then the imbalance between Germany and Spain, as expressed by those figures, would be even higher.
In a monetary union, adjustment can only occur through real movements in wages and prices. Since Germany is not inflating, and is not likely to inflate in the future, I see no chance of that happening, even in the long run. My conclusion is that, in the long run, this adjustment will eventually happen through a nominal change in the exchange rates – which means 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 Spain than for Germany, and when you also know that this cannot be true, then there must be something wrong with the unit of account. The other potential solution is that there could be a 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 declines of house prices after bubbles. But this type of discrepancy could not account for such a wide gap.
Indeed, this view also ties in with anecdotal evidence. Looking back to 1999, my own experience was that restaurants and taxis in Berlin were cheaper than restaurants or taxis in Brussels or Paris, but the differences have now become extreme. Curiously, the price gap also affects tradeable goods: European cross-border retail markets are not working efficiently.
This leaves me to conclude that the unit of account is not really the same across the eurozone – that Spain and Germany have a different euro. This is also the reason why I believe southern Europeans have a rational reason to shift their savings to bank accounts in the north – because this would present the only way to preserve the value of their euros in the long run.
Of course, I would not expect the ECB or any other European institution to conclude that the euro is not the same in Germany as in Spain. It is their job to deny this. But the imposition of capital controls in Cyprus has set a precedent. It now has a new currency. I call it the Cypriot euro. According to the ECB’s study, Germany also has its own currency – the German euro – and it is massively undervalued.
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Copyright The Financial Times Limited 2013
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