Germany has parlayed its Eurozone membership into massive trade surpluses.

When challenged about its massive trade surpluses, Germany seems to enjoy hiding behind the euro “whose value it cannot control.” Meanwhile, Germany holds down domestic wages and prices, effectively devaluing the euro within Germany against the euro for other European countries.

If the Eurozone countries had implemented a Market Access Charge (MAC) when the common currency area was created, the Eurozone Crisis might well have been avoided, or at least significantly reduced.

Prior to 2008, German vendor finance and outright bank lending had flooded into Europe’s southern periphery countries (Greece, Italy, Spain, and Portugal), driving wages, prices, and overall inflation there sharply higher. Their goods became less competitive because of rising domestic prices, and with no ability to change the euro's exchange rate to reflect their own national reality, imports became artificially cheap and exports became artificially expensive. This was the primary cause of the large current account deficits and foreign debt liabilities that drove the acute crises in these four countries.

The cross-border flood of German credit may have been engineered as part of Germany’s aggressive export policies. Whatever the motive, a key mechanism was the large spread between interest rates in Germany and those in its neighbors to the south, a spread driven primarily by Germany’s exceptionally high domestic rate of savings and the consequent surplus of domestic capital -- factors highlighted by Klein and Pettis in their highly influential book, Trade Wars are Class Wars.

For example, the average spreads over German rates for Spain and Italy averaged 3.3 percent between 2011 and 2013 (see chart below). Adding Greece to the unweighted average would raise the spread to an astounding 6.9 percent.

As Maastricht criterion long-term bond yields (mcby) in Germany averaged only 1.9 percent during this period, German bankers lending to the southern European countries earned returns 1.7 to 3.7 times higher than at home. Such spreads proved irresistible, especially when the German banks’ perceived risks of currency mismatch and default within the Eurozone were close to zero.

If each Eurozone country had implemented a MAC when the so-called “common currency area” was created, MAC charges would have been triggered in the southern tier nations as soon as their trade deficits reached one percent of GDP. Although an initial MAC rate of 25 to 50 basis points would not have had an immediately tangible impact on cross-border lending, the market access charge would have made Germany’s bankers think twice about the rising risks of lending to such markets.

Over time, with semi-annual increases of 25 to 50 bp, the combination of falling net yields and rising risk perceptions would have slowed the flow of capital from Germany into these countries. After two or three years, this process would have moderated foreign credit inflows, thereby reducing inflation sufficiently to return domestic prices and wages to more competitive levels.

In this way, country-specific MACs within the EZ might well have prevented or significantly reduced the impact of the Eurozone crisis that came about largely because of excessive intra-zone, cross-border capital flows.

I would be the last to claim that a policy tool such as the MAC would be sufficient to solve the Eurozone’s problems. The problems there are extensive, complex, and deeply ingrained, the result of historic national differences of culture, priorities, and experience. Policy initiatives on multiple fronts will be needed. Establishing banking and fiscal authorities with executive powers over the individual countries to assure policies consistent a common currency area  are probably needed, and policy reforms going far beyond these basics will also be needed, especially in countries like Greece.

Nevertheless, I would suggest that, even today, introducing a MAC in each of the European countries could make a major contribution to establishing the conditions needed to maintain the unity and viability of the Eurozone. While not sufficient by itself, the MAC or something very much like it may well be necessary. 

In fact, a new Plaza Accord that included the same dynamic link to balanced trade that is built into the MAC would eliminate the Achilles Heel of the original Plaza Accord -- the lack of a dynamic like to market realities. The 1985 accord was simply a on-shot exchange rate adjustment determined by bureaucrats sitting around a table who, despite being highly intelligent and well-meaning, had no way of pre-determining the series of exchange rate adjustments that would be needed to maintain balanced trade for the United States and other countries indefinitely.

Implementing the MAC would provide this urgently-needed dynamic link, assuring market-driven consistency between market exchange rates and balanced trade forever.

Revised Jan. 26, 2022

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