06 December 2013

Bundesbank/Dombret: Global currency blocs - Is the euro a burden or a competitive advantage?

For practically all purposes, the euro is the second most important currency in the world - a role it took over from the Deutsche Mark. In some respects it has even surpassed the Deutsche Mark, for instance in its share of global currency reserves.  However, the problems in the euro area at present have weakened the euro's standing. We need to deal with these problems if the euro is to play a lasting role as a stabilising factor in the international currency system.

The reforms in the individual euro area countries are an important step in this direction. Another step is the reforms in the institutional framework of monetary union, principally the work on a banking union. These measures put the euro area well on the way to rendering itself less vulnerable and remaining an attractive destination for international investors.

In and of itself, a common currency is in the first instance an opportunity for greater competitiveness. A single currency area provides enterprises with a wider market, and one in which foreign exchange risks are eliminated. In turn, this creates a solid footing for international expansion. The more prominent a domestic currency and the economic area from which it originates, the easier it is for exporters or importers to use their own currency for transactions outside the currency area. In addition, enterprises benefit from a broad and well-developed financial market, and this kind of market is more likely to exist, the larger and more successful the relevant currency area is and the more trustworthy the currency.

On the other hand, a large currency area represents a challenge for enterprises, too. They are exposed to stiffer competition on account of the larger number of market players. However, from a macro-economic point of view, greater competition is to be welcomed, because it spurs innovation and promotes necessary reforms.  Against this backdrop, how are we to explain the lack of competitiveness in some euro-area countries? This does not primarily have to do with the single currency. The causes are to be found, rather, in excessive credit growth, deficient labour market regulation, and pay increases not backed by productivity growth.

The crisis has shifted attention back to the competitiveness of euro area economies - with the focus on countries which have lost some of their competitiveness. If the crisis is to be overcome, it is vitally important that these countries become more competitive again. And that, in turn, requires that work continue on the reforms which have begun. Some initial success can be seen already, and this should encourage governments to stay the course of the path they have embarked upon.

A propos competitiveness: Germany's large current account surpluses may be partly accounted for by the euro's relatively weak external value in German terms. However, other factors are more significant. These include the global focus of German enterprises stretching back over decades, and high growth in the markets outside Europe. Furthermore, the demand for German products from the rest of the world is of benefit to other euro area countries, as it boosts German imports.

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