Thursday, 19 May 2011

Great Letter by Cypriot Economist and fellow blogger

Dr. Panicos Demetriades brilliantly encapsulates in a letter in the Financial times what I have been teaching in Economics of the European union for the past two weeks: that it is Germany who is out of step with the rest of Europe and thus it is Germany that needs to readjust its exchange rate to make its export more expensive.

Right now Germany is getting the best of all worlds - it has successfully lobbies for the ECB to raise interest rates in order to cool time domestic spending; it has prevented losses on the German banking system by keeping Greece afloat for enough time for the German Banks to offload their debt; and the concerns about Greece are keeping the Euro low which allow it to massively increase its exports without any accusations of "beggar thy neighbour policy". Yes it gave money for the bail outs but that money was loaned (and has been receiving interest on) and not a handout as the German media have suggested.

Thus it is the German economy that is out of lockstep that the rest of Europe and it is the German economy that needs a separate currency that is to appreciated. The ECB Raising interest rates at a time where at least 3 Eurozone states are already finding it difficult to repay their debts sounds illogical until on factors in that the desire for Germany to cool inflation it its own country takes precedent over what is happening in souther Europe.

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