What do some people mean by saying the European Monetary System has become a “Deutschmark area”?

Question

I don't understand the econ behind it! Thanks a lot.

Answer 1

"Deutschmark area" refers to he monetary policy of the Euopean Central Bank (EZB). The main instrument of the central banks to inflience the economy is by setting the interest rate for which the EZB lends money to the commercial banks and he economy.

Usually there are four targets for an economy:

full employment (which is today considered at around 3 - 4 % unemployment rate),
low inflation (which today is considered around 2 %),
growth of the gross domestic product (GDP): depending of the country : for Germany it is considered 1 - 2 %, for the US it is considered around 3 %,
balanced imports and exports,
stable rate of exchange with other main currencies (Euro/Dollar/Yen/Chinese currencr Rimnimbi)).

There is a "target conflict" here:

if you flood the market with money (low interest rate by the EZB) you create demand which may outstrip the capacity which casues high inflation and/or incerase the imports (which brings your trading into inbalance).

The question is: what do you give priority ?

Germany has a population of around 80 mio people in a Euro area of around 450 mio people (this is around 18 %), but the economical share is around 33 %.

Historically the Germans are afraid of inflation. My grandmother was born in 1899 anmd lived through 5 currencies: "Mark", a huge inflation in 1923 which wiped out the savings of he middle class (a war had to be paid for: WW I), "Rentenmark" later called "Reichsmark" up to the end of 1945, another inflation after the war and then the "Deutsche Mark". This currency psychologically was the symbol of the "Wirtschaftswunder" after the war and the value of this currency was "untouchable". Because of this history the German Central bank gave priority to the inflation rate and Germany were willing to live with a smaller growth rate and a higher unemployment rate than its neighbours.

When Germany agreed to the introduction for the Euro they were scared thet the value of the Euro would be lower then the DM, meaning higher inflation rate and less monetary disciplin of the other member countries. They only agreed under the condition that a "Growth and Stability Act" to be signed between all the members. The main points are: an inflation rate close to 2 %, a deficit of the state expenses of maximum 3 % and a total debt in relation to the GDP of 60 %. With this Act they forced a high pressure on the other members.

They also forced the other members to elect Wim Duisenberg as the frist president of the EZB knowing that he would fight for low inflation of 2 %.

(There was an expression in France:
" Le Franc fort est de Frankfort", meaning " the strong franc is from Fankfurt (where the german central bank and now the EZB is seated)")

For the first 5 years of the Euro this looked foolish: the growth rate of Europe was lower then the US, the unemployment was higher then in the US, no real income growth for the people and the Germans were not well liked. But it is turning. After the necessary adjustments were made Germany and Europe today are growing faster then the US, the Euro is gaining weight against the Dollar, the oil producing countries consider to change the oil price to the Euro, the chinese and japanese are considering to move part of there huge dollar reserves ( 1200 bn) into the Euro,
and Mr.Bernanke also seaks for a 2 % inflation rate.

It seems the "German/European" policy is the more successfull concept on the longterm.

Answer 2

Um, are you looking at an old textbook or something? The Deutschmark ceased to exist years ago. Germany now uses the Euro.

Answer 3

Yeah anarchists such as myself have been trying to convince people of this for centuries, but they won't have a bar of it.Greed and violence would still exist, but in smaller societies, where community justice was meted out they would be ostracised and flounder without a supporter network. Thus the deterrent value of our justice system would be far more effective than the current ones are. Also all the useful people who could fiix machines and grow things would be living better lives than the useless people whose only skills lie in ordering others about would have to get off their fat duffs and do some graft for their daily bread, and I really do like that idea a lot.

Answer 4

the Deutschmark or Mark was Germany's monetary unit. roughly equivalent to 1.8 marks to the dollar at the time of the introduction of the European encompassing "Euro".

Answer 5

this refers to the to the european exchange rate mechanism, in which european currencies were pegged to each other. in a sense the German central bank was defining monetary policy for the ERM area.