Germany has been here before. The political union of East Germany with West Germany was cemented with a currency union. The politicians decided to do it at the political rate of 1 ostmark to 1 DM, a very favourable rate for ostmark holders. The Central Bank’s advice to do it more slowly, or at a lower rate for the ostmark was ignored.
The result was a very expensive and long job to try to get East Germany up to somewhere near West German living standards. The one independent study of the costs to West Germany puts them at Euro 1.3 trillion over the first twenty years. Today the cost is around Euro 80 billion a year.
It was a much easier task than uniting the Euro currency area. All the people involved spoke the same language. Most of them felt they belonged to the same country. A politically acountable government was put in charge to take the main decisions, which had authority and consent from most of the people. Labour migration was relatively easy to the richer places, owing to the common language and sense of common nationhood. Around one quarter of the population of working age left East Germany to get jobs in West Germany.
Despite all these advantages, it was a long and difficult task. It created tensions between the two Germanies. Some in the West complained that the East Germans relied too much on subsidy and needed to raise their game. Some in the East felt the support of West Germany was too grudging, that they did not show enough sympathy and understanding for how East Germans thought about it all.
If it cost that much to unite the two Germanies with a single currency, how much do people think it will cost to unite the 17 members of Euroland? Why wouldn’t it cost several times the Euro 1.3 trillion it cost Germany? I read rumours of a further bail out for Spain in discussion. Yesterday Spanish ten year borrowing costs rose about 7%, the level which is said to be too costly. Italy did succeed in raising some new borrowings, but at high rates. It looks as if it is going to take a lot more subsidised lending to save the Euro. At some point the markets will ask just how much of this extra credit can Germany support?