In The Economic Consequences of Mr. Churchill, written in 1925, John Maynard Keynes warned the Chancellor of the British Exchequer, who was at that time Winston Churchill, of the dangers of an overpriced currency. By relinking the pound sterling to the gold standard after World War I, Keynes warned, Britain stood to damage its export industry, deflate the economy, drive wages down, and raise unemployment. In short, an overvalued currency would create misery in much of Britain. It turned out he was right.
Germany's central bankers would do well to take their old Keynes essays off their bookshelves, because by any reasonable measure, the German mark today is vastly overvalued. While the masters of money at the Bundesbank congratulate themselves on the mark's emergence as a global reserve currency, they might also check in with Corporate Germany to find out what's happening in the real economy. They would discover that while hot money has been pouring into the mark, German investment capital has been rushing out of the country. It is no accident that in 1994, the U.S. received more foreign investment than any other country, including China. Much of that investment came from such companies as Mercedes-Benz, Hoechst, and Deutsche Telekom. While Germany, thanks to high real interest rates, is getting billions in portfolio investment, the U.S. is getting the economic growth and jobs that could have gone to Germany, were it not, in part, for the high cost of the mark.
The mark's new reserve status means that German manufacturers, who clawed their way back to competitiveness at 1.5 marks to the dollar, now must begin the difficult process all over again. In Europe, the market turmoil and currency misalignments caused by the mark's meteoric rise are distorting the functioning of the European Union's single market. France, in particular, is suffering. The successor to outgoing President Franois Mitterrand will soon be forced to decide whether it is worth adopting truly Germanic fiscal policies to wind up virtually alone in a monetary union that is run by the Germans.
The strong mark, of course, does help in one major way. It provides fiscal discipline to European countries still attempting to retain high welfare-state spending supported by heavy debt. But Europe and Germany are paying a very high price for this kind of discipline. Let's hope it is not in misery.