Germany’s export advantages make tying to the d-mark a one-way bet

Evidence

The problem with keeping up with the Germans is that German industrial exports have the lowest price elasticities in the world. In plain English, Germany makes really great stuff that everyone wants and will pay more for in comparison to all the alternatives. So when you tie your currency to the deutsche mark, you are making a one-way bet that your industry can be as competitive as the Germans in terms of quality and price. That would be difficult enough if the deutsche mark hadn’t been undervalued for most of the postwar period and both German labor costs and inflation rates were lower than average, but unfortunately for everyone else, they were. That gave the German economy the advantage in producing less-than-great stuff too, thereby undercutting competitors in products lower down, as well as higher up the value-added chain. — Mark Blyth, Austerity, 212

Categorization

• XREF: Explains the structural asymmetry — German low price elasticities and undervalued currency — that Mattei identifies as the root of German-led export surpluses and symmetric adjustment demands placed on Southern Europe.
• SHARE: Send to anyone interested in German economic dominance or European monetary history — the point about the d-mark being undervalued for most of the postwar period is the sort of counterintuitive detail that changes the whole framing.