All Is Not Well in Euroland

By Davis, Natalia; Redenbaugh, Russell | The American Spectator, March/April 2002 | Go to article overview

All Is Not Well in Euroland


Davis, Natalia, Redenbaugh, Russell, The American Spectator


The great experiment to homogenize the monetary, tax and trade policies of the 300 million souls of Europe is struggling forward. On a recent trip to Germany and Ireland, we personally experienced a pervasive, but necessarily temporary, campaign to escape a central law of economics: the Law of One Price.

The law of one price simply states that in the long run identical goods cannot sell at different prices, after adjusting for differences in the costs of taxes and transportation. In establishing the euro as a single currency across the European community, Germany and the rest are rediscovering its perils.The sharp price increase incurred by translating from deutsche marks to Euros will result either in a sharp drop in the quantity demanded, or in a wrenching downward ratchet of all German prices. A vendor of internationally traded goods cannot price above the market and, in the long run, neither can local restaurateurs or service providers. Having lived in Germany just three years ago, we were shocked at how expensive the country had become, even for auslanders like ourselves. Rather than posting prices consistent with the exchange rate, many vendors and restaurateurs seem merely to have transcribed their prices from deutsche marks to Euros-a nearly 100 percent markup. No wonder that Germans have dubbed the new currency the "teuro," from teuer-expensive.

Those price dislocations are slowing Germany's economic recovery. For the past six years. Germany has had either the slowest growth or second-- slowest growth in Europe. Exports are up--now more than a third of GDP--and prosperity is down. Put another way, Germany is exporting capital through its trade account surplus--a disinvesting economy.

Adding to the mess is a myriad of laws to "protect" consumers from "excess competition" --low prices! This same thicket of laws protects workers from being laid off and German companies from being acquired. Price-comparison ads, for instance, are verboten. RyanAir, the Irish-based version of South West Airlines, openly flouts this law, selling out every plane and gladly paying its fines. Under an "anti-discount" law, German companies are free to raise prices but cannot lower them without government approval. Or paying another fine.

Higher prices means fewer goods sold and more unemployment. At 10.4 percent, Germany's jobless rate is almost double the U.S. figure. Shops are empty and restaurants are only frequented by the expense account crowd. …

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