Published in The National Business Review (Auckland), 22 February 2013
There is nothing better than a good comparison. Except a better comparison. I love comparing things, whether it is cities, cars, or countries. In my career, I have led a number of comparative research projects. Even my PhD thesis was in comparative law and economics on the issue of – wait for it – comparative advertising. If you called me a professional comparer I’d be relatively happy with this description.
As I am now living in my fourth country, I cannot help comparing New Zealand’s policy discussions with my previous experiences in Australia, Britain, and Germany. Of course, a few issues are uniquely kiwi. There is no equivalent of the Treaty of Waitangi in Germany, for example (although the Bavarians might have appreciated something like this).
However, I have heard most other policy discussions elsewhere before. It seems that all countries are dealing with the same challenges in their education systems; they are all trying to find the right balance between employee protection and labour market flexibility; and they are experimenting with different ways of delivering public infrastructure on budget and on time (and they all fail regularly).
Hearing the complaints about the ever-appreciating New Zealand dollar and its alleged detrimental effects on kiwi manufacturers and exporters, I cannot help thinking of Germany. Before the introduction of the Euro, West Germany had one of the world’s strongest currencies, the Deutsche Mark. And the German discussions at the time were not dissimilar to New Zealand’s today.
After the traumatic experiences of hyperinflation in the Weimar Republic and the monetary chaos following the collapse of the Third Reich, the Germans yearned for stability. So they tasked their new central bank, the Bundesbank, with achieving just that – and only that. The Bundesbank was not meant to promote growth, exports, or employment. Its sole function was to keep the purchasing power of the newly minted Deutsche Mark stable. It succeeded.
The strength of the Mark became the pride of the nation and allowed German tourists to go on longer holidays to ever more exotic destinations. Some even made it to New Zealand. With ‘deutschmarks’ in their wallets, the Germans felt they could afford the world. In the process, they came to revere their central bank so that former European Commission President, Jacques Delors, once mocked them: “Not all Germans believe in God, but they all believe in the Bundesbank.”
However, not everybody in Germany was happy with the strength of the Deutsche Mark. Sure, it was reassuring to finally have a safe store of value. Yes, seeing the costs of imported goods fall was great news to consumers. But for German manufacturers the picture was less rosy.
As the Deutsche Mark went from strength to strength, German companies constantly felt the pressure of the exchange rate in export markets where their products became more expensive for international customers. At the same time, their competitors abroad enjoyed the benefits of falling exchange rates and could undercut Germany’s high prices.
A look at long-term monetary statistics reveals what a challenge this meant for German industry. In January 1960, you needed to pay DM 4.17 for US$ 1. In December 1998, on the eve of the Euro’s introduction, the exchange rate had fallen to just DM 1.67 – a depreciation of 60 percent over 39 years.
The depreciation of the US dollar against the Mark was not actually too bad when compared to other currencies. It was even worse for the British Pound Sterling (76 percent), the Italian Lira (85 percent), the Spanish Peseta (83 percent), the Greek Drachma (96 percent) – and also the Kiwi dollar (85 percent).
Given these dramatic changes in the exchange rate, you would have expected German companies to go out of business one after the other as they could no longer compete with their foreign rivals. You would have also thought that Germany would have been flooded with French cars, Italian machinery or at least Greek olives. With the possible exception of the olives, it never really happened. What happened instead was something completely different.
German companies of course moaned and complained endlessly about the pressures of the exchange rate. Already in March 1961, news magazine Der Spiegel dedicated a cover story to industry complaints about an appreciation of the Mark by 5 percent. And that was before the Mark’s decades-long appreciation had begun in earnest.
The captains of German industry were vocal in their opposition to the rising exchange rate. But then they always went back to work, lifted their game until they were able to beat their international rivals once again.
The result was remarkable. The structure of Germany’s industry changed. The constant exchange rate pressure had forced German companies to innovate, become more effective and simply get better. Of course, it also contributed to sectoral change which meant that some industries such as textiles no longer found it possible to produce in Germany.
On the other hand, this loss was more than compensated in other industries as is apparent in Germany’s success as an export nation. From the 1960s until 2009, Germany was the world’s largest or second largest exporter in every single year, alternating with the US. Only the rise of China has recently beaten Germany into 2nd or 3rd place.
Comparing Germany’s historical experience with New Zealand’s current dollar discussion, a few things become clear. A rising exchange rate certainly poses a challenge to exporters and manufacturers. But that does not mean that they will go out of business.
It may just as well mean that they will rise to the challenge by innovating and getting better. They may also benefit from falling prices for imported components. In the end, they could even export more if these efficiency-inducing effects overcompensate the relative price effects of the rising exchange rate.
In any case, the historical example of the Deutsche Mark should caution against premature conclusions from the rise of the kiwi dollar. It does not need to be a disaster. In any case, to return to the strength it enjoyed against Germany in 1960, the kiwi dollar would still have to appreciate by 377 percent against the Euro.
Good we got that compared.