Ifo Viewpoint No. 83: The Thirty Billion Euro Deal: Seignorage of ECB
Munich, 22 May 2007
For Peer Steinbrück and Axel Weber 2007 is an important year, as the fifth anniversary of the euro in circulation also marks the end of the transition phase to the full socialisation of the Bundesbank’s seigniorage, i.e. its profits from money creation. The times when Germany could achieve special profits from exporting its currency are gone for ever.
Seigniorage is generated when the central bank makes available the money it has itself created to the private sector in exchange for interest-bearing assets like bills of exchange or deposits of securities. Seigniorage is the interest earned on the assets that the central bank has acquired with its money. The Bundesbank once had accumulated a very large stock of assets relative to the size of the country because the deutschmark was also used abroad for transaction purposes and store of value. Following the collapse of communism, the deutschmark became popular in Eastern Europe and beyond. The thousand DM notes under Turkish mattresses were legendary. One third of the stock of deutschmarks once circulated abroad. This is why the deutschmark had special status compared to other pre-euro currencies, and the Bundesbank was able to earn special profits, which Theo Waigel and Hans Eichel, former German finance ministers, were always able to anticipate. Since 2002 these good times have passed. The euro has replaced the deutschmark, and the interest earnings from the stock of assets have been summed up and distributed according to country size.
In Article 32 of the Protocol on the Statute of the European System of Central Banks and of the European Central Bank annexed to the Maastricht Treaty, it was stated that the degree of socialisation of the interest earnings was to amount to 40 percent in the first year of the currency union and would then be increased step by step to 100 percent within five years. What was meant by the first year was not clear, however: 1999, the year of the virtual introduction of the euro, or 2002, the year of its physical introduction. Otmar Issing was able to achieve acceptance of the later date. This saved the German taxpayer billions of euros. Nonetheless, since 2002 socialisation has occurred at rising amounts, and since the beginning of this year it has been completed. There are various reasons why the Bundesbank was able to transfer on average €8.8 billion p.a. to the treasury in the five years before the physical introduction of the euro (1997 to 2001) but only €2.7 billion p.a. in the five years after (2002 to 2006). Besides low interest rates and the collapse of money demand at the time of euro conversion, the reasons include the socialisation of seigniorage.
At first glance, the Maastricht agreement on the distribution of the interest earnings looks good: If one shares a common currency, one might as well share the seigniorage fairly. Therefore one could argue, as the Bundesbank did, that complete socialisation of seigniorage was a natural implication of the currency union, to which there was no alternative at the negotiations of the Maastricht Treaty.
One could, however, also hold the view that Germany could have done better in those negotiations. The German negotiators could have argued that the rights to the interest earnings on the assets accumulated before euro conversion ought to stay with each country and that only the rights to the future growth of these assets would be socialised under the euro regime. Since the other countries were keen on getting rid of the deutschmark, such a position would certainly have been accepted. Based on the opening balance sheets of the euro countries on January 1, 1999, Holger Feist and I calculated (www.cesifo.de) the wealth implications of such a result. Accordingly, Germany would have been richer by €29.3 billion net and France poorer by €31.3 billion. Finland would not have been able to increase its assets by €3.3 billion, and Austria would not have lost €1.8 billion. Spain, too, which relative to its size had a lot of currency in circulation due to its large underground economy and whose head of the central bank, Luis Angel Rojo, later fought in vain against the socialisation, could have avoided the permanent loss of interest earnings on a stock of assets worth €11 billion.
Of course, this does not mean that Germany has made a bad bargain with the euro. After all, the euro is doing very well. Euros in circulation have grown much faster recently than could have been expected from simply extending the trend of the pre-euro currencies. There are already more euros circulating worldwide than dollars. Although Germany is getting a smaller percentage of the cake than before, it may well be getting an absolutely bigger piece because the cake is much larger now.
That is cold comfort, however, as the socialisation of the rights to the interest earnings on the stock of assets that had already been accumulated under the deutschmark regime was nevertheless unnecessary. That Germany needlessly transferred about €30 billion to France in the Maastricht Treaty remains a portent that will be a reminder for Peer Steinbrück and Axel Weber when, at the end of 2007, they will add up the Bundesbank profits to be transferred.
Professor of Economics and Finance, University of Munich
President of the Ifo Institute
Revised version. Earlier published as "The Thirty Billion Euro Deal". Published as "Schlecht verhandelt", Wirtschaftswoche, no. 16, April 16, 2007, p. 186.