The German language has some interesting words, while only unsatisfactorily translatable, have made it into other languages: “Gemütlichkeit”, which is a typical German quality moment, “Schadenfreude”, taking joy in the misery of others, or “Weltschmerz”, the sadness, when faced with the cruelty of the world.
In economics one of those words is “Währungsreform”. Here also the translations “currency reform” or “monetary reform” only unsatisfactorily render the meaning of Währungsreform. In Germany during the 20th century, two and a half of those have been implemented. Two of them were rather painful for savers. No wonder hence that among all Europeans, the Germans are the ones, which raise this issue quite often when talking about the Euro.
The first German Währungsreform, and still the most severe, occurred in November 1923 when the Rentenmark replaced the Mark, whose value had been eaten away by the most famous hyperinflation in history. The conversion was one Rentenmark for one billion Mark. During this period of hyperinflation, the wealth of the German middle class, if it wasn’t in tangible assets, was completely wiped out.
The second German Währungsreform occurred in June 1948, when the Deutsche Mark replaced the Reichsmark (the Rentenmark was renamed the Reichsmark in 1924) at a de facto exchange rate of 0.65 Deutsche Mark for 10 Reichsmark. Prior to this the Reichsmark, due to massive money supply creation during World War II, had lost almost any confidence as an accepted mean of exchange. Again, for savers it felt like a wiping out of wealth despite the fact that the introduction of the Deutsche Mark turned out to be one of the building blocks of the post-war German economic miracle.
A third partial Währungsreform occurred during the German unification, when the East German Mark was exchanged against the Deutsche Mark at an exchange rate of 1:1 respectively, 2:1 conditional on flows and assets characteristics. For East Germans, depending on the eyes of the beholder, it was either perceived as wealth destruction or wealth creation (the official exchange rate between East and West was 1:1, while the market exchange rate was more 10:1).
The introduction of the Euro was not a Währungsreform as such since the Deutsche Mark was change into the Euro at the then official and market exchange rate of 1.95583:1. But thinking the unthinkable, a break-up of the Euro would certainly amount to a new Währungsreform.
Would it destroy wealth in Germany? It could, if the Euro were to be exchanged into a new Deutsche Mark at a lower rate than the one used during its introduction. But digging deeper, we should also take the relative value of the new Deutsche Mark against the rest of the Eurozone partner currencies into account. To assess this, we can use unit labor costs as guidance. According to the OECD, Eurozone’s costs relative to Germany have increase by 14% over the last ten years. Hence, any exchange rate below 1.70 new Deutsche Mark per Euro would definitively be detrimental for Germans.
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