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The Deutschmark in Eastern Europe, Black Money and the Euro: On the Size of the Effect

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  • Hans-Werner Sinn
  • Frank Westermann

Abstract

Black money on the run as well as returning D-Mark stocks from Eastern Europe and Turkey can explain much of the euro's exchange-rate weakening. The portfolio balance model presented by Hans-Werner Sinn and Frank Westermann, in contrast to other related models, distinguishes between cash, securities and stocks in the international portfolios of capital investors. The model shows that the exchange rate is dependent on the demand for money in the narrow sense, i.e. M1 or M0, and not on M3 or other aggregates with interest-bearing papers. According to calculations, from 1997 to 2000 nearly 50 billion euro from Eastern Europe, Turkey and the stashes of black cash in the eleven euro countries could have flowed back. Transferring to the euro the results of an American study that shows that every billion of additionally sterilised dollar cash demand increases the dollar exchange rate by a half a cent, this would explain 25 cents of the 34 cents that the euro lost in the period 1997 to 2000. The downward pressure on the euro is likely to continue to the end of the year. After the introduction of euro cash in January and February 2002, this pressure will gradually disappear.
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  • Hans-Werner Sinn & Frank Westermann, 2001. "The Deutschmark in Eastern Europe, Black Money and the Euro: On the Size of the Effect," CESifo Forum, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 2(03), pages 35-40, February.
    • Handle: RePEc:ces:ifofor:v:2:y:2001:i:03:p:35-40
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    References listed on IDEAS

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    1. Hans-Werner Sinn & Frank Westermann, 2001. "Why Has the Euro Been Falling?," CESifo Working Paper Series 493, CESifo.
    2. Martin D.D. Evans & Richard K. Lyons, 2017. "Order Flow and Exchange Rate Dynamics," World Scientific Book Chapters, in: Studies in Foreign Exchange Economics, chapter 6, pages 247-290, World Scientific Publishing Co. Pte. Ltd..
    3. Helmut Stix, 2001. "Survey Results about Foreign Currency Holdings in Five Central and Eastern European Countries," CESifo Forum, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 2(03), pages 41-48, February.
    4. Seitz, Franz, 1995. "Der DM-Umlauf im Ausland," Discussion Paper Series 1: Economic Studies 1995,01, Deutsche Bundesbank.
    5. Dominik H. Enste & Friedrich Schneider, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March.
    6. Sinn, Hans-Werner, 1996. "International Implications of German Unification," CEPR Discussion Papers 1508, C.E.P.R. Discussion Papers.
    7. Razin,Assaf & Sadka,Efraim (ed.), 1999. "The Economics of Globalization," Cambridge Books, Cambridge University Press, number 9780521622684.
    8. Martin D. D. Evans & Richard K. Lyons, 2001. "Portfolio Balance, Price Impact, and Secret Intervention," NBER Working Papers 8356, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Gebhard Flaig & Wolfgang Nierhaus & Wolfgang Meister & Oscar-Erich Kuntze & Andrea Gebauer & Erich Langmantel & Martin Meurers & Monika Ruschinski & Timo Wollmershäuser, 2003. "Ifo Economic Forecast 2004: Recovery has begun," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 56(24), pages 16-42, December.
    2. Giancarlo Corsetti & John Flemming & Seppo Honkapohja & Willi Leibfritz & Gilles Saint-Paul & Hans-Werner Sinn & Xavier Vives, 2002. "The Weakness of the Euro: Is it Really a Mystery?," EEAG Report on the European Economy, CESifo Group Munich, vol. 0, pages 27-42, 04.
      • Giancarlo Corsetti & John Flemming & Seppo Honkapohja & Willi Leibfritz & Gilles Saint-Paul & Hans-Werner Sinn & Xavier Vives, 2002. "The Weakness of the Euro: Is it Really a Mystery?," CESifo Forum, Ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 2002(CESIFOFOR), pages 27-42, 04.
    3. Pompeo Della Posta, 2005. "Fundamentals, International Role of Euro and 'Framing' of Expectations: What are the Determinants of the Dollar/Euro Exchange Rate?," Working Papers de Economia (Economics Working Papers) 24, Departamento de Economia, Gestão e Engenharia Industrial, Universidade de Aveiro.
    4. Helmut Stix, 2002. "The Euro in Central and Eastern Europe (CEE countries) : survey evidence from five countries," CESifo Forum, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 3(03), pages 33-38, April.
    5. Hans-Werner Sinn & Wolfgang Nierhaus & Wolfgang Meister, 2001. "Bottoming out," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 54(24), pages 27-42, January.

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    More about this item

    Keywords

    D-Mark; Euro; Geldumlauf; Schattenwirtschaft; Osteuropa; German Mark; Monetary circulation; Hidden economy; Eastern Europe;
    All these keywords.

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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