Last year, Ambrose Evans-Pritchard, the international business editor of the Daily Telegraph, argued that Germany had two options in responding to the Eurozone crisis. Either it should accept that it must bail-out the “Club Med” countries of Southern Europe, or it should leave the Eurozone altogether. For Evans-Pritchard, if the Eurozone were to collapse, then this would be the best way to go about it:
This is the only break-up scenario that makes much sense. A German exit would allow Club Med to uphold contracts in euros and devalue with least havoc to internal debt markets. The German bloc would enjoy a windfall gain. The D-Mark II would be stronger. Borrowing costs would fall. The North-South gap in competitiveness could be bridged with less disruption for both sides.
There’s a well-known article by economist Barry Eichengreen that examines what might happen in the event of a Eurozone member leaving the Single Currency. Eichengreen points out that something as big as changing currencies can’t be done overnight, and that during the preparatory phase there would be a titanic bank-run as everybody pulled their money out before the currency devalued. What would happen, though, if the currency were not about to devalue… but to revalue? Might we see a situation similar to Switzerland today, with the government frantically trying to cool down the currency and dampen demand?
Andrew Watt, senior researcher at the European Trade Union Institute, agrees that a new Deutsche Mark would be bad news for Germany:
The immediate consequence would be a substantial increase of the Deutsche Mark. And that’s exactly why it’s so ridiculous. German commentators are bleating about the cost of saving these Southern Europeans. But of course, if Germany left then all this wonderful competitiveness that Germans have built up would be gone overnight.
We spoke to Peter Spiegel, the Brussels bureau chief of The Financial Times, and asked him to expand on why it might not work:
I don’t think that’s a viable solution for the eurozone or for Germany. I don’t think the Euro flourishes without Germany in it. And for Germany, I don’t think the German people understand how much benefit they get from the Euro. Look what’s happening in Switzerland right now: the Swiss Franc is shooting through the roof! You’d have the same flight to the Deutschmark. The entire German story has been an export story; they are a manufacturing powerhouse sending goods to Asia and other markets. Let’s not forget that Germany, although it’s an economic powerhouse, still has as its biggest market the Eurozone – and it’s benefiting from a single currency and a single Euro. Lastly, let’s not forget that German banks are benefiting hugely from the bailouts. They are the ones who leant to Ireland and others.
The ideas that have been presented in the above post are fully respectable, yet they all fail to point out the profound difference between a fixed exchange rate and a currency union. I am afraid that the advocates of orderly exits from the euro (either for Germany or for any other country), reach false conclusions by neglecting this important “detail”.
What Mr.Ambrose Evans-Pritchard argues and what the rest of the respected analysts fail to underline is that the euro is not a fixed exchange rate, where countries can opt out at will and with minimum loses (even more so with benefits).
A currency union, the euro, is a far more complex entity. Countries in a currency union are interconnected, since they have first abolished all or most of the trade barriers between them, their economies have practically merged into a single market and their banking sector, as well as other important sectors of the economy, are organically linked.
Severing a part of this “organism” will doom both the part and the whole just as if a vital organ is removed from the human body where both eventually die. The reason that is true is because the country that opts out will trigger a chain reaction in the banking sector and in all other sectors it can influence, which will see private banks and other corporations falling one after the other just like in a domino. Moreover the markets will begin to speculate over which will be the next country to exit, there will therefore be immense speculative pressures which will eventually drive more countries out until the point where the currency union collapses, leaving behind chaos and severe open wounds.
I wrote an article on this topic in my blog only a few days ago, where I offer some more thoughts on the issue. If you are interested feel free to check it out and leave your comments. Here is the link:
Thanks and keep up the good work.
Many thanks for your comment, Protesilaos! Peter Spiegel touched on your point about the interconnectedness of EU economies – and the Barry Eichengreen article is also well-worth reading for further insights.
It would indeed risk financial catastrophe if a country were to leave the eurozone. However, what happens if there is ALREADY a financial catastrophe taking place? As Paul Krugman has argued, if there is already a bank run and financial crisis taking place, then the marginal cost of leaving the euro is lower: http://krugman.blogs.nytimes.com/2010/04/28/how-reversible-is-the-euro/
Of course – we are not there yet (and may never reach that point), but the idea is not inconceivable.
Thank you for replying.
Just to avoid any sort of misunderstandings, I would like to make it clear that my comment did not imply that the respected experts you have included above do not know the issue that I raised. I only said it is not pointed out in the above piece. I understand however that this is a technical issue and might not be a good idea to complicate matters.
As for the statement of Mr. Krugman, of course it is correct given the right conditions.
Thank you and keep up the good work.
having spent 3 months in europe l was impressed have homogenious the young people of europe are. It gives me great faith that the cycles of endless conflict may be behind them, except for the germans. They still believe they are the masters of europe and care only for themselves. Their iflexible idealogy destroyed europe twice in the last century and l believe they will financially do it again. They are a people who seem to have the dogma that “whatever the result we will do it our way.” A sad but true fact.
Hi David. I think your criticism of Germany is off the mark. I don’t believe Germans think they are “masters of Europe” and to compare the behaviour of modern Germany to the actions of the Third Reich seriously risks invoking Godwin’s law.
The concerns of modern Germans about what is happening to their tax money are completely understandable, given that they are the strongest economy in Europe. Surely it is up to politicians, then, to argue why even a self-interested Germany should seek to avoid the default of a eurozone member.
While at first glance you might get the idea that Germans are rude, they won’t hold a door open for you, but there again they don’t hold doors open for each other.
But go back – go camping down the Rhine or stay in a youth hostel and you’ll find the Germans are quite friendly once the initial contact is made.
1) Germany did not start WWI, get your history straight – Austria did.
2) Germans are much more like northerners and get straight to the point. Also per your note: “They still believe they are the masters of Europe and care only for themselves.” Well if that is the case, then the USA believes it is the master of the world……..”, since it seems it has to mingle into everyone’s business.
The owners of the Daily Telegraph, the Barclays brothers, seem to have a fanatical hate of the EU and the euro. It is therefore not surprising that their business editor, Ambrose Evans-Pritchard, is writing an article designed to stir trouble for the eurozone.
It is only in the wild fantasy world of the English europhobes that Germany would leave the eurozone. It would make no sense for Germany. If the country left the zone the euro itself would almost certainly collapse and I suspect there would even be risks to the EU itself.
German banks would be at risk, trade would be severely harmed, world confidence in Europe would be drastically reduced and there would be a long term recession as the situation would be confusing.
There are clearly three options to the eurozone crisis:
1 Carry on bailing out.
This is not a solution. Ever so often there will be bailouts, which will just leave crisis coming on and off the boil.
This won’t provide a solution as countries like Greece will not be able to restructure as they will have to focus on just paying off the interest rates on their debts.
The only people really gaining be the speculators.
2 A number of weaker countries to leave the euro
Greece, Portugal possibly Ireland and possibly others to be persuaded to leave the eurozone.
I personally feel this solution will not work well as the process will be very damaging to the countries leaving the euro and it will lead to many years of instability to the euro itself.
Again the speculators will be targeting the weakest members of the eurozone trying to force another country out of the zone for their profits.
3 A Marshall type plan for the eurozone
Just after the war the Marshall plan was a scheme by the USA to help Europe rebuild its economies after the war. (I note the main reason for the support was to stop Communism spreading).
What the leading Europe nations need to do is to float a fund based on euro-bonds based on the whole eurozone, rather than just the weaker countries and so having much lower rates.
The deal should include more financial and economically restructuring between the eurozone members. This would give countries, such as Greece, time to re-organise say their tax collecting structure and some of the funding should be to provide support from other countries.
The funds should also support weak non-euro economies, such as Latvia, helping them towards euro membership.
This third solution is clearly the best for the long term.
– it will give the weaker countries time to restructure
– it will neutralise the speculators
– it will be easier for countries, such as Germany, to sell to their electorate – a long term solution is better than selling one bailout after another
– it will help the eurozone move towards more integration
– it will help the entire EU economy stable.
A wide segment of the British press, mostly owned by non-UK resident owners are virulently opposed to the EU and the eurozone. As a result the debate about European issues in my country is often at a very childish level.
08/09/2011 Peter Spiegel, The Financial Times Brussels Bureau Chief, has responded to this comment.
20/09/2011 Daniel Dăianu, former Finance Minister of Romania, has responded to this comment.
28/11/2011 Poul Nyrup Rasmussen, President of the Party of European Socialists, has responded to this comment.
If Germany were to leave the Eurozone, their economy would take a severe hit. Gemany is the world’s third largest exporter, despite only having about 85 million people. The Germany economy is thriving right now on a large current account surplus.
Germany effectively devalued their currency by joining the EMU and by ratifying much weaker members (Greece, etc.). It is very important that the Germans stay with in the eurozone to keep up their current exporting levels.
A young and naive me once wondered why in the world are their not two different currencies within the eurozone. There are clearly two very distinct areas, club med and western/northern europe. Club Med countries (Spain, Portugal, Italy, Greece, etc.) have a lot in common, not just economically speaking, but lifestyle wise as well. The same applies to the western/northern euro area (Germany, The Netherlands, Sweden, Belgium, Austrian, and most of France).
Just a few comments from an University student, comments and very much appreciated!
More and more market colleagues are looking at the position of Germany in the Euro as the cause of the Euro problem, and are factoring in its forced Leaving due to its own stance.
There is no doubt that there will be a rebalancing that will be felt all around the world, none greater than in Germany who will find it harder to sell its goods and that view I suspect was reflected today in its failed bond sale. It would also force a Float of the Euro that would in the long run help the present P.I.I.G.S to recover without the present German imposed severity.
I’d love to disagree with david evans.
I’ve spent much time in Europe too, and in Germany included, but I haven’t noticed any special difference between the youth of the Netherlands and Germany, for example. Obviously, German people are special and they’re proud of their country, in a way, too much, but that’s not the reason for leaving the Eurozone. The unity is a great support and advantage.
Germany should leave the European Union they should not have to pay for Greece, Ireland, and Portugal mistakes. If the bailouts of these countries are allowed it sends a message to other countries to run up the countries credit card so politicians can be elected. But back on topic Germany should leave the EU and use a gold standard economy or make there currency assets based then when then when other countries in the EU need bailouts Germany can bail them out with their on currency and in the loans and in the fine print ask for collateral if payments aren’t made.
i don’t think they should leave. but i think they should make a zone within the euro-zone. connecting with other north-western countries in the euro-zone. the Netherlands, Belgium, Austria, France (although they are doing a bit stupid aswell)
because at the moment all these countries good economy is going downwards a bit… mainly because these countries have to pay for the mistakes or incompetence of countries like Greece, Italy, Spain, Portugal,…
governing should been looked up as ruling a business… therefor, it is quite important that you save up enough money to invest again in your own business… to make enough progress.. now they spending most of it to foreign countries who are incompetent or too fraudulent. and therefor making their citizens also victims… no wonder there is a lot of mischief or anger around.
by making a zone within the euro-zone, they can protect themselves somehow, and still helping the other countries in the euro-zone.
Germany99 has best post.
Patricia – Europe also mingle in everyone business, but try to pose as pacifist especially France. Not mention that France has sold Saddam chemical weapon, which make possible for him to kill many hundred thousands people. So where it was (as Chirac proclaim) international law applied in case of France? I agree that USA are also not saint in this, but EU leader countries are not better.
Germany probably benefits the Eurozone more than the Eurozone itself benefits Germany, and the only reason Germany is still in this currency union is probably due to their economy being one of export nature, one example is that the German automotive industry is quite large, and it would be easier to trade with their European partners if Germany had the same currency as them. However, most Germans feel, and rightly so, that they are paying too much for other, smaller, less financially responsible countries. They also feel that there money will be wasted, as these country’s financial irresponsibility will prevent them for ever paying them back to Germans. To put it simply, the Average Joe of Germany are most likely quite angry at how they’re essentially paying for people’s (sometimes too many) social programs in other country’s.
Now, even though most middle class Germans have some right to be a bit, to put it simply, pissed off, it’s important to look at the global perspective. If Germany left the Eurozone, it would probably bring the rest of the Eurozone into financial depression, and severely lower their currency, due to Germany’s grand influence on the EU. Now, remember Germany is an export economy? If Germany left the EU in financial ruin, it’d be quite difficult for a Volkswagen to be sold to their now broke French neighbors?
This is, at least in my humble opinion, why when the disgruntled middle class of Germany tell Merkal to simply leave their ‘freeloading neighbors’ she might not be so inclined to do so. They’re many more sides to this issue that I haven’t touched on or discussed, but due to me not wanting to make this post into a lengthy article, I think I shall end it here.