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.