Why Germany Should Leave the Euro Zone

The departure of Germany would take pressure off the weaker countries, and the costs of breaking up the euro zone will have to be paid no matter who leaves

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German flag flying outside the Reichstag in Berlin.

Most discussion about a potential breakup of the euro zone assumes that Greece and other financially troubled countries would be the ones who ended up abandoning the common euro currency. But there’s a compelling alternative to that conventional wisdom — that the true problems of the euro zone could be best addressed if Germany were the one to leave, accompanied, perhaps, by a few other rich countries.

The argument for the weak countries leaving is that they would be able to escape the austerity policies imposed by Germany. Once they abandon the euro, their new national currencies would quickly depreciate, making their economies more competitive internationally because their exports would be cheaper for foreigners to buy. In the process, of course, the weak countries might have to default on their euro-denominated debt, but that would be the inescapable price of freedom. Presumably, the richer European countries would then try to establish a smaller, more viable common-currency zone.

The trouble with this conventional scenario is that it rests on a couple of big misconceptions — namely that the chief problems of the weak countries are budget deficits and debt, and that if budgets are balanced and debt is managed down, those countries would be able to make interest payments on their bonds and the banks that own those bonds wouldn’t have to suffer big losses.

(MORE: Is Germany’s Euro Crisis Strategy Actually Working?)

In reality, though, the biggest problem of financially troubled European countries is not debt but high labor costs. Easy credit over the past decade allowed those costs to rise rapidly in some countries, which were then less able to export their goods or compete with cheap imports. From 2000 to ’07, higher labor costs reduced competitiveness by 10% to 20% in Italy and Spain. And even with all the austerity policies since 2008, Spain and Italy have been able to improve their competitiveness only by a few percentage points, if at all. Those countries will never be able to compete economically until they get their labor costs down significantly. And it’s very difficult politically to get workers to accept 10%-to-20% wage cuts.

Well, there is one way: financially weak European countries could devalue their currencies, which would bring down labor costs across the board almost invisibly. That’s a lot easier for a population to accept than overt wage cuts industry by industry. Moreover, in the absence of devaluation, countries would spend the next decade chipping away at labor costs in an atmosphere reminiscent of the Great Depression. The only catch is that devaluation is precisely what the euro was designed to prevent.

So why shouldn’t the weaker countries just pack up and leave? Trouble is, although their new currencies would immediately fall in value, the euro would remain strong. And as soon as people anticipated a devaluation, they would withdraw money from local banks and instead deposit it in the banks of countries that were going to keep the euro. Moreover, countries that left the euro zone would still be stuck with debts to foreigners that would be denominated in euros – but they would have to pay back those loans with their own devalued national currencies, which would make the debt burden seem even heavier.

At the very least, the result would be capital flight and higher interest costs. And more likely, countries that leave the euro zone would be unable to make all the payments on their debt and would end up defaulting anyway. That would be incredibly disruptive to the global banking system, and the countries that defaulted would probably be locked out of the credit markets for several years.

(MORE: Europe’s Economic Woes: That Sound You Hear Is the Euro Cracking)

By contrast, if Germany were the one to leave, the euro would be the currency that falls in value, relative to Germany’s new national currency and also to the dollar. The weaker European countries would get to keep the euro but still get the devaluation they need, which would reduce their labor costs far less painfully than through wage cuts. In addition, the value of their outstanding debt would decline along with the value of the euro, and they would be more likely to be able to make payments on that debt and avoid defaulting.

The standard argument against this solution is that as the value of euro-denominated debt falls along with the euro, banks in many countries would have big losses on bonds they own. But losses from falling bond prices are less disruptive than sudden defaults. And the fact is that those losses have really already occurred, they just haven’t been acknowledged. The goal at this point is not so much to prevent losses, but to find a way for banks and other international financial institutions to absorb their losses without triggering sudden bank failures or a global financial crisis. In short, it’s not about the money, it’s about stability. And for once, it may be easier to maintain order without the help of Germany.

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8 comments
Manuel
Manuel

Finally this hypothesis is assuming the role it should have (Paul Krugman, George Soros,...). Indeed, how could be possible that countries in struggling would accept leaving the eurozone (when they are full right members of the euro - there is not even the process of exiting  euro)and then keep their debts in euros to pay with a devaluated new currency. The euro is not a German currency exclusively, the euro must defend the interests of all states, as in any monetary union. This conception of the strongest being the one who imposes his only will on the majority, reminds other times, times that led to destruction of countries and even the imposition of loans, which generated war reparation debts, that now seems not interest to address. Beyond the economic component the role of Germany in refusing to devalue the euro in their only interest will trigger a much more serious problem and wake a widespread anti-German sentiment that will last, much longer than the economic crisis. Now is the time for politicians and historians to warn for the feelings that are in genesis in europe.The annexation of the Sudeten was a signal also ignored by the world and did Germany feel it could do everything at their own pleasure. If Germany does not want to lead the common good, must leave and follow their own path, alone!

bicycle
bicycle

@Manuel I think not just Germany but Austria, Holland, Denmark, etc as well. They can then form a separate union with a strong currency. The weak countries can then make the euro as cheap as they want and the stronger countries don't have to keep sending them money. 

Manuel
Manuel

 @bicycle is 

Send them money?!? What are you talking about?!? The euro is not yours exclusively, and the ECB should be at the service of the 17 full right members states, not at the service of Germany only. Austria, Holland or Denmark don't really count, because if their neighbor have a cold they will have a tuberculosis. I think you have some kind of aryan superiority complex and that is blinding you, because you don't have to send your money to anyone, you should look to a true monetary union and watch to what FED is doing in USA, to the benefit of ALL their members states: it is printing money and contrary to europe, it is growing. Germany is starting to face the boomerang effect: her biggest market (europe - 60%) is closing their doors. German investors confidence is going down, german cars sells down the toillet, and you are talking about a strong currency?!? Think better quickly...

Let's go to a referendum, because living under german dictatorship, again, only over our dead bodies! Will the world need a third time! to confirm the german caracter? They prove it day after day...


For your factual clarification:

http://www.slate.com/blogs/moneybox/2013/03/18/ecb_s_monetary_policy_can_t_just_be_good_for_germany.html

Manuel
Manuel

 @bicycle

  @bicycle 

At least we agree on something, the "south" and "north" should separate themselves inevitably. The north think is paying to the south, and the south think that has never been such an easy target for market speculation and spiral recession, because they simply do not have any monetary weapons to defend themselves, in  useful time, to prevent the total collapse of their societies.

It's irrefutable that the medicine applied is truly killing the patient and for what? So the south can have more "German cars" circulating on the streets? Well an "Alfa Romeo" or a "Peugeut" should serve perfectly, people don't need or desire to be exactly equals, and at least, by not letting the patient die, he may be able to pay the capital and the big interest that came with it.(There are countries in southern europe leaving their citizens kill themselves to honor their state commitments, which is a very serious question, but remember that a dead economy cannot pay anything and this kind of austerity will definetly kill the patiente)

Glad it seems that we reached a concordance: The euro divides more than unites, without, apparently, nothing more to discuss, there is only the need to pass to action. 

Sunny regards 

bicycle
bicycle

@Manuel @bicycle And the eu-politicians have continuously lied also. They always said that no there would be no high inflation and no the currency would be strong and they ridiculed anybody who said different. But like what everybody already said beforehand came true not long after, prices were already like double six months later. And then that lunatic that tried to impress other finance ministers in given away billions to greece saying yeah they'll pay it back, with interest. lol Like the article says, a split up would be the best, limit the damages of this whole debacle from even expanding. There's a good chance Berlusconi becomes pm so we can expect to pay for Italy next year also. 

bicycle
bicycle

@Manuel @bicycle News flash http://www.spiegel.de/international/europe/poor-germany-it-is-time-for-a-debate-on-euro-crisis-burden-sharing-a-894398.html At least Angela Merkel is the only one that is able to keep her back straight. Our own pm's are happily to take on the whole eu debt in order to get a friendly pat on the back from Hollande. Germany pays the most for the eu and they're being depicted as nazi's. I think it's time for a split up because  it's just not going to work. People have never asked for any of this but they keep on paying for it, that's why they don't want no poll because they know what people are gonna vote, they only have to remember the eu constiution referendum and what happened there


Manuel
Manuel

@bicycle @Manuel

I agree 100% with you, when you say that reforms have to be made in the South. Never argued otherwise. I know well many southern countries and I know that most of their people also want a fundamental reform of its institutions (maybe except public employees). However, this does not justify in any case, the arrogant manner and with a sense of superiority like the "north" has treated southern populations. This form is not compatible with a future partnership and will inevitably lead to a rupture. The youth of these countries have an outstanding academic level as never had before, but faces unemployment levels between 40 and 50%. Is that their fault? Of course not! They needed to have the support of all possible economic policies to help them reform their countries and even then it would be humanly impossible to do it in a blink of an eye. But what have they had from the Eurozone? An ECB that helps only one country, that is unquestionable and antidemocratic. There should have been a negotiation on equal terms, one agressive monetary policy and reforms. But what have happened was only reforms with an economic governance and a monetary policy that killed an entire innocent generation in the south. The policy imposed will generate a division that will last longer than the current politicians, because trust with the north is over permanently. Of course they are right to want their sovereignty back on the south, France included. The north has to think that there is nothing so attractive on their side (and if their desire is to have a strong currency, then have it but do not  impose it on others, just leave, because the south cheerful and alive I knew, long before the euro, is sad and had enough of this!

bicycle
bicycle

@Manuel Why you think I'm German? I'm not German and don't have any german relatives as well. But yeah they're doing good, actually the best of whole europe. But yes a union like that is better, also with Finland. Perhaps the uk would be willing to join also, they want to leave also because they too are getting sick of it.  The southern countries are demanding the north for money and depict them as dictators whenever they say ok i'll give you money only if you change you economic policies like this. Because they know if they don't do that, they'll come back in five years asking for more. Where i come from there is a saying: the one who pays is the one who decides. Now this thing that money has to be printed, just adding another tax (inflation) because the southern lived on borrowed money and wanna keep living on that. Financing their economy through money printing is how their economic system works, and now they want to north to do the same. I'm telling you the other countries that don't have all these problems are getting sick of it. They are getting sick of tax increases because their government gave too much money to the south and keep on doing it because it's a bottomless pit, they are getting sick of france using the eu to finance their agriculture with eu subsidies, they are getting sick of people saying we need to print money so everybody pay yet another tax and further miss their once so strong currency and have the once low interest rates blow up, they are getting sick of the drunk polish too, and the criminals coming from romania coming to rob everybody. 

There should indeed be a referendum for everybody. People should be able to choose whether they want to go with france and instead of reform just print more money and let the whole economy be based on agriculture or with germany for austery and market reform and introduce the german mark instead.