A German exit from the euro could be relatively easy
The fundamental problem of the euro is widely seen as one of “herding cats” – the impossibility of coordinating complex policies among 17 discordant nations, each with different interests, traditions and ideas. This is not true. The dividing line in Europe is much simpler. On one side are France, Italy, Spain and every other significant country, backed by the U.S., Britain, the IMF, the European Commission and the leadership of the European Central Bank, proposing serious and complex technical solutions based on genuine fiscal federation, which means the sharing of national debts. On the other side is Germany, occasionally supported by Finland, Austria and Slovakia, always saying Nein!
Every new veto threat from Angela Merkel increases Germany’s embarrassing isolation, as Joschka Fischer, its former foreign minister, recently warned: “Germany destroyed itself – and the European order – twice in the 20th century. It would be tragic and ironic if a restored Germany … brought about the ruin of the European order a third time.” But if Germany’s role as spoiler is increasingly recognized, why don’t the other countries do what this column suggested last week: Tell Merkel to put up or shut up – either abide by majority decisions or leave the euro?
The standard answer is that Germany is the “paymaster” of Europe; so without Germany the euro zone would be “bankrupt”. Such metaphors are a lazy substitute for clear thinking. To see why, compare the consequences of Germany leaving with the Greek exit, which was described as “manageable” by European officials only a few weeks ago. German departure would be less disruptive than Grexit for three reasons.
First , a Greek devaluation would trigger capital flight from the next weakest country – Spain, then Italy and France. Germany would not create such domino effects. Once the Deutschemark was restored and revalued, there would not be a “next strongest” country to attract capital flight. Of course, some people might still send their money from Italy or France to Germany, to speculate on further revaluation, but that would be no different from investment flows out of Europe at present into dollars, pounds or Swiss francs.
Second, and most crucially, the euro zone would become a more credible and coherent unit without Germany. Liberated from German obstruction, the ECB would be able to follow the examples of the U.S., Japanese, British and Swiss central banks, using quantitative easing to bring down interest rates to zero at the short end and to around 2 percent on long-term bonds. Just as important, the euro governments could finally form a genuine fiscal union, using the entire fiscal capacity of the euro zone to back jointly guaranteed eurobonds. The euro zone could then be treated again as a single economic unit, comparable to the U.S., Japan or Britain – and in terms of key fiscal ratios it would score well. Public deficits in euroland ex Germany were 5.3 percent of GDP in 2011, according to the IMF, compared with roughly 9 percent in Britain and 10 percent in the U.S. and Japan. Gross debt (including financial bailouts) was 90.4 percent of GDP, against 98 percent, 103 percent and 205 percent in Britain, the U.S. and Japan, respectively. Trade deficits were much smaller than in Britain or the U.S. In short, euroland without Germany would be far from bankrupt – and the key reason for the euro crisis isn’t lack of competitiveness but Germany’s refusal to mutualize and monetize public debts.
Third, a euro break-up caused by Germany withdrawing would be far less chaotic from a legal standpoint than a break-down in which the euro disintegrated as weak countries were pushed out. The euro without Germany would remain a legal currency, governed by the same treaties as before. International contracts in euros would be legally unaffected, but simply devalued in terms of new German marks or dollars, just as British contracts were devalued when the pound fell from $2 to $1.40 from 2008 to 2009. Only contracts within Germany governed by German domestic law, for example retail bank deposits and wage deals, would be redenominated into marks. The German government would face no legal challenge if it decided to save money by repaying bonds in devalued euros (as specified in the contract) instead of converting them into marks (as speculative investors might hope).
None of this means that a German exit would be painless. German export companies would lose sales because of the strong mark. Most German banks would have to be recapitalized by the government, since their mark liabilities would not be matched by devalued assets in the euro zone. The Bundesbank would probably require the biggest recapitalization in history, since its loans to the Target2 clearing system run by the ECB (698 billion euros at the end of May and rapidly rising) would only be repaid in devalued euros.
But these would all be local difficulties for Germany, not existential threats for the whole of Europe. For the rest of Europe, a euro without Germany would be perfectly feasible and even attractive. Pressuring Germany to leave the euro therefore need not be an empty threat.
If European leaders can only make Merkel understand that she seriously risks exclusion from the euro, she may start to behave in a more cooperative way. In that case, the costs and benefits of actually expelling Germany will never have to be tested.
PHOTO: A man holding an umbrella in the colors of the European Union enters the Chancellery in Berlin before talks between government and opposition leaders about the EU fiscal pact, June 21, 2012. REUTERS/Thomas Peter