All the debate about the pros and cons of a Greek exit
from the euro area is missing the point: A German exit might be better for all
concerned.
Unless Europe’s leaders take some kind of radical action, such as adopting and executing
some of the many reform ideas they have floated, the currency union is headed
for disintegration.
The problems of Greece, Ireland and Portugal have spread to Spain, the fourth-largest economy
in the euro area. Italy is probably next. The other members of the currency
union can’t afford to bail them all out. Further loans will serve only to
exacerbate the fundamental problem of too much debt and add to the growing enmity between the strong
northern tier and its wards to the south. Without healthy economic growth --
and Europe is now back in a recession -- multiple countries will have to
restructure their sovereign debts. Greece’s agonizing two-year restructuring experience suggests that doing several
more would be extraordinarily difficult, if not impossible.
A Greek exit from the currency union would make the situation even worse. There is no mechanism to decide, or deal with, whichever nation might be next, and even that presumes that exits could be managed. The more terrifying prospect is that the other afflicted countries might exit in an uncontrollable panic, complete with bank runs, failures and general disarray. The accompanying repudiation of hundreds of billions of euros in debt would overstrain the European financial system, even Germany’s. The global economy would be paralyzed as everyone wondered which domino would be next to fall.
German Exit
What, then, might a German exit do? With integration
and multiple restructurings so unlikely and withdrawal of the weak members so
fraught, it might actually be the best of all available options.
A single, powerful nation would have the best shot at
executing a relatively swift exit that would be over before anyone could panic.
No agonizing over who exits and who doesn’t. Stripped of its German export
powerhouse, the euro would depreciate sharply, but would not become a virtually
worthless currency, as, for example, any re-issued Greek drachma surely would.
With the euro devalued, a Greek exit and devaluation would be relatively
pointless. So, no contagion or bank runs. With new exchange rates making all
the non-euro financial havens prohibitively expensive, and with the threat of
forced conversion into devalued national currencies removed, depositors in
southern Europe would lose their impetus to run.
Germany’s exit would provide immediate benefits to all
the remaining euro-area nations. The currency depreciation would radically improve their trade
competitiveness -- exactly what many observers have said the weaker nations in
the south need most. The euro area’s balance of payments would improve,
providing sorely needed funds to service its external debt. The benefits would
accrue to the euro area as a whole, as opposed to serial exits at the weak end
of the spectrum, which would crush one weak nation after another, with each
exit increasing pressure on the next candidate.
Other relatively strong euro-area nations, such as the
Netherlands, would probably pause before following Germany’s lead. If they
left, they would lose the trade advantages offered by the newly depreciated
currency, and would have to bear all the costs and complications of
reintroducing their own money.
The cheaper euro, of course, would be bad for foreign
investors holding euro-denominated assets. On the bright side, the losses would
be simultaneous in timing, spread evenly across creditors, and more moderate in
the southern European countries than they would be in a euro-exit scenario.
Vital Interest
Certainly, there are problems not purely related to
currency, including Spain’s real-estate bust and its impact on Spanish banks. Here the devalued
currency might bring fresh foreign investment. Nevertheless, governments might
have to bail out certain European banks struggling with bad assets or whipsawed
somehow by the euro’s devaluation. Collective support might be required for
Greece and others. Germany would still have reason to assist: Its exit from the
euro would not diminish its vital interest in the survival and success of the
European economy.
While polls suggest that most Germans would be happy
to have their old currency back, Germany would not escape unscathed. Its
exports would contract as the new exchange rate made German goods much more
expensive abroad. It would be vilified for violating the orthodoxy of Europe’s
post-World War II drive toward integration.
Nevertheless, such a bold move might stave off
disaster today, and it wouldn’t necessarily signal the end of the European
project. Famously, American revolutionaries “ran away to fight another day,”
and they ultimately won. The U.S. Constitution succeeded brilliantly after the
first attempt at union, the Articles of Confederation, failed.
Indeed, a German exit today might set the stage for a
strong reunion tomorrow. Having learned their lessons and come to terms with economic
reality, the nations of the euro area might do a better job of integration the
second time around.
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