The European Central Bank in Frankfurt, Germany (Wikimedia Commons)
It is no secret that recent attempts at saving the Eurozone have only been partially effective insofar as they have avoided a formal withdrawal by any member while not actually bringing a conclusion to the current financial crisis.
Europe’s debt crisis is now considered a bigger threat to the world economy than the fiscal cliff that will face America at the end of this year (Rushe, 2012). Millions of European Union workers have voted against harsh austerity measures, and protests have been seen in Portugal, Spain and Greece (BBC, 2012). The Swedish finance minister has warned that Greece’s departure will come soon, probably in the next six months (Monaghan, 2012), while Jeremy Warner (Independent, 2012) argues that ‘Spain must leave the single currency’.
However what is the likelihood that Germany, the ‘leader’ and ‘paymaster’ of the Eurozone will abandon the Euro?
Red Jahncke, president of a financial consulting company, George Soros, the billionaire investor and philanthropist, Kenneth C. Griffin, founder of an investment company and Anil K. Kashyap, a professor of economics and former economist at the US Federal Reserve, have all addressed reasons as to why Germany should leave the Eurozone and all four agree on one thing: if Germany were to leave the Eurozone, the Euro would depreciate sharply but this would give weaker nations financial relief, as well as increasing competitiveness between the remaining Eurozone members.
Jahncke argues that although the Euro would fall in value considerably, the currency would not become worthless.
Not only that, he says, after devaluation, there would be no need for a Greek exit – and devaluing the euro would be pointless, so there would be no runs on any European banks. The depreciation caused by Germany’s exit would help weaker countries who need to improve their trade competitiveness. Plus, new exchange rates in place would make non-euro financial havens expensive, thereby preventing depositors in southern Europe from fleeing offshore. All this would boost stability since it would prevent a series of emergency exits by one southern European country after another.
This is a controversial view. And John Browne of Euro Pacific Capital, writing on the website of the MoneyShow.com is one of many who take issue with it. He goes beyond the inevitability of the Euro merely depreciating, and talks about the possibility that without Germany, the Euro simply may not survive (Browne 2012).
Griffin and Kashyap at least acknowledge that a depreciating currency may not be preferable but that it would benefit the nations that have large debts to pay. They argue that devaluing the Euro would increase competitiveness within the Eurozone, though it is unclear to what extent. Soros agrees with this, explaining that a ‘Germany-free Eurozone could be more competitive in exports’.
Jahncke talks about Germany leaving the Eurozone as the better option, and the other more destructive option being the departure under duress of Greece, Spain and others. Jahncke’s view is that a Greek exit could set off a domino effect elsewhere in southern Europe, leading to a global paralysis that even Germany, the Eurozone powerhouse, could not contain (Jahncke, 2012). Economist Nouriel Roubini, best-known for being the only analyst to anticipate the 2008 US housing crisis and the worldwide recession which followed, is a dissenting voice, however. He believes a Greek exit would be good for Greece and its economy, without having a great effect on other nations. Additionally he judges that a break-up of the Eurozone would occur only if Italy or Spain were also to leave, but added that it is ‘unlikely to happen’ (Tymkiw, 2012).
This, frankly, is because, in line with current thinking, Germany is unlikely to abandon the Euro – Jahncke’s idealistic view of the impact this would have on the Eurozone economy ignores the calamitous political fallout that would follow, since the Euro was originally a Franco-German project intended to concrete the two countries economically and politically at the heart of Europe.
Jahncke does correctly observe that the EU cannot afford to bail out Ireland, Portugal and Spain, a widely-held view. Raoul Ruparel, economist with the think tank Open Europe, which stands for Eurozone reform, believes a bailout for Spain alone would cost in the region of €650 billion – and Spain is by no means the most heavily indebted southern European nation (Monaghan, 2012).
The three articles I have selected all assess the beneficial economic impact of a German exit from the Euro on weaker Eurozone countries, and how it would be a less destructive option than say Greece, or Spain making an abrupt, emergency exit, but they have not included any reasons that would persuade Germany to go. As I briefly outlined above, the political damage a German exit would do to the EU would be immense.
Jahncke refers to the hounding Germany would receive from other nations were it to leave the Euro. Germans don’t seem concerned. A recent poll suggested that 51% of Germans feel their country would be better off outside the Eurozone (Telegraph, 2012).
But of course Germans are unhappy that they feel they are propping up southern European nations whose uncompetitive economies and bloated public sectors, not to mention their dubious financial credentials for joining the Euro in the first place, have left them with huge fiscal commitments.
Ian Bremmer from the Financial Times says Germany is too successful economically precisely because of the Euro, which it entered at a favourable rate and so enjoys a more competitive position vis-a-vis other European nations. Germany’s exports currently account for 9% of the world’s total exports and it would undoubtedly become less competitive out of the Euro, so there would be a significant economic ‘hit’ to take on Euro withdrawal (Bremmer 2011).
Raising the question of a German withdrawal is more to do with an academic exercise conducted in the media than anything to do with Realpolitik – the latter says that this is an issue German voters should consider ahead of important domestic elections in 2013. But the reality is that Germany will not leave the Euro. Germans, perhaps mindful of their history, perhaps aware of their political commitment to the EU, simply will not abandon a currency, which, as Europe’s strongest economy, it had the most to lose from joining in the first place. Economists and others may pontificate about withdrawal but the German reality is this: it simply has to make the Euro work.
Hannah BARKAN (Student at Loughborough University)
Texts that are used: