Until very recently, most of the buzz surrounding the possible breakup of the Eurozone has revolved around the prospect of Greece abandoning the euro in favor of the drachma once more. But over the course of May, it has become increasingly evident that the country that is out of step with its peers isn’t Greece, but rather Germany.
The healthiest economy in the Eurozone, which swallowed its own dose of tough austerity medicine a few years ago, Germany has had no compunction in insisting that its fellow members in the single-currency community follow suit today. That is entirely logical; to the extent that they don’t and that bailouts are required, Germany is going to have to shoulder the lion’s share of the costs of any emergency financial assistance.
So, should Germany leave the Eurozone instead of Greece?
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The idea isn’t without merit. At present, German Chancellor Angela Merkel is the “odd man out” in the ongoing debate over the relative merits of austerity and some form of stimulus to help boost growth throughout the rest of the region. After all, it was François Hollande’s anti-austerity campaign that helped him triumph over Nicolas Sarkozy last month and capture the French presidency.
And if there is a country in the Eurozone that appears to be equipped to go solo, it seems likely to be Germany: a diversified and (relatively) resilient economy, which can raise capital to fund itself at rock-bottom rates. The country’s economy has a higher level of productivity, and being part of a much less productive economic bloc with a common currency makes German exports disproportionately competitive, at the expense of fellow Eurozone nations. That generates trade surpluses and when coupled with Merkel’s hardline policies, exacerbates anti-German sentiments in countries like Greece to levels not seen since World War II.
Germany has been able to demonstrate that its economy can thrive when the rest of the Eurozone struggles, as economist Ed Yardeni pointed out in a note to clients last month. German production jumped 2.8 percent in March as orders streamed in from China, Brazil and other emerging markets. Unemployment is low, a dramatic contrast to countries like Spain, struggling with 25 percent unemployment. “Can Germany’s economy decouple from the weakness in the rest of the euro area?” Yardeni wondered. “So far, so good.”
The big problem is that austerity doesn’t work in economic environments in which everyone is suffering. When Germany swallowed that medicine, they did so against a backdrop of global growth. Recent experience seems to indicate that when practiced en masse, austerity doesn’t do much for growth and can mean political suicide for the politicians who succeed (against increasingly heavy odds) in promoting austerity-based policies.
A German exit from the Eurozone is what former Argentine Finance Minister Guillermo Nelson proposes. In recent media interviews, he has argued that bailouts are politically impossible for German politicians to countenance; a Greek exit over the insistence on the austerity measures would be more costly and more threatening to Europe’s banks. The Germans, he argued, “continue to keep the discussions under politically correct guidelines. They need to break the standstill.”
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Certainly, something has to change. “The Euro should not exist,” declared a group of UBS economists last autumn. At least, they hastily qualified, it shouldn’t exist in its current form or with its current membership, given that in its present shape, it “creates more economic costs than benefits for at least some of its members.” That doesn’t mean that a German exit, much less a Greek exit, is a rational solution, those economists opined. Indeed, they calculated that if Germany left, the economic cost would wipe out 20 percent to 25 percent of the country’s per capita GDP in its first year outside the Euro – a figure that is still much smaller than the hit Germany would take by bailing out peripheral Eurozone economies like Greece and Portugal.
And if one of those peripheral nations opted to leave? Well, the costs would be higher still, at around 40 percent to 50 percent of a country’s per capita GDP in the first year after it departed, with smaller sums in every year that follows. That might make austerity look like a sunset stroll on the beach in comparison. The economic costs aren’t all: UBS raises the twin specters of the emergence of authoritarian regimes and civil war as logical consequences of the breakup of a monetary union.
Ultimately, it all boils down to politics. A big part of the raison d’être for the European Union and its predecessor organizations was political – no one who had survived the two World Wars that had devastated Europe in the first half of the 20th century wanted to risk a repetition. The answer was some mechanism to force the country’s nation states to focus on their common interests rather than their divergent political philosophies; to view the world through a broader prism than simply “national interest.”
Of course, that has worked less well in practice – the EU has always been replete with inter-member squabbles – but it has prevented nastier forms of conflict. And while some members have always rejected the concept (notably Britain), in the eyes of others, such as former Bundesbank honcho Helmut Schlesinger, the economics of monetary union and economic union in general, were always seen as facilitating and preparing the way for political union.
Politics is about accommodation as much as it is about confrontation, and it’s time for Europe’s leaders on both sides – from Syriza supporters in Greece to the hardliners in Germany – to accept that any departure from the Eurozone is a lose/lose scenario. In the kind of heated political debate that’s taking place right now, it’s hard to demand that the continent’s politicians think rationally about the economic price tag of any nation’s departure from the Eurozone.
But an appeal to the political consequences – how might Greek or Spanish workers feel if their borders were sealed and workers denied the right to work in France, the Netherlands or Germany without special visas? – might help refocus the debate on what needs to be done to accommodate the most pressing needs of both sides, and ultimately to some kind of integration of fiscal policy. The interregnum will certainly be difficult – but could it really be more difficult that the period of utter chaos that would follow the departure of any Eurozone member from the pact? It’s hard to see how.
