<nettime> Bloomberg View > Ashoka Mody > "Germany, Not Greece, Should Exit the Euro"

[nettime's_groving_greporter <nettime@kein.org>]

< http://www.bloombergview.com/articles/2015-07-17/germany-not-greece-should-exit-the-euro >

Germany, Not Greece, Should Exit the Euro

   148 Jul 17, 2015 2:00 AM EDT
   By Ashoka Mody

   The latest round of wrangling between Greece and its European creditors
   has demonstrated yet again that countries with such disparate economies
   should never have entered a currency union. It would be better for all
   involved, though, if Germany rather than Greece were the first to exit.

   After months of grueling negotiations, recriminations and reversals,
   it's hard to see any winners. The deal Greece reached with its
   creditors -- if it lasts -- pursues the same economic strategy that has
   failed repeatedly to heal the country. Greeks will get more of the
   brutal belt-tightening that they voted against. The creditors will
   probably see even less of their money than they would with a
   package of reduced austerity and immediate debt relief.

   That said, the lead creditor, Germany, has done Europe a service: By
   proposing the Greece exit the euro, it has broken a political taboo.
   For decades, politicians have peddled the common currency as a symbol
   of European unity, despite the flawed economics pointed out as
   far back as 1971 by the Cambridge professor Nicholas Kaldor. That
   changed on July 11, when European finance ministers agreed that it
   could be both sensible and practical for a member country to leave. "In
   case no agreement can be reached," they said, "Greece should be
   offered swift negotiations for a time-out."

   Now that the idea of exit is in the air, though, it's worth thinking
   beyond the current political reality and considering who should go.
   Were Greece to leave, possibly followed by Portugal and Italy in the
   subsequent years, the countries' new currencies would fall sharply in
   value. This would leave them unable to pay debts in euros, triggering
   cascading defaults. Although the currency depreciation would eventually
   make them more competitive, the economic pain would be prolonged and
   would inevitably extend beyond their borders.

   Related: Greece Default Watch

   If, however, Germany left the euro area -- as influential people
   including Citadel founder Kenneth Griffin, University of Chicago
   economist Anil Kashyap and the investor George Soros have suggested
   -- there really would be no losers.

   A German return to the deutsche mark would cause the value of the euro
   to fall immediately, giving countries in Europe's periphery a
   much-needed boost in competitiveness. Italy and Portugal have about the
   same gross domestic product today as when the euro was introduced, and
   the Greek economy, having briefly soared, is now in danger of falling
   below its starting point. A weaker euro would give them a chance to
   jump-start growth. If, as would be likely, the Netherlands, Belgium,
   Austria and Finland followed Germany's lead, perhaps to form a new
   currency bloc, the euro would depreciate even further.

   The disruption from a German exit would be minor. Because a deutsche
   mark would buy more goods and services in Europe (and in the rest of
   the world) than does a euro today, the Germans would become richer in
   one stroke. Germany's assets abroad would be worth less in terms of the
   pricier deutsche marks, but German debts would be easier to repay.

   Some Germans worry that a rising deutsche mark would render their
   exports less competitive abroad. That is actually a desirable outcome
   for the world -- and eventually for Germany, too. For years, Germany
   has been running a large current account surplus, meaning that it sells
   a lot more than it buys. The gap has only grown since the start of the
   crisis, reaching a new record of 215.3 billion euros ($244 billion)
   in 2014. Such insufficient German demand weakens world growth, which is
   why the U.S. Treasury and the International Monetary Fund have long
   prodded the country to buy more. Even the European Commission has
   concluded that Germany's current-account imbalance is "excessive."

   Germans know how to live with a stronger exchange rate. Before
   introduction of the euro, the deutsche mark continuously appreciated in
   value. German companies adapted by producing higher-quality products.
   If they reintroduce their currency now, it will give them a new
   incentive to improve the lagging productivity in the services they
   produce for themselves.

   Perhaps the greatest gain would be political. Germany relishes the
   role of a hegemon in Europe, but it has proven unwilling to bear the
   cost. By playing the role of bully with a moral veneer, it is doing the
   region a disservice. Rather than building "an ever closer union" in
   Europe, the Germans are endangering its delicate fabric. To stay close,
   Europe's nations may need to loosen the ties that bind them so tightly.

   This column does not necessarily reflect the opinion of the editorial
   board or Bloomberg LP and its owners.

   To contact the author on this story:
   Ashoka Mody at amody@princeton.edu


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