Home—Blog—Why Germany should dump the euro
Feb 12, 2010, 09:36
Posted byMerryn Somerset Webb
Comments (28)
A few years ago it wasn't really the thing in mainstream media circles to mention the inherent instability of the euro. And it most certainly wasn't the thing to mention that its inherent instability might lead, in the end, to its collapse.
But by the beginning of last year, as the spreads between the sovereign debt of the likes of Greece and Spain and that of Germany widened, that changed. Greece was occasionally mentioned as a potential problem for ongoing unity – although always with the aside that any country leaving the zone was, as John Authers of the FT put it in January 2009, "close to an unthinkable event." It isn't unthinkable any more: for the last few weeks the business pages and blogs have been full of almost nothing else.
But however much the market might have liked the drama, it looks like Greece isn't going to be the one to break ranks this year. And why would it? Imagine if it chucked in its membership and issued its own new currency. You might think that a good thing. Not having a depreciating currency has long been seen to be a big part of Greece's problem. But the nasty truth is that it wouldn't really help much.
Why? Because Greece's debt would stay denominated in euros (shifting it into the new currency would be an effective default). So the more the drachma II fell, the bigger the debt burden would become. Currency-risk-averse investors would also demand an ever-greater premium to buy any new debt. It would be miserable.
Issuing a new currency would also cause an immediate run on all the banks (who would want it?) and make no difference whatsoever to the core problems of the untaxed black economy and rigidity of the public sector.
But imagine if it wasn't Greece that left the euro, but Germany. The deutschemark II wouldn't fall. It would rise, making any euro debt easier to dispose of and making any euro-priced assets the Germans happen to fancy even cheaper to buy than they already are. It might also make Germany's patient tax payers (who have muddled along with no big wage rises and no feel-good house price bubble of their own for years now) happier than the alternative – a great deal of money spent bailing out the eurozone's more free-spending members.
In the 1990s, says Ambrose Evans Pritchard in the Telegraph, German citizens were given a pledge by their leaders that the loss of the D-mark would not "lead to monetary disorder or leave them liable for Club Med debt." Given that Greece has a public debt now heading for 140% of GDP by 2012, it looks as though that pledge will be very hard to stick to.
Indeed, along with the rest of the eurozone, Germany has just promised to provide "determined and co-ordinated action if needed to safeguard stability" in Greece. It's enough to make you wonder if this time next year a new German currency will have moved from being completely unmentionable to merely being "an almost unthinkable event."
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(12 February 2010, 12:09PM) Complain about this comment
you said that Greece will not choose to leave the euro, because"shifting their debt into the new currency" would be an effective default. Thats true. but in what do they differ from Argentina, who had done the same. Their problems are the same, so their solution could also be the same.PS if you think Germany will leave the Euro, dont forget the Netherlands, they will join. In fact, a yr ago some former worker for the Dutch National Bank did a lecture, where he predicted that Germ and Neth would leave the Euro within 2 years!
(12 February 2010, 12:15PM) Complain about this comment
Surely the unspoken truth about the Euro is that it's about political union rather than any overriding economic logic. So whilst the Euro was never going to be a good deal for the German people economically, it does politically give them a central place in a united Europe, which is something that Germany has always wanted ( and previously attempted by force of arms ). It's an interesting scenario though, and would certainly make a lovely stress test model for the FX, Bond, and Commodity markets. Germany leaves, Euro disintegrates. Dominic Firsby may yet see his spike in Gold you never know.
(12 February 2010, 01:23PM) Complain about this comment
Latin Monetary Union between France, Belgium, Italyand Switzerland failed in 1873 after 6 years. This was primarily because no state would alienate its monetary sovereignty knowing that it might become partially liable for the costs of financial mismanagement by its neighbours ! Plus ca change ! Most pundits have been suggesting that the weakest links will drop out of the Euro first but I believe that the crunch will come in Germany. The German electorate will not be prepared to bail out the Club Med countries.Interestingly this was a scenario highlighted a number of times by Business for Sterling in objecting to the UK joining the Euro which was repeatedly rebuffed by the the EU and Europhiles.Sadly we live in a world of half baked political decisions, taken largely for expedient reasons of short term popularity or peer group pressure within a cosy elite that the rest of us have to pay for over many years !
(12 February 2010, 02:55PM) Complain about this comment
I for one miss the Drachma. I was in a taverna on Lesbos in April 2002 a - just before the tourist season and a few months after Greece adopted the euro. The Euro regulators (or whoever) had solemnly announced prices would be converted at the exact rate and not be allowed to be rounded up, and there would be inspections and penalties to make sure they didnt. So, for example 500 drachs became say E1.67., but only it seems until the first tourists appeared - us! If any inspections had been carried out it must have been in the dead of winter, because as I was sitting there the owner was going through a stack of menus and "simplifying" the prices...eg, E1.67 became E2. Always up, never down.
(12 February 2010, 04:23PM) Complain about this comment
Wow, Germany out of the Euro. My German relatives couldnt wish for better news than that. They despise it. If the French want to keep this absurd currency to assist them in a bit of empire building then let them carry on. German unemployment has rocketed whilst real wages along with house prices have fallen making everyday living for the average German pretty miserable. This whole project was nothing more than polititical union and backed up by forces of globalisation, so come on UKIP your time is just around the corner both I and my German relatives and friends are rooting for you.
(12 February 2010, 09:07PM) Complain about this comment
USA deficit as % of GDP is currently running around 12%. The US is currently spending $1,000,000 every 4 minutes to engage it's enemies in Afghanistan and Iraq. We are not hearing much lately on immediate collapse of $. Currency market wars are at play here, and it is naive to think otherwise. There is a stable EU asset grab in process and signs will start to appear in markets. Wake up people, you are being played.
(13 February 2010, 10:27AM) Complain about this comment
Some years ago I visited Greece and then France. Not having spent all my 'Greek' Euro coins, I showed one to a French friend. She - by no means a stupid person - looked at it in amazement and said "You mean that's worth the same as a French Euro?!"Oh dear.
(13 February 2010, 11:30AM) Complain about this comment
Hang on - if d-mark-II falls against the euro that's bad news (following logic of drachma-II), so if it rises against the euro, that's good news ? For a net exporting nation such as Germany ?
(13 February 2010, 12:58PM) Complain about this comment
Yes Craig, thats what I was thinking too. But I expect I have missed the point as usual ..
(13 February 2010, 02:41PM) Complain about this comment
Carry on, its a great side show! I am grateful we retained our currency, I cannot imagine the Japanese giving up the yen so why should we!! I am very surprised at the speed with which Europe has grown in size and in currency terms. If you look back over the last few years there has been umpteen emerging countries joining or attempting to join EMU and/or the EU, probably because they are "emerging" and do not trust themselves to sort out their own housekeeping and would like Germany/France as house of mum and dad! The EU has grown too big, too fragmented, too imbalanced and far too fast. I was surprised Germany gave up their currency in the first place, maybe they are going soft.The Euro is being manipulated without question. I cannot imagine Germany cares much for Greece, Portugal or Spain aside from their Summer hol's that is.
I think this is alot of hu ha. What if we had one currency world wide? What will California do issue it's own currency, I think not, and if California falls more backwords the federal governement will move in. I think same will happen with Grece or any other Eurozone country.
(13 February 2010, 02:45PM) Complain about this comment
The wealth behind wealth needed a move away from the Gold standard and the subsequent Breton woods agreement.Intention - the public would have no way to effectively value paper FIAT currencies against.Problem Germany ........ having experienced hyper inflation and all that entails - they are just too damned prudent. So if their currency stayed strong that would be the cat amonst the pigeons.Solution saddle them with the Euro & unification. Heaven and earth was moved to do it.Heaven and earth will be moved again to keep them in & what the wealth behind and above wealth wants happens. One of the many benefits of the super wealth dynasties.
(13 February 2010, 04:35PM) Complain about this comment
Ford and GM and many other giants formed finance arms to fund their customers buying their products - they blew up in the end. Remember the scenes of those private planes leaving Chicago for Washionton to plead for a bailout? Didnt GM still go bust?Does this sound like Germany / the Euro to anyone else? Germany sensibly makes products which they then fund Greece to buy and then Germany also gives them a bailout when it blows up. Oh well perhaps Brussells can sort out a pre pack fopr Greece as well
(13 February 2010, 06:02PM) Complain about this comment
In support of Anthony Cape Town. I have lived in France for the last 19 years so experienced the introduction of the Euro. Leaving aside the pain which we exparts are feeling at present, the euro has been a disaster for inflation in France. The government regularily claims about 2% inflation per year, even after the first year of the euro when we who live here think that it was nearer to 10%. On the first day prices in our local bar went up 13%! everything was rounded up using a larger value unit, and the rot has continued at at least 5% per year. How can the individual relate a price change from 6.68 francs to 1 euro. At least, in the UK a £ remained a £ and ten bob became 50p.
(13 February 2010, 07:44PM) Complain about this comment
Greece is typical of socialist governments in Europe that pandered to their electorate, the public sector, with massive public spending and reductions in the working week. It clearly demonstrates the shortcomings of democracy and the irresponsiblity of the champagne socialist who ruled, were corrupt and resorted to any demagoguery that we see them elected again. What they really need is a dose of the enterprise culture instead of the nanny state.
(14 February 2010, 01:08AM) Complain about this comment
LerenardBang on the button. Govt has become a socialist Ponzi scheme robbing wealth and liberty from every country it has ever been practiced. So most of Europe then!Only problem only minor parties now offer a free market, free lifestyle solution. Here in the UK all 3 parties look like ducks (socialists), quack like ducks (socialists) and act like ducks (socialits). We have UKIP, so let's hope they can get their act together and pick up some voters before socialism fulfills the final chapter in the script, goes bankrupt
(14 February 2010, 10:10PM) Complain about this comment
I agree that Germany could well leave the Euro sooner rather than later. As a teenager in 1996, I went on a holiday with a group of (West) German teenagers, and nearly all of them were strongly against giving up the mark for the euro. They were also unhappy about the high cost of reunification. Germans seem to have grudgingly gone along with the Euro since, but if the government bail out Greece, Spain, Portugal, etc (as I expect they will), I would expect a huge popular backlash against this, reigniting questions on the euro. It will then be a matter of time before popular pressure is brought on the political elite to take Germany out of the euro.
(15 February 2010, 08:21AM) Complain about this comment
The Germans have the perfect "out" from the euro: the German electorate was never allowed to vote on giving up their currency so their membership of the eurozone is already illegitimate. However, even the suggestion that Germany might hold a referendum on their continued membership would throw Europe into chaos. And when the switch back to Deutschmarks happened every holder of euros in the world would be bringing their cash to be changed for DM-IIs - and the Greeks would be head of the queue.
(15 February 2010, 11:15AM) Complain about this comment
We are in this mess because of the one fits all Euro bank rate, if the Euro rate was set for industry and commerce only and each country set its own rate for morgages and credit card debt. eg for morgages bank rate plus 3% [tax?] this would have controlled the huge house price increase from 1998 onwards, and for credit cards bank rate plus anything from 5% to 12.5% [tax] a problem with this system would be how would you stop people moving their accounts abroad
(15 February 2010, 02:40PM) Complain about this comment
Let's hope it doesn't come to that. The German taxpayer might be unhappy having to shoulder a greater share of the financial burden from weaker members but a quick look at recent European history might wonder how long before things get much nastier for everyone. The kind of trouble leaking from less well off European states has done Germany little good over the last 100 years or so & maybe they'll realise a bit more money in the bank in the short term could easily be offset by pain of a different degree in the long run. The EU isn't perfect but it's a damn sight better than any alternative I've seen so far.
(17 February 2010, 02:07AM) Complain about this comment
The general mood around the US Fed in the late 1990's was that the Euro was no threat to the dollar and that it would crash and burn without a federal monetary policy. I'm guessing that European elites were always aware of this and that have been eagerly waiting for the perfect crisis to centralize policy and finally build a real European Superstate. Germany can not leave the EuroZone or, within less than a decade, the entire state will look just like the US rustbelt. Companies will leave Germany to take advantage of Club Med's lower costs. It would be a NAFTA-like situation and make any current bailout situation look like chump change to the average German taxpayer. I do hope this situation scares the UK enough to stay out of the Euro. Once this mess is over and central monetary policy is in place, the UK can simply buy up enough Euros to keep the Pound level while maintaining independence.
(17 February 2010, 11:25AM) Complain about this comment
This is an interesting article Merryn from a different viewpoint. Not many have looked at the position of the strong within the Eurozone instead they have concentrated on the weak. However as I have been reading on the notayesmanseconomics web blog there are so many moral hazards around that it would now not be so inconceivable for Greece to leave the Euro.This is in my view a measure of how badly Europe's leaders have handled this crisis...
(18 February 2010, 11:26AM) Complain about this comment
Now would be an excellent time for the pound to join the euro. But what chance of that with Little Englanders still thinking themselves so brilliant with overvalued houses and a sinking currency? Unity is normally better than disunity, and think what might have happened in Eastern Europe post-communism without the European Union. Peace and prosperity go hand in hand with a strong currency.
(26 February 2010, 02:27PM) Complain about this comment
perhpas the short selllers are the true defenders of freedom and democray, by destroying the Euro they are helping chech the marxist stae of Europe
(13 March 2010, 10:46PM) Complain about this comment
The euro is being kept artificially high and the dollar low. Wall Street is doing this. The large corporations in America. It is so they can export there stuff made in China. I have family in Ireland and friends in France and Spain. Because of the high euro business people are going out of business due to americans not traveling abroad to spend their money. This is what they say.I believe the euro will collapse soon!!!
(19 April 2010, 12:14PM) Complain about this comment
It seems the idea that Germany might be the one leaving is becoming more mainstream...http://www.telegraph.co.uk/finance/financetopics/financialcrisis/7594859/Morgan-Stanley-fears-German-exit-from-EMU.html
(22 April 2010, 12:18PM) Complain about this comment
The EU was always designed to be a political union, to make it a financial one was always just an idealist's dream which reminds me of H.L. Menken's comment that 'an idealist is one who, on noticing that a rose smells better than a cabbage, concludes that it will also make better soup.'Well they are all in the soup now.
(07 May 2010, 12:50AM) Complain about this comment
Ten years ago I predicted that the Euro would last no more than three years and I'm not happy to say that I have been proved wrong. The fact that this deeply flawed currency has lasted more than three times longer, means that the remedy will be more than three times harder to take.The only good thing to come out of it may be a rapid disintegration of the EU itself - and no, I'm not anti-European. I spend nearly all my holidays touring its full length and breadth by car and I love every country in it. I just hate the waste and fraud and homogenization of the EU.
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