Monday, June 11, 2012

Germany Should Leave the Euro but Probably Can't

According to some, an underlying problem in the euro zone is the productivity gap between the creditor nations and the "Club Med" countries, 20 or 30 percent by some counts.

Inside a currency zone like the euro, the way to reduce that imbalance is for the less productive countries to slash wages and payroll.... But whatever mitigation you could provide would do little to change the awful social reality of that adjustment.

The alternative, of course, is to restore the currency markets. A 20-to-30 percent fall in the value of a new peseta or drachma would do a lot to make the southern countries more competitive.... Still, a forced exit from the euro would be seen as humiliating. And it would foster precisely the sort of resentment that European politicians have spent the last 60 years trying to avoid....

So why not have Germany walk out instead? The economic effects might be much the same as forcing Greece, Spain, or Italy to exit. The move could be spun externally as a self-sacrificial move by a noble Germany to correct the productivity imbalance in the EU. Internally you could sell it on the basis that German taxpayers would no longer be on the hook for all the presumed spending excesses of the South. In other words, a German exit might be a way to throw out the bathwater without losing the baby.

One problem with this strategy, if it can be called that, is simply that a break-up of the euro may not in Germany's short-term interests.
Read the whole post at Harvard Business Review
Germany Should Leave the Euro but Probably Can't
David Champion | Senior Editor, Harvard Business Review


Trixie said...

Tom, your thoughts on next Sunday's elections in Greece? More of the same or a possible tipping point here?

Tom Hickey said...

The story that will probably emerge from the Greek election is a growing protest vote, not so much for the left or right parties, but a protest against centrist politicians "cooperating with the enemy" in forcing an unworkable austerity. Golden Dawn seems to be merely a marginal protest movement, but Syriza on the left has the potential to be a strong player for some time.

On balance, I think that most Greeks would like to see a truly centrist position, but they don't trust the centrists to protect their interests.

So I think that the outcome of the Greek elections will be more sending a message instead of adopting a new political course for Greece over the long haul.

The eventual outcome in Greece and the EZ is really up to Germany now, and there seems to be sentiment to kick Greece out of the currency union. That would be a very bad mistake politically, I believe, even though it might be economically better for Greece to leave the euro and go back to the drachma.