EuroPissants: Should Germany [!] Leave Eurozone?

♠ Posted by Emmanuel in at 4/16/2012 10:14:00 AM
Having lived on and off the continent during the past few years, I am a follower and sometimes patron of various things European: Euratom. Euro currency. Eurofighter. Eurostar. Eurotunnel. Eurotrash. Not wanting to be left behind in all this naming fun, I've come up with the EuroPalin and EuroNasty. Today, dear friends, I must indulge your patience as we consider yet another term as indicated in the post title. You see, it is not enough to acknowledge that the PIIGS economies are the weak ones in the EMU. Rather, gaping current account and budget deficits coupled with general uncompetitiveness bedevils more than Portugal, Ireland, Italy and Spain. That's the unfortunate truth.

Conventional thinking, reinforced by brainless "reality show" fare in the popular consciousness, suggests that the solution lies in eliminating the weakest link(s): We vote you off the island, Greece. You're fired, Portugal, and so on and so forth. This sort of logic dominates the thinking of those who believe that all that will remain in the EMU are a small cotorie of muscular economies alike Germany and the Benelux states.

Well guess again. Michael Sivy over at the TIME displays fresh thinking by suggesting that it's Germany which should leave the Eurozone, pronto. The logic is again that Germany's overwhelming competitiveness buoys the single currency and makes the rest uncompetitive. It's an argument favouring the good of many (most Eurozone countries) against the few (German and a few others). Given the Germans' dislike of significant devaluation, it may be better for them to pursue this objective in a national context away from those desperate enough to benefit from it. After arguing that little girlie man economies leaving the Eurozone will be worse for them than staying in, Sivy proffers his novel solution:
By contrast, if Germany were the one to leave, the euro would be the currency that falls in value, relative to Germany’s new national currency and also to the dollar. The weaker European countries would get to keep the euro but still get the devaluation they need, which would reduce their labor costs far less painfully than through wage cuts. In addition, the value of their outstanding debt would decline along with the value of the euro, and they would be more likely to be able to make payments on that debt and avoid defaulting.

The standard argument against this solution is that as the value of euro-denominated debt falls along with the euro, banks in many countries would have big losses on bonds they own. But losses from falling bond prices are less disruptive than sudden defaults. And the fact is that those losses have really already occurred, they just haven’t been acknowledged. The goal at this point is not so much to prevent losses, but to find a way for banks and other international financial institutions to absorb their losses without triggering sudden bank failures or a global financial crisis. In short, it’s not about the money, it’s about stability. And for once, it may be easier to maintain order without the help of Germany.
In a way it's positive reinforcement for boorish behaviour in forming the EuroPissants, but there you are.

Finally, you may be thinking: Can a group of weak-kneed, overindebted and devaluation-loving states secure continued existence? Why, yes of course. Check out that lame-o republic called "The United States of America."