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Should Germany leave the euro? It is, after all, the big country with an obvious exit option. The question becomes more pertinent after the decision by Angela Merkel, Germany’s conservative chancellor, to support Mario Draghi, president of the European Central Bank, against Jens Weidmann, her appointee as head of the Bundesbank, over plans to buy bonds of governments in difficulty. The president of the Bundesbank, Germany’s most respected institution, has now become a spokesman for conservative German eurosceptics. The ECB, Germans realise, will not remain a reincarnated Bundesbank. Once again, we are reminded that the eurozone is set to be a miserable marriage. Might a separation, however disruptive, be better?
The danger for Germany, in the event of a break-up of the euro, is that there might be too much of the German currency as a result of non-residents’ efforts to convert into the new money. The Bundesbank could prevent this, however, by restricting conversion to German residents alone. Losses would then fall on residents of the countries whose new currencies would collapse in value.
If Germans have accumulated worthless claims, via their huge current account surpluses, they might have done better not to have run the surpluses. Similarly, the fact that Germany might exit without suffering some of the damage people fear makes exit an option.
Indeed, Charles Dumas of London-based Lombard Street Research argues that euro membership has encouraged Germany into a costly mercantilist strategy at the expense of its people and the productivity of the economy. He notes that Germany’s real personal disposable incomes have risen remarkably little since 1998. So, too, has real consumption. But now the necessary cure for the ills of the eurozone will impose higher inflation in Germany, which the Germans will detest; prolonged deflationary recessions in important eurozone markets; and ongoing transfers of official resources to its partners.
All this ensures that neither the economic nor the political gains of eurozone membership are what German policy-makers would have wanted. Worse, years of conflict over “bailouts”, debt restructurings, structural reforms and unpopular adjustments in competitiveness now lie ahead. Maybe a painful divorce really would be better than that.
Mr Dumas believes so. He argues that going back to an appreciating Deutschmark would squeeze profits, raise productivity and increase real consumer incomes. Instead of lending surplus savings to profligate foreigners, Germans could enjoy higher living standards at home. Moreover, this would generate swift adjustment in competitiveness of eurozone members, which would otherwise occur too slowly, via high inflation in Germany and high unemployment in partner countries.
If Germany continues to run large current account surpluses, it necessarily has to accumulate huge claims on foreigners. If experience is any guide, much of these will prove a waste. The danger is that the strategy of real wage suppression and soaring external surpluses is a costly dead end. It may well damage the German economy. It certainly compels Germany to transfer resources to its “customers”, in one costly way or the other.
Exit is indeed an option. If it is rejected, as I predict, much the same adjustments will ultimately occur in even more painful ways. The alternative is the transfer union that Germans fear. Germany has paid a heavy price for the mercantilist strategy. Inside or outside the euro, it cannot – and must not – endure.
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