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 have with a package of reduced austerity and immediate debt relief.
That said, the lead creditor, Germany, has done Europe a service: By proposing that 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 Cambridge Prof. 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 timeout.”
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.
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 the 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 would 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 proved 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.
Ashoka Mody is a visiting professor in international economic policy at Princeton University. Previously, he was a deputy director at the International Monetary Fund’s research and European departments.