Let’s hope Germany thinks hard about George Soros’s proposal that it should lead the euro system or leave it. The more carefully Germans study this choice, the more eager they will be to make the present system work.
Many German voters are understandably sick of their euro adventure. The next phase of crisis management, following the European Central Bank’s promise last week to buy the bonds of struggling economies, will demand new fiscal outlays from German taxpayers and expose them to greater risk of losses later. Their growing resentment of Greece, Ireland and Portugal -- and soon Spain and Italy, whose appetite for assistance is vastly bigger -- calls into doubt Europe’s efforts to stem the crisis and threatens the euro’s viability.
Germans might reconsider their nostalgia for the deutsche mark, though, if somebody -- their own government, for instance -- had bothered to spell out the alternatives to the bailouts. Maybe Soros’s intervention will help that to happen.
Up to now, the obvious alternative to keeping Greece and the others afloat within the euro system has been for them to leave or be ejected. This used to be unthinkable but isn’t any longer. The doomsday option has become a bargaining chip that weak and strong countries alike are trying to use.
Europe’s governments made a big and irreversible mistake when they accepted that a euro breakup was possible. This further undermined the system and made the European emergency harder to manage. Still, ejecting the weak remains unlikely because everyone understands it would cause immense damage, and would start an unraveling that might be hard to stop.
Ejecting the strong is a better idea. It isn’t a new one, by the way. In a column for Bloomberg more than a year ago, Anil Kashyap of the University of Chicago Booth School of Business argued that Germany and a small group of other strong performers should break away to form an uber-euro. Kashyap and Kenneth Griffin, of Citadel LLC, an investment firm, then wrote an article for the New York Times saying Germany should go it alone and gradually reintroduce the deutsche mark.
There’s a big difference between those two ideas -- dividing the euro system into two multinational blocs, and letting Germany gradually bring back the deutsche mark. Consider the second, which presumably has the greater appeal for German voters who miss having a currency all their own under the guardianship of the Bundesbank.
Resurrecting the deutsche mark has one main thing in common with ejecting the weaklings, and one decisive difference. What they have in common is a currency realignment that would improve the weaklings’ competitiveness -- boosting their exports, encouraging inward investment, and helping them to grow. True, the improvement in Greece’s competitiveness, say, would be much bigger if Greece left the system than if Germany did. (If Greece exited, its labor costs would fall relative to costs in France, Finland and other countries, whereas if Germany left, Greek labor costs relative to France and the others would be unchanged.) Nonetheless, Germany’s exit would help the Greek economy.
The crucial difference is that Germany’s exit would not require wholesale redenomination of financial contracts and the mayhem that would result. Suppose Greece is kicked out. With their rapidly devaluing drachmas, Greeks would be unable to settle their euro-denominated debts. Contracts would have to be recast or repudiated, inflicting large and uncertain losses on creditors. And the question immediately arises: Which weakling will be next to go?
If Germany brought back the deutsche mark, it would have both its strong creditor status and a rapidly appreciating currency, so its euro-denominated contracts could all be left in place. As Kashyap and Griffin explained, “Germany would be able to reintroduce the mark without altering the form of any current asset, liability or contract. For example, euros deposited in German banks would remain euro-denominated. So would outstanding German sovereign and corporate debt now denominated in euros.”
There would still be complications, to put it mildly. (One of many questions: What becomes of the enormous surpluses the Bundesbank has built up at the ECB as a part of the bank’s settlement process, called Target2?) Nonetheless, a German exit would improve the weaklings’ competitiveness without the risk of contagion or of instantly throwing the entire euro system into turmoil -- without starting, as Barry Eichengreen called it, “the mother of all financial crises.”
What’s the catch? Unforeseen complications aside, mainly this: The counterpart of growing exports and higher employment across the rest of the euro system would be falling exports and higher unemployment in Germany. The new deutsche mark would probably appreciate enough to push Germany into a deep recession.
That’s why Germans should ponder Soros’s suggestion, and be careful what they wish for. They look at the euro system and see only impositions. But surrendering the deutsche mark (and before that, fixing their currency’s value relative to other European currencies) gave them an export performance and enormous balance-of-payments surpluses that they otherwise wouldn’t have enjoyed.
And let’s not forget those surpluses were recycled as unsafe lending to Europe’s weaklings. It takes bad lending as well as bad borrowing to build a debt crisis. The bailouts that German taxpayers resent so bitterly were necessary partly to protect Germany’s undercapitalized banks from the consequences of their own actions. So far, the division of the burden of adjustment between bad borrowers and bad creditors has been much to Germany’s advantage. The Irish economy was crushed to keep creditors whole. Ask the Irish who has been treated unfairly.
Germany’s economy is an impressive performer, to be sure, but the Germans’ posture of moral superiority in this crisis is false. If a sense of shared responsibility -- to say nothing of the European solidarity Germany has been prating about these past decades -- isn’t enough to bind Germany to its neighbors, maybe naked self-interest will do the trick. Think about it, Germany. Resurrect the deutsche mark, and do the rest of Europe a favor. You’ll be the biggest loser.
(Clive Crook is a Bloomberg View columnist. The opinions expressed are his own.)
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