Why it's time for Germany to leave the eurozone

Why it's time for Germany to leave the eurozone

Influential figures including Ben Bernanke have called on Germany pull its weight to end the eurozone's dysfunction. The only alternative is a German exit from the euro 

By Mehreen Khan 4:55 PM BST 21 July 2015

Germany's finance minister, Wolfgang Schauble, has drawn opprobrium and praise in equal measure for his suggestion that Greece takes a "time-out" from the eurozone. 

In proposing that Greece could be better off outside the euro, the irascible 72-year-old crossed a political rubicon: he confirmed that the single currency was "reversible" after all. 

But having broken the euro's biggest taboo, commentators have now suggested that it should be Mr Schaeuble's Germany, rather than Greece, that should now take the plunge and ditch the euro. 

To stay close, Europe's nations may need to loosen the ties that bind them so tightly

Ashoka Mody, former IMF bail-out chief

Figures as esteemed as the former Federal Reserve chief Ben Bernanke used last week's decision to press ahead with a new, punishing bail-out for Greece as an opportunity to remind Germany of its responsibilities to the continent.

Mr Bernanke took to his blog to highlight that Berlin's excessively tight fiscal policy has helped scupper the euro's dreams of prosperity and "ever-closer" integration between 18 disparate economies. 

In its latest assessment of Germany's economic strength, even the IMF (seen in many German circles as chief disciplinarian against the errant Greeks) urged Berlin to carry out "more ambitious action... and contribute to global rebalancing, particularly in the euro area". 

• AEP: Germany's trade surplus is the biggest threat to the euro 

A botched rebalancing

Germany's record trade surplus is held up as the main symptom of its dangerously preponderant position in the eurozone.

A measure of the economy's position in relation to the rest of the world, Germany's current account hit a euro-area record of 7.9pc or €215bn in 2014. It is now expected to hit more than 8pc of GDP this year, according to the IMF. 

The persistently high surplus in part reflects the strength of Germany's much-vaunted export industries. But other contributing factors are reasons for concern. The IMF has said such chronic imbalance also reflects a "reluctance by the corporate sector to invest more in Germany". 

Persistent imbalances are unhealthy, reducing demand and growth in trading partners

Ben Bernanke

As Mr Bernanke also notes, the surplus puts "all the burden of adjustment on countries with trade deficits, who must undergo painful deflation of wages and other costs to become more competitive." 

Southern economies such as Greece are chief victims of the cost of this adjustment. But as the chart below shows, with Germany in the bloc, the eurozone's rebalancing act is going nowhere. 

The initial adjustment between debtor and creditor nations, which started in 2008, "has halted since 2012, and seems to be on the verge of reversing", find Standard & Poor's. 

The Black Zero 

The other problematic area of Germany's economy policy is the government's obsession over the "schwarze Null" or "black zero" policy to reach a balanced budget. 

Berlin managed to hit this magic target earlier this year. The "schwarze null" is held up as the cornerstone of German financial strength and stability in a perilous global environment, but has drawn criticism as yet another symptom of the eurozone's dysfunction. 

Economist Paul De Grauwe has dubbed it a quasi-religious "balanced-budget fundamentalism”.

The fiscal rectitude has also fallen foul of the IMF's prescriptions for the German economy. The Fund recommends Berlin pump at least 2pc of GDP into investment projects over the next four years, a target which the government is consistently falling short of. 

Why a German exit would help 

Princeton economist and former IMF bail-out chief Ashoka Mody is among the most recent proponents of a German exit from the euro. 

Mr Mody notes that a return to the deutsche mark would provide a two-fold boost to the rest of the beleaguered eurozone: it would immediately cause the euro to plummet in value, stimulating exports in the southern periphery, and also cause far less disruption to the rest of the bloc than a potential Grexit. 

"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", writes Mr Mody.

"Germany's assets abroad would be worth less in terms of the pricier deutsche marks, but German debts would be easier to repay."

Outside the single currency, German industry would be forced to return to a pre-euro world, and continually adjust to the costs of an appreciating currency. But Mr Mody posits that this transition, although a big initial shock, would hardly be new for German businesses. 

A less competitive currency could also provide a much needed incentive for German industry to produce higher-quality products and improve sluggish productivity in the service sector, he adds. 

A design to shackle German strength

Germany's economic prowess under the euro should not be over-estimated.

One of the drivers behind its "fiscal fetishism" is a deep insecurity about the country's longer term economic prospects. Germany is one of the fastest ageing economies in the world, in need of mass immigration, more women in the labour force and a substantial boost to its birth-rate. 

And for all its relative economic strength, the euro was always at its heart a political construct designed to neuter a reunified Germany 25 years ago. 

Paradoxically, Mr Mody now says that a release from the shackles of the single currency could finally pave the way for Germany to act as the "benevolent hegemon" a functioning fixed-exhange rate system has always needed.