Is the Time Right for a Gerxit? Eurozone Could Do Better Without Germany
Germany should be the next country to leave the European Union (EU). The world needs a “Gerxit.” The euro project required much effort and several sacrifices. More will be required to keep it alive. Defending it at all costs is futile, and much of this effort has focused on the wrong problem. Consider what the EU has done to keep Greece in the eurozone, or what Italy and Spain must do to remain.
The single currency, the euro, has long been a sore point, largely because of Germany’s excessive power within it. A Gerxit would bring balance to the current disparity. The euro has split Europe in two: those who back the euro—having gained from the single currency—and those who oppose it, because they have suffered from it. The euro and the eurozone have represented perhaps the most ambitious project that the EU has undertaken to date.
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The euro’s sharp decline against the U.S. dollar over the past two years has added some oxygen to the single currency. This has encouraged European exports, leaving the eurozone’s external accounts in a surplus situation. The eurozone has showed that it can work. Together, its members have sold more goods and services than it has purchased from beyond its expanded borders.
Something Is Changing in Berlin
So far, none of the eurozone members have left the single currency, but Germany has started to push Italy out. This could backfire, leaving Germany as the outsider. German economist Dr. Clemens Fuest said that it is not impossible to think of an Italy out of the single currency. (Source: “German Ifo think tank chief says Italy risks quitting euro zone,” Reuters, January 1, 2017.)
The opinion of Fuest, who is the president of the Munich-based Institute for Economic Research (IFO), carries weight. He is close to the German government and community institutions. The European Central Bank (ECB) has also hinted at the precariousness of Italy’s position. The ECB raised concern about the government recapitalization to save Banca Monte dei Paschi di Siena.
In short, the coming months will be crucial for the future of the euro, and much will depend on assurances that the government will provide for future investments. But, what if, as suggested above, Germany left the eurozone? In short, the euro would work much better.
In a more balanced universe, the eurozone’s overall current trade surplus should have helped the euro to appreciate. But, within the eurozone itself, once-leading Europtimists France and Italy continue to import more than they export.
It’s Germany that is running away with it, exporting ever more, benefiting from a euro that is valued too low for the size and scope of its economy. That is the essence of the eurozone’s problem. It’s not Greece; it’s not Italy or France: it’s Germany.
Germany, due to its aging demographics, needs above all to generate income outside its borders to finance the pensions of its senior citizens. That explains its counterintuitive, and potentially disastrous, immigration policy. German factories must run at full capacity, but the domestic labor supply is dwindling.
Meanwhile, such eurozone members as Greece, Spain, Portugal, and Italy—and even France—suffer under the single currency. Italy, for example, is the third-largest economic power in the eurozone. Yet they would suffer more, if they were to abandon the euro altogether. The costs of such a step would be astronomical for all but Germany (and a handful of northern European states).
Leaving Eurozone Would Be Disastrous for EU’s Southern States
If the over-indebted states of the southern eurozone were to give up the single currency, they would face a sudden explosion of debt. If Italy were to return to the lira, France to the franc, and Spain to the peso, their debts would suddenly be denominated in a much higher-value foreign currency.
The debt-to-gross domestic product (GDP) ratio is about 133% for Italy, 98% for France, and 200% for Greece. If a debt-stricken state with 100% or more of its GDP were to leave the euro monetary union, its debt would multiply in relation to its GDP.
The resulting devaluation from euro to lira, in a hypothetical (but likely) Italian example, would leave it with a situation like Greece: from about 133% to about 200%. This is assuming a devaluation of 50%, which would mean that the Greek debt would represent 150% of its GDP. The cost of servicing such debt would rise further.
Lenders would demand higher interest, making it impossible for a state, even one with Italy’s industrial and export capacity, to emerge. The only solution would be default, hurting the millions of citizens who had entrusted their savings in euros.
It was this kind of debt bomb that allowed the U.K. to take over several countries—like Egypt—in the 19th century heyday of the British Empire. “Boost debt and occupy the finance ministry” rather than “divide and conquer” should have been the country’s unofficial motto.
Such is the potential problem of abandoning the euro that, in the event of a crisis, the most financially weak states would sooner leave the political—rather than the financial—European Union (if that were possible). It’s the only way to keep their debts manageable.
Note: European treaties say that leaving the eurozone would also result in an exit from the EU.
Germany Would Thrive Even after a Gerxit
The euro winners, like Germany, would not suffer if they were to leave the single currency. Germany would easily be able to return to the Deutsche Mark. Yet, if Germany continues its current growth path, ignoring the reality of the southern eurozone, the European Union could last for a few more years, perhaps a decade, wanting to be optimistic.
Indeed, beyond the financial union, there are pressures that could cause the political European Union to crack in 2017. Should Marine Le Pen—who recently met Donald Trump in New York—win France’s spring’s election, France could pull a Frexit within two to three years.
Few would dare discuss the bleak reality of the EU’s future. It’s worse now than it was when Greece was on the brink in 2011 or 2012. The outgoing president of the European Parliament (German) Martin Schulz warned that the EU faces a very real risk of collapse. (Source: “Martin Schulz: EU hamstrung by Brexit and rise of populist right,” The Guardian, January 5, 2017.)
Schulz sees the populist right as the enemy of the EU, but he should look closer to home. Schulz should look for the motivation behind the populists who are ganging up on the euro and the European Union. It’s closer than he thinks: it’s German Chancellor Angela Merkel.
Nothing against her personally, but Europeans owe the wave of unpopularity that’s hit the EU, and the rise of nationalism—financial and political—to her leadership. Angela Merkel faces an election this year. If she wins and pursues politics as usual—with German interests in mind exclusively—she will spell the end of the eurozone and the EU.
Donald Trump—himself of German descent—has said as much. Angela Merkel bears much responsibility for the current mess in the European Union. Germany is the most important member of the EU in economic and population terms. Inevitably, EU policy considers Germany as a point of reference.
But, unlike some of Germany’s recent great statesmen, from Helmut Kohl to Helmut Schmidt—not to mention one of the original founders of the EU project in the 1950s, Konrad Adenauer—Angela Merkel has weakened the EU.
Germany Has Played Direct Role in Weakening Eurozone
While maintaining a clear trade surplus vis-à-vis the other members, Angela Merkel pursued, with a robot-like insistence, tax austerity policies against the southern European Union countries. The Greek crisis is a clear example. This is not excuse for the Greeks, who got themselves into a financial mess, but German (and French) banks played a significant role.
The banks generously financed Greek consumption in the full awareness of the risks, propelling the crisis to unmanageable levels. Had the German banks stopped the speculation-driven loans at the start of the crisis, it would have been possible to stop it before the point of no return. Instead, Germany (and France) were keen to ensure that their banks collected their debt.
Germany added insult to injury. As a condition for the granting of additional loans, Germany demanded the right to buy stakes in many Greek tourism companies, from airports to hotels. Then there is the disastrous immigration policy, the very same that Donald Trump targeted.
With the encouragement of Turkey, hundreds of thousands of refugees started to land on Greek shores in 2015. Without consulting its partner EU states, Germany decided to accept Syrian refugees. Syria, the most secular Arab state, would have been a source of educated and secular-minded individuals. They would have been ideal in filling the many jobs that Germans no longer want to perform, but need to be done.
The miscalculation backfired immediately. Just as African migrants reach Italian shores claiming to be Eritrean (they are classified as political refugees, therefore eligible for refugee status), migrants arriving via Turkey—including many Afghans and other Central Asians—”impersonated” Syrians.
Angela Merkel’s policy only helped to boost the number of landings of illegal migrants on Greek shores. Worse, to get to Germany, the migrants had to cross the Balkan states. Thousands of these people were left stranded. Turkish President Recep Tayyip Erdogan exploited the European weakness and started to blackmail the EU. He demanded a few billion euros in “aid” to help contain the migrant wave.
The whole European Union—not just German taxpayers—would pay Erdogan’s toll-charge. Meanwhile, as Angela Merkel’s migration generosity backfired, many migrants have been trying to get into the EU from other peripheries, putting pressure on Hungary, Austria, and Italy.
Angela Merkel also encouraged the Ukrainian nationalist Maidan movement. She supported regime change in Kiev, perhaps in hopes of setting up a new economic sphere of influence in Ukraine, as it had done with Central Europe in the first post-USSR days.
Thus, Angela Merkel enthusiastically adopted sanctions against Russia. This forced many EU countries, especially those in southern Europe, to honor them. They lost billions of euros in trade. Meanwhile, these mistakes by Merkel added leverage to a list of eurozone grievances exacerbated by the 2008 financial crisis. The latter caused southern European companies to lose competitiveness compared to Germany.
In Italy, the national income per capita dropped 10% between 2008 and 2016, whereas in 1999 it was 20% higher than the EU average. Unemployment in Italy is three times greater than in Germany, for example.
Meanwhile, Angela Merkel’s Germany makes sure that nobody exceeds a three-percent public debt threshold. But Germany, which has a surplus, should, according to the Euro agreement, increase public spending. This was a mechanism designed to encourage more equilibrium. The intent is to promote the economies of poorer EU countries by boosting their exports to the richer ones.
If Germany were to leave the common currency, its renewed Deutsche Mark would be competitive against the euro. The European economy would resume a more realistic picture. It would look more like Sandro Botticelli’s “Birth of Venus” instead of Pablo Picasso’s “Guernica.”
If Angela Merkel is re-elected, it would be on a platform of protecting the idea of a German Europe rather than a more European Germany, as Chancellor Kohl prophesied. (Source: “Germany Cools to EU Unity, Turning Inward,” The Wall Street Journal, March 28, 2010.)
Donald Trump warned that other countries would follow the U.K. in leaving the European Union, but he’s partially wrong about the reasons. Trump says it’s because people want their own identity. That’s true, but more than that, Europeans want a more balanced economic union. Currently, many of them see the European Union as a tool for German hegemony. And who can blame them?
