Germany Should Exit Euro, Not Greece, Economists Say

Ben Bernanke, former chairman of the Federal Reserve and now an economist at the Brookings Institution, wrote in a blog post on the Brookings site that Germany is responsible for uneven employment within the eurozone, its tough fiscal policies boosting its trade exports while keeping demand low at home; that’s resulted in a “lasting trade surplus with its neighbors.” While Bernanke didn’t call for Germany’s exit, he did say that fiscal austerity must be relaxed on Greece—something Germany has already refused to consider.

Bernanke also called for the eurozone to rule against such long-lasting trade imbalances as Germany’s, in the interests of stimulating a fairer trade exchange through looser fiscal policies.

Then there’s Ashoka Mody’s take. Mody, a visiting professor in international economic policy at Princeton University and formerly a deputy director at the International Monetary Fund’s research and European departments, wrote that in actually proposing that Greece should leave the euro, Germany broke “a political taboo.” Yet if Greece left the eurozone, breaking what has been regarded as an unbreakable union, Portugal and Italy could follow in years to come. All their currencies would “fall sharply in value … [leaving] them unable to pay debts in euros, triggering cascading defaults.” While eventually they would emerge stronger and more competitive, the chaos in the meantime would hurt far more than just the countries immediately involved.

Instead, Mody wrote, a German exit would boost the eurozone, as Griffin and Kashyap pointed out, because the value of the euro would fall. And if, said Mody, “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.”

Germany would benefit from its exit, being both able to buy more with marks that would be valued higher than euros, and also being able to repay euro-denominated debts more easily. But other countries would also benefit; lower demand for German goods elsewhere in the world would compel Germany to reduce that “excessive” current account imbalance—that’s what the European Commission has called it. Also, German companies would have to improve the quality of goods and services intended for domestic consumption to counteract the effects of a stronger exchange rate.

George Soros has also called for a German exit from the eurozone—because Germany is so firmly opposed to Eurobonds as a means of saving the joint currency from implosion and weaker countries from impossible austerity that its opposition has prevented the possibility of even being considered.

Eurobonds, said Soros, enacted under a tighter Fiscal Compact—something else Germany opposes, but which Soros said “would practically eliminate the risk of default”—would provide an answer to the current crisis. Eurobonds would eliminate the treating of “all heavily indebted eurozone members [as having] the status of a Third World country over-extended in a foreign currency,” and allow “the danger of default [to] disappear, as would risk premiums. Banks’ balance sheets would receive an immediate boost, as would the heavily indebted countries’ budgets.”

Soros wrote, “Germany has the right to reject Eurobonds. But it has no right to prevent the heavily indebted countries from escaping their misery by banding together and issuing them. If Germany is opposed to Eurobonds, it should consider leaving the euro—although he also said a departure would be “ill-advised.” Surprisingly, Eurobonds issued by a Germany-less eurozone would still compare favorably with those of the U.S., U.K., and Japanese bonds.” Why? Because “[i]f Germany left, the euro would depreciate. The debtor countries would regain their competitiveness. Their debt would diminish in real terms and, if they issued Eurobonds, the threat of default would disappear. Their debt would suddenly become sustainable.”

Countries leaving the eurozone, said Soros, would not fare so well. “Their exports would become less competitive, and they would encounter heavy competition from the rump eurozone in their home markets. They would also incur losses on their claims and investments denominated in euros.” If, on the other hand, Italy were to leave the eurozone, said Soros, “its euro-denominated debt burden would become unsustainable and would have to be restructured, plunging the global financial system into chaos. So, if anyone must leave, it should be Germany.”