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The European crisis - should Germany quit the Union?

Updated on September 4, 2012

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Strange bedfellows - Germany and Greece.

The crisis in Europe appears to be not as serious as it was in the middle of 2012, when it was widely believed that Greece might decide to opt out of the European Union, leading to an eventual break up of the Union. That has not happened and somehow, the Union has survived. However, every few weeks, there are reports of high-level meetings in different European cities where they meet to address a crisis either in Greece, Spain, Portugal, Italy or maybe Ireland (collectively called the PIIGS) and somehow resolve to keep the Union intact. Skeptics would call it kicking the can down the road.

The fear all along has been that a break up of the European Union would lead to a major turmoil in the global markets. Thus stronger countries like Germany prop up the weaker countries and profess that they do not wish the Union to break up. One wonders how long this can continue – so what if you turn the problem around, and ponder if it makes more sense for the strongest link to quit the Union? Yes, outrageous as it may appear, it is worth considering whether Germany quitting the Union might turn out to be a better alternative! Let us go back a bit and see whether this proposal makes sense.

Improbable Alliance

Skeptics have for long maintained that the European Union would not last, given the vast differences in culture, lifestyle and attitudes between the North Europeans and their Southern brethrens. Before the Union, the weaker currencies of Greece, Spain, Portugal and Italy made it easier for the North Europeans with their strong currencies to spend their holidays in the warm and sunny beaches in the south. Tourism thrived in these regions, and the weaker currencies actually improved the economies of these countries. But as the push to join the European Union was stepped up towards the end of the last century, and as more countries joined the Union and the Euro became the common currency in 1999, the equation started to change. Integrating the southern European and then the East European countries into the Union was a challenge, but the stable world economy until 2008 allowed the integration of the Union to progress somewhat smoothly, though only one slow step at a time. But when the financial crisis erupted in 2008, this process started falling apart, and the weaker economies of the south have constantly been under threat since then.

The stronger partner in the Union

The size of the population and GDP of the other North Europeans countries pales in comparison to Germany, undoubtedly the powerhouse of the Union. German Chancellor Angela Merkel says she is committed to holding the union together, but the cost of maintaining the Euro is high, and it appears many Germans have lost the appetite to continue writing checks to pay the debts of Greece and the other countries. So let us examine the scenarios in the event of a break up.

Scenario I – Greece exits the Euro

As has been widely expected, if Greece quits the Union, there would undoubtedly be problems in the short run, and Greeks would have their savings considerably eroded. They would switch back to their own currency the Drachma, which would be very weak. But the weaker currency would make Greece a tourist attraction, something that the country has had a reputation for in the past and would certainly be in the future. No matter which way they go, they cannot escape initial hardships, but this route could work out well for the country in the long run. In all likelihood, some other countries would follow suit.

Scenario II – Germany exits the Euro

Now this gets interesting, as one needs to think outside the box. Germans have the capacity to accomplish a swift exit from the Euro before the market panics (which is bound to happen if Greece exits). Without the powerhouse that is Germany, the Euro would depreciate, but not below the Drachma or the currency of any other country that may later exit. Without the Germans, why would Greece and the other weaker countries even need to leave the Euro zone? The depreciated Euro would find its level of competitiveness and despite a short-term turmoil (that seems unavoidable, no matter what course is adopted), the European Union would likely be stronger in the long run.

And what happens to Germany, if they were to exit? They would also switch back to the Deutsche Mark, which would undoubtedly be stronger than the Euro. The strong Deutsche Mark would make it tough for them to export, but the Germans would figure out how to be competitive – haven’t they done it so many times in the past? Actually, the Germans might prefer this option rather than continuing to write checks to maintain the current Euro zone. Now that may be the time to bring out the Beer and the Bratwurst…!

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    • Prakash Dighe profile image
      Author

      Prakash Dighe 5 years ago from Dallas, Texas, USA

      Yep, that was my thinking when I wrote the Hub two months ago. There has been no major crisis or developments since then, and even though I'm not too much up to date with what's happening there, I believe things are just hobbling along, and any moment the Euro and the Zone could erupt into a crisis. One thing I do know - countries like Greece, Spain and Portugal that were so popular for tourists many years ago when they had their own currencies, have gradually become more expensive when they joined the Euro. Maybe my proposal will eventually "come up for consideration"! Thanks for your comments Rebecca!

    • Rebecca2904 profile image

      Rebecca 5 years ago

      Interesting Hub! It's a very complicated issue that takes more than a little brainpower to understand, but you've explained it very nicely here :) The way I understand it... If Germany were to leave the Euro, the Euro would almost immediately decrease in value, which would be helpful to the southern European powers as it would ease the burden of their debts, and also encourage international investors to part with their money once again (for example in the Spanish real estate market). I could be wrong though, I'm hardly an economist!

    • Prakash Dighe profile image
      Author

      Prakash Dighe 5 years ago from Dallas, Texas, USA

      I'm glad that a German feels this way. But will Germany really quit?

    • CHRIS57 profile image

      CHRIS57 5 years ago from Northern Germany

      You are right, for Germany to leave Euroland is an option. But then, only for Germany and othern Northern Europeans. Not for the debt loaded economies in the south.

      If Germany leaves, the internal deflation called Austerity measures will be replaced by an external Euro devaluation. But what does that help Greece? Their debt doesn´t come from not being competitive to Germany, their problems come from being not competitive to any other European economy. If Germany steps aside, the place will be taken by Italy, not to mention France or Spain.

      Greece is doomed anyhow, no matter if Germany leaves the club or not. For Germany it is an option, not very attractive though because estimated cost is supposedly some 50% higher than staying in Euroland and paying the bills. To give an impression of the tab: It is in the range of 1 Trillion Euro, by today the Bundesbank alone holds 700 Billion in Target2.