The European crisis - should Germany quit the Union?
European Union's Flag
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.
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…!