The fundamental imbalance of the Eurozone has always been the relatively low nominal wages of Germany compared to the periphery (low that is in terms of unit labour costs). Until that imbalance was addressed the Eurozone crisis was always just going to be a matter of kicking the can down the road. Germany leaving the Eurozone cuts the Gordian knot because its currency will immediately shoot through the ceiling while the rump Euro will fall. But that will only exacerbate the problems of its banks, since they will now be sitting on devalued Euro-denominated peripheral sovereign debt (in terms of its new currency, call it the post-Euro DM). So the German government would still not avoid a massive bailout, but at least this will be a one-time affair confined to its own banks and not the bottomless pit of the current rescue fond. But it will be a boon for the remaining countries of the Eurozone, since they will now be free to export their way out of recession and debt and rid of senseless, neo-Brüningesque austerity masochism. So Germany would actually be doing everyone a giant favour by unilaterally leaving the Euro.
Since the only alternative, an internal rebalancing that could have saved the Euro through an expansionary domestic German policy (see my http://sites.google.com/site/savingtheeuro), was never considered and is now moot in face of the current run on peripheral Euro debt (see Paul Krugman in today's NY Times), Germany will exit the zone either voluntarily or soon enough by force of catastrophic circumstances. The present Berlin government may think it can continue fiddling while Rome (and Athens and Madrid and Dublin and even Paris) are burning, or deceive itself that ejecting Greece will save its skin, but the writing is already on the wall.
Tuesday, September 13, 2011
Germany would be doing everyone a favor
Posted at the Financial Times on Sept. 13, 2011 as a comment on "Time has come for politicians to back the ECB" by Martin Wolf: