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Sunday, May 19, 2013 10:47 AM

Folly of Preserving the Euro at All Costs; Should France Lead Breakup of Euro?

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The Local, a website with German news in English reports Economists warn against German euro exit.

“Even a believable rumour that Germany would exit the euro would result in a massive capital flight from the countries of southern Europe to Germany.”

The southern European banking system would then collapse, bringing down entire economies with them, Schmieding said.

The consequences for Germany would be severe. The crisis countries could no longer pay back their debt and Germany’s important export markets would drop off. On top of that German taxpayers would be burdened with immense costs, he said.

On the other hand if you add up the expected growth advantages of euro membership between 2013 and 2025 there would be a profit of nearly €1.2 trillion – or about half Germany’s gross domestic product in a year.

Thomas Straubhaar of the Hamburg HWWI economic institute thinks a return to the D-mark would be “a worst possible scenario.”

“An upward valuation of the D-mark and an accompanying devaluation of the euro would result in a massive debt forgiveness of all other euro-countries – with the costs of that picked up by Germany. This could lead to a currency war and the end of monetary stability.”

Complete Rubbish

As is typically the case in such articles, the eurozone proponents ignore the costs of staying in the euro and overly trump up the benefits. The article perpetuates the myth that German taxpayers will suffer the consequences of a breakup, but suffer no costs if the eurozone stays intact.

Nothing could be further from the truth. As I have pointed out on many occasions, Germany is going to pay a steep price either way, and so will Europe.

The cost to Europe on the current path will be another decade of Southern European depression, resentment, and capital controls. Somewhere along the line, citizens in one or more countries will decide they have had enough, and vote to exit the Euro anyway.

It is a huge mistake to believe Germany can impose its will on Southern Europe forever while not paying through the nose with eurobonds or other transfer mechanisms. If Germany returns to the D-mark, it will get paid back in cheaper Euros, but it least its stands a chance of getting paid back.

On the other hand, target-2 imbalances are so great the cost of a destructive piecemeal splintering of the eurozone coupled with outright default, will be much higher.

Many economists don't see this simply because they do not want to.   

Should France Lead Breakup of Euro?

I have argued that the best way to breakup the eurzone would be a German exit. Politically speaking that could be doable once Merkel is gone. But then aagin, perhaps not.

The problem is Germany has been the biggest beneficiary of this failed experiment, and will not give up those benefits easily, even if mathematically it must eventually (and destructively) happen anyway.

In a Bloomberg column, authors Brigitte Granville, Hans-Olaf Henkel, and Stefan Kawalec argue France Must Lead Breakup of Euro
Many observers concede that the euro was a mistake but think there’s no going back. They reckon that dissolving the monetary union would lead to economic chaos, first in Europe, and then around the world. European leaders are afraid that backtracking on the euro project would also be a lethal blow to the larger cause of European integration and could be the beginning of the end of the EU and the single market. These fears give rise to what we regard as the disastrous strategy of defending the euro at all costs.

Although a controlled segmentation of the euro system through the exit of the most competitive countries would actually be the most effective way to help the deficit countries, it could still be seen as a decision by the strong to abandon the weak. Europe’s history makes it difficult for Germany’s leaders to initiate such a move.
Protecting France

The deficit countries, struggling with recession and internal political divisions, and trying to get better terms for assistance from the rest of the EU, might be afraid of worsening their negotiating position by taking the lead. EU institutions, such as the European Commission and the ECB, couldn’t propose the solution we advocate.

French leadership in advancing this idea might work -- and could be the only thing that will. France has played the leading role in EU integration for more than 50 years. The euro is very much a French product.

In 1990, President Francois Mitterrand won Chancellor Helmut Kohl’s support for the single European currency in exchange for France’s acceptance of German unification. Persuading Germany to give up the deutsche mark, whose strength had given the Bundesbank de facto control of monetary policy throughout Europe, was a remarkable French success -- or so France believed.

The euro was seen as the ultimate underpinning for the edifice of European integration. The financial crisis and its aftermath have shown that the euro instead has the potential to destroy the whole project. It impedes the reforms necessary to restore France’s fading international competitiveness. Retaining the present euro system whatever the cost will cripple the French economy, undo French social cohesion, and weaken France’s position in Europe and the world.

As Europe’s founding father, only France has the standing to advocate a strategy of dismantling the euro system for the sake of the European Union. The alternative is economic failure, deeper divisions and bitter resentments among Europe’s nations, putting the most valuable achievements of European integration at risk. One way or another, Europe’s house will be divided.

The question is how much, or how little, this division will sweep away. Splitting the euro in the way we advocate is vital to the survival of the European idea.

(Brigitte Granville is a professor of international economics and economic policy in the School of Business and Management at Queen Mary University of London. Hans-Olaf Henkel is a professor of international management at the University of Mannheim and a former president of the Federation of German Industries. Stefan Kawalec is chief executive officer of Capital Strategy and a former vice minister of finance in Poland. The authors are signatories of the European Solidarity Manifesto.

Read Part One - Save Europe: Split the Euro. The opinions expressed are their own.)
The authors present an interesting viewpoint, well worth a closer look.

Mike "Mish" Shedlock

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