Is a break-up of the Eurozone the answer?

28th April 2010

Are Greece, Portugal and Spain at risk of being forced out of the euro? That is, after all, the question that everyone wants answered.

And does the whole situation with Greece have the potential to see Germany heading for the exit doors, leaving the Latin countries to run a much weakened Union? 

It's serious stuff and too close to homes for many. But it's clear that more and more commentators are seriously pondering a split in the Eurozone. Not only as a possibility, but also as the solution.

One poster on the FT site for example claims this would provide the exporters a stronger currency, through which consumption would increase and the overdependency on exports reduce.

What is clear is that a basic Germany versus Greece argument has quickly spiraled into a much wider debate on the pros and cons of European union as a whole – an issue that has always been divisive on these shores.

A divided Union

In a piece on, writer Martin Wolf poses the idea of Germany leaving the union – probably with the Netherlands and Austria in tow – although admits this is unlikely to happen.

"This would give Germany a very strong currency indeed – indeed a huge terms of trade gain," he adds.

"German exporters would probably survive and German people would find going on holiday much cheaper. It would surely be very popular in Germany overall.

"Meanwhile, the other members would have a much weaker currency (with a big aggregate current account deficit) and some possibility of exporting their way out of their difficulties, once again.

"As the central country, France would preside over a new Latin Monetary Union. The fiscal stability of the rump euro might even be stronger than in the old one, because economies should start growing again."

Reaction to this – particularly regarding the popularity of scrapping the euro with Germany – is certainly mixed.

"Just how popular a departure from the euro would be in Germany is questionable," writes one poster.

"In spite of having taken some time to adjust to a currency with a new name and a different value of units, the euro is generally accepted.

Change upon change

"What would be found hard to stomach is yet another such change, combined with the introduction of a floating exchange rate with the most immediate trade partners.

"The extra cost and loss of competitiveness would be an extraordinary blow, combined with the extra cost of covering against exchange rate risk."

This commentator believes the euro has fulfilled its function of protecting members against extreme currency swings very well over the past two years and splitting the area into a Germanic and a Latin euro would have left everybody worse off:

"The Germanic currency would have come under pressure – the NL-DE-AU area has seen its fair share of financial sector disruption over that period," they write.

"The Latin currency would just have been a reproduction of what is happening now, only with a French government being unwilling to pay for the delinquency of the Mediterranean members. In fact, a further break-up would have been waiting behind the stage."

Be careful what you wish for…

Other bloggers suggest the current status quo actually suits the Germans quite well and the country should be careful what it wishes for.

This mainly focuses on the currency being held artificially low by the southern states, suiting Germany's export-led economy.

"Since Germany is (almost uniquely) dependent on an export surplus in order to balance her books this inevitably means she will not be able to sustain her economy in the future," writes one commentator.

"Until Germany becomes a more self sustaining economy, i.e. grow primarily off increases in her own domestic demand, then her economy will not only remain excessively vulnerable but it will continue to be a strongly destabilising factor in the single currency area.

"Hollowing out European markets and then aiming to repeat the exercise in Asia is an unrealistic dream."

Fiscally unviable

This writer believes any moves to make the euro more sustainable are all on German recognition that running a permanent structural trade surplus with eurozone partners in the context of a permanently deflationary fiscal and monetary regime is just no longer an option.

In contrast to these views, several posters believe a split currency is exactly what the continent needs.

"It would not be without problems – a Germany with the DMark would have a reduced export surplus, for example – but I think that each of two new common currencies would be more stable than the current euro, since they would be shared by less dissimilar economies," writes one.

Another posits that Chancellor Helmut Kohl always wanted to have a more narrow monetary union among the core members of Europe (Germany, France, Benelux) and if possible other parts of the German block (Austria, Denmark, Sweden, Finland, possibly Norway).

"Looking at this you can see that Herr Kohl wanted to have an EMU that is heavily tilted towards Nordic-Germanic Europe with only France being a Latin member of the club," they add.

"Club Med should have stayed out for its own benefit and maybe joined at a later stage. They are now paying the price for overestimating their abilities."

Another Greek tragedy on the cards?

This debate clearly has a way to run and it looks increasingly likely the Greek crisis will not be the last serious problem facing the eurozone.

Business Week recently quoted Kenneth Rogoff, a former chief economist at the IMF, as saying: "It's more likely than not that we'll need an IMF program in at least one more country in the euro area over the next two to three years."

er such circumstances, the eurozone's survival must be at stake and it is clearly anything but becoming the harmonious economic bloc for which its founders hoped.


2 thoughts on “Is a break-up of the Eurozone the answer?”

  1. Anonymous says:

    I feel a bit sorry for the MPC. Many of them would clearly like to raise rates but they have been told not to by the government, whose political objectives (no short term crashes in the housing market etc) are in total opposition to the Bank’s.
    Facing in two directions at once is never easy, and it’s obvious that M. King is not finding it a comfortable experience.
    That said, I think the Bank will have to do something soon. If the ECB moves rates up, that will put a lot of pressure on the Pound, which, as we have seen, does little for exports but a lot for import costs.

  2. Ian_jones says:

    The MPC is inflating away debt, there is no other reason. They are using every ounce of the MPC’s credibility to try and get the price level to a point where debt is not excessive as a proportion of general prices and keeping interest rates low to let debtors pay down debt. The question is do they understand the end result will be much higher interest rates and inflation, in other words the 1970’s returned? I believe they are just hoping something like a war comes along to bail them out of the history books.

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