What if Germany were forced out of the euro?

2nd July 2012

by Anthony Harrington

The Summit of European leaders on Thursday and Friday 28th and 29th of June takes place against a backdrop of German intransigence to the one idea that France, Italy and Spain, and probably Portugal, Greece and Ireland as well, feel can save the EU, namely joint guarantees for euro bonds. Germany is also vehemently opposed to the new French President Francoise Hollande's other idea, a joint guarantee of EU bank deposits to stop the mounting capital flight from troubled peripheral states – a flight that is itself ratcheting up bank solvency issues. With Germany being seen as the odd one out GaveKal analyst Anatole Katletsky argues that a staggering but logical outcome of the Summit might well be that Germany is identifed as "the problem" and asked to fall into line or to leave.

If this sounds far fetched, remember that there are many in the peripheral states who feel that Germany has profited greatly from having a currency that is much weaker than the Deutschemark would have been. It's export industries are at multi year highs in terms of earnings and profitability. Also, Germany cannot shrug off responsibility, in their eyes at least, for providing much of the credit that allowed the likes of Spain to run up huge debts in the first place. There is also the fact that it is simply logical, given that Germany wants closer fiscal union, for the others to ask Germany to recognise that the big picture requires fiscal transfers from the strong core nations to the peripheral nations, in order to restore peripheral economies to health. Again, German intransigence, which is all we are likely to get from the present summit, is going to continue to be deeply frustrating for most of Germany's european partners. As I pointed out in a recent blog, Austria, the Netherlands and Finland are just as opposed as Germany to the introduction of euro bonds, but they do not control the ECB, and Germany itself, as Kaletsky points out, has just two seats on the ECB. From this it follows that if push comes to shove and the peripheral nations combine, they can force through policies for the ECB that Germany will absolutely hate and that the German public would riot over.

As Kaletsky puts it, the debtor countries, faced with a decade or more of grinding austerty and deepening debt (since all the austerity programme is achieving is to diminish tax revenues and push governments still more deeply into debt) could elect instead to turn the tables on Germany, since Germany is clearly the odd man out "and the chief obstacle to any political resolution of the euro crisis".

"It is Germany that refuses even to talk about mutual debt and banking guarantees. It is Germany that insists on self-defeating fiscal austerity and intolerable political conditions for the debtor countries. It is Germany that vetoes quantitative easing by the ECB, which could cap bond yields and relieve deflationary debt traps. And it is Germany that makes the other euro countries uncompetitive, discourages devaluation of the euro against the dollar and refuses even to relax its own domestic fiscal policies to reduce its trade surplus and support growth."

Looked at in this light, it is not impossible to imagine a club of peripheral and secondary EU states saying to Germany, "You'd better leave, we'll be better without you."

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