Tuesday, April 27, 2010

When will Germany leave the euro?

It will be hard for Southern Europe to leave the euro because this can only be done by simultaneous default and loss of market access (a future of grindingly balanced budgets, or Latin American economic policy). Their Ruritanian currencies would plummet against the euro (in which their debt is denominated). In the end, they will have to leave the euro, but it will be very ugly.

But what stops the North from leaving? And, in particular, Germany. The Germans never wanted to give up the Mark in the first place. The Neue Deutche Mark, issued by the Neue Bundesbank, would become its old self again: the hardest major currency in the world. Germany's debt would still be denominated in euro, which is no problem if the DM is strong, as of course it will be. No more membership in a club that has lost its prestige (a prestige due in no small part to the ECB's location in Frankfurt). Germany could politely ask the ECB (whatever is left of it) to move to Brussels (or Palermo). 

I'm not joking. Right now there are a lot of Germans (in Merkel's party) who are looking at Germany's aging demographics and debt trajectories and asking: "Why do we have to consolidate the rest of Europe onto our balance sheet? Why will we have to save and cut back while the southerners party on? We have barely enough for our retirement, but not enough for every Mediterranean family."

The WWII guilt thing is getting a bit tired when that entire German generation is dead and Germany has been a model European citizen for over half a century. I doubt that many young Germans have any interest in perpetual "friend payments" to countries that have no self discipline and don't like Germans.

So it may be in everyone's interest to call a halt to monetary union. But what a mess! This unravelling will be much worse than getting out of the gold standard because that was an "gentleman's agreement", not a contract, and they didn't have entitlements in 1933.

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