It’s up to Germany to save the European Union - not by endless, unfair bail-outs of the south, but by leaving the euro and letting it weaken
As the European economic crisis continues to intensify, policy makers are faced with the need to take ever more extreme measures to prevent a financial cataclysm. European Union leaders are meeting in Brussels to discuss the latest proposals: centralising banking regulation and putting limits on national spending and borrowing.
A better, bolder and, until now, almost inconceivable solution is for Germany to reintroduce the mark, which would cause the euro to immediately decline in value. Such a devaluation would give troubled economies, especially those of Greece, Italy and Spain, the financial flexibility they need to stabilise themselves.
Although repeated currency devaluations are not the path to prosperity, a weaker euro would give a boost in competitiveness to all members of the monetary union, including France and the Netherlands, which is why they might very well choose to remain in it even if Germany were to gradually leave. A resurgence of manufacturing would also allow the vast unemployment rolls of Spain, Portugal, Greece and other countries to begin to decline. The tremendous loss of human capital and human dignity we are witnessing would ease.
Reintroducing the mark would not solve the debt burdens of southern European countries, but it would give them needed breathing room to restructure their economies, reform labour markets, collect more taxes and reassure investors. The ability of the southern European countries to service their sovereign debt would immediately improve, helping to end the slow-burning debt and banking crises that have engulfed the continent since 2008.
A weaker euro would also encourage greater foreign investment. For example, Spain’s distressed real estate market would become far more attractive. Rising capital flows would also assuage investors worried about the unrealised losses on property loans held by Spanish banks.
Unlike Greece – whose exit from the euro would require either a redenomination or outright repudiation of its euro-denominated debts (with potentially catastrophic financial consequences) – Germany would be able to reintroduce the mark without altering the form of any current asset, liability or contract. For example, euros deposited in German banks would remain euro-denominated. So would outstanding German sovereign and corporate debt now denominated in euros.
A German phase-out of the euro could occur gradually, by first issuing government bonds denominated in marks, followed by corporate securities. Germany could establish a transition period before the mark would be used on a daily basis.
Germany’s industrial base would unquestionably endure hardship in the transition to a stronger currency. In the early years, Germany could use a variety of measures to manage the rate of appreciation of the mark, much as China or Switzerland do today. Over time, the industrial base of Germany would adapt and move forward.
Critics will say our plan invites financial chaos. To the contrary: capital would flow from “safe haven” assets toward more productive investments, boosting global growth prospects. Resources now dedicated to the alphabet soup of bail-out programmes and financial guarantees could be redirected. Besides, the current situation is hardly a model of stability.
While most observers, including German policy makers, believe Germany will do what is necessary to save the euro, it is more important to save the European Union, which is older, larger and more significant than the euro zone. Continuing on the current trajectory will most likely entail more bail-outs, more guarantees and ultimately dramatic sovereign defaults or enormous fiscal transfers. That would mean a continued loss of human capital and dignity for southern Europe and a nightmare of an open-ended commitment of trillions of euros on the part of Germany.
Germany’s historic responsibility is at odds with present-day reality. The only way for the euro to survive is for Germany to put every bit of its financial strength at the service of the euro – an outcome that would be deeply unfair to ordinary Germans – and even then it’s not clear the euro zone could be salvaged in its current form. Given what has played out in Greece, for German leaders to provide further financial assurances to the periphery would be unconscionable.
Like Britain, Germany can be part of the European Union without being part of the euro. What is essential is the preservation of the European Union’s greatest accomplishment: the free movement of labour, goods and services. Germany alone has the ability to end a dysfunctional monetary union and to bring prosperity back to Europe.
Griffin is the founder and chief executive of Citadel, an investment company. Kashyap is a professor of economics and finance at the University of Chicago Booth School of Business.
The New York Times News Service