Money: Deutschmark redux
14 December 2010
Frankfurter Allgemeine Sonntagszeitung
More and more Germans see leaving Euroland and returning to the long-lost Deutschmark as the preferred way out of the crisis. That is a highly risky but ultimately feasible option, say some economists.
Most Germans now agree with a sigh: if only we’d stuck to the Deutschmark! 57% of the population feel we’d have been better off never adopting the euro. And more than one third wish they could have their D-Mark back right now.
And they’re not only nostalgic die-hards. More and more coolly calculating Germans are joining the ranks of the eurosceptics: economists, executives, entrepreneurs. Volker Nitsch, a professor at the Technical University of Darmstadt, who has researched the collapse of monetary unions, says, “I’d put the probability of a country opting out of the euro sometime soon at about 20%.”
While politicians are debating, at the outside, how many more rescue packages we can shoulder, the electorate is already way ahead of them. What’s missing in the debate is facts – and protagonists that can be taken seriously. Thus far only foreigners have dared to speculate publicly about the return of the D-Mark. US star economist Barry Eichengreen, for instance, recently said Germany is one of the few EU countries that could reintroduce its old currency without triggering a serious financial crisis on the home front. It is high time we put fear aside and soberly assessed our options. What would returning to the Mark entail?
Surmountable technical obstacles
For starters, the question is whether Germany could do that in the first place. Volker Nitsch grins at that one: “No problem. Plenty of treaties have already been broken.” Opting out would merely require a declaration to that effect by parliament or the head of government.
The technical hurdles are likewise surmountable. To introduce a new currency, you need a central note-issuing bank and mints to print the new banknotes and stamp the new coins. London economist Roger Bootle estimates that the purely technical costs of the switchover would come to at most 2.5% of gross domestic product. For Germany’s purposes, that means roughly €60 billion – a lavish sum indeed, which would actually exceed the amounts Germany has already pledged to Ireland and Greece to date.
But the really crucial question is a little more complicated: namely, the economic consequences of leaving the eurozone.
A lot depends on where the exchange rate goes. Like as not, a new mark would appreciate at the outset – by up to 50% for a brief spell. And that would not leave exports unaffected: the price of German goods and machines would markedly increase abroad. What’s more, exports to euro countries would decline in the long run. History shows that the dissolution of a monetary union always shrinks trade relations between one-time partners.
The question is, would that really be such an awful thing. First of all, German exports wouldn’t necessarily fall off permanently. If the currency is strong, raw materials Germany needs and procures mainly from abroad will be cheaper. So German products can be made and sold more cheaply. Second, exporting isn’t the only object of the economy. Currency appreciation would increase consumption, which would also give the economy a boost.
The end of the euro or the beginning of the worst financial crisis in history?
The real expense lies elsewhere. Unbeknownst to themselves, the Germans have huge assets abroad. Trusting that Euroland will hold together, insurance companies, banks and funds have invested heavily in other euro countries. Were a new German currency to increase in value, German holdings abroad would lose something like €158 billion in value, which corresponds to 7% of GDP. Now that would not go down well with German savers.
But how much will the euro cost us if we hang on? Well, if bigger countries cry out for help, then Germany might have to foot the bill for untold billions. One needn’t be a mathematical genius to figure out that at some point clinging to the euro simply won’t be worth it anymore. If only it weren’t for that big But: But what happens in the short term if Germany opts out of the euro? All the scenarios in circulation on that score concur: things will be turbulent.
Assuming that a new Deutschmark would appreciate and the euro without Germany would depreciate, there would probably be a run on assets abroad within the eurozone. The Greeks, Spanish and Irish would try to bring their money to Germany before it’s too late. Massive intervention would be needed to head them off at the pass: closing the banks, restricting movements of capital, maybe even closing the borders. That’s why Barry Eichengreen says a euro breakup would be “the mother of all financial crises”.
Monetary union still a question
Whether things would necessarily be that extreme is uncertain. But the fear of the economic impact of all that tumult is great – even greater at present than the fear of how much the euro is going to cost us yet. Nonetheless, economic historian Michael Bordo believes there is a point at which Germany itself would accept that risk: “If one of the core euro countries falls on hard times, that could induce the Germans to break the European treaties.”
Still, there would have to be political differences in the equation as well. Economists have learned one thing from their – as yet meagre – study of monetary unions, says Bordo: “Monetary unions are formed for political reasons, they are maintained for political reasons, and at some point they end for political reasons.”
Translated by Eric Rosencrantz