Should Germany Dump the Euro?


Put these babies back into circulation, Fritz!

Michael Sivy (a Chartered Financial Analyst, FWIW) makes an interesting counterintuitive case in Time: that Germany, the only still-breathing country left in the euro system, should bail on the transnational currency. 

[I]f Germany were the one to leave, the euro would be the currency that falls in value, relative to Germany's new national currency and also to the dollar. The weaker European countries would get to keep the euro but still get the devaluation they need, which would reduce their labor costs far less painfully than through wage cuts. In addition, the value of their outstanding debt would decline along with the value of the euro, and they would be more likely to be able to make payments on that debt and avoid defaulting.

The standard argument against this solution is that as the value of euro-denominated debt falls along with the euro, banks in many countries would have big losses on bonds they own. But losses from falling bond prices are less disruptive than sudden defaults. And the fact is that those losses have really already occurred, they just haven't been acknowledged. The goal at this point is not so much to prevent losses, but to find a way for banks and other international financial institutions to absorb their losses without triggering sudden bank failures or a global financial crisis. In short, it's not about the money, it's about stability. And for once, it may be easier to maintain order without the help of Germany.

The standard argument for breaking up the Eurozone is that the moribund PIIGS countries should depart the common currency, go back to their old money systems, and inflate to their hearts' content, thus sparing Greeks and Spaniards such nightmarish indignities as having to work for a living. The appeal of Sivy's plan (which seems to be derived from Daily Telegraph columnist Roger Bootle) is that it would be funny. It would also be just, as the departure of Germany, presumably followed by France and the rest of the salvageable economies, would leave the euro to become the latter-day escudo it deserves to be: a valueless and physically unattractive monument to the hubris of bureaucrats who valued an economic "system" over any actual economies. 

German tourists: sandals-and-socks-shod bane of the Mediterranean.

The problem is that it's hard to see how this would solve the problem. Unless India and China have vanished from the earth recently, Germany's remarkably low wages are a feature, not a bug. And Greece is a paradox that has to be experienced, preferably (though in ever-lower numbers) by fat, pasty German tourists: a crappy third-world country that is dependent on tourism, but where everything is shockingly overpriced. The idea of breaking up the Eurozone is to let the responsible countries reap the rewards of their good behavior while letting the deadbeats do what has traditionally best for them: devaluing their own currencies and screwing their creditors. 

No matter who leaves the euro, the good news is that what was just a year ago considered madness is now conventional wisdom: The euro must be destroyed. 

Now I'm off to pitch my spec script for Princess Diaries 3: Sovereign Default: Hector Elizondo has been gravely injured protecting Julie Andrews from an anti-austerity riot, the country may have to go off the euro and back to the Genovian florin, and Princess Mia has just one week to save the kingdom by marrying a gruff central banker with a heart of gold played by Peter Dinklage. (I hate to re-use Hollywood's oldest jape, but in person Anne Hathaway really is much shorter than you think.) Maybe not box office gold, but at least box office fiat currency.