Whenever things get really bad in the Eurozone debt crisis, people start to talk about countries leaving, abandoning the euro and readopting former national currencies. For a while it was Greece – Greece should leave the Eurozone, there would be no need for internal devaluation if Greece went back to the Drachma, the Eurozone wouldn’t have to bail out the profligate Greeks if they would simply leave of their own accord. As the crisis has spread, this reasoning has become less relevant, because Greece leaving the Eurozone would not solve anything if Portugal brought it down in their wake, nor would the departure of any small, geographically peripheral members if Italy were to become insolvent. Now the discussion has turned to the full-fledged disintegration of the Eurozone, rather than just the departure of the ‘trouble-makers’. Interestingly though, far less commentary, over the course of the debt crisis, has raised the possibility of Germany leaving the Eurozone. The argument is there. If Germany left the Eurozone, the ECB could lower interest rates dramatically, the value of the single currency would fall and struggling member states could claw back some competitiveness. Is this the elusive solution, then, to the Eurozone debt crisis?
No, of course this isn’t the solution. Just like Greece alone leaving wouldn’t solve anything, Germany’s departure would still leave states like the Netherlands and Finland that, due to their relative prosperity within the Eurozone, require higher interest rates than peripheral states to combat inflation and so would keep the euro’s value high. Not to mention the fact that, just as the possibility to devalue national currencies used to provide a short-term fix to problems of competitiveness, so too would the euro’s devaluation be only a short-term fix. It would also seem an unfair tradeoff to have accepted German money for Eurozone bailouts and then kick them into the cold. In that case, Germany would be left with a fast appreciating D-Mark and the costs to business of currency fluctuations in the European market, where 60% of all German exports go. So if neither Greece, nor Greece and Portugal, nor Germany, nor Germany and the Netherlands leaving the Eurozone is the solution, why would everyone leaving be the soution?
When Eurozone watchers discuss dissolution as a possibility, they mean that political deadlock could eventually lead Europe down that path, not that it is a feasible or acceptable solution to the current debt crisis. From an economic standpoint, this is not a solution, for a number of reasons. For instance, if a country were to leave the Eurozone, their debt obligations would not be wiped clean. Instead, they would have to transfer existing debt that is denominated in euros into whatever national currency they have readopted. If debt servicing and access to liquidity are problems now, it is questionable whether increasing costs and decreasing market confidence are the respective solutions.
So perhaps we are not meant to see the breakup of the Eurozone as a solution for those states that are near to or in default, but as a solution for those that are no longer willing or able to fund the bailouts that sustain the currency union. An interesting example in this regard is the case of France. As the bailout bill adds up, so too does the pressure on French government bonds, with yields between French and German bonds moving further apart in recent weeks. A case could be made, then, for the benefits to France of Eurozone dissolution and the resultant end of otherwise seemingly endless bailouts. With regard to the economic argument, though, France has a relatively closed economy with rigid labour markets and questionable growth potential, which suggests that high interest rates would be necessary to sustain the value of the new franc near that of the euro, at least in the short-term. In the absence of this, French purchasing power would suffer and the already squeezed middle would see more of their incomes go on foreign goods to which they have become accustomed over the course of the single market and the euro’s existence.
This discussion does simplify matters, but to go into greater detail would only be to make more apparent the point that is already clear – breakup of the Eurozone is an option only insofar as it is a knowable risk. It will surely not result from any calculation, but rather from a political mishap that, though they are doing their best to lay the groundwork, I expect Europe’s leaders to avoid in the end.