Friday, November 16, 2012
Goodbye euro, hello recession
14 November 2012Die Zeit Hamburg
The 18th century architect Balthasar Neumann, once portrayed on German 50 mark notes, surrounded by characters from other former national currencies.
What would happen if Germany left the euro? Economist Gustav Horn of the Hans-Böckler Foundation, which has close ties to trade unions, speculates on what would happen in the days following a German exit from the euro – and on what Germany's most popular euro-critic, Thilo Sarrazin, might also say. Excerpts.
A what-if: What would happen if Germany were to leave the euro, as the investor George Soros is calling for?
Let’s say that, by a two-thirds majority, the German Parliament votes to leave the euro and reintroduce the German mark. Only the Greens vote against it. The exchange rate is set at one to one. The Bundesbank president leaves the ECB’s Governing Council with immediate effect.
The financial and foreign exchange markets are the first to react to Germany’s decampment. From the remainder of the monetary union, a great amount of liquidity flows into Germany. The new currency abruptly appreciates by 50 percent against the euro, and one mark now costs 1.50 euros.
The assets invested in Germany lose – in euro terms – much of their value. At the same time, the value of German state guarantees for the euro rescue fund sharply decreases. Initially, the risks to the public finances recede.
Around 200 German economists celebrate Germany's regained freedom. Thilo Sarrazin goes on a popular TV political talk show hosted by Günther Jauch to explain that Germany does not need the euro.
In the rest of the eurozone, the financial market are rocked by turmoil. The ECB, which has relocated its headquarters from Frankfurt to Paris immediately after Germany’s withdrawal, announces unlimited bond purchases, which allows the ECB bankers swiftly to reassure the stock markets.
At the same time, they will pay back Germany’s deposits in the ESM with printed euros. Calculated in marks, these meanwhile have lost a third of their value. The Bundesbank therefore takes some hefty losses, and German government debt balloons accordingly.
After a few weeks of relief over the escape from the crisis, several major car manufacturers declare that their sales figures in the new eurozone have nose-dived. German cars have become too expensive for the other Europeans. The automakers bring in short-time work and cut jobs.
A little later, the Confederation of Employers declares that Germany's economy is no longer competitive and urges wage restraint on the German unions. After one quarter, the Federal Statistical Office announces that Germany's current balance of payments surplus has halved because exports to the remaining eurozone have plunged. Thilo Sarrazin goes on the popular TV political talk show hosted by Anne Will to say: “Germany is doing well even without the euro. Its revenues have not dropped.”
In the rest of the eurozone, the countries in crisis gain more time to build up their savings. The other countries also increase their deposits in the ESM bailout fund to compensate for the absence of Germany.
The fiscal pact is suspended and replaced by a stability pact. This commits the countries to comply with an inflation target in order to avoid current account imbalances. The ESM is transformed into a European Monetary Fund (EMF). Countries that record large current account surpluses or deficits must cede a portion of their income tax revenue to the EMF.
Germany's current account balance has now evened out, thanks to the sharp decline in exports. Germany's economy is going through a sharp slump. The export industry finds itself in recession and pushes though sweeping job cuts. Domestically, the economy, hit by higher interest rates, also begins to lose momentum. In the remainder of the eurozone, however, the economic situation gradually stabilises. Thilo Sarrazin goes on the political talk show hosted by Frank Plasberg to say: “That has nothing to do with the euro.”
Volkswagen announces that it is shifting much of its car production to the remainder of the eurozone, saying “The German market is too small for our production, and we need greater exchange-rate security.” The value of VW stock jumps steeply. BMW and Daimler confirm similar plans. Against a backdrop of falling tax revenues, the debt brake forces job cuts in the public sector. Wage negotiations lead to an increase of just half a percent.
A year after leaving the euro, Germany has landed in a deep recession with a sharp rise in unemployment. Meanwhile, domestic demand is plummeting, as the low wage increases and the job cuts are now pushing down consumption. At the same time, more and more companies are announcing job relocations to the eurozone, the U.S. or Asia.
The Frankfurt Stock Exchange has lost much of its significance; the Paris Stock Exchange, in contrast, has gained in influence. Financial capital is flowing out of Germany. The rise in the value of the mark has come to a standstill.
The eurozone has now stabilised and shows at least weak economic growth. In particular, exports from the crisis countries – to Germany, above all – have risen. VW is planning to expand its facilities in Spain and is contemplating building another plant in Greece.
After two years, the growth in the remaining eurozone is once again significantly higher than two percent. The economic output in Germany, however, has stagnated, and unemployment stays high.
Around 200 German economists publish a dramatic appeal for Germany to increase its competitiveness. The German labour market is too inflexible, the wages too high and the benefits far too lavish. Two years after exiting from the euro, write the economists, Greece and Spain are on the go, while the German economy is limping.
Thilo Sarrazin goes on the TV political show hosted by Maybrit Illner to explain, “I never recommended getting out of the eurozone, but you will allow that I did have the right to say that we do not need the euro.”