The possibility of a “Grexit” -- or Greek exit from the eurozone -- has dominated headlines in recent months, as round-the-clock negotiations between Greece and its international creditors over a new bailout deal shed doubt on Greece’s future in the monetary union. Many eurozone leaders, particularly in Germany, welcomed the prospect.
But some economists say proponents of a “Grexit” have it all wrong: If one country should leave the eurozone, they argue, it is Germany.
These economists’ basic premise is that Europe’s depressed economies, which include not just Greece, but Spain, Portugal, Ireland and Italy, would benefit tremendously from a cheaper currency. Devaluing the euro would help boost their exports and even spur domestic spending, as moderate price inflation would prompt consumers to lock in deals at current prices. But currently these mostly southern European countries are stuck with a currency value that is boosted by the inclusion of Germany and other wealthier European countries. High investor demand for a currency that includes the German juggernaut keeps the euro’s value relatively high.
A German departure from the eurozone and return to the deutsche mark would reduce the euro’s value dramatically, providing Europe’s weaker economies with the cheaper currency they need to restore growth and competitiveness. Princeton economist Ashoka Mody imagines that other wealthy European nations like the Netherlands, Belgium, Austria and Finland would leave as well, possibly joining Germany in a new union. Their departures would lower the value of the euro even more, which would further benefit the continent’s weaker economies.
Germany stands to gain from an exit as well, since the new deutsche mark would be worth substantially more than the euro, enabling German consumers to benefit from cheaper consumer goods.
“The disruption from a German exit would be minor,” Mody wrote in Bloomberg on Friday. “Because a deutsche mark would buy more goods and services in Europe (and in the rest of the world) than does a euro today, the Germans would become richer in one stroke.”
A German exit from the euro would make German exports less competitive, but Mody says that by depressing German consumer demand, Germany’s current trade surplus has been damaging to the world economy.
Former Federal Reserve chair Ben Bernanke made a similar argument about Germany’s trade surplus in a Friday blog post on the website of the Brooking Institution, where he is now a resident economist. Bernanke said Germany’s trade surplus and accompanying tight fiscal policies had depressed economic growth in the rest of Europe. He called for new eurozone rules against trade imbalances in order to force Germany to lower its trade surplus.
Notwithstanding these economists’ recommendations, Greece is still the country most likely to leave the eurozone. The International Monetary Fund has called the latest bailout deal unworkable, since it fails to restructure Greece’s unsustainably high debts and is overly optimistic about the economic performance Greece will be able to achieve in order to pay down those debts. That means Greece will continue to need more loans just to meet its obligations to creditors, and will be back at the negotiating table in a matter of months, or years at most.
Eurozone leaders resisted aiding Greece until the end of negotiations, and proposed a Greek departure at the last minute. They were only willing to assist Greece in exchange for the deepest austerity measures yet, including a fire-sale privatization of some of Greece’s state-owned assets. It is unlikely that the eurozone will have a greater political appetite to lend to Greece if the current loans-for-austerity deal breaks down. Short of additional funding and liquidity support for its banks, Greece will once again face a Grexit.
“My guess is that euro exit will still prove necessary,” Nobel Prize-winning economist Paul Krugman wrote in The New York Times on Monday. “And in any case it will be essential to write down much of Greece’s debt.”