Skip to main content

Could Germany save eurozone by leaving it?

By Clyde Prestowitz and John Prout, Special to CNN
May 30, 2012 -- Updated 2350 GMT (0750 HKT)
Clyde Prestowitz and John Prout say that if Germany returned to the deutsche mark, other eurozone nations would benefit
Clyde Prestowitz and John Prout say that if Germany returned to the deutsche mark, other eurozone nations would benefit
STORY HIGHLIGHTS
  • Writers: To salvage eurozone, Germany, not Greece, should withdraw
  • They say Germany is very competitive; eurozone countries unable to catch up
  • They say Germany could improve its currency valuation, stop preventing euro bonds
  • Writers: Euro bonds could help with euro rescue; pain for Germany would be temporary

Editor's note: Clyde Prestowitz writes on globalization for ForeignPolicy.com and is president of the Economic Strategy Institute. John Prout is the former Paris-based treasurer of Credit Commercial de France.

(CNN) -- With Greece probably heading for an exit from the euro, the European and global economies may be facing disaster. However, there is still time for European leaders to reverse this destructive dynamic with one simple, outside-the-box solution: Instead of pushing Greece out of the eurozone, Germany should voluntarily withdraw and reissue its beloved deutsche mark.

The analysis of the problems of the euro and the European Union has long been upside down, focused on the debt and competitive weaknesses of the so-called peripheral countries (Greece, Italy, Spain, Portugal and Ireland) and especially of Greece. But issues of debt and competitiveness existed and were dealt with rather easily long before the euro arrived, through periodic devaluation of the currencies of the less-competitive countries against those of the more competitive countries, and especially against the deutsche mark.

The problem now is not the weaknesses of the periphery, it's the excessive competitive strength of Germany. Not only is the German economy inherently strong as a result of the high productivity of its workforce, its exports have added competitiveness because the euro is undervalued as far as Germany is concerned. Because it is the common currency of the eurozone countries, the value of the euro reflects the average of their combined competitiveness. But Germany's competitiveness is far above the average. So, for Germany, the euro is too weak. This is why Germany has been accumulating chronic trade surpluses on the scale of the Chinese.

As long as the rest of the eurozone countries are locked in the euro with Germany, the only way for them to become more competitive is to become, well, more Germanic, through austerity measures that cut government spending, reduce welfare budgets, cut wages and raise unemployment. This is, of course, what they have been doing for the past two years.

The aim has been to achieve export-led growth. But because Germany is so hypercompetitive and has been unwilling to stimulate its own economy to achieve higher consumption, its eurozone partners have not been able to increase exports to it and have had thus to compete with it in exporting to the likes of China and the United States.

That hasn't been working very well, and now the consequences of grinding austerity are beginning to tear the political and social fabric even of countries like the Netherlands, which until quite recently were enthusiastically echoing the German call for austerity and growth led by trade with countries outside the EU.

But it is not clear that the eurozone can sustain the social and political pain of austerity long enough and on the scale necessary to eventually achieve competitive parity with Germany.

The alternative is for Germany to revert to the deutsche mark. That would immediately result in appreciation of the German currency and competitive devaluation of the euro for the remaining eurozone countries. Germany would tend to buy more while selling less, and vice versa for the rest of the eurozone. The extra consumption that Germany will not deliver via stimulus policies would be automatically delivered by currency revaluation.

The single most essential element of a euro rescue has always been one form or another of a euro bond guaranteed jointly by all eurozone member countries. What the U.S. Treasury bond is to the U.S. economy, the euro bond would be to the EU. The main obstacle has been Germany's insistence that it would not guarantee payments on bonds for the benefit of other European countries.

German reversion to the deutsche mark would remove this obstacle, and with no further German opposition, the remainder of the eurozone could move ahead to establish a true euro bond, along with a unified treasury function to match the unified banking function of the European Central Bank.

Some may object that German backing would still be required for the eurozone and a euro bond to be viable. That is correct, and Germany would indeed remain committed to the eurozone for a number of reasons. It would need the eurozone more than ever to buy its increasingly expensive exports. The Bundesbank (Germany's central bank) would undoubtedly sell deutsche marks against euros to mitigate appreciation, and the resulting accumulation of euros would be invested in the new euro bonds. This in turn might inspire the European Central Bank to initiate quantitative easing programs that would stimulate the entire EU economy.

The cost to Germany of saving Europe will be a hit to exports and perhaps a temporary rise in unemployment, but a return to the deutsche mark would attract a flood of capital to Germany and thereby spur investment while holding interest rates and inflation down.

The real question is whether the cost of slower export growth and increased unemployment is less than that of paying for Greece, then Spain, etc. Somehow, the "unknown" risks of a German exit from the euro appear more manageable, more quantifiable and in some ways more familiar a challenge than endless austerity, social unrest and political polarization.

The opinions expressed in this commentary are solely those of Clyde Prestowitz and John Prout.

ADVERTISEMENT
Part of complete coverage on
September 16, 2014 -- Updated 1305 GMT (2105 HKT)
LZ Granderson says Congress has rebuked the NFL on domestic violence issue, but why not a federal judge?
September 16, 2014 -- Updated 1149 GMT (1949 HKT)
Mel Robbins says the only person you can legally hit in the United States is a child. That's wrong.
September 15, 2014 -- Updated 1723 GMT (0123 HKT)
Eric Liu says seeing many friends fight so hard for same-sex marriage rights made him appreciate marriage.
September 15, 2014 -- Updated 1938 GMT (0338 HKT)
SEATTLE, WA - SEPTEMBER 04: NFL commissioner Roger Goodell walks the sidelines prior to the game between the Seattle Seahawks and the Green Bay Packers at CenturyLink Field on September 4, 2014 in Seattle, Washington. (Photo by Otto Greule Jr/Getty Images)
Martha Pease says the NFL commissioner shouldn't be judge and jury on player wrongdoing.
September 16, 2014 -- Updated 1315 GMT (2115 HKT)
It's time for a much needed public reckoning over U.S. use of torture, argues Donald P. Gregg.
September 16, 2014 -- Updated 1225 GMT (2025 HKT)
Peter Bergen says UK officials know the identity of the man who killed U.S. journalists and a British aid worker.
September 16, 2014 -- Updated 1128 GMT (1928 HKT)
Joe Torre and Esta Soler say much has been achieved since a landmark anti-violence law was passed.
September 12, 2014 -- Updated 2055 GMT (0455 HKT)
David Wheeler wonders: If Scotland votes to secede, can America take its place and rejoin England?
September 16, 2014 -- Updated 1241 GMT (2041 HKT)
Jane Stoever: Society must grapple with a culture in which 1 in 3 teen girls and women suffer partner violence.
September 12, 2014 -- Updated 2036 GMT (0436 HKT)
World-famous physicist Stephen Hawking recently said the world as we know it could be obliterated instantaneously. Meg Urry says fear not.
September 12, 2014 -- Updated 2211 GMT (0611 HKT)
Bill Clinton's speech accepting the Democratic nomination for president in 1992 went through 22 drafts. But he always insisted on including a call to service.
September 12, 2014 -- Updated 2218 GMT (0618 HKT)
Joe Amon asks: What turns a few cases of disease into thousands?
September 11, 2014 -- Updated 1721 GMT (0121 HKT)
Sally Kohn says bombing ISIS will worsen instability in Iraq and strengthen radical ideology in terrorist groups.
September 16, 2014 -- Updated 2231 GMT (0631 HKT)
Analysts weigh in on the president's plans for addressing the threat posed by the Islamic State of Iraq and Syria.
September 11, 2014 -- Updated 1327 GMT (2127 HKT)
Artist Prune Nourry's project reinterprets the terracotta warriors in an exhibition about gender preference in China.
September 10, 2014 -- Updated 1336 GMT (2136 HKT)
The Apple Watch is on its way. Jeff Yang asks: Are we ready to embrace wearables technology at last?
ADVERTISEMENT