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It's time for Germany to leave the eurozone

Wolfgang Schaeuble
German finance minister Wolfgang Schaeuble in Washington on April 16. REUTERS/Mike Theiler

Germany's finance minister, Wolfgang Schaeuble, has drawn opprobrium and praise in equal measure for his suggestion that Greece take a "time-out" from the eurozone.

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In proposing that Greece could be better off outside the euro, the irascible 72-year-old crossed a political rubicon: He confirmed that the single currency was "reversible" after all.

But with Schaeuble having broken the euro's biggest taboo, commentators have now suggested that it should be Schaeuble's Germany, rather than Greece, that should take the plunge and ditch the euro.

Figures as esteemed as the former Federal Reserve chief Ben Bernanke used last week's decision to press ahead with a new, punishing bailout for Greece as an opportunity to remind Germany of its responsibilities to the continent.

Bernanke took to his blog to highlight that Berlin's excessively tight fiscal policy had helped scupper the euro's dreams of prosperity and "ever-closer" integration between 18 disparate economies.

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In its latest assessment of Germany's economic strength, even the IMF (seen in many German circles as chief disciplinarian against the errant Greeks) urged Berlin to carry out "more ambitious action ... and contribute to global rebalancing, particularly in the euro area."

Germany chart
The Telegraph / Highcharts.com

A botched rebalancing

Germany's record trade surplus is held up as the main symptom of its dangerously preponderant position in the eurozone.

A measure of the economy's position in relation to the rest of the world, Germany's current account hit a euro-area record of 7.9%, or €215 billion, in 2014. It is now expected to hit more than 8% of gross domestic product this year, according to the International Monetary Fund.

Germany chart
The Telegraph / Highcharts.com

The persistently high surplus in part reflects the strength of Germany's much-vaunted export industries. But other contributing factors are reasons for concern. The IMF has said such chronic imbalance also reflects a "reluctance by the corporate sector to invest more in Germany."

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As Bernanke also notes, the surplus puts "all the burden of adjustment on countries with trade deficits, who must undergo painful deflation of wages and other costs to become more competitive."

Southern economies such as Greece are chief victims of the cost of this adjustment. But as the chart below shows, with Germany in the bloc, the eurozone's rebalancing act is going nowhere.

Germany chart
The Telegraph / Highchart.com

The initial adjustment between debtor and creditor nations, which started in 2008, "has halted since 2012, and seems to be on the verge of reversing," Standard & Poor's says.

The black zero

The other problematic area of Germany's economy policy is the government's obsession over the "schwarze Null," or "black zero," policy to reach a balanced budget.

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Berlin managed to hit this magic target earlier this year. The "schwarze null" is held up as the cornerstone of German financial strength and stability in a perilous global environment, but it has drawn criticism as yet another symptom of the eurozone's dysfunction.

Economist Paul De Grauwe has dubbed it a quasi-religious "balanced-budget fundamentalism."

The fiscal rectitude has also fallen foul of the IMF's prescriptions for the German economy. The Fund recommends Berlin pump at least 2% of GDP into investment projects over the next four years, a target the government is consistently falling short of.

German Chancellor Angela Merkel addresses the session of the German lower house of parliament Bundestag in Berlin, Germany, June 18, 2015, ahead of the EU summit scheduled for June 25. REUTERS/Hannibal Hanschke
German Chancellor Angela Merkel. Thomson Reuters

Why a German exit would help

Princeton economist and former IMF bailout chief Ashoka Mody is among the most recent proponents of a German exit from the euro.

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Mody notes that a return to the deutsche mark would provide a two-fold boost to the rest of the beleaguered eurozone: It would immediately cause the euro to plummet in value, stimulating exports in the southern periphery, and also cause far less disruption to the rest of the bloc than a potential Grexit.

"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," Mody writes.

"Germany's assets abroad would be worth less in terms of the pricier deutsche marks, but German debts would be easier to repay."

Outside the single currency, German industry would be forced to return to a pre-euro world, and continually adjust to the costs of an appreciating currency. But Mody posits that this transition, though a big initial shock, would hardly be new for German businesses.

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A less competitive currency could also provide a much needed incentive for German industry to produce higher-quality products and improve sluggish productivity in the service sector, he adds.

A design to shackle German strength

Germany's economic prowess under the euro should not be overestimated.

One of the drivers behind its "fiscal fetishism" is a deep insecurity about the country's longer-term economic prospects. Germany is one of the fastest-aging economies in the world, in need of mass immigration, more women in the labor force, and a substantial boost to its birthrate.

And for all its relative economic strength, the euro was always at its heart a political construct designed to neuter a reunified Germany 25 years ago.

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Paradoxically, Mody now says a release from the shackles of the single currency could finally pave the way for Germany to act as the "benevolent hegemon" a functioning fixed-exchange rate system has always needed.

"To stay close, Europe's nations may need to loosen the ties that bind them so tightly," he writes.

Public appetite for a German euro exit, however, is almost nonexistent. But having let the Grexit cat out of the bag, Schaeuble and co. will have to suffer the fallout from the assertion that the monetary union is no longer sacred. 

Read the original article on The Telegraph. Copyright 2015. Follow The Telegraph on Twitter.
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