WHY A GERMAN EXIT FROM THE EURO ZONE WOULD BE DISASTROUS -- EVEN FOR GERMANY

Why a German exit from the euro zone would be disastrous – even for Germany

By Pedro da Costa

May 28, 2013

Let’s face it: “Gerxit” doesn’t roll of the tongue nearly as smoothly as a “Grexit” did. While Europe continues to struggle economically, fears of a euro zone break-up have receded rapidly following bailouts of Greece and Cyprus linked to their troubled banking sectors.

Mounting anti-integration sentiment in some of region’s largest economies, raise concerns about whether the divisive monetary union will hold together in the long run. Indeed, the rise of an anti-Europe party in Germany begs the question of what would happen if one of the continent’s richer nations decided to abandon the 14-year old common currency. Never mind that, viewed broadly, the continent’s banking debacle has actual saved Germans money so far.

Billionaire financier George Soros, has argued that Germany should either accept a closer fiscal union with its peers, including so-called debt mutualization – the issuance of a common Eurobond – or give up on the euro. Hans-Werner Sinn, head of Germany’s influential Ifo Institute, strongly disagrees, blaming the crisis on southern Europe’s “loss of competitiveness.”

A recent study from the Bertelsman Foundation highlights just how costly a German exit would be, even for Germany itself.

Euro zone membership provides Germany with significant economic gains that more than compensate for any advantages from a return to the deutschmark, a new Bertelsmann Foundation-commissioned study calculates. The currency union’s benefits remain even if Germany were to retain the euro and take a significant haircut on its loans to four eurozone countries hit hard by financial or fiscal crisis.

The study concludes that annual German GDP would be 0.5 percentage points lower between 2013 and 2025 if Berlin had a separate currency. This would amount to an economic loss of €1.2 trillion, or €14,000 per inhabitant, in the 13-year timeframe, a figure equal to about half the size of the German economy in 2012. The lower growth would also mean 200,000 fewer jobs in Germany.

The economic benefits of the euro arise from lower transaction costs in the absence of currency conversions and exchange-rate fluctuations, greater price transparency that stimulates cross-border trade and enhances price competition, and the lack of a strong deutschmark that would replace the euro. The advantages of lower interest rates brought on by re-introducing the deutschmark would not be sufficient to offset the gains from using the euro.

The common currency’s economic benefit also extends to an alternative scenario in which Germany stays in the eurozone but takes a hypothetical 60-percent haircut on loans extended to Greece, Portugal, Spain and Italy. In this case, Germany would experience a minimal decline of no more than 0.05 percentage points in its GDP growth rate. The small impact of the haircut stems from the benefits Germany would gain from higher exports to the debtor nations, which would see more favorable economic conditions following the write-off.

The Bertelsmann Foundation-commissioned study quantifies the euro’s economic benefits for Germany. It is not meant to quantify the consequences if Germany left the euro zone, the result of which would almost certainly be the currency union’s collapse and a subsequent major global economic crisis.