Gexit Is Better Than Grexit
There would be no domino effect if Germany leaves. Remaining in the euro entails Germany's paying indefinitely for debts made by others.
Any reasonable person would assume it highly unlikely that Europe's leaders would have adopted the euro as their common currency if they had known 10 years ago what a mess they would be in today. The euro project, however, was not a project of reason but of political correctness. Ten years ago many economists warned that adopting a common currency for countries with such divergent economies as divergent as Germany and Spain (not to mention Finland and Greece) could not work. In spite of this, Europe's unelected political class pushed through the euro.
Today it is clear as well that the euro in its present form cannot survive without bankrupting all the economies of Europe. Yet the Europe Union's political class still persists in its vain and costly attempts to save the common European currency -- simply because giving up on the euro would mean admitting they were wrong from the start. What's more, the EU ideology that Europe is to develop into a genuine federal state does not allow its leaders to admit that Europe is a cluster of distinctly different nation states with different interests, cultures, languages and traditions.
The people of Europe were cheated from the start. They outspokenly did not want their nations to be submerged into a "United States of Europe." That is why, when the euro was instituted, the political class promised that no country would ever have to foot the bill of another country. However, in 2009, when Greece needed its first bailout to avoid bankruptcy, Europe's leaders at once violated the EU rules which forbid the member states to bail out other members. If the EU had played by its own book – as it should have done – Greece would have gone bankrupt and left the euro two years ago.
Sticking to the rules, however, was out of the question: neither France nor Germany was prepared to drop Greece. France sees itself as the leader and patron of the bloc of southern EU countries; Germany fears that if it insisted on pushing a country out of the eurozone it would be accused of immoral selfishness and all the goodwill it had acquired since the Second World War would be lost. As the two major EU countries were prepared to bail out Greece, the smaller member states all went along, assuming that only one bailout (and just for Greece) would be needed.
Meanwhile, the EU has been forced to bail out Ireland and Portugal, as well, and Greece for a second time, while Greece is now clamoring for a third bailout and Spain also needs to be bailed out.
The EU's fatal decision to bail out Greece in early 2010 indicates that in an ideologically driven political environment such as the EU, it is easier for the political class to break the formal rules and ignore objective facts than to depart from the unwritten ideological imperative.
Today, despite the worsened situation, it seems to be ever more difficult for the EU's political class to change course. Doing so would imply that all the money spent on bailouts so far is lost – squandered on the fatal conceit of an ideological dream which is slowly turning out to be a nightmare.
One day soon, however, Europe will have to face reality. Either the EU is turned into a fiscal and political union, a genuine superstate where national debts are shared. Or the euro and possibly the EU disintegrate. The former option is what the political class wants, but what the European people loathe. Hence, the growing rift between the people and their political leaders everywhere in Europe, but especially in Germany which is acting as the paymaster for the whole EU. This course is the more dangerous as it will lead to enormous political resentment in Germany. Eighty years ago, we saw what that can lead to.
The alternative is a disintegration of the eurozone. Here there are several scenarios. Greece may be forced to leave the euro, followed by Portugal, Ireland, Cyprus and Spain. According to last week's Economist, this will be a costly process. A Greek exit (Grexit) might cost €323 billion; an exit of Greece plus the four above mentioned countries might cost a staggering €1,155 billion.
A more likely scenario is for Germany to leave. A recent poll indicated that 51 percent of Germans think it is time to resurrect the Deutschmark. British journalist and economist Anatole Kaletsky thinks that a German exit from the euro could be relatively easy. According to Kaletsky, German departure would be less disruptive than Grexit for three reasons.
First, a Greek exit would lead to a domino effect with capital fleeing the next weakest country in the eurozone. There would be no domino effect if Germany leaves. Second, the eurozone would become more coherent without Germany and the remaining countries could use quantitative easing to bring down interest rates, issue jointly guaranteed Eurobonds and form a genuine fiscal union, with a public deficit of 5.3 percent of GDP and a gross debt of 90.4 percent of GDP – all comparing favorably to the deficit and debt levels in Britain, the U.S. and Japan. Third, a break-up caused by Germany withdrawing would be far less chaotic from a legal standpoint than a break-down in which the euro disintegrates as weak countries are pushed out. The euro without Germany would remain a legal currency, governed by the same treaties as before. Obviously, there would be costs for German companies, German banks and the Bundesbank, but these would all constitute local difficulties for Germany.
The benefits of a German exit (Gexit) are clear for Germany as well. It would incur costs, but these are one-time costs, while remaining in the euro entails Germany's paying indefinitely for debts made by others. Better a miserable end than endless misery.
A German exit would also be better for the American economy than the current situation, in which pressure is increasing on a country such as Spain. An economic collapse of Spain would inflict a severe blow to the U.S. stock exchanges. Rather than exerting pressure on German Chancellor Angela Merkel to accept a European fiscal union, which would mean political suicide for her, the United States might try to persuade her to leave the eurozone.
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by Soeren Kern
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by Alan M. Dershowitz
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