Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
I see two types of answers to my question.

a)  Cyrille,  Migeru,  afew, (maybe melo):
We need a credible threat to leave the Euro, to change the European institutional setup. The exact nature of the changes you want has not been spelled out, but from our discussion here it is quite clear that what would be needed is, i) changes to the 'Stability and Growth Pact', ii) The possibility for the ECB to directly finance gouvernments. iii) maybe a higher inflation target.

b)  A swedish kind of death,  cagatacos:
We should leave the Euro right now.

I want to lay out here why I think that position a) is wrong and b) is correct. With the caveat that b) makes most sense for Portugal, Spain and Greece.

Why is a) wrong?

The threat is not credible:
As expressed by afew, melo and Cyrille, I guess the idea here is that if countries where to leave the Euro, their new currency would devalue leading to less demand for German good and in turn to a negative economic impact for Germany.I think there are several reasons why this will not be take seriously in Germany:
I)German economists are crazy and the economists advising our government are the worst of the bunch.
The understanding of the economy in Germany is deeply ideological: 'if you work hard things will be fine', 'a lower value for the currency is only needed for lazy southerners' and so on.
II) Even looking at it objectively it is not clear to me if German would be worse of if other countries would leave the Euro. All other countries have to import at lot of good, no matter what. So the amount of devaluation possible is limited. At the same time, the real income of Germans would rise. they could go cheaper on Holidays, they could by cheaper goods from the rest of Europe and so on. this would create a rebalancing which is urgently necessary.
III) In the special case of France I am not even sure that the new currency would devalue. The French economic weakness is a myth. I am not saying that everything is fine in France, but still the economy is quite strong. Furthermore, in contrast to Germany France has not destroyed its infrastructure in an obsession with its deficit and it has a growing population. These two factors lead to the conclusion that its growth potential is much better then the growth potential of e.g. Germany. If now on top of this France would have its own currency and could run a sane monetary policy this would probably create solid growth (I will also come back to this in b)) and therefore an appreciation of  the currency.
IV) If you simply threaten to leave the Euro your financial system will be destabilized. As soon as you start to talk about leaving the Euro you basically have to shut down all banks, or you will have a bank run. Even if you agree with I.III), then it would still make sense to first take your Euros out of France, wait till the new currency drops a little and then go back in. For Spain and Portugal, anybody how lets his Euros be exchanged to the new currency will have substantial losses. So either you do it directly and quickly, or your banks will collapse and you will have to beg the IMF for Money.

Lets go to b):

We should not underestimate the challenges in leaving the Euro. I also have to say that legally any country leaving the Euro would enter unknown territory. If some investment fond would loose money because your country leaves the Euro, could it sue? Most probably. And, while in the long run leaving the Euro could be hugely beneficial, in the short run it could lead to real loss of purchasing power for imported goods, which are a lot of goods. A debt default is also pretty much unavoidable, which also comes with real costs down the line.

That said: 25% unemployment is unacceptable. I do not see how this can continue! This is an obvious reason why Spain, Portugal and Greece should leave the Euro. Similar to Argentina around 2000, the benefits of a different monetary policy would most probably outweigh all costs.

Now for France the Situation might be different. It could probably leave the Euro, and some of its creditors might even agree to denominate the debt in the new currency. Or maybe not, but even then France will not need to default on its debt. I am quite confident that growth would be sufficient. Again, it is not clear to me that leaving the Euro is really a good idea for France at the moment, but it still beats the 'whining about leaving the Euro' option.

by rz on Sat Nov 29th, 2014 at 06:59:20 AM EST
[ Parent ]
Checking tradingeconomics.com Portugal, Spain, Italy and Greece now all has small surpluses. (France still has a deficit, though it has decreased.) So now should be a good time to leave, as many euros goes in as comes out which decreases the risk of runs and shortages.

This is odd, Germany still has its huge surplus (7.5% in 2014). The eurozone itself shows a distinct surplus for the first time. Checking the numbers:

Euro Area Current Account | 1997-2014 | Data | Chart | Calendar | Forecast

Euro Area recorded a Current Account surplus of 31 EUR Billion in September of 2014.

Germany Current Account | 1956-2014 | Data | Chart | Calendar | Forecast

Germany recorded a Current Account surplus of 22300 EUR Million in September of 2014.

So Germany's surplus was about 2/3 of the Eurozones surplus. But who is allowing an undervalued euro? China?

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Sat Nov 29th, 2014 at 02:49:54 PM EST
[ Parent ]
But who is allowing an undervalued euro? China?
This is what I could not anticipate back in 2012 when I wrote about this: that the rest of the world would tolerate a sustained Eurozone current account surplus. But it has.

Now, isn't it interesting that the trade surplus indicates that the Euro is undervalued when everyone outside Germany was screaming bloody murder about the Euro being overvalued?

This is all leading me to question even more any "hydraulic" (to borrow a term from BruceMcF) reasoning about exchange rates, trade balances and the like. The dynamics are more complicated than that.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Sun Nov 30th, 2014 at 08:22:27 AM EST
[ Parent ]
These are very interesting points. Could you please put these into a diary?
by Bernard (bernard) on Sun Nov 30th, 2014 at 04:29:16 AM EST
[ Parent ]
I made a diary out of it.

 Leaving the Euro

by rz on Mon Dec 1st, 2014 at 03:18:42 AM EST
[ Parent ]
The exact nature of the changes you want has not been spelled out
Unless and until Article 123 of the Treaty on the Functioning of the European Union (Article 104 of Maastricht Treaty) is repealed, all the rest is cosmetic. Of course, Germany will never accept that.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Sun Nov 30th, 2014 at 08:09:15 AM EST
[ Parent ]
A few comments:


German economists are crazy and the economists advising our government are the worst of the bunch.

No objection from this quarter :)
As you've noted elsewhere, some Germans have exposed it as such (but if it's written in an English paper, even the FT, does it really count?).


The French economic weakness is a myth.

No objection either, but would the hypothetical new French currency not devalue against the German one? I doubt the respective economic strengths (and the more dynamic French demography) would be enough to prevent an appreciation of the eventual new DM, if only for Deutschmark fetishism in a lot of financial circles. After all, if policies were mostly driven by facts, we would be in a very different situation, wouldn't we? Let's not forget that markets can remain irrational longer than we can remain solvent...


the real income of Germans would rise. they could go cheaper on Holidays, they could by cheaper goods from the rest of Europe and so on.

As good as it would be for German people, especially those with the lowest incomes, an over-appreciated currency would be a catastrophe for a German economy entirely oriented towards exports: a lot of companies would be hurt, not necessarily the big conglomerates who already have facilities outside of Germany, but the Mittelstand certainly. "Real income" with respect to what? Imported goods? Precisely what an export minded leadership wants to limit at all costs...

Lastly, I don't think the "credible threat to leave the Euro" is the only option for other EZ countries: never mind the fact that, barring a Le Pen elected French president, it is totally unlikely to happen, what with the current EU leaders enthralled with the austerian fairy tale. As you rightly pointed out, threats do not work well, especially with a German leadership (and a German population to a large extent) living in the parallel Swabian housewife universe. Grandstanding never works in the EU, as a British PM is finding out.

Another option is to quietly refuse to apply the full austerity straitjacket. There will be of course a lot of furor, and possibly scathing editorials from German EU commissioners (oh, wait...), but, in the finest EU tradition, no frontal crisis: just long winded horse trading negotiations ending up into some "new consensus", the details of which being difficult to predict from here.

Lastly, there's the - not entirely unthinkable - possibility that the first country to pull the metaphorical trigger won't be Greece or Portugal or Italy, or even France: Germany might well beat them all to the punch. Especially if the EU commission fails to strictly enforce full-metal austerity from Lisbon to Tallin and the cries of currency debasement and Weimar inflation upon us grow increasingly louder in Germany. This would actually provide a perfect vindication to the "lazy Southerners who cannot be trusted" theme

To quote Migeru:


I'm pinning my hopes on AfD.

The "summer series" 'End of the line for the Euro', a political fiction published by Le Monde over the summer of 2011, might even end up to be true after all :-)

by Bernard (bernard) on Sun Nov 30th, 2014 at 01:12:34 PM EST
[ Parent ]


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