Nothing Aside: Off The Mark

Okay, I realize that this article in Foreign Policy is probably about a month old, but it's less news than analysis/opinion so I figure it's never too late. Essentially the argument put forth is that Germany would be doing much better if it were still using the Deutsche Mark and should therefore dump the euro and bring back the mark. Here's the meat of the argument:

[T]he euro has been an economic disaster for Germany. Why? Because the European Central Bank (ECB) must set a one–size–fits–all interest rate for 12 very different economies. The rate has to be "right" for Ireland, which is growing at nearly 5 percent a year, and for Germany, where gross domestic product (GDP) growth is less than 1 percent annually. That means that the rate ends up being wrong for pretty much everyone—particularly Europe's more advanced economies.

I've heard this before, and understand the difficulties this causes for divergent economies. Especially for Germany:

According to Taylor rules—the widely accepted method of calculating how a central bank should set interest rates—Germany needs an interest rate of about 0.5 percent for its economy to achieve the right balance of inflation, growth, and employment. The ECB's current interest rate is 2 percent. The result is that Germany's GDP growth has fallen short of 2 percent for the last four years, its unemployment rate is at 12 percent—the highest since the Weimar Republic—and its business confidence stands at a two–year low.

That's bad. European unemployment has increasingly become an issue as highly regulated and subsidized industries are opened up to cheaper labor elsewhere as a result of globalization. On top of this, Europeans aren't getting any younger. The average age of your typical European is skyrocketing and with strong breakthroughs in medicine in recent decades, the old folks are sticking around longer. As a result, the European social welfare state is increasingly strained and must face its demographic and international economic pressures head on.

Instead, in Germany it seems many voters are resisting tooth and nail:

The voters have already made it clear that they won't accept the other methods of kick–starting the economy, such as making hiring and firing workers less difficult and cutting social benefits. The ruling Social Democratic Party (SPD) was punished in May for embarking on a policy of gradual liberalization, suffering its first defeat in 39 years in state elections in its heartland of North Rhine–Westphalia. There is even talk that the SPD will replace Chancellor Gerhard Schröder with the leftist party leader Franz Müntefering, who made headlines in April with his description of foreign capitalists as "locusts."

This I don't understand. Recent state and local elections in Germany have shown the Christian Democrats, and a few far Right parties, making substantial gains. What makes no sense is that it seems like the things that voters are upset with the SPD about are issues that would only be dealt with more harshly by CDU leaders. If they don't like pressures to liberalize their stiff corporatist structure, they will like them even less with Angela Merkel (CDU party leader) as their Chancellor.

Okay, but back to this dumping-the-euro business:

Could Germany actually pull out of the euro? Yes. Sure, the political costs would be high, but there are well–established legal precedents for the breakup of monetary unions. As recently as 1993, Czechoslovakia split into the Czech Republic and Slovakia, each of which adopted its own currency. Earlier in the 20th century, the Scandinavian Monetary Union was abandoned with little trouble after the outbreak of World War I. Even the dismantling of the ruble zone—after the breakup of the Soviet Union—was achieved fairly easily. If Germany left the eurozone, it could slash interest rates to spark a mini export boom to cover the cost of transitioning to the deutsche mark. But more important, the short–term costs of getting out of the euro are dwarfed by the long–term costs of staying put.

First, I think those examples are a bit tenuous. In Czechoslovakia the two halves had essentially been separate for quite a while. A split only made sense and didn't harm either as far as I know. Examples from before World War II seem irrelevant now that we have entered a global economic system. Extracting one part from a monetary union is no longer so simple or mutually beneficial.

I agree that Germany certainly would benefit in the short-term as its interest rate suddenly corrected itself for the local German market, but I think there are other issues to be addressed here. Most notably: Germany IS the European Union for all practical purposes. It was first devised as a way to tie German economic and industrial muscle to the benefit of all of Europe instead of against all of Europe. Now, removing Germany from the euro certainly wouldn't remove it from the E.U., but I see no way that the euro could continue to serve as an effective currency without Germany. And, if you look at how things have turned out for the euro since its introduction, it has quickly become perhaps the strongest currency out there (thanks in no small part to an intentional weakening of the dollar). Without Germany, the euro would collapse - and with it several smaller European economies that have benefitted from the new currency (Greece, Portugal, Ireland?).

Yes, Germany would benefit - on paper - from getting out of the euro, but the effects of such a move would, I think, have a detrimental impact on Europe as a whole - which Germany would certainly still be a part of. The interconnected reality of our globalized economic system has rendered such a retreat by Germany as impractical and unwise.

So how could Germany relieve its domestic economic tensions while staying in the euro system? Well, nothing is easy. But, it seems that the first step is for Germans to realize that the world is changing and the best way to make it work for you is to embrace the change and guide it as best you can. That means opening up, at least a little, the admirable German industrial partnership relationship that has worked so well in the post-war era. Give and take here, accept and open there. The heavy social safety net is something I like, but it is no longer practical on the scale that it has been. This will produce some tough realities for many Germans, and Europeans more generally, but it is necessary.

Germany can succeed without being reactionary. The current movement by voters towards extremist right parties and the refusal by industry groups to negotiate some practical changes in the German economic structure is unfortunate. Ditching the euro, however, is just as unhelpful.