Germany Cannot Afford to Drop the Euro
According to Handelsblatt’s Jan Mallien, a German euro exit would be brutally expensive. One thing you can be sure about with George Soros is that he likes to provoke.
In his speech in Frankfurt last month, George Soros delivered the following message to the German audience: “Buy euro bonds or step out.”
The logic behind this line of thinking can be summarized in a few words. The euro had a major design flaw to begin with: it enabled state bankruptcy among the member countries. This is a risk that only exists in third-world countries who are indebted in foreign currency. Industrialized countries such as the USA or Japan have an independent central bank that can print enough money to pay the national debt in an emergency situation.
But the euro countries have abandoned their independent central banks through their currency union. Therefore, investors run the risk of insolvency, at least since the financial crisis. Only a joint liability in the form of euro bonds could eliminate this risk, so Soros.
What is the alternative? Euro-critics often propose that crisis countries leave the monetary union. Soros believes this is impossible. Italy has a debt amounting to two trillion euros. If it left the euro, its new currency would depreciate dramatically. The result would be that Italy could no longer pay its sovereign debt, and banks around the world would suffer serious consequences. The world economy would face a disaster in comparison to which the financial crisis was a breeze. Even in smaller countries, the debt would have dramatic consequences, as evidenced by the recent example of Cyprus.
According to Soros, only creditors can leave the euro. A German withdrawal would be less dramatic for the world economy. The immediate result would be that the euro would depreciate – and the remaining euro countries would be competitive again.
But what would be the cost for Germany? German assets denominated in euros would instantly lose value against other euro countries. That measure would primarily affect banks and pension funds, which would need to be saved. The German industry would feel the pinch too: since the new German currency would massively gain in value, the German export sector would no longer be competitive.
Critics may argue that the D-Mark used to appreciate in value all the time as well. But it did so in reasonably orderly fashion. With a euro exit, the German industry would need to digest an appreciation of 30 to 40 percent at once. Apart from that, the political price would be immense. Europe would be a shambles and Germany isolated.