“If member states leave the Economic and Monetary Union, what is the best way for the economic process to be managed to provide the soundest foundation for the future growth and prosperity of the current membership?”
This was the question asked by the Wolfson Economics Prize this year, won by Roger Bootle, Managing Director of Capital Economics and occasional Telegraph contributor.
The prize winning essay, and those of other finalists, makes for grim reading. Call me naive, but I had hoped that the finalists would all conclude that both Greece and the eurozone were just fine thank you very much and the whole issue would just go away.
Sadly, this is manifestly not the case. Roger Bootle’s winning plan begins by saying that things are generally bad and expands on this by suggesting things will probably get worse. Bootle argues that it would not be easy for weaker countries to leave the euro and that doing so would not necessarily lead to economic growth. So why bother then?
For Greece (or Spain or Portugal or Italy) leaving the euro would require either a redenomination or outright repudiation of its euro-denominated debts (with potentially catastrophic financial consequences).
Bootle, along with the vast majority of economists, says that if a country were to leave the euro it would have to keep its plans secret until the last possible minute when they would issue a decree announcing the introduction of capital controls and wait until the formal exit to start printing a new currency, default on its debts, recapitalize collapsed banks and seek close co-operation with remaining euro members. The braver solution would be for Germany to leave the euro.
If Germany were to reintroduce the mark, the euro would almost immediately start to decline in value, which in turn would give the weaker member states the breathing room they need to restructure their economies, reform the labour markets and collect more taxes. Crucially, this would also help to end the debt and banking crisis that have dominated the continent since 2008 as the Southern European countries’ ability to service their sovereign debt would improve.
A weaker euro would make the eurozone countries more competitive and encourage greater foreign investment – Spain and Portugal’s troubled real estate markets could become more attractive, which would reassure investors concerned about unrealised losses on property loans.
Critics may argue that the exit of Germany would lead to financial chaos, but the current situation is hardly a model of stability. Continuing along the current path will lead to further bailouts, further crippling austerity measures and inevitably to sovereign defaults or huge fiscal transfers.
This is bad for both strong and weak eurozone members as it would require an open-ended commitment of trillions of euros from the former and the nightmare of continued political and social unrest for the latter.
Even if Germany were to make an open-ended financial commitment to Greece; it would still be highly unlikely that the eurozone could be salvaged in its current form. Germany is currently pouring money into a black-hole with no signs of improvement in the Greek situation or a likely end date.
Germany, like the UK, can be part of the European Union without being part of the euro. Provided that the free movement of labour, goods and services within the EU is preserved, a German exit could be just what Europe needs.