Chicago-based economists Kenneth C. Griffin and Anil K. Kashyap think that Germany should reintroduce the mark, and gradually phase out the euro. This “would cause the euro to immediately decline in value”.
Such a devaluation would give troubled economies, especially those of Greece, Italy and Spain, the financial flexibility they need to stabilize themselves. … [Moreover,] a weaker euro would give a boost in competitiveness to all members of the monetary union, including France and the Netherlands, which is why they might very well choose to remain in it even if Germany were to gradually leave. ….
[Further bailouts of troubled countries] would be deeply unfair to ordinary Germans — and even then it’s not clear the euro zone could be salvaged in its current form. Given what has played out in Greece, for German leaders to provide further financial assurances to the periphery would be unconscionable.
Like Britain, Germany can be part of the European Union without being part of the euro. What is essential is the preservation of the European Union’s greatest accomplishment: the free movement of labor, goods and services. Germany alone has the ability to end a dysfunctional monetary union and to bring prosperity back to Europe.
Kenneth C. Griffin and Anil K. Kashyap, “To Save the Euro, Leave It“, New York Times, 27 June 2012.
A German exit might be more useful than exit of Greece, but I am not convinced. Other countries – Austria, for example – would undoubtedly follow Germany and abandon the eurozone. It is difficult to predict how many countries might remain in a smaller eurozone, and how well a union of weak economies might function with a weakened euro.
Others have toyed with the idea of Germany abandoning the euro. According to Der Spiegel, the German finance ministry ran the numbers for break-up of the euro and re-introduction of the D-Mark, calculating that this could lead in the first year to a 10% fall in GDP, and a doubling of unemployment to a record high of over 5 million. A spokesperson for the ministry claims she is unaware of the existence of such a study. (See Masa Serdarevic, “Pricing the German costs of a euro break-up“, alphaville, 26 June 2012).
Hedge fund manager Kenneth C. Griffin (born 1968) is the founder and CEO of Citadel, a Chicago-based investment firm. Anil K. Kashyap is professor of economics and finance at the University of Chicago Booth School of Business, and works as a consultant for the Federal Reserve Bank of Chicago.
HT Greg Mankiw.
Tags: exchange rates