The survival of the euro is no longer up for debate. If 2010 has proved anything it is that the productivity divide between core and periphery is too great to be spanned by a single currency. The only real question is how does the breakdown happen and which countries Berlin is prepared to take with it?
Labelling countries “winners” and “losers” in this process would though be a mistake. Germany may initially look like a “winner” but there will be considerable pain for the country’s exporters as its new/old currency appreciates rapidly. On the other hand, a country like Ireland will feel much better about its prospects once the pain of separation has passed. Though it must be admitted that the actual breakdown will not be an easy process. Every country in the region has the bulk of its debts in euros.
Consequently, for many nations there will need to be a debt restructuring. This will not be a pleasant experience for debtors or creditors, though many are increasingly aware that it is on the horizon.
GERMAN DEPARTURE HAS BENEFITS
Once this episode is over, almost everybody will be much happier. The Germans will no longer have to grind their teeth about bailing out the rest of Europe and the rest of Europe will find that growth is now possible with a more competitive currency.
Indeed, many countries might be in for a period of strong growth and improved employment similar to that seen when the UK left the European exchange rate mechanism.
It must be noted that it’s likely that the euro won’t break down fully. There will remain a group of countries that are close enough economically to remain linked. This is the group of nations, with Germany as the hegemonic power, which from the outset should have pursued integration but critically should also have been brave enough to say “no” to those that did not measure up. In the end they were doing nobody any favours by allowing countries to fudge their entry criteria.
The only problem that lies in the way of this rational outcome is that much of Europe is currently burdened by a political elite that can’t admit that it was wrong. There seems to be no desire amongst these politicians to recognise that a single currency was a mistake for many nations and that it’s time to find an exit strategy. The people of Europe need better leadership and they need it now.
Guy Johnson co-anchors European Closing Bell weekdays on CNBC