THE crisis in the Eurozone is widely portrayed as being about solvency and the need for fiscal balance and austerity, but in fact these are longer term issues – the immediate crisis is one of liquidity. Solvent countries can’t roll over their existing stock of debt, as the available liquidity behind the largest economy in the world is effectively paralysed. And at the heart of this is a hidden currency crisis.
Since German politicians upped the ante and began openly talking of Greece leaving the Eurozone, capital has fled the periphery. It is as if the map of Europe has been tipped up and all the liquidity has flowed into the top right hand corner. The reason that the bond investors of the Eurozone are unwilling to buy euro denominated debt issued by the Italian government isn’t because they think they won’t get their money back, it is because they fear they will get it back in lira.
The discussions so far have had a strong political dimension, focusing on longer term problems. They may yet also produce some short-term fixes for the liquidity crisis, specifically allowing the European Central Bank to act as a lender of last resort, but unless they deal with the currency issue the crisis will continue. In my view, the best way to achieve this is not only to think the unthinkable, but to make it happen. To preserve the euro, Germany must leave.
When I make this suggestion the reaction is nearly universal: Germany will never leave. But let us look at it from the point of view of the ordinary German, seemingly the only enfranchised voter in Europe at the moment. Asked if they would like to preserve the Eurozone for the other 16 members they might accept, as the UK has, that Germany’s economy is fundamentally incompatible with remaining inside the Eurozone. They might conclude that getting back the Bundesbank to preserve the value of the currency, with a shiny new deutschemark to spend in a dramatically cheaper Eurozone, might not be such a bad thing. Equally, German exporters, far from resisting, might well be all in favour of it. After all, large amounts of German manufacturing already takes place elsewhere in the Eurozone and so a sharply lower euro against the deutschemark would be a major competitive advantage to them.
We should also remember that the euro has an importance outside of the narrow political project. It is one of the world’s major trading currencies, with not only 17 European members, but also a further group of countries formally or informally pegged to it, not only in Europe but also across much of north and west Africa. Stability in the Eurozone is thus important to many countries – including the UK – and it seems somewhat curious that they all seem happy to let Germany potentially wreck it. Rather as the child that loves the pet so much it suffocates it, Germany’s desire to hold the euro together is arguably the biggest threat to its survival. So, if Germany can’t see the need to leave the euro, then perhaps the 26 members of the EU should make the case for it to do so?
Germany has behaved in almost exactly the same way as China over the last decade. First it pegged its currency at an extremely attractive rate to a consumer bloc of over 300m people and then pursued an aggressively mercantilist policy to achieve an export surplus with that bloc. The resulting current account surplus was then recycled via the customer bond markets, bringing down long-term interest rates and encouraging and sustaining a consumption and investment boom that in turn sucked in yet more imports from Germany. Strange then, that China is vilified and called a currency manipulator while Germany is not. Now however, there is little or no demand from the consumer bloc and indeed, the course of action that Germany is seeking to impose on the periphery would ensure that something close to a depression would occur across these markets. Thus it would be entirely in Germany’s advantage to float free, delivering a deflationary impulse to Germany but an inflationary impulse to the other 16 euro members. Something appropriate to all concerned.
German bunds would appreciate rapidly, providing a welcome reverse haircut to bank balance sheets across the remaining Eurozone, while liquidity trapped in Germany would return to flow evenly around the remaining 16 members. The solvency crisis would still need resolution, but the currency and liquidity crises would have been resolved. The main losers would be ultra-federalists, German banks and Chinese exporters, hit by a significantly weaker euro. The winners? Just about everyone else. Currently unthinkable? Maybe. But not as crazy as you might at first think. Maybe someone should ask the German voters?
Mark Tinker is a global fund manager at Axa. The opinions expressed in this article are those of the author.