Preparing for the Worst The High Price of Abandoning the Euro

Will it survive?
DPA

Will it survive?

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Part 3: Exit from Europe Would Cost Each German Thousands


In no other country is skepticism of the euro as great as it is in Germany. On the one hand, that is understandable given that Germany is responsible for the largest share of the aid packages for the crisis-stricken countries. But it also comes across as a bit absurd considering the high degree to which the country has profited from the introduction of the euro.

Germany is a proud exporting nation, and around 40 percent of its exports go to other euro-zone nations. On Tuesday, the news broke that German exports will exceed the €1 trillion level for the first time. But the very companies enjoying this current success are accustomed to being able to export their goods at the lowest and most stable prices. The euro made both possible. The common currency eliminated exchange rate fluctuations in the euro zone, the euro appreciated less strongly than the deutsche mark. In other words, it kept prices competitive.

The result was a boom in exports. Between 1999 and 1993, German exports rose by around 3 percent. But between 1999 and 2003, exports increased by 6.5 percent. Between 2003 and 2007, two years after the introduction of euro notes and coins, German exports rose a staggering 9 percent. The federal government-owned investment bank KfW researched the benefits of this boom and determined that membership in the currency union has created profits in Germany in the last two years alone of €50 billion to €60 billion.

If Germany were to exit the euro zone, this advantage would vanish quite suddenly. A reintroduced deutsche mark would quickly appreciate against the euro -- UBS chief economist Deo regards a rise by 40 percent to be realistic. The result would be that exports would become more expensive. If a strong country were to leave the euro zone, Deo writes, "it would ultimately have to write off its export industry." For the German economy, this would be a disastrous scenario.

Would Would Happen If Athens Left the Euro Zone?

And what would happen to the crisis-plagued countries like Greece and Portugal? Some economists -- like Hans-Werner Sinn, the president of the Institute for Economic Research (Ifo), a leading German think tank in Munich -- believe Greece could actually regain competitiveness by leaving the euro zone by devaluating the drachma. That may sound good at first, but there's a catch: Athens would still have to pay back a large share of its debt, even after exiting from the common currency, in euros. But that repayment would be made far more difficult as a result of the drachma's devaluation. An Athens exit from the euro zone would also hit German and French banks, which have a high degree of exposure to Greek debt.

A decisive question is that of the total cost Germany would face if it left the euro zone. Economist Dirk Meyer has developed a scenario in which the total costs would fall somewhere between €250 and €340 billion. That would represent 10 to 14 percent of German gross domestic product, a considerable amount.

UBS chief economist Deo, has even gone so far as to estimate that 20 to 25 percent of GDP might be realistic in the first year after a German exit alone. That would translate to a per capita cost of between €6,000 and €8,000, with costs of between €3,500 and €4,500 in subsequent years. By comparison, if, after Greece, Portugal and Ireland each had to be given a debt haircut of 50 percent, Deo estimates it would only cost around €1,000 per German citizen -- and it would be a one-time cost.

The calculations undertaken by ING chief economist Cliffe are similarly pessimistic. In his scenario, he assumes that the breakup of the euro zone would create many additional problems: falling stock prices, the need to bail out further banks to the tune of billions and a sharp drop in the euro exchange rate. "Compared to the presumed long-term benefits, the scope of the economic damage in the first two years would weigh heavily," he concludes. "Decision-makers," he warns, "perhaps ought to think of that before they gleefully describe the exit from the currency union as an option."

This sounds like a clear message to Europe's politicians. But it isn't just the real economy that would be affected massively by the end of the euro zone. The financial sector would also face new perils.

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