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Andreas Mueller Headshot

Germany Forced to be Europe's Sole Savior

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Since the introduction of the Euro in 1999, the twin pillars, Germany and France, the largest and healthiest economies with current shares of 27.1% and 21.2% of total gross domestic product respectively, have been successfully leading the Eurozone. Now, it looks as if Germany might have to be the sole leader during the present Euro crisis with the indebted countries being Portugal, Italy, Ireland, Greece and Spain, the so called PIIGS states that are mainly suffering from public debts, budget deficits and high unemployment rates.

France is in massive trouble with its own financial system and at the same time also suffering from a poor economic growth. The breakdown of the French-Belgian Dexia Bank and the latest announcement of a potential downgrading by Moody's to lower France's top credit rating AAA confirmed this development.

This will leave Germany as the only European G7-country with a flawless overall rating. The numerical extent of the crisis can be pictured best by the amount of money that is now pooled through a variety of funds by the European Union, the European Central Bank and the International Monetary Fund. These funds provide liability to countries in case of default risk, which are paid to the governments and their banks.

As recently calculated by the leading German business newspaper Handelsblatt, this total amount encompasses 2.075 billion dollars, of which Germany will have to guarantee the largest share with 526 billion. The sum is split between all 27 members of the European Union, from which 17 are unified in the single currency zone, according to population and GDP. Hence, this crisis is of major importance for the future of Europe, but the development overseas is also crucial for the United States, for no other economic relationship in the world is as integrated as the transatlantic economy.

The EU and US economies account together for about half of the entire world GDP and for nearly a third of world trade flows, according to present date facts by the European Commission. Thus, it is not just the Euro that is at risk, but also the future of the European Union and the health of the World Economy. In fact, the current global economic structure is shifting from a uni-polar system, with the United States at the top, to a multi-polar system, which is characterized by other countries converging in per capita income through constant superior economic growth.

Being a solitary country and reliable to all its partners, Germany and its public have always agreed on and were even obligated by the European Law, to pay for less developed countries in the South and East. Germany, with its strategic favorable location in the heart of Europe, has ever since its foundation also enjoyed great economic opportunities within the Union by trading products of industries and services borderless. Recent numbers also prove a solid economy balance for Germany.

With the fifth highest GDP worldwide, a moderate unemployment rate close to 7.0% and a booming export industry, the economy looks healthier than ever before. However, there are limits in the ability and willingness to stand up for inferior performers when considering the increasing problems with its Southern European fellows. This can be illustrated with the reassignment of German Juergen Stark, former European Central Bank chief, after further solid financial support has lately been granted to Spain and Italy by European politics.

Besides the question whether or not Germany's public is willing to accept these likely fiscal extra loads, the more important issue therefore should focus on if they are at all able to save the Euro and bear the extra costs; Or do Germany and other strong European countries even see their way out of this dilemma with a completely different alternative?

By European law, no weak country can be forced to leave the Euro and as probably none of them will abandon by choice, a potential solution for these strong countries could be: To leave the Euro themselves to potentially found an own new currency.

In September, an analysis by the Swiss Bank UBS showed imminent economic consequences for these scenarios: In the first year after leaving the Euro, the GDP of weak countries might drop by 40 to 45%, with subsequent annual costs of 15%. For strong countries, leaving the Euro might imply a loss of 20 to 25%, and then approximately half of that in the following years. However, this analysis is based on the assumption that leaving the Euro also includes parting from the European Union (including spacious economic consequences). European politics will try to avoid this in either case, to preserve stability and the single market, real consequences might be somewhat lower, as was stated in The Economist in one of its latest issues.

Considering the contemplated costs, Greece and the other lagging countries will almost certainly not leave the Euro. Pursuing the plan with an own strong currency for Germany along with well performing associates, such as Austria, Finland and the Netherlands, does neither appear to be a profitable way out. Additionally, each of these alternatives will probably cause a breakdown of the banking system and the total economy in the poor countries, which in return will generate difficulties in Germany or within the new union as well. Germany as a value-adding economy with little natural endowments relies heavily on exports with more than a third of its total GDP. Considering the likely appreciation of its currency following this decision, it will result in a loss of competitive advantages. Additionally, financial assets and bonds by German banks in the now depreciated countries will become close to worthless.

Finally, the question is not whether Germany is able to stem the burden of saving Europe and lead it out of its crisis. Therefore, as it seems the only possible exit strategy when considering all named scenarios, is that Chancellor Merkel has no other choice but saving the weak countries by aiding with full strength to not jeopardize her own economy. The public will have to understand and accept the lesser evil. "The Euro is much, much more than a currency," as Merkel recently announced in Der Spiegel, Germany's top news magazine, "the Euro is the guarantee of a united Europe. If the Euro fails, then Europe fails."

Nake M. Kamrany is Professor of Economics and Director of Program in Law and Economics at the University of Southern California. Andreas Mueller is a Research Associate of the Global Income Convergence Group in Los Angeles.