In her euro-hegemonic role Germany failed to properly handle the Greek Crisis. What economics have been whispering among themselves after the scandalous Brussels Agreement of July 13th is now on the public discussion. One of IMF’s former European bailouts official, Ashoka Mody made it very clear in his article on Bloomberg on Friday morning: It’s Germany not Greece that has to leave the eurozone.
“The latest round of wrangling between Greece and its European creditors has demonstrated yet again that countries with such disparate economies should never have entered a currency union. It would be better for all involved, though, if Germany rather than Greece were the first to exit.
After months of grueling negotiations, recriminations and reversals, it’s hard to see any winners. The deal Greece reached with its creditors — if it lasts – pursues the same economic strategy that has failed repeatedly to heal the country. Greeks will get more of the brutal belt-tightening that they voted against. The creditors will probably see even less of their money than they would with a package of reduced austerity and immediate debt relief.”
Now the idea of a member country exiting the eurozone is not a taboo anymore. But would Greece leave the euro, it will be “possible followed by Portugal and Italy in the subsequent years, the countries’ new currencies would fall sharply in value, leaving them unable to pay debts in euros, triggering cascading defaults. Although the currency depreciation would eventually make them more competitive, the economic pain would be prolonged and would inevitably extend beyond their borders.
“But if, however, Germany left the euro area […] there really would be no losers,” Mody notes and explains his argument:
“A German return to the deutsche mark would cause the value of the euro to fall immediately, giving countries in Europe’s periphery a much-needed boost in competitiveness. Italy and Portugal have about the same gross domestic product today as when the euro was introduced, and the Greek economy, having briefly soared, is now in danger of falling below its starting point. A weaker euro would give them a chance to jump-start growth. If, as would be likely, the Netherlands, Belgium, Austria and Finland followed Germany’s lead, perhaps to form a new currency bloc, the euro would depreciate even further.
The disruption from a German exit would be minor.
Perhaps the greatest gain would be political. Germany relishes the role of a hegemon in Europe, but it has proven unwilling to bear the cost. By playing the role of bully with a moral veneer, it is doing the region a disservice.” ( full article Bloomberg).
Ashoka Mody was an assistant director at the International Monetary Fund (IMF), responsible for some of the bailouts required during the euro crisis. In his time at the IMF, Mody was in charge of the IMF’s Article IV consultations with Germany - those are the institution’s regular check-ups on each country’s economy. He was also responsible for engineering the IMF’s contribution to Ireland’s bailout.