Maybe Germany should turf itself from euro zone

ROME -- ereguly@globeandmail.com

The world's biggest ATM machine, the euro zone's €440-billion ($579-billion) sovereign rescue fund, is about to be plugged in. The first countries to slip their cash cards into the dispenser might be Greece, Portugal and Spain. You can almost hear the collective moan from Germany, the main sponsor of the fund. If those countries drain the ATM machine, German taxpayers will be out more than €150-billion.

This is Germany's reward for having a successful economy: It gets to pay for the economic sins of the countries that lived way beyond their means. They spent too much, built too many condos and allowed wages to soar, making them uncompetitive. They saved and exported too little. Germany did the opposite.

Not only will Germany have to pay for its lazy and feckless Mediterranean neighbours, it is getting some blame for their woes. Everyone from hedge fund billionaire George Soros to French Finance Minister Christine Lagarde has accused Germany of making a bad situation worse by running a high trade surplus (which has to be met by a deficit somewhere else) and by not stimulating domestic demand. The Americans worry that Germany's fairly ambitious austerity plan increases the odds of a double-dip recession or deflation.

Germany can't win. You have to wonder how much longer it will put up with the absurdity of taking the blame for, and having to finance, the euro zone's economic slugs. Maybe it's not Greece that should be turfed out of the euro zone, a scenario many Germans would like to see (all the more so since it lied for a year about the true extent of its budget deficits). Maybe Germany should turf itself out and bring back the mighty deutsche mark, which was sacrificed 11 years ago to make way for the euro.

You have to remember that Germany gave up its currency reluctantly. The deutsche mark and the Bundesbank, the inflation-wary German central bank that protected it, were revered. Trust in the rock-solid currency fuelled Germany's postwar economic miracle. Until a year or so ago, when China took its place, Germany was the world's biggest exporter of manufactured goods.

Before the financial crisis hit in 2008, Germans had grown to accept the euro, partly because the European Central Bank, which is based in Frankfurt, was stuffed with old Bundesbankers, and partly because they believed the euro zone's "no bailout" clause was ironclad. If countries like Greece couldn't pay their debts, they would be given no opportunity to shake down foreign taxpayers to fix their problems.

Of course the "no bailout" clause proved to be fiction. In the spring, when Greece could no longer fund itself, and bond yields were soaring in Portugal and Spain, the euro zone countries agreed to set up a €750-billion "shock and awe" package to stabilize the currency and debt markets. The package is dominated by the €440-million sovereign rescue fund, whose biggest contributor is Germany.

Germans have since gone from tolerating the euro to disliking it, in spite of Chancellor Angela Merkel's belated support for the rescue package. In an opinion poll published on June 30 in Germany's Bild newspaper, 51 per cent of respondents called for a return to the deutsche mark. Before the financial crisis hit in 2008, only a third of respondents wanted their old currency back.

There is no chance the euro will disappear any time soon, opening the door for the deutsche mark's relaunch. German business and industry like the euro and the way it greases the export machine - exports make up more than 40 per cent of the country's gross domestic product. The euro's recent slump has pumped up the foreign sales of BMWs, industrial tools, solar panels and other goods, lifting the share prices of the companies that make them.

Voters don't share the same view. What is good for exporters is not necessarily good for them. The sovereign debt fund might have to be tapped in the next economic shock, even though both Portugal and Greece conducted successful bond auctions this week. The debt sales didn't change the fact that Greece is buried in a financial black hole. Its budget deficit is 13.6 per cent of GDP and its debt to GDP ratio is 115 per cent. As New York University economist Nouriel Roubini noted, the corresponding figures in Argentina when it defaulted in 2001 were 3 per cent and 50 per cent.

Greece has already accepted a €110-billion bailout package from the European Union and the International Monetary Fund. If it needs more, and Portugal and Spain follow with expensive bailout demands of their own, German voters would recoil in horror at the thought of deadbeat countries draining the German (and French) treasury, all for the sake of keeping the euro twitching.

At that point, one of three things could happen. Germany could demand, and get, full fiscal union among the euro zone countries; the countries on life support could be invited to leave the euro zone; or Germany could pull out of the common currency and bring back the deutsche mark.

The first option would be preferable, but might not happen fast enough to prevent the second or third scenarios from happening. In a recent economics report, UBS said: "In the long term, we do not think the common currency can survive."

Could the euro survive without Germany? Unlikely. The better question is whether German taxpayers can afford to keep the euro floating in a sea of unbalanced economics. The deutsche mark must look awfully appealing to Germans at the moment.