IS A GERMAN EXIT OF THE EURO CONCEIVABLE?
     
Paul N. Goldschmidt, Director, European Commission (ret.); Member of the Advisory Board of the Thomas More Institute, issued May 29th 2013 the paper 'Is a German exit of the Euro conceivable?' in which consequences for societies are explained, effects of implications of an exit with initiated reforms are compared and attention is given to responsibility for the return of future for rising generations.

Due to many reactions on the published article on a thinkable German exit, a paper was drafted about further developments. The debate surrounding this burning question elicits political postures which are totally irresponsible and/or unrealistic, in particular in France. In addition to the outright opposition of the extremist National Front (Marine le Pen) and the Front of the Left (Mélanchon) the controversy is also splitting the UMP on the right and the Socialists on the left. This state of affairs is highly dangerous and demands that citizens should have access to a timely, sober and objective assessment of the true stakes involved. Indeed, the wantonness with which some so-called responsible political grandees promote the abandonment of the single currency is stupefying and completely overlooks the inevitable consequences of such a move.

The confusion has reached the highest echelons of the State: President Hollande, during his press conference of May 16th, called for an “economic government” of the Eurozone, endowed with an independent budget leading, in fine, to the issuance “Eurobonds” while, a few days later, he rebukes unceremoniously the Commission for daring to issue recommendations on structural reforms (as a quid pro quo for a two year grace period to meet budgetary undertakings) wholly in keeping with the exercise of its  legitimate mandate.  In addition, one hears within the socialist party such crazy proposals (totally unmanageable) as making the ECB accountable to Eurozone National Parliaments when it should be obvious that this role should be devolved, after suitable reforms are in place, to the European Parliament.

A first unjustified amalgam, carefully nurtured by extremist parties, is to ascribe responsibility for the financial crisis and the ensuing austerity to the single currency and to pretend that the solution lies in “euro exit”! If it is undoubtedly true that errors were committed, in particular by not pursuing the completion of EMU in the immediate aftermath of the introduction of the single currency in 1999, it is also indisputable that the Eurozone has proved to be an efficient protective barrier for its Members – as well as for the EU in general – in the face of the spreading of the crisis. Without the Euro, EU Members would have had recourse, as in the past to competitive devaluations, undermining the fundamentals of the “single market” of which even the United Kingdom is a fierce proponent.

Within this context, it is worth pointing out the implicit contradiction in Mrs. Le Pen’s reasoning: indeed, if, as she purports, the Euro is too strong, then it behoves the Eurozone to agree on a foreign exchange policy which, in tandem with a compatible monetary policy implemented by the ECB, would aim at weakening the currency; in order to achieve this goal it is necessary to further strengthen economic cohesion within EMU. This solution is, of course, totally incompatible with a French exit from the Euro which would lead to the implosion of EMU and a return to a chaotic “free for all”. Mrs. Le Pen (together with other currency pyromaniacs) must therefore nail clearly her colours to the mast and decide whether she favours reinforcing the Eurozone so as to engineer a foreign exchange policy capable of defending European interests (stance that would justify the parallel she draws with Japan) or, alternatively, whether recovering French monetary sovereignty is the priority which would imply an unilateral devaluation, apparently assumed, but catastrophic for the population’s purchasing power.

It is, however, this latter option that appears to prevail and it behoves its proponents to fully assume the consequences. If the 1930 crisis is too remote to elicit a coherent reaction  from  the public when compared to the current situation, it might be appropriate to recall another more recent crisis of equal amplitude which is still fresh in our memories: the implosion of the Soviet Union and of its associated common market, the “Comecon”. One should indeed recall that each and every country implicated in the process were hit by a severe and immediate fall in living standards before progressively (and to varying degrees) climbing back up the “growth ladder”, helped, in many instances, by joining the EU.

The implosion of EMU (and consequently of the EU) would inevitably have similar disastrous effects for all Europeans which, in addition, would have to face a prolonged period of exchange controls, reminiscent of post World War II years, in order to contain capital flight. While in the case of the implosion of the communist world, the sacrifices required found some compensation in the expected significant improvements in terms of freedom and human rights, no such incentive will be on the horizon for EU citizens. Quite to the contrary, a reduction in purchasing power and other inevitable restrictions are likely to create diametrically opposite effects, exacerbating social conflict and leading to dictatorial political regimes; the latter will lead to the loss of most of the economic, social and political progress that European citizens, abusively, take for granted and which constitute today the hallmark of the EU’s envied achievements.

It is the truth of this “disenchanting” future that must be presented to the Europeans as the alternative to pursuing the deepening of sixty years of European integration. There can be no doubt that reviving the attraction of European construction involves painful sacrifices, including further transfers of national sovereignty which will be fiercely contested by the national-populist and euro sceptic battalions. Nevertheless, the preservation of European values and the achievements of its social model can only be guaranteed at EU level; solidarity among European citizens requires accepting, in exchange for additional shared rights, the corresponding shared obligations.

That is why the European elections next June will have such a crucial importance for the future of the Union. Indeed, there will be a strong temptation to convince the elector that he can, without fear of adverse consequences, use his vote to protest with impunity against the shortcomings of the Union by supporting the “euro sceptic” platforms. In light of the increased powers of the EP granted by the Lisbon treaty, such an outcome would result in the total paralysis of the EU. Exit from the economic crisis would be further delayed increasing the chances of the implosion of the Euro and the verification of its consequences as outlined here above. One should also not overlook the possibility that, if such a result became likely, markets would accelerate the process and create ahead of the vote a new financial crisis, the magnitude of which would quickly run out of control.

The time for yet further compromises is now over. Either the European citizen will be persuaded that his selfish interests as well as those of future generations are best insured by further EU integration with its challenges and difficulties but also carrying the hopes of better times, or else he should prepare himself to endure a long term and irreversible impoverishment and contemplate the end of the attraction of the European civilisation.

Lorgues, June 11th 2013

Paul N. Goldschmidt
Director, European Commission (ret.); Member of the Advisory Board of the Thomas More Institute.

------

Is a German exit of the euro conceivable?

The recent appearance of a euro sceptic political party “Alternative für Deutschland” (credited with 7% of voter support) advocating the exit of the Euro by Germany should come as no surprise. It fits in perfectly with a general feeling of euro-scepticism that is gradually affecting a growing number of citizens, disillusioned by “Europe’s” apparent failure to find solutions to the crisis.

If the emergence of such a party has been so long delayed in Germany, it may be due to the fact that the arguments put forward are diametrically opposed to those advocated by other would be candidates for leaving the Euro. To summarise, at the risk of oversimplifying, Germans “are fed up paying for others” while “the others dream of recovering their monetary sovereignty”; that would allow the latter to devalue and thus postpone and/or water down the necessary structural reforms by allowing inflation to bear part of the strain; thus they would attempt to bury the corresponding decrease in consumer purchasing power for which they would deny any responsibility.

This irreconcilable dichotomy between the aims of the “new” German euro-sceptics and those of their European homonyms is the best proof that managing serenely (and technically) a restructuring of EMU is nigh impossible, whether it takes place in the form of the exit of one or several Members or under the guise of an even more complex alternative aiming at establishing two parallel currency blocs.

Does this mean that a German exit, or for that matter any exit, of the Euro is impossible? Certainly not! However, one should not overlook the disastrous consequences that the implosion of the single currency would have on all EMU Members, which would by far exceed the efforts of austerity imposed on some and of solidarity requested from others that would flow from the acceleration of the integration of the Eurozone needed to ensure its resilience.

Indeed, one should avoid succumbing to self deception: an exit by Germany of the Euro leads inexorably to the implosion of EMU and the death of the EU itself. Looking beyond the purely financial and economic implications which are bound to have incalculable global consequences, the risk of challenges to key values such as democracy, freedom, the rule of law etc., leading to social chaos will run extremely high; the present and recent past during which inequalities have exploded both dramatically and inexcusably might well appear by comparison a blessed time indeed!

Beyond the “political” responsibility assumed – more often than not in bad faith – by the advocates of “eurexit”, one should also underline the purely technical aspects that render the abandonment of the Euro a highly risky proposition.

The introduction of the Euro was based of the legal concept of “the continuity of contracts”. Thus, all contracts denominated in tributary currencies to the Euro were redenominated, without the slightest hitch, in the single currency on the basis of fixed parities determined on June 30th 1998.

The concept of continuity of contracts should therefore, logically, also be applied in the event of withdrawal from EMU. Any other rule would necessarily lead to legal challenges, at least on behalf of parties domiciled outside of the departing country’s territory where coercive measures could be imposed or, alternatively, if the contested contracts were drafted under the laws of a third party’s jurisdiction. Thus, Sovereign debts issued in Euro should be redeemed in Euro and not in a new currency whether it were devalued or re-valued in relation to the single currency. If the law may impose a conversion on its own citizens on an arbitrary basis, a unilateral extension of such a regime to foreign investors would be assimilated to an “event of default”, preventing any further access of the issuer to international capital markets; for a country such as France, that would mean the impossibility of an orderly refinancing of its debt on acceptable terms.

As far as Germany is concerned a unilateral re-valuation of its currency would lead to a corresponding devaluation of all public and private claims denominated in Euro. This would induce cascading defaults by German companies facing continuing outlays in a re-valued domestic currency while enduring simultaneously the loss of export markets on which their current prosperity is built. The losses of German banks having granted loans in Euro would impose on the Government renewed bail-outs of an unprecedented size; it would exceed by far the amounts required to finance the alternative consisting in the strengthening of the Euro by implementing the initiatives already in place (Budgetary treaty, six and two packs, EMS, etc.), those currently under discussion (Banking Union, FTT, etc.) or those still at the stage of proposals (an EMU budget, EU own resources, debt mutualisation, etc.).

The multi-lateralisation of debts and claims resulting from the implementation of the single market and single currency, has created a web of interdependence, the fabric of which has become so dense within EMU that its dismantling appears quasi impossible without deeply upsetting the functioning of normal economic and financial circuits; through a process of contagion, these effects are bound to spread rapidly throughout the entire world markets.

The advocates of “turning the clock backwards” should be forced to explain clearly how they intend to manage the process: would it be the result of a “negotiation” with the risks of leaks and a collapse of financial markets due to the inevitable uncertainties? Would it be the result of a “unilateral decision” with obvious risks of chaos and retaliation? Would the measure be accompanied by “exchange controls” or a partial restriction of access to bank accounts creating the paralysis of both internal and external markets? The botched Cyprus rescue operation which has led to its “virtual” (temporary?) exclusion of the Eurozone should be a stark reminder to the pyromaniacs who play around with currencies that “money” constitutes the essence of a  “public good” and should not be tampered with lightly. The Euro whose strong underpinnings have not been challenged so far, as demonstrated by the €/$ exchange rate, could be brought to its knees from the moment public opinion would withdraw its trust, killing any hope of any orderly monetary restructuring.

A German exit from the Eurozone, as well as any decision by other Members having comparable effects is, by all means, conceivable as it is certainly not the first time in history that mankind has been tempted to take unwarranted risks. Such an option cannot, however, be considered by a very wide margin a solution capable of delivering less austerity, better growth prospects and the re-emergence of a stabilised environment.

On this particular topic, it is important to point out that the current debate surrounding a reorientation of “Europe’s” priorities does not, contrary to popular belief encouraged by some governments, challenge the need for continued austerity. Rather, instead of focussing the required efforts quasi exclusively on budgetary discipline which proves in the end counterproductive, emphasis is now put on structural reform which is actually another facet of austerity. Citizens will come to realise this fully when the necessary reforms aiming at pensions, entitlements, the tax code, labour legislation, public expenditures are fully implemented as their aim is clearly to reduce public deficits over time; these changes should be as “fair” as possible so as to minimise their impact on the more vulnerable elements of society. As “Guardian of the Treaties”,  there cannot be the slightest doubt that the Commission will exercise the same vigilance over the implementation of structural reforms as it has shown, at Member State’s request, in monitoring compliance with strict budgetary discipline.

On the other hand, whichever may be the sacrifices needed to engineer the deepening of European integration, they will carry, in due course, a hope of ultimate recovery, if not for our own immediate benefit, at least for the sake of rising generations who are being robbed of their future and for which we all bear a very heavy responsibility. Only then can a reinforced European Union aspire to play its rightful role and exercise significant influence within the context of a globalised and multi-polar world.

_______________________________________________________________________________________________________________________________________________________________
Tel: +32 (02) 6475310                                 +33 (04) 94732015                         Mob: +32 (0497) 549259
E-mail: paul.goldschmidt@skynet.be                                             Web: www.paulngoldschmidt.eu