29 May 2013

Paul N Goldschmidt: Is a German exit of the euro conceivable?

The recent appearance of a eurosceptic political party, Alternative für Deutschland, advocating euro exit by Germany should come as no surprise. It fits in perfectly with a general feeling of euroscepticism that is gradually affecting a growing number of citizens, disillusioned by "Europe"'s apparent failure to find solutions to the crisis.

The recent appearance of a eurosceptic political party “Alternative für Deutschland” (credited with 7 per cent 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 euroscepticism 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 eurosceptics and those of their European homonyms is the best proof that managing serenely (and technically) a restructuring of EMU is nigh on 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 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 euros should be redeemed in euros 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 euros. 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 euros 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 focusing 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 States' 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.

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

Tel: +32 (02) 6475310 / +33 (04) 94732015 / Mob: +32 (0497) 549259

E-mail: paul.goldschmidt@skynet.be / Web: www.paulngoldschmidt.eu

© Paul Goldschmidt