Flickr Creative Commons
Flickr Creative Commons
A euro-area breakup might appear to be inevitable at this point. But, instead of Greece being pushed out the door, analysts say an outside-the-box solution to the euro zone's sovereign-debt problem would be for Germany to voluntarily withdraw from the euro and reinstall the Deutsche mark.
There's no good outcome to debt problems, especially when they are this big and involve so many countries, said David Santschi, executive vice president of operations at TrimTabs Investment Research. It's just a matter of choosing the best of bad options.
Although a German exit is the least likely scenario, Santschi believes it is the best option.
There simply isn't a pot of trillions of euros in capital lying around in Germany or anywhere else to bail out every European bank and country, Santschi said. If it keeps going on with these bailouts, the costs of these are just going to rise enormously -- and Germany isn't as strong financially as everyone in the world seems to think.
Germany has a fairly high debt level, Santschi said. It is about 82 percent of the country's gross domestic product and much higher than 100 percent of its GDP once Germany's liabilities to all European institutions are accounted for.
They should recognize that these costs are totally unpayable and that they should just try to salvage whatever they can right now, Santschi said.
Germany will eventually have to decide whether it is worth it to continue to pour billions upon billions of euros into peripheral countries -- Greece, Ireland, Italy, Portugal, and Spain -- that don't appreciate it. And there seems to be a change of tone this week.
Angela Merkel, the German chancellor, warned her partners in Europe -- and the leading world economies in the Group of 20 -- Thursday that Germany can't single-handedly save its struggling neighbors.
Germany is strong, Germany is the economic engine, and Germany is the anchor of stability in Europe, Merkel said. But Germany's strength is not infinite.
If the financially troubled countries such as Greece and Spain were to head for the exit first and establish their own currencies, these new currencies would immediately fall in value. Meanwhile, with Germany still in the single-currency bloc, the euro would remain strong.
Even if the troubled countries leave the euro zone, they still won't be able to get away with the debt they owe to foreigners that are denominated in euros -- meaning they would have to pay back those loans with their own devalued national currencies.
As their debt burden gets even heavier, these countries might end up defaulting anyway, which would cause market chaos globally.
The real problem here is not the weakness of the periphery, but the excessive competitive strength of Germany, which accounts for a little more than 1 percent of the world's population, but nearly 9 percent of global exports.
The German economy is inherently strong due to its high productivity, but its exports have added competitiveness because the euro, as a common currency that reflects the average of the euro-zone countries' combined competitiveness, is undervalued -- making German exports more affordable internationally at the expense of its neighboring countries' exports.
Since adopting the single currency in 1999, Germany's balance of payments, a broad measure of exchanges with other countries that includes financial transactions, has soared from a small deficit to the world's second-largest surplus.
If Germany were the one to leave the euro area, the euro would be the currency that falls in value, relative to Germany's newly reconstituted Deutsche mark and the U.S. dollar. This would boost export-led growth in peripheral countries.
In addition, countries remaining in the euro zone would see their outstanding debt decline along with the value of the euro, making it more plausible for them to avoid defaults.
Yes, unfortunately, this also means banks in many countries would have big losses on the bonds they own.
But the argument would be, at this point, it's hard for anyone to walk out of this mess in one piece. What matters now is stability. It would make much better sense for the banks to slowly absorb the losses than to have sudden defaults that would trigger a global financial crisis.
Obviously, a German exit would not come without painful costs to the Germans.
They [the Germans] would have a severe recession, no question about it. But this would benefit them in the long run, Santschi said.
German exports, accounting for about 40 percent of the country's GDP, will be hit, and there could also be a temporary rise in unemployment.
However, as the Deutsche mark obtains safe-haven status, it would attract a flood of capital to Germany, thereby spurring investment, which would then feed into a virtuous economic cycle.
Meanwhile, as central banks around the world prepare for the turmoil to follow Greece's snap parliamentary elections on Sunday, Santschi warned that constant market intervention is dangerous.
What happens when the market stops responding well to the asset-price manipulation? There's no other backstop for the system after the central banks, Santschi said.
You can't defy financial laws forever.