In memory of Dr. Andreas Höfert

A real alternative for Germany?

| Tags: Andreas Höfert

People in Southern Europe are not the only ones more and more antagonized by the euro. Also in Germany, anger and frustration against the common currency are getting louder. The latest irate expression has been the recent creation of an anti-euro party “Alternative for Germany” (AfD).

Its program is straight to the point. “The Federal Republic of Germany is caught in the worst crisis of its history. The creation of the euro was a fatally erroneous decision which now threatens our prosperity. The old parties are exhausted and intractable. They stubbornly refuse to recognize and correct their error. We demand an orderly disbandment of the Eurozone. Germany doesn’t need the euro. The euro is harming other countries…” and so forth.

The reactions of the “traditional” German parties from left and right of this new initiative ranged unequivocally from contempt to ridicule, stating that such a program is a “dangerous nostalgia,” pointing out that AfD doesn’t bother about the complexity of “leaving the euro,” and dismissing it as “populist.”

This last term particularly seems to have become the euro-compatible vernacular to deride every politician in Europe who questions the official mantra that “there is no alternative to the euro” or as Chancellor Merkel has stated, “if the euro fails, then Europe fails.”

Despite this, AfD shouldn’t be taken lightly. The party could harm Merkel’s Christian Democratic Union (CDU) and especially its ally the Free Democratic Party (FDP), which will need to surmount the 5% threshold of voters in the federal elections to be held on September 22. A recent poll showed that some 24% of German voters were considering listening more closely to what AfD had to say.

AfD could have gained still more momentum after the publication of a study by the European Central Bank suggesting that on comparison with other Europeans even in some of the peripheral countries, Germans have less wealth or fewer assets. Indeed, what this study  shows is that the median German household in 2010 was poorer than the median Cypriot, Spanish or Greek household.

Is a German exit from the Eurozone even realistic? How much would it cost? Using unit labor costs as a variable showing the disequilibrium between Germany and the rest of Europe, it is safe to say that a new German currency would likely appreciate by 20–30% just to equilibrate the current account imbalances (the huge German current account surplus and the immense current account deficits of many peripheral countries) within the Eurozone. Given that currency markets tend to overshoot, the appreciation of the German currency could be even larger.

Direct costs for such a move would stem from the hindrances that would suddenly confront German exporters. But this is not the worst of it – that would come from many German economic entities, which would suddenly have massive balance sheet problems. Consider a German pension fund which would now pay its pensions in the new currency, while owning many assets (like French government bonds) in other weaker currencies, or a German bank with deposits now in the new currency, but which would have lent to Italian or Spanish firms, or Familie Bürger, with a mortgage now in the new currency on their finca on Mallorca.

On the positive side, the results of the ECB study would no longer hold, since the wealth of the median German household would now be in the new currency, appreciated in comparison with the wealth of the median Greek household.

Leaving the euro is certainly possible for Germany but it might be quite costly economically, not to mention the political damage that such a step will certainly do. Hence in my view, despite AfD pressure, a German exit of the euro remains far less likely than the exit of a peripheral country.