One of the IMF's former European chiefs says Germany, not Greece, should leave the euro

Five years ago Ashoka Mody was an assistant director at the International Monetary Fund (IMF), responsible for some of the bailouts required during the euro crisis — but now he thinks it would be best if Germany left the eurozone.

He made his argument on Bloomberg View on Friday morning.

In his time at the IMF, Mody was in charge of the IMF’s Article IV consultations with Germany — those are the institution’s regular check-ups on each country’s economy. He was also responsible for engineering the IMF’s contribution to Ireland’s bailout.

Unlike most people, Mody is happy that German finance minister Wolfgang Schaeuble broke the taboo of officially discussing countries leaving the euro recently.

But he wants to discuss that for a different reason than Schaeuble: “It would be better for all involved, though, if Germany rather than Greece were the first to exit.”

Here’s the crux of the argument:

A German return to the deutsche mark would cause the value of the euro to fall immediately, giving countries in Europe’s periphery a much-needed boost in competitiveness. Italy and Portugal have about the same gross domestic product today as when the euro was introduced, and the Greek economy, having briefly soared, is now in danger of falling below its starting point. A weaker euro would give them a chance to jump-start growth. If, as would be likely, the Netherlands, Belgium, Austria and Finland followed Germany’s lead, perhaps to form a new currency bloc, the euro would depreciate even further.

In short, the currency union was a bad idea — but it might be split into two more complimentary parts. The value of the new southern euro would be considerably lower, a good thing for the countries in the south.

Mody also notes that although Germany’s export explosion might lose a bit of steam, it wouldn’t be a bad thing for ordinary Germans to have a much stronger currency, since they’d become richer in reality. When the Swiss Franc un-pegged from the euro earlier this year, sending the value of Switzerland’s currency surging, Swiss manufacturers whined — but ordinary people flooded out into neighbouring French towns to snap up the newly-cheaper goods on offer.

There’s not much benefit in that sense for Greece to leave the euro. It’s a country of 11 million people, with a GDP similar to that of Lower Saxony, one of Germany’s 16 states. Its departure won’t strengthen the euro considerably for German households, and the currency will still be too strong for Italy and Spain and Portugal.

He finishes the article with a political argument about Germany’s place in Europe:

Perhaps the greatest gain would be political. Germany relishes the role of a hegemon in Europe, but it has proven unwilling to bear the cost. By playing the role of bully with a moral veneer, it is doing the region a disservice. Rather than building “an ever closer union” in Europe, the Germans are endangering its delicate fabric. To stay close, Europe’s nations may need to loosen the ties that bind them so tightly.

It’s an argument that George Soros has been known for making, and it’s compelling in a lot of ways — even if it’s incredibly unlikely to happen.

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