Why not making the Eurozone smaller?

In one of our recent posts (Will Germany kill the Euro?) we spotlighted the question whether Germany might turn away from the Euro und thus start off a destructive process of the Euro currency. Besides that scenario, another way would be to downsize the Eurozone. Thus, the question is if this development can been judged as likely and if so, which states would have to be kicked out of the Euro group?

In a recent statement posted on businessspectator.com (Eurozone will eventually be smaller: Roubini), US economist Nouriel Roubini rings the alarm when he said that “Eventually… [a smaller Eurozone is] likely, but before some of the weaker members exit the monetary union, the more likely scenario that’s going to affect the markets is a corrosive but orderly restructuring of their public debts.
Roubini, one of the few who had warned markets in advance of the outbreak of today’s crisis, thus does not stress that the Euro currency will be history. But he rather suggests that troubled members would need to abandon the Euro.

One can say that this strategy may lead to a stabilized Euro, to a faster growth for the remaining member states and also to faster recovery for the troubled states such as the PIIGS.

But which of the Eurozone member states would most probably keep the EURO currency? First and foremost, one can say that Germany has taken most advantages out of the currency system (Will Germany kill the Euro?) and should not see any direct problems for its own economy when it sticks to the Euro.

Even if there are discussions about the possibility of Germany getting rid of the Euro, the German state might miss what it can enjoy today:
In a  blogpost on seekingalpha.com, Mr. Cullen Roche, founder and CEO of an investment partnership, polemically points out in which respect Germany has already benefitted from the Eurozone:
They have their lowest unemployment rate in 18 years, a booming economy, zero inflation, a monopoly on the export market in Europe and total control over the ECB.

But what about the other Euro nations? It can be pointed out that at least France’s strength might come second after Germany. And after France? Which Eurozone member can be seen strong enough to stay in the group?One could stress the fact that the currency zone has established intense interdependencies between the member states. And for this reason, no country wants to abandon the Euro so easily as well.

One might have the uneasy feeling that it is too late to squeeze certain nations out of the Eurozone.
Even more, other economies would like to join the Eurozone as well. Perhaps, a compromise could be to help the PIIGS to recover fast and then kick them out so that these economies cannot trouble the Euro anymore. Obviously, there is no recipe for it. Either way, not all current member states can be satisfied at the same time.

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This entry was posted in Financial crisis and various bubbles to be continued, Monetary Policy and tagged . Bookmark the permalink.

8 Responses to Why not making the Eurozone smaller?

  1. stuerzele says:

    Thanks for this post, a very good thought you have been putting up here.
    I agree, that the situation of the Eurozone is very critical at the moment, but I don’t think a solution might be to “kick out” every weak country that doesn’t fulfill the criteria anymore, for the sole reason, that there won’t be anyone left to make a Union with.

    Additionally, if you see it from Germanys point of view, this situation isn’t so bad at all: Germany is providing money for the countries that need to get a bailout, say Greece, but this money will flow back to Germany through goods German companies sell to Greece. A very famous example for this is: Greece owns the largest Army proportional to its size in the whole EU. All these weapons come from a German company called Krauss Maffei Wegmann… [check out this article]

  2. vivipre says:

    Thanks for following up on that topic.

    I agree that making the euro zone smaller by “kicking out” weaker members could help them to regain strength, having an appropriately valued currency.

    However, referring to the interdependencies between the EU nations, it is no wonder that Germany has just emphasized its commitment to the single currency. An article in Reuters is stressing how Germany’s prosperity is tied to the euro by citing the German foreign minister Guido Westerwelle. “We Germans have a massive interest in a stable euro and a healthy Europe. At the end of the day, we export more to the Netherlands than to China, more to France than the United States and more to Belgium than India.”

    Germany, as Europe’s largest and strongest economy, will probably use all its strength to defend the euro and prevent a split of the currency zone.

  3. bravenewloock says:

    As early as 2002, the famous Munich Institute for Economic Research (ifo) saw the main significance of the Euro as follows: “The single main advantage of the Euro is the creation of a strong, independant European capital market”. Just imagine what would have happened to single European countries, and world economy, without the Euro!

  4. rudi2020 says:

    Very much indeed bravenewloock. A strong capital market and to act as one to the borders of the EU is the main ingredient for strength. That 1+1 is less than 2 and not 3 is this guy’s opinion in this dialog about expelling EU members i.e. Greece : http://tinyurl.com/Eurozone1

    He is member of FDP, a party which is constantly loosing faith in the public, so his statement is interesting, but can be doubted.

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  8. olexa5 says:

    Thanks alot for this summed up insight.
    I agree with stuerzele that kicking out every weaker country shouldn’t be the ultimate solution.

    Charming variations in dealing with the conversion of debts in future are currently wildly discussed in the media: one to be a relief for tax payers meaning a reference to private investors.

    All in all, I believe that it is necessary not to only creat a highly funded rescue net, but to also create a framework of guidelines (even legally regulated) to also ensure a senseful implementation.

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