Don’t Believe the Hype: Why Germany Needs Greece to Stay in Euro

By Simon Kennedy  Jan 8, 2015 1:08 PM GMT+0200

Bloomberg

Don’t believe the hype.

A reading of the German press suggests Chancellor Angela Merkel is at peace with the idea of Greece quitting the euro. Der Spiegel says her government views that as a manageable outcome; Bild reports that officials are preparing for the prospect. Lawmaker Michael Fuchs says Greece is no longer a threat to financial stability.

All that is mostly posturing for an electorate tired of the aid and angst Greece has demanded since 2010. In fact, Germany has no interest in risking the dissolution of the single currency that a Grexit could entail.

That’s because the status quo is a boon for Germany economically and politically. Indeed, the biggest European economy benefits more than most of its fellow euro members from the single currency. While a Greek departure alone may not end the euro, the risk would be of contagion through the bloc’s financial markets that forced others out.

If it had to return to the deutsche mark, German exporters, which account for about half of gross domestic product, would become much less competitive and Merkel’s prized current-account surplus would shrink. Inflation would weaken further.

Boris Schlossberg of BK Asset Management in New York reckons a deutsche mark would now trade around $1.50, about 25 percent more than the euro’s level of about $1.18.

A 2013 report by the Bertelsmann Foundation estimated that without the euro, German GDP would be about 0.5 percentage point a year smaller through 2025 -- equivalent to a loss of 1.2 trillion euros, or 14,000 euros per resident -- and cost 200,000 jobs.

McKinsey Study

A McKinsey & Co. study in 2011 estimated that of the 332 billion euros the single currency helped generate for the region’s economy in 2010, about half of it flowed to Germany.

Such numbers dwarf the 77 billion euros that the Ifo economic institute calculates Germany contributed to Greece’s bailout.

On the geopolitical stage, Germany would also see its star dimmed. Former U.S. Treasury Secretary Timothy F. Geithner last year identified German Finance Minister Wolfgang Schaeuble as the go-to-guy for the U.S. during Europe’s crisis. Russian President Vladimir Putin would also welcome strains on the continent.

“Europe can’t afford a Greek exit,” Joachim Poss, the Social Democrats’ deputy finance spokesman in the German parliament, said in an interview this week. Suggestions by allies of Merkel that the 19-nation currency bloc could weather Greece’s departure amount to “playing with fire,” he said.

To contact the reporter on this story: Simon Kennedy in Paris at skennedy4@bloomberg.net

To contact the editors responsible for this story: James Hertling at jhertling@bloomberg.net Kevin Costelloe