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Germany's currency nostalgia is badly off the mark


Let's hope Germany thinks hard about George Soros's recent proposal that it should lead the euro system or leave it. The more carefully Germans study this choice, the more eager they will be to make the present system work.

Many German voters are understandably sick of their euro adventure. The next phase of crisis management, following the ECB's promise earlier this month to buy the bonds of struggling economies, will demand new fiscal outlays from German taxpayers and expose them to greater risk of losses later. Their growing resentment of Greece, Ireland and Portugal calls into doubt Europe's efforts to stem the crisis and threatens the euro's viability.

Germans might reconsider their nostalgia for the Deutsche mark, though, if somebody -- their own government, for instance -- had bothered to spell out the alternatives.

Up to now, the obvious alternative to keeping Greece and the others afloat has been for them to leave or be ejected.

Europe's governments made an irreversible mistake when they accepted that a euro break-up was possible. This further undermined the system and made the European emergency harder to manage. Still, ejecting the weak remains unlikely because everyone understands it would cause immense damage.

Ejecting the strong is a better idea. Some have argued that Germany and a small number of other states should form their own currency club.

And consider the proposal that Germany should gradually re-introduce the mark. Resurrecting the mark has one main thing in common with ejecting the weaklings, and one decisive difference. What they have in common is a currency realignment that would improve the weaklings' competitiveness.

The crucial difference is that Germany's exit would not require wholesale redenomination of financial contracts and the mayhem that would result if countries such as Greece were booted out. If Germany brought back the mark, it would have both its strong creditor status and an appreciating currency, so its euro-denominated contracts could all be left in place.

There would still be complications, to put it mildly.

Nonetheless, a German exit would improve the weaklings' competitiveness without the risk of contagion.

What's the catch? Mainly this: the counterpart of growing exports and higher employment across the rest of the euro system would be falling exports and higher unemployment in Germany. The new Deutsche mark would probably appreciate enough to push Germany into a deep recession.

That's why Germans should ponder Mr Soros's suggestion, and be careful what they wish for. Surrendering the mark gave Germans an export performance and balance-of-payments surpluses that they otherwise wouldn't have enjoyed.

And let's not forget those surpluses were recycled as unsafe lending to Europe's weaklings.

So far, the division of the burden of adjustment between bad borrowers and bad creditors has been much to Germany's advantage. The Irish economy was crushed to keep creditors whole. Ask the Irish, who have been treated unfairly.

The Germans' posture of moral superiority in this crisis is false. If a sense of shared responsibility isn't enough to bind Germany to its neighbours, maybe naked self-interest will do the trick.

Clive Crook is a Bloomberg View columnist

Maeve Dineen's column will now appear in Saturday's paper

Irish Independent