Ireland can't ditch the euro. Germany should. Or it could rule Europe instead… – Telegraph Blogs

Saturday 12 July 2014 | Blog Feed | All feeds

Daniel Knowles



Does Germany want to rule Europe again?

Does Germany want to rule Europe again?

Last week everyone was worrying about China and its alleged currency manipulation. I thought the world was about to embark on another tortuous slanging match about "global imbalances". That was stupid of me. Unsurprisingly, everyone has been far too distracted by the economic train crash that is Ireland. And a train crash is a fitting metaphor.

As Daniel Hannan has explained, Ireland’s problem with the euro was that it let the Irish economy run too fast, for too long. Ireland needed much higher interest rates than Germany to slow it down and it didn't get them. Eventually, it had to come off the rails.

Dan suggests that the solution is for Ireland to pull out of the euro, devalue and use sterling. I’m not convinced. As Barry Eichengreen explains here, exiting the euro would cause "the mother of all financial crises". Everyone holding any Irish debts would anticipate the devaluation and instantly call them in. Essentially, it would be equivalent to a total default – something Ireland is desperate to avoid.

But, though Ireland pulling out of the euro would probably result in disaster, there is actually a solution that would work rather well. As several commentators have pointed out, instead of weakening Ireland’s currency, we can just strengthen Germany’s.

While southern Europe and Ireland were overheating, Germany was getting progressively more competitive. Now, it is running a current account surplus of 6.1 per cent of GDP – much bigger than China’s 4.7 per cent. Germany’s immense export prowess is dragging up the euro, and just as happened with America and the gold standard in the 1930s, it is compounding the problems of every other European country by forcing them to deflate painfully.

For the sake of Europe (the region – not the EU), Germany should abandon the euro and let the resurrected Deutschmark appreciate. At a stroke, it would relieve the pressure on Ireland, as well as on the rest of Southern Europe, by making their economies more competitive and their debts relatively less arduous. Over time, the single currency could be killed off, with surplus countries progressively pulling out, and the huge imbalances within Europe could finally be unwound.

Unfortunately, there is one other solution. That is that Germany bails out Ireland, and then Greece, and then Portugal and so on, until the rot finally stops. German taxpayers might not like it, but if they are convinced that the alternative is the death of Europe, they will accept it. Eventually, Germany will end up running every economy in Europe like it runs the German one, and the eurozone will have found itself a federal superstate almost by accident.

But then perhaps that was the plan all along.

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