GERMANY SHOULDN’T LEAVE THE EURO

Dennis Gartman of the Gartman Letter believes Germany is likely to leave the Euro. He says the German citizens are tired of footing the bill for the rest of Europe. On CNBC this evening he said:

“I think what ends up happening is that Germany says we’re out. We’ve had enough.”

“They had to spend billions 20 years ago to bring their Eastern neighbors back into the fold. And now they have to pay for the Italians, the Greeks and everyone else. I think they’re getting very upset with this.”

I don’t think this is quite accurate, however.  What has Germany had “enough” of?  Good times?  Germany is largely benefiting at the expense of the rest of Europe.  While German citizens complain about footing the bill for the rest of Europe, the truth is that the German economy is extraordinarily well off.   In the 10+ years since the Euro was introduced German GDP has more than doubled and unemployment has fallen to a 19 year low.    The depression that many of the periphery nations are experiencing is non-existent in Germany.

But more importantly, we have to consider the ramifications of Germany leaving the Euro at this juncture.  Remember, Germany is the strong leg in the Euro.  If they were to leave the Euro and re-establish the Deutschmark their currency would surge and the Euro would collapse.  This would immediately destroy Germany’s greatest strength – their favorable balance of trade.  This would likely result in an economic contraction and broad regional weakness.  We would likely experience a broadening banking crisis as the ECB’s safety net would collapse and borrowing costs would surge in Italy, Spain, Portugal, Ireland and Greece.  The instability would force periphery defections and a complete unraveling of the Euro.  As crisis unfolded Germany would combat their collapsing trade with greater deficit spending.  In essence, they would become exactly what they have grown to hate on the periphery – a bloated deficit spending nation with a trade deficit.  So, while it might be popular to proclaim that Germany is worse off being part of the Euro, the truth is that Germany is doing pretty damn well being a part of it.

The Euro can work.  But it requires real reform that looks more like a United States of Europe.  As it is currently constructed the Euro is destined to cause continuing turmoil and periodic crisis.  This is not sustainable.  Without these reforms we are likely to experience defaults and defections.  The obvious candidates here are Greece and Ireland.  If the European leaders are wise, however, they’ll be proactive in stopping defections and broader crisis from spreading into larger nations.  The Euro can survive this.  It need not be in the same format that exists today (fewer countries that is), but it can survive.  Ultimately, the EMU might be forced to seek greater unity through a smaller currency union.  And while smaller country defections might be healthy and necessary, I think it would be a grave error to allow any of the core components or larger Eurozone nations to be allowed to leave the Euro.

The full Gartman video is attached: