After all that has happened in the Eurozone, many came up debating what would happen in case some of the so called  P.I.G.S. countries would leave the monetary union without posing the question whether the probability that, for example, Spain leaves the Eurozone would be greater than the possibility that Germany would do so.

IMG_5839There are many debates about, literally, getting rid of the European currency. Keynesians believe that leaving the euro area would not be beneficial to Germany due to an appreciation of its currency that would undermine its economy. But in the long run, such a scenario would be a debacle.

What is obvious from the claims of the Keynesians and mercantilists is that in case there would be the possibility that Germany leaves the Eurozone, its currency would start to appreciate sharply, which could reduce its imports and put the pressure on German economy.

However, if one considers many other aspects of this situation there might appear the disagreement, since there would be a negative impact in the short term, as with any scenario involving the fate of the Eurozone, but in the long time approach it might not necessarily be disaster.

Industry

For example, certain goods Germany exports will not be replaced by some other country’s substitutes, even if the price increase in foreign currency as demand for certain goods is less elastic or not, such as pharmaceuticals, luxury cars and some high-tech products. Then, as almost all countries, Germany uses a lot of imported products. A currency appreciation would increase the purchasing power German population. People have more disposable income to purchase other goods, some of which are produced in Germany, which would ease the impact of declining exports.

Also, Germany produces cars and industrial goods, but it does not produce a lot of resources, such as oil, zinc, steel, copper, rare metals or natural gas that are used in their manufacture. A currency appreciation would therefore be significantly lower costs of production inputs and ease the impact.

Interest rates

The question is what would happen to interest rates in Germany in a scenario as such. The answer might be that they would drop, so the financing costs of companies would reduce, which also cushion the impact of declining exports. Besides that, German companies could use their preferred currency to make acquisitions abroad. Repatriation of profits would inflate revenues of the state, which would improve even more flexible budget, so it could possibly reduce business taxes, which would also absorb the shock of the currency.

From this standpoint there is no doubt that this scenario is the best for German people, and this is what their citizens actually would prefer. The question is whether politicians will respect the wishes of the people as they claim that they practice the democratic principles. However, there would be no surprise if they would be willing to dismiss the democracy for their own ends.

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