Ashoka Mody: Germany should leave euro

One of the IMF’s former European chiefs has claimed Germany should leave the eurozone after breaking the political taboo of suggesting a member state could exit the common currency.

Ashoka Mody, the IMF’s ex-head of mission to Ireland, wants Germany, not Greece, to leave the eurozone so it can operate more efficiently in its absence.

Like many economists, Mr Mody thinks the common currency is a fundamentally flawed construct the likes of Greece and Germany too dissimilar to operate. He claims a German exit would have limited negative impact.

“If Germany left the euro area… there really would be no losers,” Mr Mody wrote on Bloomberg View. “A German return to the deutsche mark would cause the value of the euro to fall immediately, giving countries in Europe’s periphery a much-needed boost in competitiveness.

“The disruption from a German exit would be minor. Because a deutsche mark would buy more goods and services in Europe (and in the rest of the world) than a euro does today, the Germans would become richer in one stroke.

"Germany’s assets abroad would be worth less in terms of the pricier deutsche marks, but German debts would be easier to repay.”

Such a scenario is in stark contrast to the likely scenario that would arise should Greece exit the euro.

Mr Mody is critical of the deal reached which saw Greek prime minister Alexis Tsipras accept tough reform measures in exchange for up to €86bn in financial assistance.

“The deal Greece reached with its creditors — if it lasts — pursues the same economic strategy that has failed repeatedly to heal the country. Greeks will get more of the brutal belt-tightening that they voted against.

"The creditors will probably see even less of their money than they would with a package of reduced austerity and immediate debt relief.”

Although a Greece exit and the reintroduction of the drachma would eventually improve Greece’s competitiveness and offer a route to economic growth, the immediate economic pain would be tough to bear.

The drachma would depreciate rapidly rendering debts unpayable and leading to widescale default.

Greece’s exit could also precipitate Portugal or Italy following the same path.

Similarly, were Germany to leave the common currency, a number of European neighbours such as the Netherlands, Belgium, Austria, and Finland could follow suit and establish a new currency bloc.

Mr Mody’s comments come following the inclusion of a possible Greek exit in a draft document by EU finance ministers — led by the German minister Wolfgang Schäuble — during negotiations on the country’s third bailout.

“In case no agreement can be reached, Greece should be offered swift negotiations for a time-out,” the document concludes.