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It's Time For The 'Nordeuro': When The Euro Zone Gets Split In Two

Op-Ed: Germany is doing itself no favors by sticking with the euro. Instead of bailing out the hapless likes of Greece and Portugal, Germany should join other countries that share a similar economic culture and create a new hard currency: the “nordeuro.’’

Hans-Olaf Henkel

EU romantics will do just about anything to continue selling the single currency as a success story. And our media keep falling for it. Even former Chancellor Helmut Schmidt denies there is a crisis of the euro; continuing to characterize the situation as a few countries in a debt crisis.

But some pushback is required here! There can be no doubt that it is extremely difficult to get a handle on just how the euro crisis came about, as there are three separate underlying problems. The first is that many banks are still on wobbly footing thanks to the financial crisis. Secondly, some euro countries are over-indebted. Thirdly—and this is the thing that's not supposed to be publicly aired—the euro itself bears heavy responsibility.

Without low euro interest rates, Greece wouldn't have been able to take on so much debt. Nor would there have been a real estate bubble in Spain of quite such mammoth proportions. If Germany finds itself in the position of having to come up with money, credit and guarantees for debt incurred by other countries, it is because of—the euro! It's also because of the euro that students in Athens, strikers in Lisbon, and "the indignant ones'" in Madrid are protesting advice Germany deems reasonable. And again, the euro has a lot to do with the spectacle, recently seen at demonstrations in Athens, of Europe's flag with the gold stars aligned like a swastika. So now, instead of another rescue package, it's time to take a moment's pause and ask: Where is all this going, and are there really no other alternatives?

If the politicians stick to their Plan A— "it will cost (the Germans) whatever it costs'"— they're headed for a transfer union in which every country is responsible for the debts of other member countries. We know where that leads from our own German inter-state financial adjustment system whereby Bavaria, Baden-Württemberg and Hesse pay for the 13 other states. Based on this principle, Germany would become the donor country for 12 other euro countries, which is tantamount to organized irresponsibility! The eurozone's competitiveness would suffer, and the standard of living would decline within the zone. For that reason alone, the only criticism that socialists and greens have of Chancellor Angela Merkel's handling of the situation is that she didn't start helping Greece out sooner.

Plan B is basically a haircut: partial debt forgiveness with or without private creditors. This would lower the level of Greek debt, but have no effect whatsoever on the country's lack of competitiveness. That's the beauty of the haircut analogy. The debts are the hair. Cut the hair, and creditors lose a part of their investment. But hair grows back! Even if you were to shave Greece, it's going to need another visit to the barber soon enough. The possibility of throwing Greece out of the eurozone altogether is not a valid one, however. It would lead to a run on the country's banks, chronic over-indebtedness, and what's more set off a domino effect with other countries.

In a pinch, the banking sector could be de-privatized

It's high time we saw a Plan C, i.e. that we carefully unknot the tangle of financial crisis, euro crisis and debt crisis and get to work on each of the three strands in a targeted way.

With regard to the financial crisis: up until now, every "euro rescue"" has de facto been a bank rescue. Why else would the United Kingdom, which is not a member of the eurozone, participate in a "euro rescue"" in Ireland? Obviously in going down that route the finance sector would have to be monitored so it doesn't set the real economy ablaze again.

An even better way to solve the problem would be to overhaul national bank rescue schemes or, in a pinch, temporarily de-privatize the banking sector, something that has proven effective in the United States and in Sweden. For Germany, the move would be virtually irrelevant as nearly two-thirds of banks are already in state hands, and that figure is even higher in Greece.

With regard to the euro crisis: instead of letting French President Nicolas Sarkozy steer, Mrs. Merkel should grab the wheel herself, rally together other countries that are financially and economically in the same frame as Germany, break away from the eurozone and create a "nordeuro."" This is not the place to go into the details of how that could be done. Suffice it to say that it would work the same way the euro was introduced, just in reverse. If it was possible to make a single currency out of 17 different ones, then it should be not be difficult to turn one currency into two.

The advantages are clear: no German-financed transfer union, no run on the banks and minimized chances of chaos. Furthermore, a devalued euro would help nurse economies from Greece to France back to health and protect against higher inflation.

Finally, with regard to the debt crisis: two currencies better suited to the economic and financial cultures of adhering countries would ultimately save countries trying to solve their own debt crises from having to get involved in the affairs of others.

There are of course disadvantages to Plan C. A revalued "nordeuro"" would impact German exports negatively. Yet the fact that we import some 45% of our exports would make that a manageable risk. Nor would we be able to get out of the single currency without a generous farewell gift, for example some debt cancellation. But let's face it: we weren't likely to see that money again under Plan A or Plan B either.

In view of the current "euro rhetoric"" we're hearing from politicians, I see very little chance of a Plan C. On the other hand: who would have thought even a few months ago that Mrs. Merkel would be steering us the wrong way with regard to European energy policy? Maybe when she sees that voters are going to react to further rescue packages the way they reacted to Fukushima she'll make a rapid u-turn and head back in the right direction.

Read the original article in German.

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