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Euro Debt Crisis & German Exit

Essay by   •  May 16, 2012  •  Research Paper  •  1,522 Words (7 Pages)  •  1,514 Views

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Punctuality, efficiency, success and many other positive aspects define German business culture. Within the EU framework and under the burden of the PIIGS, German economic and legislative policies are defined by debt, bailout packages, cross-cultural tension, economic reform debate and many other negative aspects. There exists a dichotomy of contention between German business culture and policy, and for this there are reasons for Germany's persistence as a member of the EU and reasons for its complete reduction.

The reasons that Germany stays a major member of the EU are simple: trade benefits. As it was stated earlier, Germany is known for its economic efficiencies and punctuality. In 2011, Germany was 18% more competitive than the average of EU countries. When this is coupled with the fact that German labor unions were able to negotiate wages to remain constant over roughly the last ten years, goods produced in Germany are far better relative to goods produced in other EU countries. In addition to low labor costs and relative competitive advantages, in 2011 Germany experienced a +5% surplus in balance of payments as a percentage of GDP relative to all other EU nations. Considering that the German economy is one of the largest in the world, only behind the US, China and Japan, a surplus in balance of payments relative to it is also substantial. Moreover, when compared to most other EU nations that are experiencing depressions this number is even larger. Examining both of these benefits together illustrates how beneficial membership in the EU is for Germany.

Unfortunately, at the same time many of Germany's economic issues are tied to the fact that German specie representation is given in the form of the Euro. As a result of the EU and the Euro denomination, Germany and other surplus bearing nations (France, Finland, etc.), are being held responsible for the lackadaisical approach to fiscal policy and labor productivity exhibited by countries on the brink of financial default within the EU. The PIIGS represent a long-term issue to Germany that comes in a multifaceted form. By incurring near insurmountable debt the PIIGS have decreased stability in the Euro. Additionally, the PIIGS have potentially dampened the future of Germany by tying up monies in bailout that would have been used for domestic expenditures, infrastructure, social programs, etc., within German borders. This long-term uncertainty is not of an appealing nature to Germany and is a reason for Germany to consider leaving the EU for greener pastures. Additionally, if the EU is to fail, the most prudent course of action for Germany is to withdraw sooner rather than later. The latter option is akin to kicking the can down the road for a little bit longer. Meaning, very little positive is achieved and the inevitable outcome is simply prolonged for a little longer.

For the substantial problem that Germany faces one possible solution is to withdraw from the European Union. The manner in which this can be achieved will be discussed after examining the positives and negatives that will result from the action itself. The immediate benefits are great. By Germany leaving the EU they will be free of the long-term burden of the PIIGS nations described earlier. Germany will not be subject to limiting its own national agendas to support the monetary needs of the less frugal EU members. A benefit exogenous to Germany will come in the form of long-term stabilization for the PIIGS under a devalued currency, whether that currency is the Euro or reissues of each nations sovereign currency post Euro.

As it was said, this benefit will be a result the devaluation of currencies. The economics behind this idea are as follows: if Greece, for instance, is to establish a new currency and let its value decline the goods produced within Greece will be seen by countries with currencies of a higher value as reasonably priced. As a result of this, Greek exports will increase and Greek GDP will as well. With the inset of a higher GDP the Greek government will be able to tax more and use these monies for domestic programs and other nationally beneficial purposes.

With the same token though, in the event that Germany is to leave the EU there will be negative consequences as well. Initially, there will be strong devaluation of the Euro and all debts held in Euros will be effectively substantially increased. This means that other countries within the EU will seek to abandon the currency as well and that the initial effect will result in a domino. What this would do to the interest rates of countries like Greece and Italy is send them through the roof. Based on Italian and Greek debt rates right



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