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In collaboration with Dr Robert Hancké of the London School of Economics, Australia’s No. 1 retail FX provider, 1 IG, has considered...
Breakaway country Germany
Parent region Eurozone
Old currency Euro (EUR)
New currency New Deutschmark
While creating a new currency from a position of strength can have advantages, it also has the potential to create massive instability. Would a German exit from the euro create economic fault lines big enough to entirely break Europe apart?
A new German deutschmark could attract very large capital inflows, leading to a dramatic appreciation relative to whichever other currencies were operating in the now likely defunct eurozone
This could deal a significant blow to the traditional German export industries and cause a very deep economic recession in Germany, akin to what happened in the early 1990s
The new German national currency would likely have dramatic regional consequences and would almost certainly be opposed by other members of the eurozone
Germany’s departure from the eurozone would likely lead to the collapse of the common currency and conceivably even the European Union as a whole
If economic collapse was avoided, the creation of new regional currencies, eg a northern ‘neuro’ and a southern ‘seuro’, might allow for a rebalancing of Europe’s economy
Dr Robert Hancké
“The political will among European elites to keep the euro intact is, as we have seen since the Greek bailouts, very strong. Strong enough to bear the costs of the single currency – unless, that is, German voters and politicians begin to perceive these costs to be too lopsided.”
It is likely that most of the northern economies would leave the Economic and Monetary Union and join a newly formed deutschmark bloc
The collapse of the old currency could have dramatically negative domestic economic consequences, in addition to undermining post-World War 2 European political and economic integration
The strongest member of a common currency area breaking away would have very negative consequences for Germany and the rest of the eurozone
But politics may trump these economic considerations: the vote share of centrist pro-EU parties has fallen from 80% or more 20 years go to around 55% today
Germany would likely destroy the euro, the EU, and the (already fragile) European economy by reintroducing the German mark
This would probably be seen as too big a responsibility given the country’s history
Dr Robert Hancké is an Associate Professor of Political Economy at the London School of Economics. His research interests include the political economy of advanced capitalist societies and transition economies as well as macroeconomic policy and labour relations.