Breakaway Currencies

We’ve explored nine different scenarios in which we’ve imagined a region has decided to create a new currency. Read more about breakaway currencies or select another scenario from the list below to view in more detail.

In collaboration with Dr Robert Hancké of the London School of Economics, the UK’s No. 1 retail forex provider, 1 IG, has considered...

What would happen if Germany left the eurozone to create a new deutschmark?

Breakaway country Germany

Parent region Eurozone

Old currency Euro (EUR)

New currency New Deutschmark

Germany map image

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?

Why might Germany create its own currency?

  • As the strongest economy in the eurozone, Germany is the only country that can credibly leave the euro
  • Some German citizens and politicians see themselves as 'victims’ of the euro, feeling that it forces them to prop up countries with weaker economies
  • If that feeling grows, a majority of citizens could vote in favour of a new deutschmark if given the choice
The old German deutschsmark, which was replaced by the euro in 2002.

Why is Germany’s position strong?

  • Germany is the economically dominant country in the euro area, accounting for approximately 27% of the eurozone’s GDP
  • The country runs the world’s largest trade and current account surplus on the back of strong manufacturing exports
  • It has a general government budget surplus of approximately 1.5% and is close to full employment
GDP 2015 ($ billions)   source

What could happen... Germany?

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 Europe?

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

Currency background

Change in value of euro (EUR) since 2000, based on SDRs per currency unit   source

Change in value of euro (EUR) since 2000

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.”

What would the political impacts be?

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

Would the pros outweigh the cons?

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

Why won’t it happen?

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.

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