Germany most likely to exit Euro, says Russia’s Arbat Capital

Aleksey Golubovich, chairman of the board at Russian asset manager Arbat Capital Management, says Germany’s exit from the Eurozone is closer to being reality than market participants realise.

Financial experts have been busy debating the possibility of Greece, Italy or Spain exiting the Eurozone, but what if the strongest member of the European Union simply refuses to keep paying for the debt crisis?

In his column in business magazine Forbes, Golubovich outlines how the situation might develop if Germany exits the Eurozone instead.

He writes: “The country that is, in effect, supporting the Euro, seems to need it the least. According to the results of a poll published by Bloomberg, around 40% of Germans are in favour of a Euro exit, while in other Eurozone countries this figure is much lower: 28% in Italy, 26% in France and 24% in Spain.”

Of course, if Germany chooses to exit, its economy and banks would suffer huge losses, since its financial institutions have around €2trn invested elsewhere in Europe. But the loss of personal savings by the German public can be avoided, Golubovich argues.

He writes: “All current accounts in German banks denominated in Euros can be turned into Deutsche Marks at the same exchange rate as when Germany entered the Eurozone (1 Euro – 1.96 DM), or at a 1:1 ratio, which is more likely to avoid changing all the price tags.” As a result, the Germans would have a strong national currency.

The Euro would then deteriorate in value, while the strength of the new German currency would lead to a loss of competitive advantage for German exports. But the Bundesbank can intervene at this point to weaken the currency, Golubovich argues.

In his eyes, this scenario looks more and more likely as the situation in the Eurozone deteriorates.

Otmar Issing, one of the founding fathers of the euro and a former European Central Bank chief economist, takes a different view. In his book “How We Save The Euro and Strengthen Europe”, published this week, he said: “Everything speaks in favour of savings the Euro area. How many countries will be part of it in the long term remains to be seen.”

But if some of the peripheral countries may not be able to remain in the currency bloc, Germany’s exit would be bad news, he says.

Although he understands the nostalgia for the days of the Deutsche Mark felt by some of his fellow Germans, he warns against a return to the national currency. He writes: “Even in its short existence, the euro has been more stable than the mark.”

Yet, like Angela Merkel, he opposes the idea of creating jointly issued Eurobonds, which for him “would mean the end of the stability-oriented currency union,” since Germany would have to carry the burden of eventually paying back the joint debt.

Golubovich argues that, if Germany stays in the Eurozone, it may be increasingly difficult for it to influence the decisions taken by the ECB. He points to the fact that Germany and its supporters – Austria, the Netherlands, France and Slovakia – now hold only six of the 23 votes on ECB’s board. All remaining members are either in favour of “turning on the printing press,” or at least not against it.

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