What's troubling is that the Greek bureaucracy was persuaded to use German companies, not only because of the quality and the common currency, but also because they were paid off. German companies like Siemens (SI), Daimler, Deutsche Bahn, and Ferrostaal have been accused of funneling millions of euros to Greek politicians to secure military and civilian government contracts. In one incident, Siemens allegedly paid 100 million euros to Greek officials to secure a contract to upgrade Athens's telecommunications infrastructure for the 2004 Olympic Games.
Most of the big-ticket projects executed by German companies helped upgrade Greece's antiquated infrastructure. But there was a reason it was antiquated – Greece is not a rich nation. But with an artificially strong currency and access to cheap debt, the Greeks took the money and ran.
Would you blame them? The strong currency also meant that the Greek economy became totally uncompetitive. Greece's main exports, like olives, were too expensive to sell abroad. Meanwhile, partying on Greek Island became several times more expensive than partying on a similar one in Turkey. That was fine when the economy was good, but when it seized up, Greece's tourism industry took a dive.
The weakness in the Greek economy and its big deficits should be expected when Germany's export machine is firing on all cylinders. Since there is so much intra-eurozone trade, a current account surplus in one member naturally means there will be a deficit in another.
A costly exit
UBS tried to assess what it would cost Germany if it did break away. The analysts figured it would cost around 20% to 25% of the country's GDP or 6,000 to 8,000 euros per German citizen upfront to walk away. It would then cost around 3,500 to 4,000 euros per German citizen every year going forward.
In contrast, UBS figured that if the eurozone swallowed 50% of the debt of Greece, Ireland and Portugal it would cost a little over 1,000 euros per German in a single hit. That's a much better outcome than going it alone. The study did not include extending a bailout to Italy, which has total debt outstanding that is around three times that of all those nations combined. But for the sake of argument, say one takes a 50% haircut on Italian debt – some 900 billion euros, that bailout would theoretically still cost less to the Germans than it would if they decided to leave the euro.
The reason it costs so much is because a new German-only currency would be very strong – too strong to support its current export-driven economy. While it's tough to know what the new German currency would be valued at, some of the best guesses have been around two dollars per euro, which is a 50% increase to its current exchange rate with the greenback. That means a mid-range $50,000 Mercedes would now need to be priced at $75,000. While it's still a great quality automobile, there are many of other non-German options that American consumers would probably choose in that case.
To get competitive, the German government would have to flood the market with their new currency, which would then decimate the savings of their penny-pinching populace. The instability within Germany that would result from such a move would probably make the riots in Greece look like a fun trip to the beer garden.
The Germans need the euro, but they need it to be weak in order to survive. To do that, they are going to need Greece and the other peripheral countries to stay in. While talk of kicking Greece out of the eurozone and pursuing a two-speed Europe may score some political points, it doesn't reflect the reality of today's interconnected European economy.
