All the debate about the pros and cons of a Greek exit from the euro area is missing the point: A German exit might be better for all concerned.
Unless Europe’s leaders take some kind of radical action, such as adopting and executing some of the many reform ideas they have floated, the currency union is headed for disintegration.
The problems of Greece, Ireland and Portugal have spread to Spain, the fourth-largest economy in the euro area. Italy is probably next. The other members of the currency union can’t afford to bail them all out. Further loans will serve only to exacerbate the fundamental problem of too much debt and add to the growing enmity between the strong northern tier and its wards to the south. Without healthy economic growth — and Europe is now back in a recession — multiple countries will have to restructure their sovereign debts. Greece’s agonizing two-year restructuring experience suggests that doing several more would be extraordinarily difficult, if not impossible.
A Greek exit from the currency union would make the situation even worse. There is no mechanism to decide, or deal with, whichever nation might be next, and even that presumes that exits could be managed. The more terrifying prospect is that the other afflicted countries might exit in an uncontrollable panic, complete with bank runs, failures and general disarray. The accompanying repudiation of hundreds of billions of euros in debt would overstrain the European financial system, even Germany’s. The global economy would be paralyzed as everyone wondered which domino would be next to fall.