Following Britain’s exit from the European Union, a hypothetical German departure from the euro could signal the end of the Eurozone and establish a new economic map for Europe, leading to a return to tightly controlled economic sectors, according to economic and geopolitical analyst, German Gorayez Lopez.
The right-wing extremist party, “Alternative for Germany,” has called for Germany’s exit from the EU, a proposition that has gained significant traction amid protests and strikes in Europe’s largest economy and the world’s third-largest economy, particularly among farmers and drivers due to recent legal amendments.
German Chancellor Olaf Scholz has warned that such calls for a German exit from the EU, known as “Dexit,” would threaten to destroy wealth.
The “Debt Brake” Principle
Joel Kotkin, in Forbes magazine, explains that for decades, Northern countries (Germany, Norway, Sweden, Denmark, the Netherlands, Finland, and the United Kingdom) have compensated for their very low fertility rates and reduced domestic demand through immigration and the development of high-productivity, export-oriented economies. Following the “Schuldenbremse” (debt brake) principle, introduced by Germany in its constitution in 2009, aims to ensure that “each generation pays its way and does not consume taxes that will be paid by its children in the form of debt.”
Germany was on track to achieve consecutive economic surpluses over the past five years due to the zero or negative interest rates implemented by the European Central Bank, which required less money to repay public debt and allowed for the accumulation of reserves to face the social and economic crisis caused by COVID-19, with a significant boost from investments estimated at 20 billion euros to relaunch the economy.
The Stalled German Locomotive
However, according to an analysis by the German Institute for Economic Research (DIW), Germany is currently burdened by the war in Ukraine and the complete cutoff of Russian gas supplies, causing an already apparent contraction of about 100 billion euros (2.5% of GDP). This contraction has side effects, such as pushing the economy into recession, increasing unemployment, alongside rampant inflation, and ending trade surpluses.
According to Euronews, the German “locomotive” was expected to decline in the fourth quarter of 2023 (with a negative growth rate of 0.3% of GDP) due to rising energy prices, reduced industrial production due to weak European demand, a recession in domestic consumption, and a loss of competitiveness against the rest of the world, leading to a sharp 1.2% drop in exports in 2023.
Moreover, the European Central Bank’s interest rate hike to 4.5% along with accelerated inflation at 5.9% in 2023 has led to a stagnation of real wages, tax adjustments, and reductions in agricultural subsidies in Germany, potentially putting rural Germany and the United States at risk. Other unions are also on the brink of conflict.
Charles Dumas from the London-based Lombard Street Research Center believes that “returning to the Deutsche Mark would put pressure on profits, increase productivity, and raise real consumer incomes, as Germans could enjoy higher living standards domestically instead of lending savings surpluses to peripheral countries.”
Towards Social Fragmentation?
According to a recent report by the European Union, 7.5 million Germans are expected to work in the low-income sector (mini-jobs), and according to the non-governmental organization Paritätischer Gesamtverband, the proportion of people at risk of poverty in Germany will reach 14% (16.6% of the population).
With the high rate of immigrants in Germany (nearly 20%), this could exacerbate xenophobic sentiments in German society (especially among East Germans), due to reduced labor supply and resulting fierce competition. Consequently, there’s an anticipated remarkable rise of extreme right-wing ideological groups in the next general elections in 2025.
EU’s Losses
Germany accounts for more than one-fifth of the direct investment budget in the European Union, estimated at about 143 billion euros for 2024, with 137 billion from direct investments by EU member states. Germany invests more than 30.3 billion euros, representing 21.2% of the total EU budget, according to European statistical data.
Should Germany exit the EU, the damage could extend to EU member states that benefit more from inward direct investments than from outward ones. Poland is the biggest beneficiary, having received 16.6 billion euros in 2022 more than it contributed to the EU budget, with Spain and Italy following.
Towards an Exit?
According to a poll by TNS-Emnid for Focus magazine, 26% of Germans might consider supporting a party that advocates for Germany’s exit from the Eurozone. Hence, the political rise of “Alternative for Germany,” initially founded by academics and businessmen but later veered towards extremism with anti-foreigner stances, including the potential expulsion of millions of foreign citizens. The party isconsidering a referendum on Germany’s exit from the Eurozone (“Dexit”).
A hypothetical German exit from the euro could herald the end of the Eurozone, mapping a new economic landscape in Europe that signifies a return to tightly controlled economic sectors and a victory for the United States in achieving the “Balkanization of Europe,” according to Lopez.
Germany relies on the EU for two-thirds of its goods imports, totaling 739 billion euros, and employs 7.65% of its workforce from EU member states, totaling 36.6 million people, of which 2.8 million are from EU countries.
While the exact economic losses are currently incalculable, drawing parallels with Britain’s EU exit (“Brexit”), which wasn’t as integrated into the EU as Germany, the core of the EU, the British economy suffered a 5% loss following Brexit. Using the same rate for Germany, a “Dexit” could entail losses amounting to 227 billion euros for Germany.
