Will Germany Exit the Euro Zone?

When Greece first appeared to be on the brink of default, analysts looked for signs of a euro-zone breakup, as stronger countries like Germany balked on funneling their taxpayer euros to rescue dissolute southern economies. Now, as Europe inches toward a Greek bailout, that danger seems to be receding. But a new one's cropped up in its place. As some economists, including Morgan Stanley's Joachim Fels, now speculate, the bailout may actually raise the risk that Germany will decide to exit the euro zone to save its own neck. German Chancellor Angela Merkel is facing rising discontent at home, as voters remember the old pledges that Germans would never have to bail out profligate economies to the south. If Germany were to leave—perhaps along with economic allies such as the Netherlands, Finland, and possibly France—it would not only soothe domestic worries but also spare the mess of making struggling southern economies choose between default on the one hand and austerity programs, falling wages, and rapidly rising unemployment on the other. With little sign that the government debt crisis is over—or confined only to Greece—this kind of solution could soon become more mainstream in the European debate.

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