How the Eurozone Might Split

Could Germany Become a Reluctant Hegemon?

Euro coins on display in Zenica, Bosnia and Herzegovina, June 2015. Dado Ruvic / Reuters

In February 2016, the Organization for Economic Cooperation and Development opined that developed country growth prospects had “practically flat-lined” and that only a stronger “commitment to raising public investment would boost demand and help support future growth.” Fast-forward some 24 months, and despite Brexit, the election of U.S. President Donald Trump, and the rise of the populist Alternative für Deutschland in Germany, the euro seems to be a much better bet than it has been in a long time. But has the euro really weathered the crisis and come out stronger? In this article, we make two interrelated arguments about the future of the eurozone.

The first is that even if the recent economic upturn continues, the eurozone could still split in two over the medium to long term thanks to a built-in design flaw in the eurozone architecture that makes it extremely difficult for the eurozone governors to deal with persistent export and import imbalances between states.

As a single-currency area, the eurozone formally has no internal imbalances. In reality, however, the persistent export surpluses it runs against the rest of the world are generated in the north and east of the eurozone, while persistent budget deficits are generated in the south, an imbalance that could yet lead to a split in the eurozone. This would result in Germany and the eastern European states keeping the euro even if France and the southern Europeans bail out. Europe would be left with two sets of countries: those in the core of the eurozone, largely in northern and eastern Europe, that would remain on the euro (or “real euro”) and those in the south that would be pushed to adopt a new currency, which we term the “nuevo euro.” (The nuevo euro countries would be unlikely to revert to their pre-euro national currencies for fear of adding to the already grave disruption caused by their break with the real euro.)

Such a split would be massively disruptive. As investors came to fear

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