Missing the Mark

Fiftysix percent of Germans want to dump the euro and bring back the deutsche mark. And who could blame them? Before the euro was introduced, Germans were told that the new currency would do for Europe what the deutsche mark had done for West Germany: create a productive economy with high growth and low unemployment. Instead, the euro has been an economic disaster for Germany. Why? Because the European Central Bank (ECB) must set a onesizefitsall interest rate for 12 very different economies. The rate has to be right for Ireland, which is growing at nearly 5 percent a year, and for Germany, where gross domestic product (GDP) growth is less than 1 percent annually. That means that the rate ends up being wrong for pretty much everyoneparticularly Europes more advanced economies. The impossible task of setting an interest rate appropriate for all European countries has paralyzed the ECB, which has not moved rates since June 2003. By contrast, the U.S. Federal Reserve has tweaked rates nine times during the same period, and the Bank of England six times.

According to Taylor rulesthe widely accepted method of calculating how a central bank should set interest ratesGermany needs an interest rate of about 0.5 percent for its economy to achieve the right balance of inflation, growth, and employment. The ECBs current interest rate is 2 percent. The result is that Germanys GDP growth has fallen short of 2 percent for the last four years, its unemployment rate is at 12 percentthe highest since the Weimar Republicand its business confidence stands at a twoyear low. Even the German government, which dismisses the idea of dropping the euro as absurd, acknowledges that the eurowide interest rate has hurt Germany. Economy minister Wolfgang Clement admitted earlier this month that Germany is paying a not inconsiderable economic price for Europes onesizefitsall policy.

Regaining control of its monetary policy is fast becoming Germanys only real choice. The voters have already made it clear that they wont accept the other methods of kickstarting the economy, such as making hiring and firing workers less difficult and cutting social benefits. The ruling Social Democratic Party (SPD) was punished in May for embarking on a policy of gradual liberalization, suffering its first defeat in 39 years in state elections in its heartland of North RhineWestphalia. There is even talk that the SPD will replace Chancellor Gerhard Schrder with the leftist party leader Franz Mntefering, who made headlines in April with his description of foreign capitalists as locusts.

With the German people longing to have their currency back and with national elections likely in 2006 or sooner, you would think that at least a few German politicians would be jumping on the antieuro bandwagon. Youd be wrong. Instead, they are pointing out that the poll isnt very surprising at all, as a majority of Germans never wanted to give up the deutsche mark in the first place. In 1997, a European Commissionsponsored poll found that 54 percent of Germans opposed the single currency, and only 32 percent supported it. The problem is that this silent majority still does not have a major political party it can vote for.

The German political classs total failure to respond to popular pressure on this issue is emblematic of what is wrong with Europe today: It is a continent governed by elite consensus, not popular will. Europeans are becoming increasingly angry because their politicians refuse to offer real choices. If this situation persists, unabashedly populist politicians will start winning elections, not just headlines. One can only hope that these populists will be more like the Dutch liberal Pim Fortuyn than the extreme French nationalist JeanMarie Le Pen.

Are Germans being realistic when they say they want the deutsche mark back? Could Germany actually pull out of the euro? Yes. Sure, the political costs would be high, but there are wellestablished legal precedents for the breakup of monetary unions. As recently as 1993, Czechoslovakia split into the Czech Republic and Slovakia, each of which adopted its own currency. Earlier in the 20th century, the Scandinavian Monetary Union was abandoned with little trouble after the outbreak of World War I. Even the dismantling of the ruble zoneafter the breakup of the Soviet Unionwas achieved fairly easily. If Germany left the eurozone, it could slash interest rates to spark a mini export boom to cover the cost of transitioning to the deutsche mark. But more important, the shortterm costs of getting out of the euro are dwarfed by the longterm costs of staying put. The economic malaise afflicting the eurozone will not lift anytime soon: The 12 economies of the zone are actually growing further apart, and the French and Dutch people appear to have blocked any future progress toward a political union that could have united these divergent economies.

German politicians argue that by refusing to offer voters the chance to bring back the deutsche mark they are behaving responsibly. In fact, the opposite is true. There is no better recruiting sergeant for extremism than the effective disenfranchisement of a majority of the population. The rejection of the EU Constitution in France and the Netherlands should have alerted Europes elites to the dangers of ignoring their populations. If no major party proposes bringing back the deutsche mark in Germanys coming elections, it will show that Europes political class is continuing to sleepwalk the continent to disaster.