Should Germany leave the euro? Some analysts are arguing that despite the seemingly massive costs of such a move, the long run effects for Germany and rest of Europe would actually be positive. In today’s Telegraph Roger Bootle argues that by keeping its labor costs down Germany could weather the storm and southern European nations could get much needed relief through currency devaluation.

He writes, “If, one way or another, the link between Germany and the southern euro member countries is broken, for Germany this would not be a trip into the unknown so much as a return to the days of the Deutschmark. By reducing the domestic price of exports and imports, a stronger currency would transfer income from producers to consumers. The result would be increased consumption.

Admittedly, there might still be a net loss of aggregate demand. In that case it would fall to the German government to stimulate it. For all its anti-Keynesian rhetoric, in 2010 the German government enacted the largest fiscal stimulus of any advanced country. And the current budget deficit of about 1pc of GDP is low enough to permit some stimulatory action now. On top of this there are structural reforms which could help to increase consumer spending, including the relaxation of restrictions on credit.”

Yet this much too sanguine a view in our opinion. If Germany were to return to the Deutschmark the resulting political and economic upheaval that would ensue would be far worse than just a mere devaluation. In the chaos that would follow policy could devolve not only in devaluation but default. In the meantime the capital flows into the safety of the Deutschmark could double or triple the currency in a matter of months hobbling all German export business not only in the Eurozone region but globally as well. All one needs to do is to see the recent history with the Swiss franc and imagine a scenario five or perhaps ten times worse for Germany given the relative size and scope of its economy.

The euro has always been a political as well as economic construct and of the implicit unspoken rules of the deal was that Europe allowed Germany to unify in return for the creation of a common integrated market that was specifically designed to avoid the tragic conflicts of the past. A break up of the euro therefore will be seen as break up of Europe as well, and the costs would be far larger than a simple currency devaluation.