The European Monetary Union break-up: an economic experiment on the return of the deutsche mark

Abstract

ABSTRACTBy using the macro-econometric input–output model INFORGE, this paper investigates the economic effects of a unilateral break-up of Germany from the European Monetary Union (EMU). The results show that a return to a national currency lowers Germany's growth path. Positive effects of a break-up due to lower domestic prices, increasing real wages and lower imports are fully compensated by the loss in international competitiveness. On industrial level, the negative implications are the strongest in those industries that depend strongly on exports. Strong indirect implications are expected for the business-related service sector. Although the results of this economic experiment depend strongly on its underlying assumptions, it can be shown that a break-up of the EMU would result in a heavy welfare loss for Germany.