What if Germany was to leave the Euro?  It wouldn’t be “good”, but it may be the “better” solution for Europe under current circumstances.

Let’s assume Germany stops using the Euro (€) as its currency and resurrects the Deutsche Mark (DM).  It could create a new currency, but for ease, let’s just go with the DM. The DM would instantly be afforded hard currency status which would ease the transition for Germans as they would have an attractive currency. 

For the rest of the EuroZone (EZ) it would be less problematic than bringing back the drachma, peseta, lira, etal.  It would likely also reduce deposit flight from Mediterranean countries, though there would be some flight into DMs and Swiss Francs.  Greek and other periphery country peoples are hesitant to leave € as they fear an immediate catastrophic plunge in value of their new currency and many trade partners potentially shunning those new currencies for payments.

The rest of the Eurozone could continue to operate with the € if Germany left the currency, which would likely lose value against the DM, US$, Swiss Franc and Yen.  That could improve exports from countries using the € and their balances of trade, and they would more easily be able to adjust other aspects of competitiveness like wages, benefits and debt overhangs.  Of course there are many risks too.  The Netherlands and other stronger economic states could also consider leaving the € for their own currencies, potentially setting a downward spiral in motion for the remaining economies. 

The European Union currently operates with a multitude of currencies, and still affords cross border movements of people, capital, goods, and trade benefits.  The monetary union, the EZ,  shares a common currency but is hindered by not having a fiscal union or a banking union (with Euro wide deposit insurance). 

To create and integrate a fiscal union will take considerable time to be approved by the many countries who have understandably been hesitant to relinquish sovereign control of their own central banks and governing bodies to Brussels or anywhere else. 

Germany could signal its intent to rejoin the Euro currency upon a formalized fiscal union and banking system. Once the unsustainably debt burdened nations have improved their ability to align revenues and expenses - whether through increased tax burdens, more competitive wages and goods, or debt repudiation/default/restructuring - likely a combination,  then German re-entry to the EZ might include Eurobonds and other mechanisms that Germany has refused to allow to this point.

This would still be very disruptive and disliked, even by Germans, who worry their exports will drop.  However, their exports are falling anyway under the recession already underway. No seriously actionable program has really been established to expunge the debt saturation of the periphery.

Most pundits expect Greece will chose to leave or be forced out of the Euro as the currency its debt is denominated in.  Spain’s banks will still need to be recapitalized at a level the sovereign state cannot afford.  Italy’s sovereign debt appears headed for interest rate levels that can’t be serviced as rollovers mount.  Portugal and Ireland’s situations are not improving. The intertwined banks loaded with leveraged purchases of sovereign bonds that have fallen in value remain an ongoing problem. Germany’s departure from the Euro may be less harmful than the trajectory the EZ is currently hurtling along.