Levy Economics Institute of Bard College
Policy Note 2011/1
February 2011
The recent turmoil in Europe has given rise to the idea that the euro might be reversible, and that one or more countries might revert to a national currency. Research Associate Marshall Auerback applies the sector financial balances approach to national income accounting in order to determine what would happen if Germany decided to reembrace the Deutschmark and regain its fiscal freedom. (The sectoral balances model was devised by the late Distinguished Scholar Wynne Godley and is detailed in the Institute's Strategic Analysis series.) While Germany would likely emerge with a strong global "safe haven" currency that would save its banking system, such currency appreciation would destroy its export base (external sector) and result in much larger budget deficits.
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