How Volkswagen's fall could hurt Germany — but help Europe

The trainwreck that is eurozone macroeconomic policy has been out of the news for a while, but the continent is still struggling with high unemployment and a wounded economy produced by the Great Recession. If you want an insight into just how perverse the eurozone's circumstances are, consider this: The Volkswagen bombshell, while it could certainly hurt Germany, could very well help the embattled European debtor nations like Greece and Spain.

The revelation that the iconic German automaker has been using deceitful software code to defeat U.S. emissions testing has shaken Germany's long-standing (and often high-handed) reputation for moral rectitude. But beyond that, if Volkswagen's North American car sales seriously drop, that could damage the automaker's finances. And while the $18 billion in potential fines it faces are survivable, they would be a brutal hit. Volkswagen's yearly profits are only $2.8 billion, and the company has $24 billion in cash reserves.

Germany is already facing the consequences of China's slowdown and a mere 1.8 percent projected economic growth this year. "All of a sudden, Volkswagen has become a bigger downside risk for the German economy than the Greek debt crisis," Carsten Brzeski, the chief economist for ING, told Reuters.

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So how could this actually help the European periphery countries? It gets back to the bizarre and often destructive ways the design of the eurozone interacts with macroeconomic realities.

All countries run trade deficits and surpluses with each other — someone's always exporting or importing more than the other one. Whether any particular trade imbalance is good or bad depends on a host of factors, but it does have consequences: If a country has a trade deficit (importing more than it exports) that means some amount of demand is leaving its borders to buy goods elsewhere.

A country can counterbalance that loss of demand. It can borrow more, and use government deficit spending to bring demand back into its economy. Or it can devalue its currency, which will make its exports cheaper and more attractive, and thus rebalance the trade flows. Or it can just live with a depressed economy. But one way or another, the math of national accounts has to balance.

In recent years, Germany has been able to boast the biggest trade surplus (more exports than imports) of any country in the world: a whopping 7 percent of its annual economic output, and bigger on a dollar-for-dollar basis than China's infamous trade surplus. But that's just Germany's trade surplus with the world. As of 2013, Germany enjoyed a total trade surplus of €54.6 billion with France, Italy, Spain Greece, Portugal, Cyprus, and Ireland — a roster that includes some of the eurozone's most hard-hit nations. They're all losing demand to Germany, which has made it all the more difficult for them to recover in the wake of the 2008 crash.

This has actually been a sore spot with the other eurozone countries for a while. In fact, Germany's trade balance may well violate certain eurozone guidelines. But given its outsized influence in the currency union, Germany never faces any consequences.

This is where eurozone macroeconomic policy enters the picture. If the likes of Greece, Spain and Italy were all truly individual countries, they could just print more money, devalue, and rebalance the trade flows. But they all share the euro as a currency, and the European financial elites — led by Germany — can pick and choose who's lucky enough to receive monetary stimulus and who isn't. So that option's out. Greece and some of the others can't really borrow either, because their economies are already in the tank, making them a bad bet for the financial markets.

That's left Greece, especially, with only one remaining option: Just depress economic output enough until you stop buying exports and things rebalance that way. Then slowly start rebuilding. In practice, that means millions of lost jobs and destroyed livelihoods, and a decades-long slog out of a brutal recession. And Greece has, in fact, managed to close its trade deficit with the world as a whole. It just came at the cost of 25 percent unemployment and an economic collapse worse than America's Great Depression.

But while that exhausts Greece's options, there is one other possibility for resolving this problem. It's a stupid and destructive solution, but it would get the job done: Just depress Germany's economic output until it can't export anymore, and the trade flows rebalance that way. It's a stupid and destructive solution because it amounts to making Germany poorer until it pulls even with Greece. Then the two countries' needs would be much more similar — especially when it comes to monetary policy — and they could rebuild in tandem.

The much better route, of course, would be to give Greece the monetary and fiscal stimulus it needs, so it can become richer and begin to pull even with Germany that way. It's just that under the status quo, and under the eurozone's Germany-friendly monetary policy, Greece is stuck as Germany's vampiric economic victim: doomed to forever be bled dry.

Of course, the chances that the Volkswagen scandal will deal a blow to Germany's economy big enough to depress it that much are nil. But the worse-case scenario for Volkswagen would at least put a dent in Germany's output, somewhat narrowing the gap between it and its beleaguered eurozone neighbors.

There's a certain morbidly poetic justice to that.