subject: Euro Break-up Costs Could Hit 1trn [print this page] Douglas McWilliams, Chief Executive, Centre for Economics and Business Research, offers his views on what happens next with the euro zone...
"I told the Greek government two years ago in Athens that they had no option but to default and devalue.
"At the time this was an unusual view and I was attacked on prime time Greek TV by the leader of the Communist party as 'irresponsible'.
"To be frank that didn't worry me much - if the Communists think you are irresponsible you must be getting something right - because of the failure to address the problems caused by the euro early enough these problems are now worse and the options have been reduced.
"The most obvious fault line in the current situation is the conflict between the level of prosperity to which European electorates feel entitled and the levels economically available to them, particularly given past overspending. Even if they repudiate past debts (which will happen in some way or other anyway) they still are still spending more than they are earning. This is not sustainable.
"But the more important fault line is the lack of competitiveness of some of the weaker economies in the euro zone. Because they did not restrain their excess inflation when they joined the euro, they have become highly uncompetitive.
"All this is happening at a time when Western economies are struggling anyway to keep up with the emerging economies in the East. OECD figures show that since 2000 Greece has lost 24% of its export market share (which wasn't that high to start with), France 20% and Italy 18%.
"But some of the economies have done better - Spain's export market share has risen by 24%, Ireland's by 18% and Portugal's by 14%. More importantly, the German share has risen by 23%. The German current account surplus this year is likely to be about US$180billion.
"To make the euro survive would require not only writing off debts and refinancing banks but also for the Germans to subsidise the weaker economies for a minimum of 10 years and more likely 20 years as they revive their competitiveness through increased productivity and restraining their labour costs.
"Realistically this won't happen. Even if the Germans were to agree continuing subsidies the weaker countries - which are essentially failed states - cannot put the political will together to reform their economies.
"So the end of the euro in its current form is a certainty. A currency with the name euro may survive but even if it does it will be radically transformed.
"The economic consequences depend on the timing and the way in which the euro splits. There is no doubt that when the euro breaks up it will be costly. Some countries will lose around 10% of annual GDP. But this will happen anyway - the choice is between a period of austerity followed by the impact of the end of the euro and then some eventual recovery OR facing the trauma of the end of the euro early and then starting to get the recovery underway.
"By say 2025, it is about as certain as anything can be in economics that the European economy will be in better shape if it faces up to the trauma of breaking up the euro now rather than in a few years' time.
"But when the euro breaks up it will be immensely painful. Our earlier estimate was an initial cost of 2% of euro zone GDP. We still think this is a realistic estimate for a planned breakup. But with an unplanned breakup looking rather more likely, then the cost could be more in the region of 5% of euro zone GDP or more. But whatever the cost, growth will be faster afterwards than it would be if an attempt is made to keep the weaker currencies in the euro through continued austerity - the IMF and the Ifo Institute have now backed Cebr's assessment on this. So these are the bleak choices ahead - none of them pleasant though some are worse than others."
