Tuesday, September 6, 2011

What happens to a country after leaving the euro?

Who hasn't heard of a populist politician arguing that a country should leave the eurozone and be better off? I've had many discussions on this subject but as long as we don't have a precedent we really don't know what will happen. Anyway we have some calculations by UBS Securities (LINK) and I quote:

Ahead of the German constitutional court ruling on bail outs, we have assessed the cost of countries leaving the Euro. For a weak country the cost is 40%-50% of GDP in the first year. For a strong country like Germany the cost is around 20-25% of GDP.

Economic costs of break-up dramatically exceed the costs of bailing out weaker states. Political costs also need to be considered. Virtually no monetary union has broken up in modern times without some trend to authoritarian or military government, or civil war.

The cause for such a major crash is loss of credibility, default, collapse of banking system etc. I wonder whether the same people arguing against war in Iraq for example are arguing against bailing out countries like Greece which could turn into civil war? I wonder how the protesters below expect governments to fund basic needs of people with a scenario described above?

It is easy to be populist because it is good to be popular. Next time you hear somebody arguing their case about Greece, Italy or Iraq ask them about alternative theories - what should we do then (and don't settle with an answer "don't bail-out a country") - because that's what we usually see and hear - populist thoughts without a credible alternative.

1 comment:

  1. I mean the issue has been politicized too much - in a sense one can argue that it would be normal way of life if organization (i.e EU) has lived up to the expectations of 20th century - but would not proceed this way in the 21st century.

    Some countries rise, get more power & wealth - some fall, loose power & wealth.

    More or less it is same as to fight against climate change - it will happen anyway!