Chief economist warns about eurozone break-up

Πηγή: Hurriyet

Thursday, February 17, 2011

GÖKHAN KURTARAN

A pedestrian walks past a banner advertising discounts at a store closing in suburban Athens. Bloomberg photo

Even some European politicians admit that one or more member countries might withdraw from the European Monetary Union, or EMU, according to ING Group’s chief economist.

“The EMU was designed to be irreversible and the sovereign debt crisis has set the markets thinking that this may no longer be so,” Marc Cliffe said during a Wednesday meeting in Istanbul.

German politicians are discussing openly about EMU’s continuing to be the sole option, he said.

According to a recent ING report written by Cliffe, there are two scenarios in front of the member countries: a Greek exit or a compete break-up of the monetary union.

The results of the second scenario “might be dramatic and traumatic,” the chief economist said. In such case, output would fall by between 5 and 9 percent in numerous member states and asset prices would plummet. “With their [possible] new currencies falling 50 percent or more, the peripheral economies such as Spain and Portugal would see their inflation rates soar toward the double digits.”

Noting that the break-up scenario might lead to massive divergence in both interest rates and bond yields, the one-year bond yields in Germany would fall below 1 percent while those in the peripheral markets might soar into a 7-12 percent range.

“Spain is too big [for Europe] to save, unfortunately,” Cliffe said, speaking to the Hürriyet Daily News & Economic Review. He added that Greece, Ireland and all the peripheral countries have started to follow the tight policies set by European Central Bank, or ECB. A further bail out for Spain might accelerate substantial weakening of the euro as well, according to him.

Saying that Turkey has performed considerably well in the wake of the global recession compared with many European countries, Cliffe said the country’s  “biggest advantage is its independence in monetary and fiscal policies that peripheral country do not have.”

.

.

Break-up scenarios

ING chief economist Marc Cliffe’s two scenarios on the future of the European Monetary Union include the withdrawal of debt-hit Greece or a total break-up:

Scenario A: Exit of Greece

- At the mild end of the spectrum, the most plausible scenario is that Greece will be the only country to exit the eurozone.

- Greece is the most challenged country from solvency and a competitiveness perspective, and it is most observers’ favorite candidate for leaving EMU.

- The modest size of the Greek economy means that its departure would be far less disruptive than if one of the bigger economies were to leave.

- Greece’s exit will not happen in a chaotic manner. The eurozone and IMF would provide medium-term funding to ease the pain of Greece’s exit.

- The Greek exit gives further impetus for reforms in other highly indebted countries such as Spain and Portugal.

Scenario B: Complete breakup of the eurozone

- At the extreme end of the spectrum, eurozone countries and the financial markets conclude that the monetary union has failed.

- Members decide to revert to national currencies and monetary policy.

- If a core member leaves the zone, there would be protracted economic, political and financial tensions that would leave open the possibility of further departures.

- Exit from the EMU and reverting to national currencies do not directly improve fiscal solvency. Even in the absence of restructuring, foreign investors will still bear huge losses as a result of a leaver’s currencies depreciating and asset prices plummeting.