Greece or Portugal would lose up to 50% of their national income if they quit the euro, according to research by analysts at Swiss investment bank UBS. A eurozone country with a more robust economy, such as France or the Netherlands, would see 20% to 25% of national income disappear if they went back to operating their own currency.
For Greece, the loss would be $165-billion from its $330-billion annual gross domestic product, while France would suffer a loss of $660-billion from its $2.65-trillion annual GDP.
The stark warning to eurozone members that a break-up of the euro currency club will cost them dearly follows several speeches by policymakers and economists that the status quo is untenable.
German Chancellor Angela Merkel has dismissed talk of a break-up but has struggled to articulate a coherent alternative currency union that would include Greece and Portugal, the two ailing countries most likely to face eviction.
In Brussels, commission staff are busy working on plans for a closer fiscal and monetary union built around eurozone members, with stricter limits on borrowing and tighter banking regulations. But the slow pace of reforms in Greece and determined resistance in Italy to further austerity has undermined moves for a closer union.
UBS said: “Under the current structure and with the current membership the euro does not work. Either the current structure will have to change or the current membership will have to change.
“If Germany were to leave we believe the cost to be around €6 000 to €8 000 for every German adult and child in the first year, and a range of €3 500 to €4 500 per person per year thereafter. That is the equivalent of 20% to 25% of GDP in the first year. In comparison, the cost of bailing out Greece, Ireland and Portugal entirely in the wake of the default of those countries would be a little over €1 000 per person, in a single hit.
UBS analysts Paul Donovan and Stephen Deo also fear wider political ramifications. “There are also political costs to consider. Europe’s ‘soft power’ influence internationally would cease.”
But the economist Nouriel Roubini has long argued the costs of forcing ailing countries to maintain their membership of the euro could have even higher costs. Greece, Portugal and Italy could face a decade-long depression and political upheaval inside the euro, while the costs of a swift exit could be wiped out by strong growth with an independent currency. —