End of EURO is not the end of the world

I have always said that either one or two countries leaving the euro or even the euro disappearance will not be the “end of the world”. It will be a negative shock to which economic polices will have to respond. In the same time I also said that by focusing on the negative effects of euro disappearance we forget about the benefits of flexible exchange rates.

Below is a very nice report presenting both.
The main conclusion from the report:
“The experience of emerging market countries after default and devaluation shows that despite sharp, short-term pain, countries are then able to grow without the burden of high debt levels and with more competitive exchange rates. If history is any guide, the European periphery would be able to grow as Asia, Russia and Argentina have.”.

via www.ritholtz.com/blog/

6 thoughts on “End of EURO is not the end of the world

  1. Imo, the indebted countries shouldn’t leave the Euro or even default. They should just start selling a lot of public assets and significantly reduce the public sector.

    At the moment, the main problem is their debt levels, not their currency. There are plenty of public buildings that could either be rented or sold. With the new revenues or funds they could easily pay a good chunk of their debt. This in turn will reduce the interest rates.

    It’s a basic math problem. You just need to cut the public sector enough and to sell assets to pay back the debt. And to eliminate the deficit of course. Otherwise, the sale of the assets is pointless.

  2. I think the Euro forces some politicians to tell the truth, that there are no money left for high salaries and pensions in some countries. And it forces the people to think twice before they vote. Overall, it is better to face the truth than to take drugs (like devaluation, inflation).

    See the recent declaration of the Minister of Finance from Germany, it goes on these lines:
    – making the minimum salary 600 in euro in Greece will almost bring it to the level from Spain;
    – Greece should look to the Eastern European countries which have smaller salaries (including minimum salary) and some of them participate with funds for Greece;

    1. @Bogdan,
      You are forgetting something. It was the EURO safety umbrella that allowed Greece and the rest of the “gang” to borrow beyond their means. Wihout EURO they would have never been AAA and we would have not gotten here.
      The same thing happened to Romania where the “convergence story” was sold to everyone who wanted to listen. This story pushed Romanians into EURO instead of RON and brought loads of short term capital inflows.
      Devaluation and inflation bear real costs the EURO is the morphine. Look how well it works these days when ECB puhses another dose into the market.

  3. http://economie.hotnews.ro/stiri-finante_banci-11547814-ministrul-britanic-externe-zona-euro-fost-construita-fara-iesiri-grecia-intampina-probelme-daca-decide-abandoneze-moneda-unica.htm

    se sustine ca grecia daca iese din zona euro are nevoie de 30 de ani sa-si revina,in euro pana in 202o ar putea junge la 120% datorie din pib,
    in plus ue a fost construita pentru a intari democratia,ori iesita din euro , grecia s-ar putea trezi cu mari devieri de la sistem,lucru ce ar putea geopolitic fi periculos,tinand cont de pozitia geografica deci.

  4. Well, if I were to be picky I would say that comparing a possible EU breakup with the breakup of the USSR (political + ethnic breakup), Austro-Hungarian Empire (political + ethnic breakup), Czechoslovakia (political + ethnic breakup), India-Pakistan-Bangladesh (political + ethnical + religious breakup) would be a mistake. The breakup in all those states should have taken place years before it actually did. It was more of a politicaly based decision then based on the way in which their economies functioned. The new states were perceived as something new and were given a fresh start. Therefore one cannot compare new entities with countries having a bad debt track record.

    Furthermore I can’t understand why is non-government debt taken into account when considering a posible euro-exit. There are clear laws governing private default and insolvency. Why would this be a problem which could potentially trigger a euro-exit? The problem is public debt, which is not really that much of a problem for Spain. Ireland decided to save its banking system, hence the large public debt. Italy’s debt is, believe it or not held in a considerable proportion by local entities (banks, companies etc).

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