Estimated Cost of Eurozone Break-up a Shocking $22.0 Trillion
The financial crisis in the eurozone has continued for some time, and there is still no end in sight. What was once perhaps a nice theory on paper is currently crumpling under the strains of reality. It’s still a surprise to me that the founders of the eurozone did not realize the possibility of a financial crisis and the importance of having a fiscal union to go along with the monetary union. I’m sure every person knows that they shouldn’t cosign a loan with someone unless they can trust in that person’s ability to repay their debt. Instead, the eurozone has essentially given a blank check to the weaker nations, specifically the PIIGS—Portugal, Ireland, Italy, Greece, and Spain.
With this financial crisis unfolding, many are surprised that the eurozone is still holding together. So the question is: why would the wealthy northern part of the eurozone continue to support the poor and fiscally irresponsible countries during this financial crisis? Why not just break up the union? It appears that the costs associated with breaking up the eurozone might be far higher than most people realize. In fact, perhaps the eurozone members themselves know the true costs and are thus willing to throw in hundreds of billions of dollars to prevent the loss of trillions.
new study by research company Prognos has come out with an estimate; if Portugal, Greece, Italy, and Spain were to leave the eurozone, in terms of growth, it would cost approximately 17.2 trillion euros, or US$22.3 trillion, by 2020. (Source: “Euro Exit by Southern Nations Could Cost 17 Trillion Euros,” Spiegel Online October 17, 2012)
The research company looked beyond just the existing levels of debt that would be wiped out and considered the decline in economic activity in 42 economies around the world as well. While the company does state that an exit by Greece alone would have a minimal effect worldwide, it would have a serious effect on all markets, including America’s if the financial crisis were to spread to other nations within the eurozone.
The company estimates that if Spain were to leave the eurozone, it would cost America 1.2 trillion euros in lost gross domestic product (GDP) by 2020. The firm states that if Italy left, the cost of the eurozone financial crisis would be even more catastrophic for all nations around the world, including the U.S.
Obviously, these are just estimates and, considering the unprecedented nature of the financial crisis, a eurozone break-up would be extremely difficult to fully calculate. However, it is obvious that the costs of the financial crisis if the eurozone were to fold would be quite severe, including the debt not repaid, the hit to the financial system, and the loss in economic activity and wealth within those eurozone nations that had left. Obviously, the currency of any nation that leaves the eurozone will sharply decline in value, which would mean a massive drop in imports and a historic loss in wealth. Hopefully, eurozone members are aware of the costs if the financial crisis should escalate, and are doing their best to not only plug the holes but to also make the necessary structural reforms to prevent a break-up from occurring. However, time is running out.
Posted on November 11, 2012, in Government, IMF/ECB and tagged Banks, European Union, Eurozone, Greece, Gross domestic product, Italy, Late-2000s financial crisis, Spain, United States. Bookmark the permalink. Leave a comment.