Breaking up eurozone would benefit economy

Discussion in 'Economics' started by bearice, Jul 11, 2010.

  1. A report by Capital Economics released this weekend said that it would be beneficial for both weaker and stronger members because it would bring about the necessary rebalancing of the region's economy.

    The research consultancy said that since the eurozone began, weaker states such as Portugal, Italy, Ireland, Greece and Spain (PIIGS) have been hit by higher cost and price rises than countries like Germany, undermining their ability to compete.

    The report said a second problem was that although Germany runs a vast trade surplus, it has refused to increase domestic demand to help boost growth among the weaker, indebted economies.

    "As long as the eurozone continues to operate by these rules, there is no alternative to many years of economic pain," the report said. "For the sake of the future economic health and success of the European Union, the eurozone needs to break up."

    Capital Economics said that if the PIIGS split, their currencies would depreciate, wiping out much of their lack of competitiveness and enabling growth of exports.

    It said that Germany would also reap the benefits of restoring its own currency, which would strengthen, cutting the trade surplus.

    "The huge external surplus, from which German consumers derive no benefit, would be translated across into increased public and consumer spending. The standard of living of German households would rise substantially," the report said.

    Since the eurozone debt crisis began in Greece and spread to other countries with huge deficits, including Spain, doubts have been raised about the region, with tough austerity packages ordered by the EU, and a €750bn stabilisation package.

    Most commentators agree that while a break-up of the region is unlikely, tensions over recent months have made it more likely than at any time since the formation of the single currency.

    Steven Barrow, currency strategist at Standard Bank, said that although the euro had recovered ahead of the European bank stress tests later this month, the boost may not last.

    "We saw a similar thing happen to the dollar ahead of US tests in May 2009. But then the dollar started to fall again – and we expect the same to happen to the euro," he said. "Bank stress tests in the eurozone won't save the euro. This is because the eurozone primarily has a sovereign debt problem, not a banking problem."
  2. It is not just the PIIGS it is the eastern block counties too.
  3. What will happen to Euro if the Eurozone breaks up?. I mean what will be the value of Euro against the US dollar and British pound?.
  4. It would depend on who stays with the Euro and who goes...
  5. IMHO the only benefit could be for US dollar, and that is the reason while all this "informations" about euro continue to spread all over the media.

    And one fact that it is not shown, is this: under current treaties, who exit from euro cannot stay in EU. An economic disaster for any eurozone country, IMO.

    My two cents for debate:

    Anyone has any fact or reason to oppose to this analysis?
  6. There is a conference about this tomorrow in London. The Bruges Group.