Eurozone Exit of the crisis countries could cost world €17 Trillion

As the European Council meets for its summit to decide on the way forward for the Eurozone based on Van Rompuy's recommendations, Die Sueddeutsche Zeitung has reported on a study by the Bertelsmann Stiftung, which found that if the crisis-hit countries of the Eurozone left, it would cost the major world economies €17 Trillion up to 2020:

"Bei einem Austritt Griechenlands aus dem Euro hätten die wichtigsten Volkswirtschaften bis 2020 einen Verlust von 674 Milliarden zu tragen. Ein Ausstieg der Euro-Länder Spanien, Italien, Griechenland und Portugal könnte sogar bis zu 17,2 Billionen Euro an Wachstumsverlusten führen, schreibt die Stiftung.

Das höchste Minus beliefe sich in Frankreich auf 2,9 Billionen Euro, in den USA auf 2,8 Billionen Euro, der Verlust in China auf 1,9 und in Deutschland auf 1,7 Billionen Euro. Die wirtschaftlichen Einbußen in Deutschland wären dann mit 21.000 Euro pro Kopf teilweise noch höher als etwa in Griechenland mit mehr als 15.000 Euro.

[Own Translation: A Greek Exit from the Euro would cost the major economies €674 Billion by 2020. An exit by Spain, Italy, Greece and Portugal could cost up to €17.2 Trillion in loss of economic growth, the foundation writes.

The biggest lost would be in France at €2.9 Trillion, in the USA at €2.8 Trillion, the lost in China would be €1.9 Trillion, and in Germany €1.7 Trillion. The economic loss in Germany would be €21,000 per capita, which is higher even than the pro capita loss in Greece at over €15,000.]"

The isolated withdrawal of Greece would be manageable, but would also trigger a recession that would spread to the US and China. The Bertelsmann Stiftung also says:

"Für Griechenland wäre das Szenario mit einem Staatsbankrott, einer massiven Abwertung der neuen griechischen Währung, Arbeitslosigkeit, Nachfrageverlusten u.v.a. verbunden, was sich bereits schnell auf seine direkten Handelspartner auswirkt. In dem südeuropäischen Land selbst würden sich die anschließenden Wachstumsverluste bis zum Jahre 2020 auf 164 Milliarden Euro oder 14.300 Euro pro Einwohner belaufen. Die 42 wichtigsten Volkswirtschaften der Welt müssten in der Summe aber bereits einen Verlust von insgesamt 674 Milliarden Euro verkraften.

Da aber nicht auszuschließen ist, dass ein Euro-Austritt Griechenlands massive Folgen für weitere südeuropäische Krisenländer hätte, wurden die Berechnungen auch auf diese Szenarien ausgeweitet.

[...]

In ihrer Gesamtbewertung kommen die Autoren zu dem Fazit: Ein zunächst isolierter Austritt Griechenlands und sein Staatsbankrott wären zwar ökonomisch verkraftbar, könnten aber mit ihren schwer kalkulierbaren Folgen die Weltwirtschaft in eine tiefe Rezession stürzen, die auch vor außereuropäischen Volkswirtschaften keinen Halt machen würde. Neben den rein ökonomischen Konsequenzen ist auch mit erheblichen sozialen Spannungen und politischen Instabilitäten zu rechnen – vor allem in den Ländern, die aus dem Euro ausscheiden, aber auch in anderen Volkswirtschaften.

[Own Translation: For Greece a bankruptcy scenario along with the devaluation of a new Greek currency would mean unemployment, loss of demand, etc, which would have a rapid impact on Greece's direct trading partners. In Southern Europe the economic loss up to the year 2020 would be €164 Billion, or €14,300 pro capita. The 42 biggest world economies would have to reckon with a total loss of €674 Billion.

However it must not be rulled out that a Greek Exit would have massive consequences for the southern crisis-hit countries, so the calculations were applied to these further scenarios.

[...]

Overall, the authors came to the conclusion that an isolated Greek Exit and its bankruptcy would be economically manageable, but the unpredictable consequences could lead to a deep global recession that would not stop at Europe's borders. Apart from the purely economic consequences, there are also the high social tensions and political instability to consider - especially in the exiting countries, but also for other economies.]"

Not a time to be rowing back on the progress that's already been made.


Update: The EUObserver has an article on this in Englisgh here. And the calculations were done by Prognos for the Bertelsmann Stiftung, rather than by the Stiftung itself.

Conversations with ourselves

Last week there was a PES (Party of European Socialists [centre-left]) conference in Warsaw, not that it made much media impact. Even EUobserver, which is dedicated to EU news and politics, was so taken up by the Wikileaks story that it simply didn't mention it. Centre-left party leaders from the UK and France did not turn up. EurActiv has an article on the Conference, reporting that the PES have now set up a working group to figure out how a Commission President candidate will be chosen for the 2014 election - but it was the lack of interest that sticks with you.

In some ways this is strange, particularly in Ireland. The Irish Labour Party have said that they will not be bound by the IMF/EU-Ireland bail-out agreement, and it has denounced the conservative consensus in Ireland and in Europe. The stress on investment and growth (though the Labour party would also cut spending and raise taxes to reduce the deficit), is quite similar to the speeches being made at the conference. Growth and jobs; the two words were repeated again and again in Warsaw, with continuous reference to the dominance of the centre-right EPP (European People's Party [centre-right]) in the EP, Commission and Council, and their philosophy of austerity, in contrast to what Greek PM Papandreou termed PES "responsibility".


PES leader Poul Nyrup Rasmussen:

Plenary speeches : Poul Nyrup Rasmussen from PES_Party of European Socialists on Vimeo.

Greek PM George Papandreou:






The two parties who have a chance of winning the next election and electing their leader Taoiseach (Prime Minister), Labour (PES) and Fine Gael (EPP) are pretty much in line with their pan-European parties' philosophies (though it's more doubtful when it comes to the EU's own resources and economic governance). Given the talk of a loss of sovereignty and the control the EU now has over our economy, stressing the influence and links with influential blocs within the EU could have some bonuses, but this possibility isn't explored because that's not how the Europarties are seen by the national parties, and that's not how the EU is represented. It's surprising how much the Commission is represented as purely technocratic, and that Olli Rehn's insistence that the Commission does not "involve" itself in domestic politics passes without real comment. The EU does respond to shifts between the right and the left, as can be seen by the shift in the Commission's composition ever rightwards over the last 10 years as the EPP have gained ground in the Council and Parliament.

The point is that there is the room and the place for political debate and discussion. At the moment a lot of the crisis politics has fallen by default to the European Council - the leaders of the Member States - which favours the voices of those who can shout loudest, and unfortuneately this means that any debate that is going on about the Eurozone is taking place in segmented groups, rather than allowing for an exchange of views across borders. The Irish press, and other European media, can complain that Germany is not being sensitive to the situation of the rest of the Eurozone and doesn't appreciate how much the Euro benefits it, but how useful is that if there's no debate between these different ideas and perceptions in each country? Who is trying to persuade the German public of certain right/left-wing policies that are necessary for the weaker Eurozone states, and who is arguing of the necessity of the largely German and Dutch-supported policies to strengthen economic governance in the weaker Eurozone states?

If we just express outrage at the bail-outs and the running of the Eurozone from different perspectives within our constituencies, then we've little hope of coming to a workable agreement that everyone can at least understand, rather than having another crisis measure hastily agreed at another European Council summit.

[EurActive] "...the centre-left wants to introduce a financial transaction tax of 0,05%, with the revenues going to fight against poverty and promotion of green growth.

Second, the PES wants to introduce an Employment and Social Progress Pact to contrast with the Stability and Growth Pact setting out limits on public debt and deficits for euro zone governments. Instead of strict fiscal discipline, the socialist pact would prioritise job creation, leaving behind the Conservative economic approach based on "punishment and sanctions," said Poul Nyrup Rasmussen, PES President.

Other measures include the introduction of Eurobonds that would add to the EU solidarity budget and setting up a European Debt Agency that would help EU tackle debt problems."

Surely competing ideas like these need to be aired and well discussed?

Where are the MEPs? I have not seen an MEP on Irish TV talking about how the EU should approach these matters. Perhaps nobody in the Irish media thought to grill them on what was going on in the EU, or to ask them what could or should be done differently. If we do not try and influence the EU through our MEPs and their parties, then we are missing an opportunity to exert political pressure and to force "Brussels" to respond. With billions being loaned and transferred across the EU and Treaty change in the air to secure the Eurozone, there is clearly a lot at stake - we should be contacting MPs and MEPs, holding public meetings and TV debates where the different Europarties and national parties debate their different visions of the Eurozone. Force them to take positions; to make the case for their ideas. If MEPs from different Member States joined in, then the different viewpoints of other parties in different constituencies could be discussed and understood.

Experience shows that it's hard to interest people in MEPs and European issues, and it would be undoubtedly difficult to set up public meetings and debates consistency across the Eurozone, but we cannot and should not leave the sole political debate behind the closed doors of the European Council, and we are wasting are time carping ineffectively about the positions of other countries, essentially, behind their backs. If we want to make our political voices heard, we should at least try to use the system we have to its full extent.

Don't worry, the Commission has a cunning plan

The Commission apparently has a plan to aid Eurozone countries that default, though it will not reveal them to the public. Though since there can be no buying up of national bonds or bailing out of defaulting governments, the balance of payments scheme seems to be the only mechanism available (that I know of - not being an economist, I can't say for definite). If that's true, it seems the amount of money that is involved is minuscule (unless the ceiling is raised significantly: at the moment the ceiling is €25 billion).

I'm not too impressed by the claim that they're "equipped intellectually, politically, and economically to face this crisis scenario", either. First of all, I would question the fact that the aid (under "The Plan") seems to be on offer only after the country has defaulted, or at least it is only spoken about in these terms. Second, the Commission's performance over the last few months hasn't been inspiring. If its defence of the single market, the heart of the EU, is so weak, then I don't expect much ambition in this area either. That the Commission has proved so inept in demonstrating the usefulness of the EU to the public by taking a pro-active stance is, in my opinion, the most damning aspect of Barroso's Commission.

Never mind the lack of political promotion and initiative during the referendum campaigns, etc. as highlighted by the Anyone But Barroso campaign, though these reasons are by themselves important - this failure to act effectively cannot be rationalised away with the idea that the Commission shouldn't be assertive in the national political arena; the crisis is huge, and the need for effective common plans and co-ordination has never been greater. If the Commission cannot summon up the courage and ambition to act in an area where it is so desperately needed, then I can only assume that this one has a death wish.

Germany: willing to step in?

It seems that Germany is finally beginning to realise the need for it to take a lead in the EU (and I suppose we'll worry later if this unduly increases Germany's influence in the bloc further). The eurozone bond idea is out, as far as Germany is concerned (and so as far as the eurozone is concerned too). The Nordic countries are apparently sceptical about the idea (while agreeing that the euro is a Good Thing), but I'd say that Germany has pretty much killed it off for now. A eurozone bond would have helped the more crisis stricken eurozone countries, but if western banks are so tied up in Eastern Europe, then it might not do much good overall anyway.

And in any case, it would make things more expensive for Germany.

Of course, German money will be handed out only on German terms. For Ireland the conditions could be a bit of a slap in the face: protection of the Irish corporation tax (which is quite low in order to attract investment) was one of the planks of the No campaign back in June, despite the retention of the veto in such areas. In the end economic realities could force us to raise our corporation tax to get our hands on German money.

Of course, the German government is there to serve the German people so it can hardly be blamed for acting to ensure its own interests where its own money could be splashed about. Shoring up the European economy is naturally itself in the interests of Germany, but moves to act on this can hardly be politically comfortable, to say the least, and if this is acted on, then Germany should be congratulated for its solidarity with other member states when Germany itself is facing a tough time too.

Perhaps there should be some sort of country or industry insurance in the EU (or the eurozone)? I know nothing about economics, so I'm just tossing out random ideas, but with Europe's economies so interdependent, a common fund for supporting member state governments or Europe-wide industries could be an alternative to just relying solely on Germany. If every country contributed regularly to this fund, which could be administered by the Commission to ensure that it wasn't applied in such a way that it could harm the workings of the internal market, then the burden would be lifted from Germany (to a degree), and the political danger inherent in relying on one member to prop up the whole group would be mitigated. Member states would have to commit to certain rules to make sure that the fund wasn't abused (though it's hard to see how it could be enforced when the whole point of it is to help in times of crisis).

The EIB, etc. are stepping into a support role for countries at the moment, but they were not designed to help combat the effects of a crisis of this scale in the member states. Something stronger is needed.

Moves to help ensure the better regulation of Europe-wide (and global) flows of money are good, but all economic areas grow and develop quickly and the regulation regime we produce today may be outmoded in 20 years time, or even dismantled in the future just as the regulation resulting from the Great Depression was scrapped in the name of free market orthodoxy (plus the fact that every generation sees themselves as smarter than the last one). So prevention, while better than the cure, cannot always be relied on. We need to have some medicine in place as a back up, should we need it.

The Return of Ken Clarke

Ken Clarke's return to the Tory front bench has been widely reported and commented on on the Internet. Apparently, his economic wisdom is boundless and will help right the wrongs of the British economy which were inflicted by Brown.

However, despite his seemly vast economic knowledge, according to the Tories, his opinions on the Euro are heresy, and something which shouldn't be taken too seriously since it's not something he would know about anyway. Pro-Europeanism and views on the largest project of economic integration in the world are also outside this economic genius' remit, as is anything that would challenge the Tory's conventional wisdom.

I mean, he would have to have been Chancellor once for anyone to consider his views seriously, wouldn't he?

On a serious note, I do think Clarke is a capable politician and minister, and he's probably a good choice for Cameron's shadow cabinet. He may hold views that go against the Conservative party orthodoxy, but I'd say that he'd toe the line now (or at least make more of an effort to) now that he's back in frontline politics. As a "big-hitter", he could be a very valuable weapon for the Conservatives.