Leaving the euro would cost Europe's indebted countries 40 to 50 percent of their entire economy — in just the first year, with heavy costs continuing for years, economists for Swiss bank UBS say in a report.
Leaving the euro would be so legally, politically and financially complicated, that the report concludes it has "close to zero probability," and that some form of closer European cooperation between euro member countries on budgeting and spending is more likely.
Despite the low probability, economists Stephane Deo, Paul Donovan and Larry Hatheway tried to model what would happen if a country pulled out of the currency. Costs included a probable collapse of the departing country's banking system and its trade with other euro countries, as well as government debt default and widespread corporate bankruptcies.
The result: it would cost a financially weak euro country — such as Greece or Portugal — between 9,500 euros to 11,500 euros ($13,300 to $16,100) per person, or 40 to 50 percent of annual gross domestic product in just the first year, with 3,000 euros to 4,000 euros per person in costs each following year.
As a bottom line, they compared the eurozone to residency at the Eagles' "Hotel California": "You can check out any time you like, but you can never leave."
While conceding that the shared 17-country currency is flawed and needs changes, they said recent statements by some German lawmakers and economists about expelling Greece were based on misconceptions.
To avoid defaulting on its debts, Greece has needed two expensive rounds of bailout loans that have been unpopular in Germany — the largest contributor of loan guarantees. Greece used the access to low-cost borrowing it gained by joining the euro in 2000 to run up large amounts of government debt. Ireland and Portugal have also needed bailouts.
The European Union treaty, the UBS report said, has no provision for expulsion and only sketchy provisions for withdrawing voluntarily from the EU itself, not the euro — although in practice it would be impossible to do one without the other.
The costs arise from people rushing to pull their assets out of banks before they can be switched into a new currency that's less valuable, and from the devaluation of the currency. They estimated a 60 percent drop in the new currency, a 7-percentage point rise in borrowing costs for everyone from skeptical creditors afterwards, a drop in trade of 50 percent, and the loss of 30 percent of bank deposits, used to recapitalized the collapsed banks.
Euro withdrawal would lead to capital controls, possible closure of the country's borders to prevent cash flight ahead of the changeover, and possible secession of discontented regions, not to mention the loss of Europe's prestige in the world.
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