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Why are countries so afraid to leave the Eurozone?

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Show 1 Answer (Answer provided by Ion Sterpan)
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Good question. The earlier videos spoke about the costs of staying in the eurozone for countries with weak growth. This one speaks about their costs of leaving. For weakly growing countries both staying and leaving are costly. Which means that the underlying problem is their slow growth, no matter if they stay or leave. The tough decision should address the underlying problem. The underlying problem is that they have not yet reformed their institutions. We should not forget that the reason these countries entered in the eurozone in the first place was to credibly commit that they would not inflate (because their central banks would not be able to print euros). That commitment is important to investors. It secures the institutional environment. If these countries leave, they leave because they want to break that commitment.

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Tommaso, that 30-40% figure came from a report by UBS. Info on the report is here: http://www.zerohedge.com/news/bring-out-your-dead-ubs-quantifies-costs-e...

Here is an excerpt:
"The cost of a weak country leaving the Euro is significant. Consequences include sovereign default, corporate default, collapse of the banking system and collapse of international trade. There is little prospect of devaluation offering much assistance. We estimate that a weak Euro country leaving the Euro would incur a cost of around EUR9,500 to EUR11,500 per person in the exiting country during the first year. That cost would then probably amount to EUR3,000 to EUR4,000 per person per year over subsequent years. That equates to a range of 40% to 50% of GDP in the first year."

It doesn't make it very clear how they actually arrived at these figures. They probably have some model of the economy and how GDP responds to credit conditions, the government's fiscal situation, exports, etc. and make assumptions about how all of those things would react to leaving the euro. Concerning your question about historical feedback, I think that the model they use is probably informed by past examples of sovereign default and currency devaluations (of which there have been many-- in the case of the euro it would just be a much bigger deal.)

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