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In earlier videos (Background), it is said that the poorer countries will be the first one to leave eurozone because of reasons such as Capital imbalance and less competitiveness in export. There the case is just opposite where the cost of leaving eurozone is much higher for the poorer countries. Please explain.
The cost of leaving eurozone is high but by remaining in eurozone with so much of problems, the problems are just being postponded and when they actually arise it may be unmanageable. A tough decision may be needed sooner than later. As I see as long as there are independent democratic governments in each nations who have sole authority to decide on each nation's fiscal policy the problem will remain.
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.
could you explain me in more detail how experts calculate 30-40% lost in GDP for the first year after changing the currency? any historical feedback? thanks
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.)