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Greece would lose half of its GDP by leaving the euro zone

07 September 2011 / 18:09:21  GRReporter
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If Greece leaves the euro zone, it would lose half of its GDP, says a study by the United Bank of Switzerland, on the future of the euro. According to the Bank’s analysts, leaving the euro zone would lead to Greece’s suspension of payments to creditors, failure of companies, breakdown of the banking system and a shock to the world trade. The new currency will be devalued by 60 per cent, but that would not really help the economy. The average Greek would be between € 9,500 and 11,500 poorer in the first year and between € 3000 and 4000 per year over the next few years.

UBS analysts’ conclusion is that the euro is not working under the current structure of the euro zone and with its current members. Therefore, either the structure or its members need to change. They also forecast a gradual and painful alignment of the public finances of the euro zone states. According to them, the decreased number of states involved in it would reduce the international impact of the European Union. UBS also warns that no monetary union in the modern history has broken down without some kind of totalitarian or military government, or a civil war.

Another major European bank, Royal Bank of Scotland, forecasts Greece’s default in December, which would seriously shake global markets. More specifically, the analyst Harvider Sean from the British Bank indicates the date December 11, 2011, when the report by the International Monetary Fund on the progress of Greece is expected to be presented. His arguments are the Athens’ inability to carry out the reforms, which it has undertaken, the too ambitious fiscal targets set by the supervisory Troika, the difficulty with which the Greek Parliament adopts new laws and the reluctance of the European Union and the International Monetary Fund to compromise.

In case of actual Greece’s default, the debt crisis would spread uncontrollably and the European Central Bank would have to intervene. "Private capital will not return to these markets as the risk of disintegration of the euro area will be very high," says in his analysis Harvider Sean, who states that global markets are only beginning to understand the seriousness of the situation. The solution he proposes is the European Central Bank to intervene hugely not only in the market of government but of private securities too.

The ECB doctrine of "no European sovereign default" is simply untenable, states in his analyses Harald Hau, Professor of Economics and Finance at the University of Geneva, who also argues that the European guarantees for Spanish or Italian public debt are just unacceptable to the French, German, or Dutch taxpayer. "The Finns have already said their farewell to the Greece rescue plan and they cannot be blamed their good common sense," says the economist. He also warns that when the full financial burden of EFSF guarantees falls upon the German taxpayer over the next three years, it will become evident that Chancellor Merkel has led her Christian democratic party down a road to political suicide.

Harald Hau, however, states that the default by more European countries (other than Greece) does not imply the demise of the euro.  In his opinion, mandatory recapitalisation in the banking sector may offer a fast track exit from the current debt crisis. The economist does not support the Eurobonds and defines them as "a bundle of nails for the euro coffin". He argues that many bankers support them, because this is the way to socialize private losses from the restructuring of the Greek debt.

 

Tags: Euro zoneGreceDebt crisisGDPDefaultSuspension of paymentsEconomyMarkets
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