Utopias may be out of fashion but doomsday scenarios are not. In the United States, the threat of debt default looms over the budget ceiling debates in the manner of impending Armageddon. Europe’s own disaster is the break-up – partial or total – of the Eurozone, referred to by many as implying the end of the European Union itself.
We have argued here before that Greece should leave the Eurozone. By implication, other struggling countries might also do better outside the currency union. Specific material consequences are difficult to predict but an effort has been made by some to look at what life outside the Eurozone might look like (thanks to Art Goldhammer over at French Politics for the tip). Reported on the Financial Times Alphaville blog, HSBC researchers have put together some figures on what a split in the Eurozone would have meant for its different constituents. Life outside for Southern Mediterranean countries looks rather rosier than it does for them at the moment.
The HSCB team had the idea of taking the Swiss Franc as a model for what a Eurozone core of countries free from debt crises (Germany, France, Benelux) would have looked like currency-wise. Basing the Euro-core currency level on the actual Euro-Swiss franc rate of 2009, the team find that at those rates a Eurocore currency would have risen 28% more against the US dollar than the actual Euro. This would have put a downward pressure on the big trade surpluses enjoyed by many of the Eurozone core countries, which is the self-regulating effect usually expected from exchange rate movements that are tied to real economy fundamentals.
Turning to the indebted countries, the Eurozone periphery as the HSBC team calls them, their currency would have been significantly weaker than the Euro as it stands today. If we take the current Euro rate as a simple of average of the Euro core and Euro-periphery rates, then the Euro-periphery rate to the US dollar is at parity. If we take into account the different size of the core and periphery and calculate with weightings, the Euro-periphery rate to the dollar depreciates to 0.65 Euro cents. The HSBC team show in a graph how – under this system – Greek and German real effective exchange rates would have diverged considerably.
The analysis is speculative and there is a long way to go from a weaker currency to a stronger economy over the longer-term. But the implication of the analysis is clear: life outside the Eurozone would have been potentially better for the periphery countries in so far as their currencies would have reflected the fundamentals of their economies and provided a route towards greater competitiveness other than the current cycle of self-defeating austerity packages.
The notion that Greek’s exit from the Eurozone would be economic suicide is ridiculous. There are good reasons to suppose that with its own currency Greece could tackle its own problems more effectively. If anything, it would mean the Greek government could focus on the material well-being of its people directly, rather than indirectly as a consequence of its prior decisions to remain – at all costs – within the European Monetary Union.
Fundamentally, the economics of the current moment in Europe are indeterminate. At issue is a political choice about the interests to be defended and goals to be achieved. Reorienting fiscal policy in Greece towards jobs and growth rather than on the deflationary policy being pursued today would benefit a majority of Greeks. But it would mean taking the plunge and pursuing life outside the Eurozone, something few Greeks seem ready to do.