by Don Alexander, MBA
Associate, RSD Solutions Inc.
Mr. Alexander also lectures at NYU and SunySB
Conversations about the breakup of the Eurozone are changing as the debate about a break up continues to evolve. Some analysts (including the author) argue that ’avoid breakup at all costs' dogmatism may not be a prudent view. Getting good data may well be difficult, but any arguments about the cost of a Eurozone breakup must be compared to the ongoing cost of the status quo.
Jens Nordvig looks at this issue in a recent VOXEU communique (6th Nov.) called The Eurozone breakup debate: Uncertainty still reigns. In the spring of 2012, political tension in Greece was the debate focus while in the summer the focus shifted to Spain’s funding difficulties, especially the redenomination risk on Spanish assets. Then the ECB stepped in and reduced sovereign funding costs in the periphery. Subsequently, the Eurozone breakup debate has again shifted focus to core countries.
There is limited consensus on the implications of various forms of breakup and on the preferred path for the Eurozone. European policymakers remain adamant that the Euro is irrevocable. Meanwhile, academic economists and market strategists continue to disagree about both the merits of keeping the Eurozone together and about the costs of any breakup scenario.
Despite years of debate, little progress towards reaching an informed consensus has been achieved. While, the question remains on what can be done to more objectively evaluate the implications of various breakup scenarios?
The Eurozone remains unique as a currency union: (1.) The Eurozone is large in economic terms and differs from past currency unions that have split. (2.) Eurozone countries are substantially wealthier than other countries that have experienced a breakup in the past. (3.) The euro serves a unique role both as a reserve asset and as a currency widely used in international capital markets.
The effects from a Eurozone breakup on macro-level balance sheets will be determined by the relevant external assets and liabilities that are defined as those cross-border positions where the legal jurisdiction of underlying financial contracts is foreign to the country in question. Basic macroeconomic datasets - such as net foreign asset positions and cross-border banking statistics - are really useful if we wish to analyze the implications of currency union breakups. Yet current official data sources tell us nothing about the legal jurisdiction of the assets and liabilities in question. The author estimates the euro’s international dimensions of €20 trillion of euro-denominated contracts in existence outside the jurisdiction of individual Eurozone countries, not a minor issue.
The breakup scenarios being debated, involving strong countries exiting, also change the analysis. Problems associated with extreme capital flight that have been used to argue that the cost of a breakup would be prohibitively costly, would be smaller in a situation where a strong country leaves. For instance, a Finnish exit could be managed without devastating disruption to financial markets. Thus, 'avoid breakup by all means' is not a universal truth.
The costs of the status quo need to be considered; how much would non-breakup cost? The cost of the current policy path is not explicitly accounted for. Quantifying the cost of the status quo is a dynamic exercise and most would agree could be more costly than was predicted earlier. A robust cost-benefit analysis is needed that includes specific Eurozone breakup scenarios versus the costs of the current path of gradual integration. Many different Eurozone breakup scenarios have been debated but without being able to properly quantify the effects of breakup scenarios, uncertainty still reigns.
No comments:
Post a Comment