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The collapse of the Eurozone

By Fotis Fitsilis*

The recent developments in Europe regarding the future of the Eurozone are not

reassuring. Both the turbulence in the Franco-German axis and the open conflict

between Great Britain and Germany, have a negative effect at the cohesion of the

European Union. At the same time, Member States, such as Hungary, are openly

expressing their opposition to the prospect of entering the Eurozone. In Greece

there are voices arguing in favor of leaving the Eurozone. Consequently, a simple

question rises. Is it reasonable for Greece to keep the Euro as its currency? In fact,

the consequences for Greece leaving the Eurozone would be extremely severe, both

for the country and for the entire European Union. In the following article, I will

attempt to capture the most important of them.

The consequences for the European Union

The European Union will suffer from the deconstruction of the Eurozone, because:

a) An exit (also called Grexit in our case) from the Euro is not foreseen in the EU

Treaties. In contrast, the Lisbon Treaty contains a voluntary withdrawal clause

(Article 50), explicitly recognizing the possibility for a Member State to choose

whether to remain in the EU or not. From the above, it can be deducted that an exit

from the Eurozone is indirectly connected to an exit from the European Union, which

would probably mean the beginning of the Unions end.

b) Europe without one of its strongest symbols, the Euro, will significantly lose its

influence in global politics. The same, however, is also true for the largest countries

in the EU (e.g. France and Germany).

The consequences for a strong European economy

Strong economies will pay a high price if the Eurozone collapses. Let's look at the

consequences in a sample case, e.g. of Germany.

a) 40% of Germany's exports are directed to Eurozone countries. The main reasons

are the lack of quotas, the elimination of the exchange rates and monetary stability

offered by the common currency. The reintroduction of the DeutschMark would

probably be followed by its rapid appreciation against the Euro. German products

will be sold up to 40% more expensive (calculation of UBS), resulting into a shrinking

of the German export industry.

b) The collapse of the Eurozone would put an immense burden in the German

economy. Calculations vary between 14% and 25% of the German GDP only within

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the first year. Comparatively, the rescue of the troubled economies in southern

Europe would cost just a small fraction of these nightmarish figures.

c) The decline of shares in the stock exchange is expected to put most Banks in

trouble, only to be bailed out with new billions from the German tax payers.

d) The creation of national currencies will automatically trigger a transferring of

funds towards the strong countries monetary unit, particularly towards the

Deutschmark, as the European citizens would want to exchange their national

currencies against a stronger and more reliable currency. This will lead to strong

inflationary pressures, which the Germans despise, as it evokes to them the dramatic

period of the Weimar Republic (1919-1933), short time before the rise of Nazism in

Germany.

The consequences for a weak European economy

Proportionally, the greatest impact from a collapse of the Eurozone will be recorded

in the economically weaker southern European countries like Greece, Portugal and

Spain.

a) As seen above, an exit from the Euro is not foreseen in the treaties. Instead, an

exit from the EU is possible, a process which, however, requires considerable

amount of time (up to two years), in which investors will have all comfort to

withdraw their funds and their investments from the respective country

(disinvestment).

b) During the establishment of the Euro the national debts of all countries in the

Eurozone were automatically converted into Euros. In most contracts, an inversion

of this procedure is not foreseen, while particular attention is to be paid to the

legislation that regulates national debts. Lengthy legal battles are possible to arise

between countries and their lenders, a perspective that will further tarnish their

image. Like many sovereign countries, Greece was retaining its national debt under

national law. This was changed in 2010, following the loan agreements for 110 billion

Euros according to the first Memorandum between Greece and the Troika.

c) Weak countries will have to pay off their debts having a new devalued currency,

which obviously makes payments impossible.

d) When a country changes its currency there are always winners and losers. To the

latter we count the savings of the middle-class people, whose deposits will

automatically lose value due to the devaluation of the currency. This may lead to

severe social unrest.

e) The most common phenomenon observed in a state of bankruptcy is a massivedemand of cash from the banks, the so-called bank run, and the attempt to move

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capital abroad. This massive capital outflow will possibly give the final blow to the

banking industry.

The European course

The crisis in the Eurozone has plunged the European Union into the most difficultphase of its history. The number and magnitude of the consequences that would

follow the dismantling of the Eurozone would be devastating for every European

economy. This is why immediate measures need to be taken, in order to restructure

the national economies of the troubled EU member states.

The Greek society is undergoing this painful transformation having already felt the

effects of the global economic crisis. Its cohesion will be once again put into the test.

As time passes nothing will remain unchallenged. Not even the founding Treaties of

the European Union.

SOURCES

Nikos Mousis, "European Union: Law, Economics, Politics," Papazisis, Athens,

2011

Yannis Varoufakis, Drachma?, 18.11.2011,

http://www.protagon.gr/?i=protagon.el.8emata&id=10309

David Bcking, Der Preis des Ausstiegs, 29.11.2011,

http://www.spiegel.de/wirtschaft/soziales/0,1518,800461,00.html

*Fotis Fitsilis is an electrical engineer (PhD) and an economist. He is the Head of the

Department for Scientific Monitoring and Reporting in the Hellenic Parliament. This is

the English version of an article that was posted on 11 December 2012 in the Neos

Agon newspaperof Karditsa, Greece.

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