Monday

13th Jul 2020

Study: Greek euro-exit could start €17tn 'wildfire'

  • Spanish anti-austerity protesters burn EU flag in Madrid (Photo: tom.tziros)

The nightmare scenario of Greece, Italy, Portugal and Spain leaving the euro could cost the world economy €17 trillion, a new study says.

The figure - totted up by German consultancy Prognos for the Berlin-based Bertelsmann foundation - would amount to "a lengthy worldwide recession" stretching from the US to China and to "major strains on the social fabric and political stability" in the euro-departing countries.

Read and decide

Join EUobserver today

Support quality EU news

Get instant access to all articles — and 20 years of archives. 14-day free trial.

... or subscribe as a group

The study admits the consequences of a Greek exit - until recently mooted as a real option by top German policymakers - are a "mystery."

But it notes that a "domino" effect in which "capital market speculation and other untoward responses ... provoke sovereign default on the part of Portugal, Spain and ultimately Italy" is possible.

The EU treaty has no mechanism for expelling countries from the eurozone.

But if creditors stop shovelling bailout money into Greek coffers, Athens would have nothing with which to pay for healthcare, police or pensions, forcing it to introduce its own currency and to rely exclusively on internal tax income.

The Prognos scenario posits that a return of the drachma in 2013 would force Greece to write off another 60 percent of its debt.

The write-down would cause huge losses for private banks and sovereign creditors, creating a spiral in which lenders such as France, Germany and EU bailout funds, the ESM and EFSF, see their credit ratings go down and their borrowing costs go up.

The new drachma would also be worth 50 percent less than the euro.

The devaluation would mean that Greece's extant 40 percent euro-denominated debt would cost twice as much to service.

It would also ossify economic growth by destroying the confidence of business investors and average people's appetite for mortgages and spending.

Prognos said a Greek exit would cost the world economy €674 billion between 2013 and 2020. Greece would lose €164 billion and Germany €73 billion.

If Portugal goes as well, it would cost the world €2.4 trillion. Portugal would suffer an €84 billion loss and Germany €225 billion.

The Greece-Portugal shock would send ripples around the world - US GDP would fall by €365 billion and the Chinese economy would lose €275 billion.

Adding Spain, the world would lose €7.9 trillion, with costs escalating for France (€1.2 trillion), Germany (€805 billion) and the US (€1.2 trillion).

If Italy goes too, the figures balloon to €17.2 trillion worldwide, €2.9 trillion for France, €1.7 trillion for Germany, €2.8 trillion for the US and €1.9 trillion for China.

"In the current situation we have to make sure that the crisis in Europe does not turn into a wildfire," Bertelsmann chairman Aart De Geus said in a note accompanying the report.

Eurozone gives Greece 10-day ultimatum

Eurozone ministers have given Greece 10 days to implement budget cuts in return for a bailout cash, as Germany Merkel braves protesters on a visit to Athens.

Portugal in crisis after 1mn say No to austerity

Portugal is in political crisis as it struggles with a major popular backlash in the face of troika-approved austerity measures that would raise social contributions for employees.

Michel lays out compromise budget plan for summit

Ahead of expected tense discussions next weekend among EU leaders, European Council president Charles Michel tries to find common ground: the recovery package's size, and grants, would stay - but controls would be tougher.

News in Brief

  1. Croatia opens for US tourists, defying EU ban
  2. Poll: only 61% of Germans would get Covid-19 vaccine
  3. UK to spend €788m on new UK-EU border control system
  4. Berlin wants first use of EU cyber sanctions on Russia
  5. Erdogan warns neighbours over hydrocarbon reserves
  6. Bulgaria: political crisis amid anti-corruption protests
  7. Pope and Turkish-German leader join Hagia Sophia protest
  8. France and UK create joint migrant intelligence unit

EU forecasts deeper recession, amid recovery funds row

The economies of France, Italy and Spain will contract more then 10-percent this year, according to the latest forecast by the EU executive, as it urges member state governments to strike a deal on the budget and recovery package.

Stakeholders' Highlights

  1. UNESDANext generation Europe should be green and circular
  2. Nordic Council of MinistersNEW REPORT: Eight in ten people are concerned about climate change
  3. UNESDAHow reducing sugar and calories in soft drinks makes the healthier choice the easy choice
  4. Nordic Council of MinistersGreen energy to power Nordic start after Covid-19
  5. European Sustainable Energy WeekThis year’s EU Sustainable Energy Week (EUSEW) will be held digitally!
  6. Nordic Council of MinistersNordic states are fighting to protect gender equality during corona crisis

Latest News

  1. Poland's EU-battles to continue as Duda wins tight vote
  2. EU 'in-person' summit plus key data privacy ruling This WEEK
  3. Let's have positive discrimination for EU stagiaires
  4. We need to do more for our small and medium-sized enterprises
  5. Romania's virus surge prompts queues and new worries
  6. Michel lays out compromise budget plan for summit
  7. Border pre-screening centres part of new EU migration pact
  8. EU 'failed to protect bees and pollinators', report finds

Join EUobserver

Support quality EU news

Join us