Sunday

7th Jun 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.

Vestager hits back at Lufthansa bailout criticism

Commission vice-president in charge of competition Margarethe Vestager argued that companies getting large capital injections from the state during the corona crisis still have to offset their competitive advantage.

News in Brief

  1. Poland accused of 'blatant violation' of EU court injunction
  2. EU concerned by US approach to Kosovo and Serbia
  3. City morgues cast doubt on Putin's virus data
  4. ECB increases pandemic stimulus to €1.35 trillion
  5. New EU cloud computing platform 'moonshot'
  6. City of Berlin passes anti-discrimination law
  7. Iran hits record corona cases in second wave
  8. EU job losses tell tale of pandemic damage

Stakeholders' Highlights

  1. UNESDAHow reducing sugar and calories in soft drinks makes the healthier choice the easy choice
  2. Nordic Council of MinistersGreen energy to power Nordic start after Covid-19
  3. European Sustainable Energy WeekThis year’s EU Sustainable Energy Week (EUSEW) will be held digitally!
  4. Nordic Council of MinistersNordic states are fighting to protect gender equality during corona crisis
  5. UNESDACircularity works, let’s all give it a chance
  6. Nordic Council of MinistersNordic ministers call for post-corona synergies between economic recovery and green transition

Latest News

  1. EU warns UK to abide by Brexit political declaration
  2. Internal EU borders open by 15 June - bar V4, Portugal, Spain
  3. CAP 'failed to halt biodiversity loss', auditors find
  4. After Covid-19, deserted Venice struggles to survive
  5. Commission plans strategy to 'maximise' vaccine access
  6. How spies use women to steal EU secrets
  7. Hong Kong - when the Chinese Dream became a nightmare
  8. Right of reply: Letter from the Hungarian government

Join EUobserver

Support quality EU news

Join us