Tuesday, November 6, 2012
The Eurozone breakup debate: Uncertainty still reigns
November 6, 2012
Conversations about the breakup of the Eurozone are changing. This column argues that an '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.
The debate about a Eurozone breakup is evolving. In the spring of 2012, political tension in Greece meant that the debate focused on ‘Grexit’. In the summer of this year, the focus shifted to Spain’s funding difficulties, especially the redenomination risk on Spanish assets. Then the ECB stepped in. Its Outright Monetary Transactions programme has since reduced sovereign funding costs in the periphery. Subsequently, the Eurozone breakup debate has again shifted focus and now concentrates on the possibility of strong countries - such as Germany and Finland - leaving the Eurozone (Soros 2012, De Grauwe 2012, Tett 2012).
Is there a consensus?
There is still limited consensus on the implications of various forms of breakup and on the preferred path for the Eurozone. European policymakers remain stubbornly 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.