Plausibility Check: some or all PIIGS countries leaving the Eurozone in worse Euro crisis

[Onkel Willie]

Assuming that the Euro Crisis that started in 2009 somehow became worse, disregarding the why for the sake of this discussion, what would the likelihood be of one or more PIIGS countries (Portugal, Italy, Ireland, Greece and Spain) leaving the Eurozone, either reverting to a ¨Southern Euro¨ or to their previous currencies?

Critics of the Euro have argued that the Euro was too strong a currency for the weaker Mediterranean economies, which were trapped by it in an incompetitive situation, after which it became a balance of payments problem that the Euro (a political project, not an economic one) turned into a debt crisis. According to this line of argumentation, Southern Europe experienced inflation via Euro capital flows (which they couldn't actually do anything about, free market and all that). Then the capital flows dried up. Which required one of two things to happen - either an external devaluation, where the currency drops, restoring competitiveness, or an internal devaluation.

Devaluating the Euro was never considered an option as far as I know. A weak Euro versus a strong dollar would have made imports expensive for EU countries and Germany was definitely not going to inflate its economy to allow Southern Europe to be competitive again because of: a) downward direction of salaries and b) damaging the productive capacity of the economy and thereby killing GDP and making the debt/GDP ratio worse.

I do have some issues with these assumptions. If a country, like Greece for example, returned to the drachma then it would soon learn the hard way, again, that the drachma was never a much traded currency because it is a net importer with a not too stellar economic record. Secondly, much of the debt owned by the PIIGS countries would be in euros. If say the much larger Mediterranean major export-oriented economy Italy goes back to the lira, would its creditors accept payment in lira? If not, how f**cked is Italy by reverting to its old currency? Would its towering debt be offset by bouncing back in terms of competitiveness of its exported goods and services or not? Same questions for the others of course.

TL;DR version:
1. How likely is the departure of one or more PIIGS countries from the Eurozone in a worse Euro crisis (perhaps one in which the north demands too much reforms from the south for footing the bill)?
2. Assuming one or more leave: How is/are the departing country/countries affected? What happens to their debts and how is their economy affected by an external devaluation of its ¨new lira¨ or ¨new drachma¨?
3. Does the Euro survive?
4. Effects on the European and the global economy?

 

[Godot]

Unlikely that a whole lot changes from OTL, really. I suppose you'd have an earlier and more severe rise of austerity v. anti austerity politics and the like, but really exiting the Eurozone is more difficult than it seems. Even the oft bandied about Grexit was left in the dustbin.

Best comparison can be found from the sovereign debt crisis onwards. No real reason I can see that a crisis in 08 would differ that much from the one in 2012.

 

[Onkel Willie]

Unlikely that a whole lot changes from OTL, really. I suppose you'd have an earlier and more severe rise of austerity v. anti austerity politics and the like, but really exiting the Eurozone is more difficult than it seems. Even the oft bandied about Grexit was left in the dustbin.

Best comparison can be found from the sovereign debt crisis onwards. No real reason I can see that a crisis in 08 would differ that much from the one in 2012.

So you're saying if Grexit or, God forbid, Italexit happened the economic crisis wouldn't be much worse than IOTL? Just more debate about austerity vs. anti-austerity and that's it? Wouldn't the serious blow to the Euro's prestige have any effect on its course versus the dollar for example? And this leaves the issue of whether debtors would accept payment of debts in lira and drachmas, because Italy and/or Greece could collapse if they don't.

 

[Godot]

So you're saying if Grexit or, God forbid, Italexit happened the economic crisis wouldn't be much worse than IOTL? Just more debate about austerity vs. anti-austerity and that's it? Wouldn't the serious blow to the Euro's prestige have any effect on its course versus the dollar for example? And this leaves the issue of whether debtors would accept payment of debts in lira and drachmas, because Italy and/or Greece could collapse if they don't.

Not quite - more like, if Grexit didn't happen after 2012, why would it happen after 2008?

Now, it really does depend on the severity of this theoretical crisis. However Europe *did* feel the effects of the 08 downturn, but the EU availed itself well enough. Mind you, the seeds of future issues were definitely planted in 2008/09, but in that crisis itself, Germany actually suffered a worse hit to it's GDP growth than Greece, with the Baltics faring the worst out of the EU. Not implying there's a one to one correlation between GDP and economic prospects, but you see what I mean.

It really depends on the severity of 08 in your hypothetical, I suppose.

 

[Tanaka did nothing wrong]

Well, there are some problems:

a) much of the debt after 2002, which also happened to be much if not most of the debt in total in Greece (and perhaps Spain, Portugal and Italy) was intra-Eurozone, since it had been the French and German banks that had jumped with both hands (since the markets there were ideal, with large demand, not ideal supervision and also, significant capital accumulation on the part of the average individual - at least a fully owned home for most customers, often small liabilities etc). By throwing them out of the Euro system, you immediaely endanger a large part of the already burdened portfolios of these banks. While in theory you could perhaps hatch up a system to give these countries the funds to meet their obligations, at the same time you make insolvency rather likelier, since the constraints of the Euro in that area don't exist. Also, with them out of the Euro system, the IMF would have a greater , perhaps sole say in the structuring of the programme, so you could have a haircut in addition to "internal devaluation" measures (austerity and the like), to improve the debt sustainability. All these increase real (or perceived) risk, which in turn makes these banks more fragile; a Franco-German bailout could be necessary in this case, which would be a rather unpopular move. Merkel was no fun of "controversial" domestic measures and with elections approaching, setting aside billions to save "greedy and irresponsible banks" would be see as political suicide, especially when there would be a body of opinion, potentially a vocal one, which would argue that siad bailout became both indispensable and much more expensive because of the decision to get these countries out of the Euro: all in all, it could trigger rather many negative developments. France would be in a similar position, and having to pay these many extra billions with an economy in the red would be a tough sell.

b) The social conditions in the Mediterranean countries, at least in the short term, would probably be rather worse than OTL. Dependence on imports and weak currencies would be an explosive cocktail. Italy, Spain and Portugal could probably manage to steady the ship at some point, but in Greece you would perhaps see numerous signs of a humanitarian crisis and bankruptcy would probably not be avoided. This could lead to considerable destabilisation and radicalisation, with the old political system even more discredited and potentially imploding (so a 2012 situation 3 years earlier and perhaps this time both New Democracy and PASOK go down), which would leave a vacuum both for the hard/far right and the hard/far Left. This in turn could be considered as rather troublesome by the Americans as they would see the country experiencing the worst domestic crisis since 1974 - 1975, so they would probably exert pressure on the Europeans to not go ahead with this plan (similarly for the other countries).

c) It would be a major setback to the idea of European integration if the Euro was seen as a currency unable to deal with a major crisis. It would probably at least discourage prospective members from attempting to join the Eurozone.

Now, if all these were bypassed/settled somehow and the Euro wasn't effectively ended, then you would probably see Europe adopting a "double-track" integration to a larger extent. The silver lining is that the Euro would probably be more viable and perhaps, some lessons might be absorbed, so fiscal union could be pursued more comprehensively, as well as push for actual banking reform. The Mediterranean countries would go through a lot of pain, probably even more than OTL, at least in the short term, but if they remained mostly stable and there was a somewhat effective management of the fallout, perhaps the new economies could be built on a sounder basis with a greater emphasis on viable outlets of long term economic activity and growth - although I place myself more to the pessimists' club and I think that we would see OTL's stagnation.

(I hope I didn't make any mistakes or blundered in my analysis ).

 

[Fuzzy Dunlop]

So you're saying if Grexit or, God forbid, Italexit happened the economic crisis wouldn't be much worse than IOTL?

I think it's called Quitaly not ItalExit.

 

[Gancio The Ranter]

I think it's called QuItaly not ItalExit.

In Italy it's called ItalExit or insanity depending on your political positions

 

[kham_coc]

In Italy it's called ItalExit or insanity depending on your political positions

It's displacement activity - Italys problems is its weak state and decentralised systems, not the currency and the people who are most for italexit is invariably the same people most opposed to change, and ironically probably also the ones who would suffer the most from that change as opposed to the other change.
Especially when, except via inflation, the lira would solve none of Italy's problems.

 

[Fuzzy Dunlop]

In Italy it's called ItalExit or insanity depending on your political positions

You have to admit though Quitaly is easier on the tongue

Like Frexit, Grexit or Nexit.

 

[lukedalton]

So you're saying if Grexit or, God forbid, Italexit happened the economic crisis wouldn't be much worse than IOTL? Just more debate about austerity vs. anti-austerity and that's it? Wouldn't the serious blow to the Euro's prestige have any effect on its course versus the dollar for example? And this leaves the issue of whether debtors would accept payment of debts in lira and drachmas, because Italy and/or Greece could collapse if they don't.

Grexit is manageable but Italy is litteraly 'too big (and integrated) to fail' and his economic collapse will bring a cascade effect on the entiere continent...at first, we are talking about a second depression here

 

[Neoteros]

It'd be interesting if, after the old currencies come back, they eventually become pegged to each other in a new Latin Monetary Union; and if North Africa were more democratic and stable, you could see the birth of a new supranational, pan-Mediterranean union including the likes of Libya and Tunisia, maybe Algeria and Morocco, if they feel like trying to ditch French influence, but Egypt would be far too big a fish for such a pond.

Still, you could cover the Fezzan in solar panels, and employ the local Berber nomads as their caretakers, that'd be one hell of a way to further a renewable climate agenda.

 

[oberdada]

It is legally not possible to leave the EURO-Zone without leaving the EU.
Of course, in theory, those rules could change, but considering the time it usually takes to change European Treaties, the crisis will likely be over, one way or another.
Even if there was a will, with wasn't there.
At the time, there were some considerations on how to conduct a country leaving the EURO, but I never so a plan that looked plausible for execution.