Leaving the Euro: What Would It Cost?

By: Conrad de Aenlle

The euro zone was created with easy entry and virtually no exit. It was designed to go forward only and have no reverse gear. A German court ruling Wednesday, which confirmed that the government has the authority to continue using taxpayer funds to bail out Greece and other economic weaklings, makes that clear.

So does a new study by UBS on the consequences of a country leaving the euro, or the currency bloc falling apart altogether. There is no mechanism for kicking anyone out, it notes. As much as citizens of countries that have lived within their means, mainly in northern mainland Europe, might like to kick their more profligate brethren in places like Portugal, Italy, Ireland and Greece out of the euro zone, the various treaties governing the European Union and the currency forbid that, the study points out.

That's just as well, it concludes, because as expensive as the continuing bailouts and belt tightenings may be, the cost of dropping the euro for weak countries would be higher. The same is true, it says, for any stronger euro zone member that got fed up and decided to leave.

As a practical matter, the study's authors contend, it's about as impossible for a country to drop out as to be forced out. There would be costs of various sorts, and they would be prohibitive.

Whether a country exiting the euro is weak or strong, there would be severe damage to its banking system, to trade and to corporate creditworthiness, they say. There would be an additional price to pay if the departing country is one of the bloc's weaklings from a severe devaluation as the old national currency is readopted.

The currency would be worth 60 percent less against the euro than when the country entered into monetary union and adopted the euro, the UBS analysis estimates. There would be a mitigating benefit from a reduction in export prices that the devaluation would bring, but only a slight one, they reckon. The bottom line:

"We estimate that a weak euro country leaving the euro would incur a cost of around 9,500 to 11,500 euros per person in the exiting country during the first year. That cost would then probably amount to 3,000 to 4,000 euros per person per year over subsequent years. That equates to a range of 40 percent to 50 percent of [economic output] in the first year.
". . . If Germany were to leave, we believe the cost to be around 6,000 to 8,000 euros for every German adult and child in the first year and a range of 3,500 to 4,500 euros per person per year thereafter. That is the equivalent of 20 percent to 25 percent of [economic output] in the first year. In comparison, the cost of bailing out Greece, Ireland and Portugal entirely in the wake of the default of those countries would be a little over 1,000 euros per person, in a single hit."
On the next page: The costs aren't just in euros and cents.