Sunday, January 27, 2013

The Case For Not Exiting The Euro

By Grant de Graf

Professor Klaus Schwab's arguments for not exiting the Euro was published in the Huffington Post on January 19, 2013 "The Re-emergence of Europe: Why Exiting the Euro is a Bad Idea".

His arguments for not exiting the Euro can be summarized as follows:

  1. Jettisoning the euro altogether and opting for national devaluation may eradicate a country's current account balance in the short term, but it will not lead to longer term growth.
  2. Even though a devalued currency may make exports cheaper and therefore more attractive to foreign buyers, imports would become more expensive and cause a decrease in real incomes.
  3. An overwhelming number of economists, international civil servants and policy-makers argue that a fragmentation of the Eurozone would cause a new depression and massive wealth destruction around the world. 
  4. It would end the period of economic integration that has characterized world politics since the end of the Cold War. The important founding notion of solidarity would be broken. Old rivalries could be reignited. 
  5. There is a high risk of financial chaos, as a country would have to quickly revert to its new currency.
  6. Lack of clarity as to who would set the exchange rate for the new currency. 
  7. High probability of debt default, bank collapse and lack of access to international capital markets.
  8. There is no legal frame work for a member country to re-establish its own currency. 

This is why the arguments are without foundation:
  1. The goal for exiting the euro was never to balance a current account deficit, but rather to provide a country with a viable framework to export its goods at competitive prices and consequently drive up local production and the economy.
  2. The higher cost of imported goods would swing demand towards local production and if anything result in higher levels of disposal income.
  3. Predicting the future is a dangerous game. What is the basis of the estimates which forecast further recession and wealth destruction? Is this scenario a consequence of higher administration costs or lower expected GDP? Clearly, the forecasts are not founded on sound economic principle or pragmatism. 
  4. Economic fragmentation and political rivalry does not have to be the result of a country's exit from the euro. An exit from the euro needs to be effected with deliberation, planning and the full co-operation of the EU,  regarded not as a rogue act of self-interest, but rather as a measure which is beneficial for all parties (which it is).  
  5. The changes necessary to invoke the euro did not result in chaos and pandemonium. Similarly, if a country were to exit the euro, there is no reason to assume that with the correct planning, this would be any different. History provides us with a long record of successful instances, when nations took on new currencies.
  6. There is no more efficient setter of the exchange rate, than the market.
  7. Defaulting on debt and exiting the euro are two different things, with one having nothing to do with the other. In fact, an exit from the euro makes the case for default less likely. The higher prospects for economic recovery (following an exit) make access to capital markets more compelling.
  8. The lack of a legal basis for a country to exist the euro is unfortunate and possibly demonstrates the lack of planning that went into the creation of a single currency union. Irrespective, if exiting the euro is indeed the optimal route for a country and the EU to follow, there's little doubt that European leaders will devise a blueprint which will accommodate such an initiative.

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