If you cast your mind back to the peak of the GFC, when people were actually talking about the dissolution of the Economic and Monetary Union (EMU), a.k.a. the Eurozone, or more specifically, a unilateral exit by Greece or Italy, we were told by the ‘experts’ that it would be catastrophic. Over and over, headlines shouted at us how disastrous it would be if the Eurozone failed. Well, guess what, even pro-Euro researchers have come to the conclusion that the effects of collapsing the monetary union would be minimal, to say the least. And when we dig into their analysis a bit deeper, using technical knowledge, the results are even more devastating for the pro-Euro camp. Mostly, using techniques that give pro-Europe narratives the best chance of delivering supportive empirical results, they find mostly impacts that are not statistically different from zero, of an abandonment of the common currency and a return to currency sovereignty for the 20 Member States. I haven’t seen any attention given to this in the mainstream media or from those pro-Euro Tweeters that tweet away with all sorts of nonsense about how good the common currency has been. But then that would be a bridge to far for them I guess.
When Greece was being turned into a colony by the Troika, the general ‘expert’ view was that announcing a unilateral exit rather than accept the ridiculously harsh and anti-democratic bailout package with the accompanying nation-destruction austerity, would plunge the nation into (Source):
… an abyss … a nightmare … chaos … unthinkable anarchy
The journalist who penned that description correctly identified it as “bankers’ drivel”.
Even a former Greek Prime Minister, Antonis Samaras claimed in February 2015, when the talk of Grexit was at fever pitch that (Source):
… living standards could fall by 80% within a few weeks of exit … All of this could push the eurozone into recession.
Tony Blair, who is yet to be tried for crimes against humanity as a result of his part in the illegal invasion of Iraq, claimed in 2011 that (Source):
If the single currency broke up, it would be catastrophic.
At the time, he was reported as continuing to “hold out the possibility that in the ‘very long term’, Britain might still join the euro” – such was the extent of his judgement failure.
I could find a myriad of quotes like that from the commentariat and so-called ‘expert’ economists.
They were happy to see the Greek economy shrink by nearly 30 per cent and see massive public wealth transfers to the elite financiers as part of the austerity-forced privatisations of course.
Real GDP contracted by 26.8 per cent between 2008 and 2016.
By 2022, the contraction was still 20.6 per cent compared to 2007.
In per capita terms, the contraction since 2007 has been 17.6 per cent and since the bailout, modest recovery has been recorded.
So for 14 years, the Greek economy has been held in a state of near collapse anyway.
I wrote about all these issues and provided a blue print for multilateral and unilateral exit for the Member States which would have restored prosperity almost immediately in my 2015 book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale (published May 2015).
The framework set out in that work and the analysis is still apposite.
Nothing much has been changed even with the pandemic and the Ukrainian situation.
Even after it was obvious that the Greek bailout had not delivered the Troika’s promised results and the IMF had been forced to admit that it had got its modelling wrong, there were still ‘experts’ toeing the European Commission line.
I wrote about that the IMF admission in this blog post – The culpability lies elsewhere … always! (January 7, 2013).
The big bankers have continually lobbied against any break given that they are protected by the European Central Bank and making big bucks from the monetary policy initiatives (cheap money, QE rendering capital gains etc) that have kept the Eurozone intact, even with the dysfunctional monetary architecture.
Even in 2019, commentators parading as ‘experts’ were claiming that the “economic consequences and legal controversies would make Italexit practically impossible.” (Source).
Apparently, a “working group comprised of high-level representatives of the Italian government and central bank was asked to study the consequences of an involuntary Italian exit from the euro” concluded that there would be a “severe recessionary ipmact on the economy”.
That is the standard prediction and leads to conclusions like this:
Admitting — unambiguously — that exiting the euro would be disastrous should be the first and most crucial step for whoever aims to lead Italy.
Unambiguously – eh!
Fast track to February 2023
The German ifo Institute for Economic Research, which is based in Munich and is one of the largest ‘think tanks’ in Germany is typically pro-Euro although during the worst of the GFC, its then president, Hans Werner-Sinn argued that the EMU should be reduced in size and allow the Member States that would continue to struggle to “do it outside and depreciate their currencies” (Source).
In its most recent econpol Policy Brief (Number 48, Vol. 7) – Complex Europe: Quantifying the Cost of Disintegration (published February 2023) – the ifo Institute conducts an analysis of the consequences of reversing Europe’s integration process.
They use a technique based on the – Gravity model of trade – to calculate the various stages of disintegration.
The model is a pretty standard technique in international trade studies and essentially forecasts the strength of trade flows based on the respective size of the economic units (in this case Member States) and how far apart they are.
The overriding conclusion is that trade declines as the distance between the units increases and increases in proportion with the size of the nations, which is hardly surprising.
I won’t go into the technical details of how these models are estimated using econometric techniques.
Suffice to say, there are many problems of estimation bias and misspecification that can arise.
Further, most studies end up with a significantly and large ‘unexplained residual’, which means in English that a large portion of the variation in trade flows is not explained by the ‘gravity’ variables.
We should thus be cautious in assessing any conclusions that arise from these studies.
After all, gravity analysis predicted an almost catastrophic collapse of the British economy after the 2016 Referendum, which clearly didn’t happen.
The researchers considered various levels of disintegration of the European project and the estimated consequences for national income generation, production and trade.
So they seek to answer:
… how much lower the growth in trade, production and value would have been if individual steps of the integration had not taken place.
The stages of disintegration are:
1. “collapse of the European Customs Union” – back into WTO allowed tariffs.
2. “Dismantling of the European Single Market” – back to “the introduction of non-tariff trade barriers”.
3. “Dissolution of the Eurozone” – so abandonment of the common currency.
4. “Breakup of the Schengen Agreement” – border controls reimposed.
5. “Undoing all regional free trade agreements (RTAs) between the EU and third countries in force in 2014”.
6. “Complete collapse of all European integration steps”.
7. “Complete EU dissolution and additionally termination of all net fiscal transfer payments between EU members”.
Essentially, they trace the impacts of the ‘disruption’ to intra-EU trade of these stages.
In terms of the “impact on income” they find that:
Real consumption effects differ vastly across countries and integration agreements.
For the abandonment of the Eurozone they conclude:
… we find negative effects for all member states. However, only in the case of Luxembourg (-2.53%) and Germany (-0.7%) are the effects statistically significant … Countries outside Europe are hardly affected.
I will come back to what this means soon.
The following graph used data from their Table 2 – “Changes in real consumption in %, baseline year 2014”.
The red bars denote the results where the statistical significance is at the 10 per cent level (I will explain).
The average effect is only 0.4 points and that is distorted by the estimates for Luxembourg and Malta. If we exclude those nations the average impact i only 0.3 points.
So very small in fact.
But several points should be made.
1. For all but four nations (Germany, Hungary, Luxembourg and Turkey) the results are negative. Why? Because in statistical terms, the rest of the estimates are no different than zero, given they were not found to be statistically significant.
2. Even then, the level of statistical significance that is used is 10 per cent confidence whereas it is more standard to impose a tougher test of significance using the 5 per cent level.
Which nations would have shown up to be significant at that level?
3. Overall, given those points, these results, in as far as we can accept the limitations of the techniques used, reveal that a break up of the Eurozone would have fairly minimal impacts.
Moreover, the gravity model approach gives the conjectures in the study the best chance of getting significant results both in statistical and quantitative terms.
That is, it will give the worst case scenario for the break up of the Eurozone.
The fact that the impacts detected are minor and most not significantly different from zero is a very interesting result that the mainstream media and the technocrats in Brussels will not be advertising very broadly.
We should also note that the simulations are rather biased towards getting large negative results given they do not anticipate any use of the increased domestic policy scope that would come from restoring each nation’s currency.
If a nation just exits the Eurozone and continues to offer the same sort of ‘Brussels approved’ policy options then, of course, the impacts will likely be negative.
But that will come mainly from the policy stance and might be exacerbated to some degree by the increased costs arising from the exit (the so-called transaction costs).
However, if a nation was to exit, restore their own currency, and then pursue a full employment strategy and invest significantly in restoring public infrastructure etc, then I would conclude that the nation will benefit in material terms over time.
Even if the currency depreciated somewhat, that adjustment would be finite and help offset any unit cost differentials between that nation and other stronger export nations.
Of course, initially, it would be likely that the currency would appreciate given that it would be in short supply in the foreign exchange market and remain that way for some time.
Conclusion
There are many problems with this type of analysis.
But the point to remember is that they give pro-Europe narratives the best chance of delivering supportive empirical results.
A technician (such as myself) can see through the limitations, particularly the sparseness of the counter factual (no policy responses using currency sovereignty seem to have been simulated).
But even if we take the results on their face value, their estimates of the damage that abandoning the Eurozone would have on income and real consumption are minimal to say the least and mostly indistinguishable from zero.
Juxtapose that with the official line from the mainstream economists, the IMF, and the European Commission, and you encounter the world of dissonance – hype and hegemonic defence versus reality.
I am still one that considers the only viable future for the 20 Member States is to exit the EMU, restore their own currency sovereignty, and then negotiate inter-governmental agreements at the European level (by abandoning the neoliberal treaties) to deal with matters that can best be handled at the higher than national scale.
That is enough for today!
(c) Copyright 2023 William Mitchell. All Rights Reserved.
