Breakaway or breakup?

Published on, by Marco Annunziata, June 1, 2012.

There was a time when Greek exit from the Eurozone seemed implausible – now the prospect is so openly discussed that it even has its own word: Grexit. But amid the media frenzy, we should remind ourselves that single-country breakaway is not the same as a Eurozone breakup. This column discusses the steps to ensure that the former does not imply the latter. It urges leaders to take them quickly.  

The risk of a Greek exit from the Eurozone looms large. A breakaway by one country would increase the risk of a Eurozone breakup, with all individual countries reverting to their original currencies, but would not make it inevitable:

  • A Greek breakaway has become a distinct possibility;
  • A Eurozone breakup is still a tail risk.

The distinction is important because the two have very different implications:

  • A Greek breakaway would have devastating consequences for the country’s economy and social fabric; but if the Eurozone firewalls hold, collateral damage to the global economy would be limited.
  • A full Eurozone breakup, on the other hand, would see the European financial system implode in a domino of sovereign and corporate defaults; the Eurozone would enter a deep multi-year recession; Germany would share the region’s fate, with its banking system crippled and its main export markets collapsing; replacing the world’s second reserve currency with a plurality of new currencies would cause chaos in global financial markets.

The aftermath of Lehman’s collapse would look like a walk in the park.

A background of recession and popular resentment has emboldened some Greek politicians to argue that austerity is unjustly imposed by Europe, and that Europe can be scared into weakening its conditions. EU politicians, the ECB, and even the IMF have openly acknowledged that a Greek exit is a possibility. Greek spreads have widened by close to 13 percentage points from the post-debt restructuring lows (Figure 1).

Figure 1: Ten-year sovereign spreads (vs Bund): … //

… Important progress has already been made:

The fiscal compact has been agreed; Spain and Italy have already introduced debt-brake clauses in their constitutions, and Spain recently enacted new legislation to strengthen control over local public finances. Important structural reforms have already been launched or are under discussion.
Events might however unfold so fast that even a decisive European response would not prevent a temporary but severe dislocation to global financial markets. This would go hand in hand with a rise in global risk aversion, which could slow or reverse investment flows to emerging markets and dampen the already lacklustre US recovery. The risk of another temporary setback to the global recovery has incred.
(full text, Figures 1 to 3 and References).


How do economists assess the european economic crisis? A survey, on, by Andres Frick, Andrea Lassmann, Heiner Mikosch, Stefan Neuwirth, Theo Suellow, June 3, 2012;

Myths about trade, jobs, and competitiveness, on, by Richard Dobbs, Jan Mischke and Charles Roxburgh, May 31, 2012;

Is Europe ready for banking union? on, by Nicolas Véron, May 23, 2012.

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