If you think back to the height of the global financial crisis, when people were actually talking about the Economic and Monetary Union (EMU), which is the dissolution of the euro zone, or more specifically, a unilateral exit by Greece or Italy, we were told” Experts” think it will be catastrophic. Over and over again, the headlines yell at us what a disaster it would be if the eurozone failed. Well, guess what, even pro-euro researchers have concluded that the impact of a collapsed currency union would be minimal, to say the least. When we dig deeper into their analysis with technical know-how, the results are even more damaging to the pro-euro camp. Mostly, using techniques that provide the best chance of supporting empirical results for pro-European narratives, they find that most effects are statistically indistinguishable from zero, namely the abandonment of the common currency and the restoration of monetary sovereignty by 20 member states. I don’t see mainstream media paying any attention to it, or pro-euro tweeters tweeting all kinds of crap about how good a common currency is. But I think that will be a bridge to the distance for them.
When Greece was turned into a colony by the Troika, the general “expert” opinion was that declaring a unilateral exit rather than accepting the absurdly draconian and anti-democratic bailout package and accompanying state-destructive austerity measures would have plunged the country into (source):
…Abyss…Nightmare…Chaos…Unimaginable Anarchy
The reporter who wrote the description correctly identified it as “bankers’ gibberish”.
Even former Greek Prime Minister Antonis Samaras claimed in February 2015 that the Grexit discussions were at a fever pitch (source):
…living standards could drop by 80% in the weeks following exit…all of which could push the euro zone into recession.
Tony Blair, who has not yet been tried for crimes against humanity for his part in the illegal invasion of Iraq, claimed in 2011 that (source):
It would be disastrous if the single currency disintegrated.
At the time, he reportedly continued to “think that the UK could still join the euro ‘for a ‘long time'” – such was the extent of his miscalculation.
I can find countless such quotes from commentators and so-called “expert” economists.
They were happy to see the Greek economy shrink by almost 30% and to see massive transfers of public wealth into the hands of elite financiers, as part of the forced privatization of austerity.
Between 2008 and 2016, real GDP contracted by 26.8%.
By 2022, it will still shrink by 20.6% compared to 2007.
On a per capita basis, it has contracted 17.6% since 2007 and has seen a modest recovery since the bailout.
So for 14 years, anyway, the Greek economy has been on the brink of collapse.
I wrote about all these issues and provided member states with a blueprint for multilateral and unilateral exits that would restore prosperity almost immediately in my 2015 book – Eurozone dystopia: groupthink and mass denial (Published May 2015).
The framework and analysis presented in that work still apply.
Even the pandemic and the situation in Ukraine haven’t changed much.
Even after it became clear that the Greek bailout had not delivered the results promised by the troika and the IMF was forced to admit that its modeling was wrong, there were still “experts” following the European Commission’s line.
I wrote about the IMF acceptance in this blog post — The culprit is elsewhere…always! (January 7, 2013).
Big bankers have been lobbying against any breakout because they are protected by the ECB and make big bucks from the monetary policy moves that keep the Eurozone intact (cheap money, QE providing capital gains, etc.), even if the currency Dysfunctional architecture.
Even in 2019, commentators calling themselves “experts” claimed that “economic consequences and legal wrangling would make Italexit all but impossible”. (source).
Apparently, “a working group composed of senior representatives of the Italian government and central bank was asked to study the consequences of Italy’s involuntary exit from the euro zone” and concluded that “a recession would be severely affected”.
This is the standard forecast and leads to the following conclusions:
An unequivocal acknowledgment that exiting the euro would be disastrous should be the first and most crucial step for those aiming to lead Italy.
Unambiguously – Mmm!
Fast track until February 2023
Germany’s ifo economic institute, based in Munich, is one of Germany’s largest “think tanks” and is generally pro-euro, although at the height of the global financial crisis, then-president Hans Werner Singen argued that EMU should Scale down and allow member states that will continue their efforts to “do it outside and devalue their currencies” (source).
In their latest econpol Policy Brief (No. 48, Volume 7) – Complex Europe: Quantifying the costs of disintegration (published February 2023) – The ifo institute analyzes the consequences of reversing the European integration process.
The technology they use is based on- trade gravity model – Calculate the stages of decomposition.
The model is a pretty standard technique in the study of international trade, and primarily predicts the strength of trade flows based on the respective sizes of economic units (in this case member countries) and the distance between them.
The most important conclusion is that trade decreases with distance between units and increases with country size, which is not surprising.
I won’t go into the technical details of how to estimate these models using econometric techniques.
Suffice it to say, many problems of estimation bias and misspecification can arise.
Furthermore, most studies end with significant and large “unexplained residuals”, meaning that in English a large proportion of the variation in trade flows cannot be explained by the “gravity” variable.
Therefore, we should be cautious in evaluating any conclusions drawn from these studies.
After all, Gravity Analysis predicted a near-catastrophic collapse of the UK economy following the 2016 referendum, which clearly did not happen.
The researchers considered varying degrees of disintegration of the European project and estimated consequences on national income generation, production and trade.
So they try to answer:
…how much lower trade, production and value growth would have been if the various steps of integration had not been taken.
The stages of disintegration are:
1. “Collapse of the European Customs Union” – Return to WTO-allowed tariffs.
2. “Disintegration of the European single market” – back to “Introduction of non-tariff trade barriers”.
3. “Eurozone breakup” – ie abandonment of the common currency.
4. “Breakdown of the Schengen Agreement” – re-imposition of border controls.
5. “Abolition of all Regional Free Trade Agreements (RTAs) between the EU and third countries that entered into force in 2014”.
6. “The total collapse of all European integration steps”.
7. “Total dissolution of the EU and termination of all net fiscal transfers between EU member states”.
Essentially, they tracked the impact of the “disruption” on intra-EU trade during these phases.
In terms of “impact on income”, they found that:
Actual consumption effects vary by country and integration agreement.
For abandoning the eurozone, they conclude:
…we found negative effects for all member states. However, only Luxembourg (-2.53%) and Germany (-0.7%) had statistically significant effects… countries outside Europe were barely affected.
I’ll get back to what this means shortly.
The figure below uses data from Table 2 – “Percent change in real consumption, base year 2014”.
The red bars represent results at the 10% level of statistical significance (I’ll explain).
The average effect is only 0.4 points and is distorted by estimates for Luxembourg and Malta. If we exclude these countries, the average impact is only 0.3 points.
Actually very small.
But there are a few points that need clarification.
1. Results were negative in all but four countries (Germany, Hungary, Luxembourg and Turkey). Why? Because in statistical terms, the rest of the estimates are no different than zero because they were not found to be statistically significant.
2. Even so, the statistical significance level used is a 10% confidence level, whereas it is more standard to use a 5% level for more stringent significance tests.
Which countries will be significant at that level?
3. Overall, taking these points into account, these results suggest that the impact of a breakup of the euro area is rather small insofar as we can accept the limitations of the techniques used.
Furthermore, the gravitational modeling approach offers the best chance of obtaining statistically and quantitatively significant results for the conjectures under study.
That is, it would give a worst-case scenario of a breakup of the eurozone.
The fact that the detected effect is small and not significantly different from zero is a very interesting result that the mainstream media and technocrats in Brussels will not publicize widely.
We should also note that the simulations are rather biased towards large negative outcomes, as they do not anticipate the use of the expanded domestic policy horizon that would result from restoring each country’s currency.
If a country just exited the Eurozone and continued to offer the same type of “Brussels-approved” policy options, then of course, the impact could be negative.
But this will come mostly from policy stances and may be exacerbated to some extent by the increased costs of exiting (so-called transaction costs).
However, if a country were to exit, restore its currency, then pursue a full employment strategy and invest heavily in restoring public infrastructure, etc., then I would conclude that the country would benefit materially over time.
Even if the currency depreciates somewhat, this adjustment will be limited and help offset any unit cost differences between the country and other export powerhouses.
Of course, initially, the currency may appreciate because the foreign exchange market is in short supply and will remain so for a while.
in conclusion
There are many problems with this analysis.
But the thing to keep in mind is that they offer the pro-European narrative the best chance of delivering supporting empirical results.
Technologists (such as myself) can see through these limitations, especially the sparsity of the counterfactual (the policy response using monetary sovereignty does not seem to be modeled).
But even if we take the results at face value, their estimates of the damage to income and real consumption that abandoning the euro zone will do are marginal to say the least, and virtually indistinguishable from zero.
Juxtapose it with the official lines of mainstream economists, the IMF, and the European Commission, and you have a world of dissonance—hype and hegemonic defense versus reality.
I still think the only viable future for the 20 member states is to exit the EMU, restore their own monetary sovereignty, and then negotiate an intergovernmental agreement at the European level (by abandoning neoliberal treaties) to deal with the issue preferably at a higher than national level internal processing.
Enough for today!
(c) Copyright 2023 William Mitchell. all rights reserved.
