03 June 2012

Future of Eurozone: Grexit, Spexit or Nexit?

For an outside observer such as the IMF, the most urgent (even though not certainly always the most important from sustainability point of view) challenges facing eurozone are rather obvious:
* Lack of growth / demand which is, among others, being reflected in the high unemployment and possibly lost human capital, in lower tax revenues and higher social benefits etc.;
* Large differences in the competitiveness of individual countries resulting in balance of payment problems, i.e. in chronic surplus countries such as Germany and in chronic deficit countries such as Spain;
* Generally (often unsustainably) high public and private debt burdens that may easily lead to the further rating downgrades; 
* Weak / Poorly capitalised large international banks that are too big for being bailed out by individual countries;
* Lost confidence and adverse feedback loops; weaker countries in real trouble while having fallen into the vicious cycle;
* Social unrest; people being tired and angry or about to give up.

Various outcomes are possible depending on how these challenges are being addressed by the European policy makers and central bankers in the conditions of conflicting interests, and under the pressures of their own unhappy (read: angry) citizens, the IMF, Mr. Market and the rest of the world::
* Nexit = No exit, moving towards the European Union, which is plan “A”, and as such the desired outcome;
* Grexit (Greece leaving the eurozone), Spexit (Spain leaving the eurozone) and/or some other exit, which may happen, and if it’s a bigger exit than the possible Grexit, may well introduce materialisation of plan “B”;
* Division or break-up of the single currency area all together, which is plan “B” that just happens if the policy makers cannot agree.
Of course, the final outcome is a hot topic and subject of various speculations.

The Table below presents the alternative ways for dealing with the current situation. As you see, we cannot be more than disappointed about the delivery of our (elected?) leaders. Indeed, after several years of crisis and billions if not trillions spent simply for “buying time”, it still seems that they do not know what they are doing... We have heard lots of nice speeches like this one by Nemat Shafik, the Deputy Managing Director of the IMF at Brussels Economic Forum on 31 May 2012: Reviving Growth in Europe; yet we have little if any idea about the future prospects. As a further illustration for this, you can read more about the myths of European austerity in the blog of Daniel Lacalle, for example.

(If you do not see the table well, then right click, "Open Link in New Window" and enlarging the image would help.)

As a final comment for this post: note the amazing similarities between the two (or three) alternative approaches that are being discussed:
* European banks have to take further losses & need to be re-capitalised anyway, either in a straightforward way or in a more obscure way;
* Burdens of restoring the balance within the eurozone have to be shared anyway, no matter if via tax payers first guaranteeing and then paying the debts of the weaker countries, losing savings because of the higher inflation or the re-capitalisation of the financial industry from the (current or future) tax payers’ money;
Hiding the real burden for their electorates (which would be obvious in case of the exits) should give the European policy makers a good reason for not letting Spain to go. Bankers do not like the exits or break-up of the eurozone either, because then the not sustainable business models would become even more evident... This even if a Grexback (Greece exiting and defaulting, and then re-joining) would be more efficient for dealing with the competitiveness gap.

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