Euro Breakup Would Unleash GDP Growth

Euro Breakup Would Unleash GDP Growth, Capital Economics Says

By Jeffrey Donovan

July 11 (Bloomberg) -- The breakup of the euro area would save the 16-nation region from years of economic stagnation by boosting weaker members’ competitiveness as well as domestic demand in Germany to spark growth, Capital Economics said.

“The threatened breakup of the euro zone, which many see as a potential disaster, would actually open the door to renewed economic growth, not just for weaker members of the zone, but for Europe as a whole,” Capital Economics analysts including Roger Bootle in London said in a report released today.

Greece’s debt crisis has driven down the euro and forced governments from Spain to Italy to embrace austerity measures and cut their deficits, clouding the outlook for recovery from the worst recession in six decades. The International Monetary Fund on July 8 kept its forecast for 1 percent growth this year in the region, which expanded 0.2 percent in the first quarter.

Europe’s weaker economies face “years of economic pain” as they deflate costs and prices to regain competitiveness with Germany, which runs a large trade surplus and restrains domestic demand, Capital Economics said. Italy, Spain, Ireland, Portugal and Greece could quickly narrow the competitiveness gap if they returned to their own currencies, which would depreciate and allow exports to expand, it said.

‘Escape Route’

“This would offer them an escape route from their difficulties through economic growth, rather than depression,” the economists wrote.

A full abandonment of the euro would also help Germany as a restored deutsche mark would appreciate and make the government expand domestic demand to maintain jobs and growth, pushing up the German standard of living, according to the report. That, in turn, would further fuel imports from euro countries, helping to rebalance Europe’s economy.

In a separate report on July 7 by ING Bank NV, economists including Mark Cliffe in London said a euro-area breakup is “thinkable, but unpalatable.” The region’s cumulative loss in economic output in the first two years after a breakup would be “close to 10 percent, dwarfing the fallout caused by the collapse after the demise of Lehman Brothers in September 2008,” according to the report.