Politicians in the ‘core’ countries of the Eurozone are toying with the idea of Greece leaving EMU, which would risk an exodus of other peripheral members. A new ING report suggests that this could be very costly. It assesses the balance sheet exposure of core countries to the periphery, showing that the total official and banking sector exposure is currently around €2.2tn, or 36% of core country GDP. This is before we begin to factor in other private sector exposures, let alone the huge recession that might ensue (see the earlier post on EMU Break-up: Pay Now, Pay Later).
True, the costs of sustaining EMU in its current form are large and growing. The Eurosystem’s core central banks had to finance an acceleration in the capital flight from the Eurozone’s periphery to an annual rate of almost €800bn in the first half of the year, equivalent to 25% of the periphery’s GDP. But the good news is that this is reversible: quantitative easing, or steps towards banking union or common bonds, could each play a role in turning around the capital flight and put EMU on the road to survival. The challenge is that this depends on Eurozone leaders stepping up progress on recent policy initiatives.
Click here for the report.