The official forecast that the Greek general government sector will run a primary non-interest surplus in looks optimistic. A sizeable government deficit would remain to be funded. Monetisation of the remaining deficit through the issuance of a New Drachma, for which there would be very little demand as the Greek economy would remain informally eurosised to a significant degree, may well be the only funding option.
Without external funding, imports would collapse, further disrupting domestic production already weakened by collapsing domestic demand. Aggregate demand and aggregate supply would chase each other downwards. If Greece storms out of the EA, something that has become more likely following the growing political unrest and economic uncertainty and distress in the country, there might be little fear other countries would follow suit.
This self-fulfilling fear might force the actual departure of the afflicted country. A disorderly sovereign default and EA exit by Greece alone is manageable. Greece accounts for only 2. However, a disorderly sovereign default and EA exit by Italy would bring down much of the European banking sector. Disorderly sovereign defaults and EA exits by all five periphery states — an event to which I attach a probability of no more than 5 percent, would drag down not just the European banking system, but the north Atlantic financial system and the internationally exposed parts of the rest of the global banking system as well.
The resulting global financial crisis would trigger a global depression that would last for years, with GDP falling by more than 10 percent and unemployment in the West reaching 20 percent or more. Emerging markets would be dragged down too.
Exit by Germany and the other fiscally and competitively strong countries would be possibly even more disruptive. I consider this highly unlikely, with a probability of less than 3 percent. The sovereigns in the periphery would default. The new DM would appreciate sharply. Financial institutions in the new DM area would have to be bailed out because of losses from exposure to the old periphery and the soft core.
As nothing holds the remaining EA countries together, the rump-EA splits into perhaps 11 national currencies. Become an FT subscriber to read: The terrible consequences of a eurozone collapse Leverage our market expertise Expert insights, analysis and smart data help you cut through the noise to spot trends, risks and opportunities. Join over , Finance professionals who already subscribe to the FT. Choose your subscription. Trial Try full digital access and see why over 1 million readers subscribe to the FT.
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Pay based on use. The funding strike and deposit run out of the periphery euro area member states defined very broadly , would create financial havoc and mostly like cause a financial crisis followed by a deep recession in the euro area broad periphery. So the remaining euro area members would suffer at least temporarily from an uncompetitive exchange rate as well from the spillovers of the financial and economic crises in the broad periphery.
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