Buiter on the eurozone

Former LSE economist Willem Buiter is predicting dire consequences from breakup of the eurozone.

Consider the exit of a fiscally and competitively weak country, such as Greece – an event to which I assign a probability of about 20-25 per cent. …. Balance sheets would become unbalanced and widespread default, insolvency and bankruptcy would result. Greek output would collapse.

Greece would temporarily gain a competitive advantage from the sharp decline in the new Drachma’s value, but … [s]oaring wage and price inflation would restore the uncompetitive status quo. ….

Disorderly sovereign defaults and eurozone exits by all five periphery states – an event to which I attach a probability of no more than 5 per cent – would … trigger a global depression that would last for years, with GDP likely falling by more than 10 per cent and unemployment in the West reaching 20 per cent or more. Emerging markets would be dragged down too.

Exits by Germany and other fiscally and competitively strong countries could be even more disruptive. …. I consider this highly unlikely, with a probability of less than 3 per cent. …. Everyone, except lawyers specialising in the Lex Monetae, would become much poorer.

Even if a break-up of the eurozone does not destroy the EU completely and precipitate the kind of conflicts that disfigured the continent in the past, the case for keeping the show on the road seems rather robust.

Willem Buiter, “The terrible consequences of a eurozone collapse“, Financial Times, 8 December 2011.

Willem Buiter (1949-) was a member of the Bank of England’s Monetary Policy Committee from June 1997-May 2000. He joined the London School of Economics in September 2005, then left in November 2009 to take up a position as Chief Economist of Citigroup.

For the record, after the September 2008 collapse of Lehman Brothers, Buiter made a strong plea for the UK to adopt the euro:

The message of this paper is that the global financial crisis that started in August 2007 provides another powerful and sufficient argument for the United Kingdom to join the EMU and adopt the euro as soon as technically possible. This new financial stability argument for UK membership in the EMU is separate from and in addition to the conventional optimal currency arguments for joining, which have also become more persuasive in the past few years.

Willem Buiter, “Why the United Kingdom Should Join the Eurozone“, International Finance 11:3 (Winter 2008), pp. 269–282.

Readers might question whether Buiter’s current advice is any more useful than his advice three years ago to the UK was.

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