A research group named Prognos AG ran a study to assess the damage, the fallout, if any of the PIIGS were to bail out of the EuroZone. They imagined a range of possible outcomes, ranging from Greece leaving by itself to essentially the collapse of the entire EuroZone, with Greece, Spain, Portugal and Italy all politely jumping ship. Or being impolitely forced to walk the plank at the point of a sword. Either way this assessment, as you might imagine, is not pretty.
German news magazine “Der Spiegel” displayed the Prognos AG data, their forecast of doom, in a series of graphics. And you know how much I love graphics. Let’s go.
This first graphic considers the cost in billions of €Euros if one or more of the PIIGS defaulted on 60% of its sovereign debt. Given that sooner or later Greece is going to default if they are to reach the “120% of GDP in 2020″ being demanded by the IMF, this study has an element of realism to it. This has been evident for some time. Note that Germany and France are the most exposed in any such default. Note also that the US losses are calculated as a point of reference, ranging between €6.3Billion and €47.8Billion … $8.2Billion and $62.1Billion. Click on the graphics to enlarge them a bit.
This next one takes a different perspective. It estimates the impact on GDP growth rates if all of the PIIGS excepting Ireland were to exit the €Euro and migrate back to their national currencies, which would of course be immediately and massively devalued. Again the US is included as a frame of reference, suffering an impact of less than 1% of GDP annually through 2020. One oddity in this analysis, at least to my eye, is Spain. Once the initial shock of currency conversion is absorbed, Spain is expected to benefit greatly by its exit out to 2020. I have no idea why. Portugal would gain a bit. No other EU nation would. Note, too, that France would take by far the worst of it, still running at deep recessionary GDP losses when everyone else had returned to stability in 2020.
Yet one more point of view of the damage to come in the event of political failure to “rescue” the PIIGS. This graphic attempts to quantify all losses … monetary, commerical and economic … over the next 8 years, 2013 through 2020, as a percentage of “economic strength”. Essentally, underperformance of GDP relative to what the GDP would have been had no failure occurred. As before, the US pays the smallest total price. 25.7% over 8 years, or about 3.1% of underperformance, of “economic strength” annually. The damage throughout the EU is massive. Once again France is in last place, sustaining more damage than would any of the PIIGS.
Looking at these data and thinking about why some countries, say France, would pay a steeper price than others, say Germany, I can only offer this speculative rule: the level of damage sustained through 2020 would be in direct relation to the inflexibility of the nation’s commercial, legal and social structure in 2013.
Put in overly simplistic terms for brevity and clarity: in France unions run the government; in Germany the government runs the unions. Both countries are union-oriented welfare states to be certain. But who has the last word on changes to be accepted or rejected, on adjustments that must be endured, who finally decides how flexible the economy must be when under stress, matters greatly. This in mind, “The Economist” Op-Ed on France is a must read.
The Wizard and I were in Paris a few years ago when, as it happened, Sarkozy tried to change the work rules regarding fulltime and parttime employment standards. He tried to loosen the grip of the unions. We watched from the safety of our balcony while unionists, pensioners and students filled the streets, and watched Sarko back down on TV shortly thereafter.
Faced with a demand to deeply and fundamentally alter their “social contract” in the face of the dissolution of the EuroZone, or the default of one or more of the PIIGS, the French would go to the barricades by the millions to resist those changes. They would fight even the smallest amendments; dragging their feet to bitter end.
Germans faced with the same crisis demands would weave those changes into the national fabric, amend and adjust the social contract to balance the sacrifice, then would go to work and do their best to turn lemons into lemonade. Culture matters. And for that reason I think my conjecture is right on the mark and Prognos AG’s forecast of France’s demise is reasonable.