Analisis de Nouriel Roubini Sobre Posibles Salidas de La EZ

WHATS ON NOURIELS MIND
June 26, 2012
Who Will Exit First? Grexit, Fixit, Quitaly, Going Dutch or a German D-Euro?
By Nouriel Roubini The future of the eurozone (EZ) is shrouded in doubt and most assume that Greece will be the first to jump ship and exit. However, there are increasing signs that other member states could decide to cut and run, even before Greece does. Grexit: Greece is still likely to depart first. It is on life support and would be allowed to fail and exit if Italy and Spain are successfully ring-fenced. Even if, as is likely, Italy and Spain are not yet out of the woods, Greece is still highly likely to exit when its new government falls, in the next 6 to 12 months. Fixit: There are increasing doubts in Finland about EZ membership. First, the other Nordic countries are outside the EZ and/or the EU and are doing fine economically and otherwise. Second, if Finland were to exit the EZ it might (although it might not) also be forced to exit the EU; however, even under that scenario, it could keep most the benefits of EZ and EU membership without any of the costs. Third, by exiting, Finland could avoid the implicit and explicit losses and costs that continued membership of the EZ would entail. Fourth, many social, business and political forces in Finland are skeptical of the euro and/or supportive of an exit. Quitaly: Powerful political and financial interests are explicitly and implicitly urging Italy to leave the EZ and return to the lira. They include Berlusconi and part of his party, the Lega Nord and a new, increasingly popular, anti-establishment party. The current technocratic government, which is taking the decisions necessary to keep Italy in the monetary union, is looking increasingly vulnerable. Going Dutch: As in other core EZ economies, social and political forces that are skeptical of the EZ membership are becoming more influential in the Netherlands. As with Finland, the main driver of euro opposition is bailout fatigue, but the Dutch are also suffering from austerity fatigue. New elections are on the horizon, and pro-exit parties look set to do well. GermanyGoing for the D-Euro: The average German voter suffers from bailout fatigue and is open to at least considering an exit. Indeed, recent polls suggest that a majority of Germans are euroskeptic and at least one-quarter would like to return to the deutschmark. But the political, business and financial establishment is still strongly supportive of the euro given the costs of an EZ break-up. It remains likely that Greece will be first out the door; but there are forces in both the core and periphery pushing for an early exit of other EZ countries. In Italy, Berlusconi and those close to him explicitly favor Italys return to the lira; Italian businesses with euro assets abroad and domestic debts in euro would vastly benefit from the conversionupon exitof such liabilities into new depreciated liras. In core economiesespecially Finland, but also the Netherlandsconcerns about the increasing losses attached to EZ membership deriving from implicit and explicit liabilities are mounting, while the benefits appear smaller and smaller. Consider the existing potential losses from the EFSF, the ESM, the Target 2 balances; and then add to them the potentially larger ones deriving from a fiscal union with debt monetization, a transfer fiscal union for the poorest members of the EZ and the risk of guaranteeing, at the EZ-wide level, all of the EZs bank deposits, including those of the periphery.
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Assumingas is likelythat the EZ will lose some of its members in the next few years, which will be the first country to exit? Greece, hitherto the clear favorite, in a Grexit? Or a new challenger: Italy (Quitaly), Finland Page | 2 (Fixit) or perhaps the Netherlands (Going Dutch)? Until now, the conventional wisdom has been that Greece will be the first country to leave, possibly eventually followed by other extremely fragile member states (Portugal and Cyprus being the prime candidates). But, increasingly, there are signs that other EZ members could decide to quit the monetary union before Greece does. Grexit: The Case for Greece Greece is still most likely to exit first. The latest election saw a narrow victory for parties supporting euro membership and some austerity and reform, but Greece is still on course to leave the monetary union in 2013. The government was born fragile and the weakly aligned coalition members all want to renegotiate the terms of the memorandum with the troika. Center-left Pasok will be divided over being a junior member of a coalition led by the conservative New Democracy; i.e., sharing all the costs of austerity and possible failure, while not enjoying much of any upside success of the government strategy. Greece is likely to underperform even revised fiscal and reform targets and therefore is at riskevery three monthsof failing the troika reviews that allow the disbursement of further funds. It is clear that Greece is on life support and would be allowed to fail and exit if Italy and Spain are successfully ringfenced and placed out of danger. If, as is likely, Italy and Spain are not yet out of the woods, Greece will still exit when the current government falls, in the next six to 12 months, opening the way for an electoral victory by leftwing Syriza, which would be the prelude for default and exit. Polls suggest that about 75% of Greeks favor the euro; but 80% of them also oppose the sacrifices needed to stay in the euro. For an increasing number of Greeks, it will become clear that the costs of membershipa recession deepening into depressionoutweigh the benefits. Certainly, if Italy and Spain were to emerge from the woods having been successfully ring-fenced, Greece would be allowed to leave as the collateral damage to the rest of the EZcontagionof such an exit would then be manageable. So, in that scenario, a Greek exit would be highly likely, unless Germany and the rest of the core were to accept that the only way to keep Greece in would be to create a fiscal transfer union, not just a fiscal union with fair risk-sharing; to transfer concessional resourcesif not outright free unilateral transfersto Greece on a longterm basis (i.e. for decades). But persuading German and other EZ tax payers of the merits of such a transfer union looks impossible for now. So, Greece still looks like the most likely candidate exit the EZ first. Fixit: Could Finland Choose to Exit? Talk of Finland leaving the EZ sooner rather than later has increased, with many in influential positions now reconsidering the costs and benefits of EZ membership and coming to the conclusion that a Fixit may be the countrys best option. Consider the following factors. First, the other Nordic countries are outside the EZ and/or the EU and are doing fine economically and otherwise. Norway and Iceland have never joined the EU: The former has remained a success story as a resource-based economy; the latter suffered a severe financial crisis driven by the popping of a massive real estate bubble, but so did members of the EZ such as Ireland and Spain. Denmark opted out of EZ membership and is semi-pegging its currencythe Danish kronato the euro. Sweden was supposed to join the EZ, but it never did and isnt likely to join any time soon. Since none of the other Nordic economies are part of EMU, what are the benefits of Finland remaining a member?
Second, if Finland were to exit the EZ it might also be forced to exit the EU; however, it could keep most the benefits of EZ and EU membership without any of the costs. Like Denmark, it could semi-peg its own new national Page | 3 currency to the euro (or to the deutschemark if the EZ were to eventually fall apart completely), thus benefitting from low exchange rate volatility, while keeping open the option of moving its currency up or down, if needed. It could even keep most of the benefits of free trade with the EU by establishing a free-trade agreement with the EU and/or with Germany, while not being subject to many of the other legislative and regulatory constraints that EU membership entails (even if access to EU markets requires being subject to many regulatory constraints). Or, it could try to negotiate remaining a member of the EU while quitting the EZ, as the EZ is now considering allowing member states to leave the EZ without surrendering their EU membership. Third, by exiting, Finland could avoid the losses and costs that continued membership of the EZ would entail: a) Finland would no longer need to contribute to the European Financial Stability Mechanism (EFSF) and European Stability Mechanism (ESM); after all, EU members that are not EZ members do not contribute to the two EZ rescue programs;
b) In the event of exit, Finland would also avoid potential losses deriving from the build-up of Target 2 balances in the core of the EZ, including Finland. Indeed, Finlands Target 2 balances would be phased out upon exit; c) Trade losses in the event of an EZ break up and the core sticking with the euro (which would sharply appreciate relative to the new currencies of exiting periphery countries) could also be reduced;
d) Since the EZs survival requires the core to take on even greater credit riskvia debt mutualization (i.e. Eurobonds), via a fiscal union (that may in part be a transfer union to poorer EZ members) and via an EZ-wide deposit insurance schemeFinland could avoid these additional implicit liabilities by exiting before such risks are undertaken or materialize; e) Finlands potential GDP losses in the event of the EZ breaking up could also be lowered via the extra degree of currency and monetary policy flexibility implied by a return to a national currency; and f) Some private unofficial estimates put the potential losses of Finland with continued EZ membership at between 10 and 15% of Finnish GDP.
Fourth, many social, business and political forces in Finland are skeptical of the euro and/or supportive of an exit. The most fervent euro-skeptic group is The Finns Party (formerly the True Finns). But even the broadly pro-euro National Coalition, the party of the current prime minister, contains opponents to the common currency, one of which is Finlands President, Sauli Niinist, who bemoans the fact that Finland bails out richer EZ members, yet is still pro-euro. Another party leader, Ben Zyskowicz, last week pointed out the EZs fundamental design flaws. For the time being, the forces formally supporting a Fixit are in the minority, but there is now significant internal debate on the pros and cons of membership. If Greece moves closer to exit and Italy and Spain end up on the verge of losing market access and requiring even more risky financial support from the EZ core, Finland may decide that the additional credit risk is not worth the benefit. Indeed, the country has already been the most vocal so farin debates about the EFSF, the ESM and other aspects of the periphery bailoutsin requesting formal collateral or seniority for its contributions to the EZ periphery rescues. For now, the ruling coalition is still firmly in support of EZ membership, but there are plenty in favor of an exit in the political opposition; even within the coalition, many are grumbling in private about the costs of EZ membership. A trigger to increase the chances of Fixit would be a decision by the EZ to increase the potential losses and credit
risk of the core membersincluding Finlandsvia a fiscal and transfer union, debt mutualization and EZ-wide deposit insurance. At that point, the forces pushing for Fixit may get the upper hand. Quitaly: There Is Now a Higher Risk of Italy Exiting as Powerful Forces Want a Return to the Lira In Italy, Prime Minister Mario Montis technocratic government is playing bad cop, by pursuing painful and predictably unpopular austerity and reforms, with a key aim being to keep the country in the EZ. However, it is now being strongly attacked from both the leftthe unions are becoming increasingly restless and militant with more and more strikes and street demonstrationsand especially the right, and appears vulnerable. The recent regional elections saw significant losses for the party of ex-Italian Prime Minister Silvio Berlusconi and its previous ally, the Northern League, as well as some losses by the center-left parties. A key beneficiary was the anti-euro, anti-austerity Five-Star Movement, led by a comedian, Beppe Grillo. Grillo recently referred to the EZ as a box of dynamite with a fuse that is getting ever shorter. And [Italy is] sitting on top of it. In this context, fearing that supporting austerity and reform will further reduce its popularity, Berlusconis party is now starting to attack the governmentwhich, nominally, it had been supporting from the outsideand the euro. A few years agowhile in oppositionBerlusconi made a statement that the euro has been a disaster for Italy, a way to blame the countrys problems on the center-left government that signed off on Italy joining the euro. He and other members of his party have recently made other euro-skeptic statements and, increasingly, editorialists and op-ed writers in a wide range of newspapers that Berlusconi controls are starting to propose that Italy must return to the lira. The Northern League, which represents the interests of small, medium-sized and even some larger businesses in the north of Italy, is another major euro-skeptic party; it is behind the drive to reduce transfer payments from the rich north of Italy to the poorer south, and is certainly opposed to funding poorer EZ regions. Berlusconis party is not yet willing to pull the plug on Monti as it would be blamed for causing even more disruption, but it is by no means certain that the current government will survive until the scheduled election in spring 2013. At that point, one cannot rule out Berlusconi and his re-formed party, the hard-right Lega Nord and the Five-Star Movement all running in the 2013 parliamentary elections on anti-euro platforms. On top of this, powerful economic groups are explicitly and implicitly urging Italy to leave the EZ and return to the lira. Many industrial and manufacturing businesses in the traded sector are struggling as the real appreciation in Italy has led to export-market-share losses and a flood of import-competing goods from abroad (high-value-added goods from Germany and the EZ core; low-value-added labor-intensive goods from China and many other emerging markets). Moreover, many Italian business owners and firms have large foreign assets in euros stashed after decades of capital flight and tax evasionin bank accounts abroad, while their domestic and foreign liabilities are in euros. If Italy were to exit the EZ, these foreign assets in euros and other currencies would receive a massive a capital appreciation against a depreciated new lira, while their liabilities in euros would be coercively converted into depreciated Italian liras. The effect on their net wealthassets minus liabilitieswould be massively positive. The same thing happened in Argentina in 2002 when industrial and business groups with foreign assets in dollars and dollar liabilities at home supportedand used the media groups that they controlled to push foran exit from the currency board and a pesification of their dollar debts. Dollar debts issued in the Argentine jurisdiction were pesified, while those contracted abroad were defaulted on and then reduced in dollar terms after a case-by-case renegotiation. The same would happen if Italy were to exit. These powerful economic and financial interestsespecially among upper-income households and firmswould vastly benefit in terms of their P&L and balance sheets from an Italian exit from the EZ. Of course, such an exit
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would, though, represent a capital loss for lower- and middle-income households that have most of their savings in bank deposits that would be converted from euro into liras and for holdings of government debt that would also Page | 5 need to be restructuredand converted into lira. These households would benefit from the increase in growth and jobs that a return to the lira would entail, but they would experience a massive reduction in their wealth (deposits and holdings of public debt) and in the real purchasing power of their wages if an exit were to occur. Might the Netherlands Go Dutch? As in other core EZ economies, social and political forces that are skeptical of the EZ membership are becoming more influential in the Netherlands. As with Finland, the main driver of euro opposition is bailout fatigue; i.e., the argument often heard in the Netherlands and other parts of the core is: Those damn Greeks had a big fat Greek wedding not just for a long weekend but for more than 20 years. We gave them one bailout, then a second bailout, then a 5% reduction in their foreign debt. But they still resist austerity and reforms. Enough is enough: Lets pull the plug and force them to exit. The Dutch are not just weary of the bailouts in principal; they are also specifically concerned about the rising credit risk and costs for their country: i.e., the contributions to the EFSF and now the ESM; implicit liabilities (in the case of the exit of some member states and/or break-up of the EZ) from growing Target 2 balances; and greater implicit and explicit liabilities if the core were to accept Eurobonds, a fiscal union with a good chunk of transfer union embedded into it and EZ-wide deposit insurance. In addition to bailout fatigue, the Netherlandslike the EZ peripherysuffers from austerity fatigue. Indeed, the government recently collapsed after one of the coalition members refused to accept the additional fiscal tightening that adherence to the new EZ fiscal compact entails. So, the political noise against both austerity and bailouts is becoming more vocal. Among the political forces, the most euro-skeptic is the New Freedom Party (PVV) led by Geert Wilders, a rightwinger known for his anti-Islamic rants. The PVV recently commissioned a report written by Lombard Street, a UKbased research consultancy that is highly euro-skeptic. The report comes to the conclusion that the costs of EZ membership for the Netherlands are much larger than its benefits. Although the reports client has radical political views (which are, though, becoming more mainstream), Lombard Street is a respectable economic consultancy. The results of the report are as expected: Remaining in the EZ could entail massive losses for the Netherlands, resulting from the need to continue bailing out the periphery economies. Those losses could amount to 127 billion-231 billion over the next four years. Moreover, Lombard Street notes that Dutch GDP growth was only 1.25% per year in the first decade of the EZ; while it was about 3% per year in the previous two decades. This report comes to the following conclusion: While unquantifiable, no spurious counterfactual story is required to show that EMU membership to date has imposed substantial welfare losses on Dutch citizens. Their own superior pre-euro performance, coupled with their subsequent inferiority compared with Sweden and Switzerland, is undeniable. Wasteful investment and intractable Med-Europe deficits, with continued dependency, make for a stressful future. It is difficult to see what explanation there could be other than the euro. Although many scholars and mainstream politiciansincluding the prime minister, Mark Ruttehave criticized the results of the report and made arguments for the benefits of continued EZ membership, it is clear that forces in favor of a Dutch exit are becoming more vocal and influential.
Following the breakup of the last coalition, parliamentary elections this September will act as a further litmus test of the full extent of the undoubtedly rising level of euro-skepticism, and of bailout and austerity fatigue. Indeed, Page | 6 the issue of Europe looks set to play a key role in the election campaign, with even the political parties that support Dutch membership of the EZ continuing to oppose moves toward political union among the 17 members. Recent opinion polls point towards a strong showing by the PVV and, in particular, the anti-austerity far-left Socialist Party. However, it is likely that the election results will also demonstrate the increasingly fragmenting effect of the EZ crisis on Dutch politics, with no one or even two parties set to be in a position to form a new government and several months of negotiations likely to be required before a new coalition can be formed. How About a D-Euro or Deutsche-Euro or a Hard Euro? The German political, business and financial elite are aware of the benefits that the EZ brings (essentially a large export market in the EZ periphery for the advanced goods that Germany produces), so economic and political forces in favor of an exit of the blocs largest economy are still in the minority. However, the average German voter suffers from bailout fatigue and is open to at least considering an exit. Indeed, recent polls suggest that a majority of Germans are euro-skeptic and at least one-quarter would like Germany to return to the deutschmark. Indeed, some argue that an exit from above of Germany (and a few other core countries)i.e., a German departure from the EZ, a return to the deutschmark and a sharp appreciation of the new currencywould be preferable to an exit from below of the weaker economies. These arguments suffer from a number of problems: First, whether the German currency appreciates or the periphery currencies depreciate, the adverse effect on German exports would be the same, as both imply a nominal and real appreciation for the Germany currency. Second, the key German losses under any exit scenario would be those related to its foreign assets. Again, such losses dont depend on whether Germany exits or the periphery exits. If Germany exits, the real value in new deutschmarks or in German-led new euros of German foreign assets in old euros towards the EZ periphery would rapidly shrink as real and nominal appreciation of the new euro/deutschemark occurs. Conversely, if the periphery exits, the ensuing real increase in the new French franc value of all liabilities (balance-sheet effect) would force the periphery to stop paying those euro debts, thus imposing significant losses on creditors once the face value of such euro claims is reduced or, at worse, converted from euros into depreciated new local currencies.
So, a German exit would not be less costly than the exit of the weakest EZ members. Thus far, with most of the political class, as well as the business and financial community, being in favor of continued EZ membership, the chance of a German exit is still very low. Also, there is no legal way for Germany to exit the EZ without also exiting the EU, which Germany would certainly oppose. But things could change over time if the Spanish and Italian crises become worse and persuade the europhile finance minister, Wolfgang Schuble, who is now in favor of a Greek exit, to become more skeptical about the chance of the EZ surviving and thriving. Also, note that the idea of the EZ splitting into two, a strong euro around Germany and the core and a weaker, depreciated euro around the periphery members, is quite far-fetched. If Germany and the core were to leave and form a hard-core euro zone, the members of the periphery would not stick with a weak and failing euro; rather, at that point, it is more likely that they would leave the EZ and go back to their national currencies, the damage of a break-up being largely over. Thus, Germanywith the coreexiting the euro is substantially and de factoif not formally and de jureequivalent to a number of the weakest members exiting the euro and going back to their own national currencies. The latter is more likely than the former as a break-up process.

Conclusion
It remains most likely that Greece will be first out the door: The new coalition will collapse within 6-12 months and Page | 7 radical partieslike Syrizawill become more powerful, at which point the exit process will effectively begin. But there are now many financial and political forces in the core and periphery of the EZ that are pushing for an early exit of their respective countries from the monetary union. In Italy, Berlusconi and forces close to him are riding the tiger and explicitly favor Italys exit and return to the lira. In core economiesespecially Finland, but also the Netherlandsconcerns about the increasing losses attached to EZ membership deriving from implicit and explicit liabilities are mounting, while the benefits appear smaller and smaller. Consider the existing potential losses from the EFSF, the ESM, the Target 2 balances; and then add to them the potentially larger ones deriving from a fiscal union with debt monetization, a transfer fiscal union for the poorest members of the EZ and the risk of guaranteeing, at the EZ-wide level, all of the EZs deposits, including those of the periphery.
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WHATS ON NOURIELS MIND

June 26, 2012

WHATS ON NOURIELS MIND

WHATS ON NOURIELS MIND

WHATS ON NOURIELS MIND

WHATS ON NOURIELS MIND

WHATS ON NOURIELS MIND

WHATS ON NOURIELS MIND

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