The breakup of the euro area would save the 16-nation region from years of economic stagnation by boosting weaker members’ competitiveness as well as domestic demand in Germany to spark growth, Capital Economics said.
“The threatened breakup of the euro zone, which many see as a potential disaster, would actually open the door to renewed economic growth, not just for weaker members of the zone, but for Europe as a whole,” Capital Economics analysts including Roger Bootle in London said in a report released today.
Greece’s debt crisis has driven down the euro and forced governments from Spain to Italy to embrace austerity measures and cut their deficits, clouding the outlook for recovery from the worst recession in six decades. The International Monetary Fund on July 8 kept its forecast for 1 per cent growth this year in the region, which expanded 0.2 per cent in the first quarter.
Europe’s weaker economies face “years of economic pain” as they deflate costs and prices to regain competitiveness with Germany, which runs a large trade surplus and restrains domestic demand, Capital Economics said. Italy, Spain, Ireland, Portugal and Greece could quickly narrow the competitiveness gap if they returned to their own currencies, which would depreciate and allow exports to expand, it said.
“This would offer them an escape route from their difficulties through economic growth, rather than depression,” the economists wrote.
A full abandonment of the euro would also help Germany as a restored deutsche mark would appreciate and make the government expand domestic demand to maintain jobs and growth, pushing up the German standard of living, according to the report.