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Sunday 11 December 2016

Euro exit could cost €45,000 for each family

Pressure on currency and fears of its demise mount after Dutch government's bombshell

Published 11/09/2011 | 05:00

NEW RULES: Dutch finance
chief Jan Kees de Jager
NEW RULES: Dutch finance chief Jan Kees de Jager

THE cost of Ireland leaving the euro could be as much as €45,000 per family in the first year, according to research report for clients of giant Swiss investment bank UBS.

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The threat of a break-up of the euro mounted last week when the Dutch prime minister, Mark Rutte, and his finance minister, Jan Kees de Jager, dropped a bombshell by suggesting that countries that persistently break eurozone budget rules should be chucked out of the currency. With the latest Greek bailout deal on a knife-edge, the possibility of Greece leaving the euro has increased dramatically in recent weeks.

Analysts believe the departure of Greece would lead to major problems for the other bailed-out countries, Ireland and Portugal, as markets smell blood. Ireland's massive bank debt is like catnip for sharp-suited hedge-fund bosses and institutional investors looking to "short" our bonds.

This could lead to a domino effect, with the weaker countries being forced out the door. Spain, Italy and France would also come under enormous pressure from speculators.

"We estimate that a weak euro country leaving the euro would incur a cost of around €9,500 to €11,500 per person in the exiting country during the first year. That would then probably amount to €3,000 to €4,000 per person per year over subsequent years," according to the report from UBS economists Stephane Deo, Paul Donovan and Larry Hatheway issued last week.

"That equates to a range of 40 per cent to 50 per cent of GDP in the first year." The value of Ireland's economy -- or GDP -- is forecast to be just over €150bn this year.

"The cost of a weak country leaving the euro is significant. Consequences include sovereign default, corporate default, collapse of the banking system and collapse of international trade," according to UBS.

The notion that a country could leave the euro and set up a new currency -- an Irish punt for example -- which would devalue, is slammed by the UBS economists.

"Exiting the euro is not going to take place with a small depreciation of the new national currency. The idea that a 10 per cent or 20 per cent adjustment is all that is required is fantasy. Why on earth would a country go through this much trauma for so small an adjustment?"

The suggestion that a country leaving the euro could regain competitiveness by devaluing its new currency "is not likely to hold in reality", according to the report. UBS estimates that Europe would impose massive tariffs against the exports of the seceding country.

"The EC explicitly alludes to this issue, saying that if a country was to leave the euro it would compensate for any undue movement in the new national currency," according to UBS.

It has also been suggested that Germany might leave the euro and revive the deutschmark. This would also lead to corporate defaults, recapitalisation of the banking sector and the collapse of international trade.

UBS estimates that it would cost every German man, woman or child up to €8,000 in the first year if the country left the eurozone and up to €4,500 per year after that.

The cost of bailing out Ireland, Greece and Portugal entirely in the wake of a default would be just over €1,000 per German as a one-off hit.

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