Collapse of the euro would have disastrous effects
In a letter to the editor in leading Dutch newspaper De Volkskrant, ING’s chief economist Mark Cliffe said that the collapse of the euro would have a particularly disastrous effect on the Netherlands. That is why the Netherlands has the greatest interest in saving the euro.
Mark Cliffe’s article of 1 December 2011:
ING: ‘Losing the euro would spell disaster’
De Volkskrant – 1 December 2011
The collapse of the euro would have a particularly disastrous effect on Dutch business and the Dutch economy, according to Mark Cliffe, ING’s chief economist.
Calls for tough sanctions against weak eurozone countries are growing. Forcing a country to leave the currency union is no longer a taboo subject. However understandable this position may be, ejecting countries from the euro would be a very expensive mistake, leading to financial and political chaos. In this scenario, the open Dutch economy would be disproportionately affected.
The chaos that would ensue from a forced or unforced exit from the euro is almost impossible to comprehend. If a country were to be ejected from the euro, bankruptcy would be inevitable. This is because the ejected country would be forced to reintroduce its old currency, which would immediately fall in value against the euro owing to a lack of confidence. Old debts in euros could not be repaid and creditors would not see most of their money.
In addition, the introduction of a new currency would be a logistical and legal nightmare. The financial system of the departing country would collapse. Savers in that country would cause a run on the banks to withdraw their savings, as a result of which banks would fail. This would create a downward spiral of weakening economic growth and a fall in the price of shares, bonds and other securities, making the introduction of the currency a nightmare.
Capital market interest rates for the departing country would rise steeply and would force the government to make even more painful cuts. The social unrest we have witnessed in recent months in some of the weak eurozone countries would reach new heights.
The spread of panic to the other weak eurozone countries would be virtually unavoidable because savers and investors would be asking themselves: ‘Who is next?’ The current debt crisis has shown how great the danger of contagion is. Several eurozone countries saw interest rates on their loans rise to unprecedented levels and were forced to go knocking on the door of the European emergency fund.
The departure of one or more weak countries would also have a significant impact on the remaining eurozone countries. The euro would see a sharp rise in value against the new currencies. Exports would become too expensive at a time when demand is already under pressure from the economic slump. Exports from the remaining eurozone countries to the countries that had left the European currency would collapse.
This is where the strength of the Dutch economy would take a hit. As a prime exporter, we would be dealt a hefty blow. In the past twenty years, virtually no other country has profited as much from the euro and the European internal market. In 2010, the Netherlands exported EUR 244 billion to the rest of the eurozone – virtually half of our GDP. The collapse of the euro would therefore have a disastrous effect on Dutch business and the economy.
The departure of a weak eurozone country would also have a major impact on our pensions and other savings. Dutch banks, pension funds, insurance companies and investment funds have invested almost EUR 850 billion in the eurozone. This means that our country is more exposed to external developments than any other key eurozone country. The impact of falling share prices, write-downs and defaults by bankrupt countries would be anyone’s guess.
Furthermore, large Dutch companies, particularly the multinationals, operate throughout the eurozone. Their operations are international, with different business units in various countries. If the euro comes under significant pressure, the question is where would their operations and investments be running risks? Until this question is answered, new investments would in all probability be postponed.
The single currency has greatly benefitted the Netherlands. The euro has allowed us to boost our competitive position in the eurozone. In the past, some of our trading partners devalued their currencies, which meant that their prices were immediately more competitive.
This option was lost with the advent of the euro. We would not have had such great export success with the guilder and this would have had a significant impact on employment; just over one hundred thousand fewer jobs, as a result of which unemployment figures would be up by one third.
Calculations have shown that the euro has increased productivity in the Netherlands by approximately two per cent. Given the ageing population, this is a welcome boost to government coffers.
Of all the eurozone countries, the Netherlands has the greatest interest in saving the euro. However expensive it is to keep the weaker countries afloat, the collapse of the eurozone would be far more costly.
Mark Cliffe is chief economist at ING
Read also 'EMU Break-up' report, dated 1 December 2011, by Mark Cliffe, ING's chief economist and global head of ING Financial Markets Research (PDF 770 Kb).