Many economists expect catastrophic consequences if any country exits the euro…

When it comes to what’s going on overseas, it seems like all we hear are dire predictions like these.  But it may not necessarily be so.

Jonathan Tepper — a portfolio manager, economist, chief editor of the independent global macroeconomic research service Variant Perception, and an American Rhodes Scholar — disagrees:

In contrast to the consensus view, he makes a compelling case in favour of any country that exits the euro — combined with a sizeable devaluation of its currency — in his recently-published paper on the eurozone crisis called “A Primer on the Euro Breakup:  Default, Exit and Devaluation as the Optimal Solution”.

History is on Tepper’s side.

During the past century 69 countries have exited currency areas with little downward economic volatility.  Furthermore, according to data from the IMF, the majority of large devaluations in recent years have had exactly the same effect one would expect:  Economic growth was reinvigorated — if not immediately, then within 3 years of devaluing the currency.  But let’s get back to the issue at hand:

The real problem here is that EU peripheral countries — Greece, Portugal, Ireland, Italy and Spain — have far too much debt and severely overvalued exchange rates.  They’re being choked.

They’ll never be able to pay off their debt; and without more balanced exchange rates they can’t compete — and will, therefore, continue to suffer from low growth.  To quote from Changing Fortunes:  The World’s Money and the Threat to American Leadership, by Paul Volcker and Toyoo Gyohten, “A nation’s exchange rate is the single most important price in its economy; it will influence the entire range of individual prices, imports and exports, and even the level of economic activity.”

Jonathan Tepper contents that the pain of devaluation would be brief and, as in the case of Asia in 1997, Russia in 1998 and Argentina in 2002, rapid growth and recovery would follow:

  • After the devaluation, Indonesia, South Korea and Thailand experienced short, sharp downturns — but then grew quickly for the next decade and achieved pre-crisis GDP levels within two to three years.
  • In Russia, the expected catastrophe didn’t happen.  The pain lasted only about six months, followed by a decade long boom.  After devaluation, the Russian stock market increased over 4000%.
  • Once Argentina defaulted and devalued, economy has grown by more than 8% a year since 2003.

Written in understandable terms, whether you want to just read his key conclusions, or prefer the read the entire 50 pages as I did, there’s value to be had by reviewing it.  Find it here.

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