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June 26, 2012
Who Will Exit First? Grexit, Fixit, Quitaly, GoingDutch 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 cutand run, even before Greece does.
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 thewoods, Greece is still highly likely to exit when its new government falls, in the next 6 to 12 months.
There are increasing doubts in Finland about EZ membership. First, the other Nordic countriesare outside the EZ and/or the EU and are doing fine economically and otherwise. Second, if Finlandwere to exit the EZ it might (although it might not) also be forced to exit the EU; however, even underthat 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 continuedmembership of the EZ would entail. Fourth, many social, business and political forces in Finland areskeptical of the euro and/or supportive of an exit.
Powerful political and financial interests are explicitly and implicitly urging Italy to leave theEZ 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 takingthe decisions necessary to keep Italy in the monetary union, is looking increasingly vulnerable.
As in other core EZ economies, social and political forces that are skeptical of the EZmembership 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.
Going for the D-Euro:
The average German voter suffers from bailout fatigue and is opento at least considering an exit. Indeed, recent polls suggest that a majority of Germans are euro-skeptic and at least one-quarter would like to return to the deutschmark. But the political, businessand 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 andperiphery pushing for an early exit of other EZ countries. In Italy, Berlusconi and those close to him
explicitly favor Italy’s return to the lira
; Italian businesses with euro assets abroad and domestic debtsin euro would vastly benefit from the conversion
of such liabilities into new depreciatedliras. In core economies
especially Finland, but also the Netherlands
concerns about the increasinglosses attached to EZ membership deriving from implicit and explicit liabilities are mounting, whilethe benefits appear smaller and smaller. Consider the existing potential losses from the EFSF, theESM, the Target 2 balances; and then add to them the potentially larger ones deriving from a fiscalunion with debt monetization, a transfer fiscal union for the poorest members of the EZ and the riskof guaranteeing, at the EZ-
wide level, all of the EZ’s
bank deposits, including those of the periphery.