Pros and Cons of a Eurozone Breakup

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Assess the advantages and disadvantages of a Eurozone breakup.

In the past few months, the likelihood of a Eurozone breakup has been escalating due to increasing tensions in the monetary union. The departure of problematic periphery countries like Greece from the Eurozone would have many implications onto Europe and the rest of the world.

If the Eurozone were to break up, whether partially or completely, it would send the rest of the world into panic and economic turmoil. The countries departing the euro would have to revert back to its old currency and as such face a significant devaluation. Thus people who have their savings in these countries would see a significant fall in value of their savings. In order to prevent this from happening, investors would withdraw their savings from the affected banks and sell their government bonds immediately. Therefore countries leaving the Euro would face a situation of significant capital outflows or capital flight. These capital outflows would dent investor confidence and may limit the ability of the affected banks to lend money due to liquidity shortage. This ultimately will result in lower economic growth.

Having said so, the resultant devaluation of currency may not be a bad thing. It is a known fact that some Eurozone economies suffer from lack of competitiveness which has resulted in their weak growth in the recent years. By leaving the Eurozone and allowing their currencies to devalue, these countries can immediately boost the competitiveness of their exports without having to suffer through years of painful internal devaluation. After having increased their competitiveness significantly, exports will increase and higher economic growth can be achieved.

In addition to the initial capital flight from departing countries, a European credit crunch may occur. For instance, if Greece were to leave the Eurozone, the knock-on effects from a Greek bank run would threaten other European banks and financial...
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