Eurozone break-up would speed recovery

A break-up of the eurozone would lead to faster growth and spare weaker members of the single currency decades of depression and deflation, one of the UK's leading forecasting groups said today. Capital Economics said that, far from being a potential disaster that would result in economic chaos, the return of national currencies would enable Europe to break out of a prolonged period of weak expansion. Christopher Smallwood, the author of the report, quoted by 'The Guardian,' said the problem was that Germany refused to expand its demand to help countries such as Greece and Portugal grow their way out of difficulty.

"The eurozone with Germany at its core operates as a system with a strong deflationary bias - one in which the whole burden of adjustment falls on deficit countries obliged to take strong deflationary action. As long as the eurozone continues to play by these rules, there is no alternative to many years of economic pain," he said.

Greece, Spain, Portugal and Ireland have all announced austerity packages to cut their budget deficits and to stimulate export-led growth. Smallwood, formerly an economic adviser to Barclays, said that Portugal, Italy, Ireland, Greece and Spain would be better off outside the euro area since that would result in a fall in their currencies and restore the competitiveness lost during their membership of the single currency.

He added, however, that this would still leave a problem for other core members of the euro area, such as France, which would continue to suffer from the "deflationary bias" in German economic policy unless Berlin agreed to restore the Deutschmark. Smallwood said the result of such a move would be a rising currency that would wipe out Germany's trade surplus and force the country to boost domestic demand to prevent the country sliding into deflation. "Restoring the market would lead to the rebalancing of the German economy which cannot occur as long as it remains in the eurozone. "This is the best option for Europe. For the sake of the future economic health and success of the European Union, the eurozone needs to break up."

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