Don\’t think so Jose

the president of the European Commission, has warned that the collapse of the eurozone would cause a crash that would instantly wipe out half of the value of Europe’s economy, plunging the continent into a depression as deep as the 1930s slump.

The EU economy is around $15 trillion in GDP. Roughly.

A collapse of the method of exchange, the euro, would not wipe out half of that, reduce GDP by 50% to $7.5 trillion, no.

Possible to read that precis of his statement another way, that a collapse would mean a loss of wealth of $7.5 trillion though. That\’s certainly possible. Italy alone has $2 trillion (ish) of govt debt, that might go to 50% or par in a crash. So there\’s $1 trillion. Add France, Belgium, Spain, banks falling over: possible I guess that there\’s a wealth loss of $7.5 trillion.

But I doubt very much that that would translate through to a 50% fall in GDP. For we\’ve a recent example of what wealth effects do to economies.

The US economy is around $15 trillion in GDP as well (not accurate, but close enough). And the housing crash took $7 trillion or so of wealth out of that economy. Fall in GDP directly attributable to that? a few percent perhaps, 3,5, 6%?

Yes, financial crises are different from other ones in their effects on GDP. But, trying to be fair to Barroso, I think he means wealth, not a fall in GDP. Well, at least, I hope he does. Because I could see the wealth one being correct but not the GDP interpretation.

Hmm, maybe I\’m being too kind to the man:

27-country EU broke apart the estimated initial cost would be up to 50 per cent of European gross domestic product.

Consistent still with either explanation.

A eurozone crash, the commission has predicted, would see £10?trillion wiped off the value of the European economy, a catastrophe that would send living standards plummeting to the levels of Latin America. The shock would wipe out all the gains of Europe’s longest period of peace since the Second World War and herald the political chaos and collapse of governments that ushered in Nazism 80 years ago.

And that isn\’t. so, is it the journalist or the politician making the extreme statement?

4 thoughts on “Don\’t think so Jose”

  1. Could be either a journalist or a politician, really. It certainly isn’t an economist. How do these people get their jobs?

  2. “And the housing crash took $7 trillion or so of wealth out of that economy. Fall in GDP directly attributable to that? a few percent perhaps, 3,5, 6%?”

    I know what you’re getting at, but of course money is not wealth. Money is money. A halving of the average market clearing price for houses does not mean that the actual houses have disappeared.

    The problem comes from the modern monetary legal framework which encourages using debt as money.

  3. If – I don’t see why it would but let’s just say – Italian government debts were given a haircut 50%, then it doesn’t mean that much wealth has been destroyed, for the claims on future taxpayers have also been reduced. The difference is to do with complex factors – didn’t Robert Barro write a paper on this?

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