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02.07.2015.

Costs and Benefits of Eurozone Breakup.

Eurozone financial markets have stabilized since 2012. But the European monetary union continues to face significant challenges. Widespread political opposition to further European integration implies that the risk of a breakup has not been eliminated.

To analyze the costs and benefit of single country exit from the Eurozone as well as full-blown breakup of the euro it is necessary to take into account both real and financial effects.

Importantly, legal parameters that will guide currency redenomination at the micro/contract level also turn out to be key determinants of the balance sheet effects at the macro level.

In this paper, Jens Nordvig presents a comprehensive framework - based on legal analysis - for redenomination of contracts, ranging from cash instruments to derivatives. He then aggregates the key insights to the macro level. To quantify the balance sheet effects involved in exit from the Eurozone, he also creates a database of the relevant external exposures for each Eurozone country.

One specific implication of the analysis is that the negative balance sheet effect associated with exit from the Eurozone is much larger for Spain than for Italy, even if Italy’s headline public debt level is higher than Spain’s. 

 

Jens Jakob Nordvig began his finance career at Goldman Sachs in London in 2001. He eventually went on to lead the global currency strategy group before joining the hedge fund Bridgewater Associates. Currently, Nordvig heads currency strategy and fixed income research for Nomura Securities. In 2012, he received international recognition as a finalist in the Wolfson Economics Prize for his lead authorship of “Rethinking the European monetary union,” an essay on the future of the Eurozone. He is also the author of the Fall of the Euro (McGraw-Hill, 2013), a book about the Euro-crisis and the future of the Euro'. 

Nordvig’s work has been published in the Financial Times and on the widely read VOX economics blog. He is regularly quoted in the Wall Street Journal, New York Times, Businessweek, and the Economist and is a regular contributor to CNBC, Bloomberg TV, and other international news channels.

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