What Are the Costs of Eurozone Exit? Lessons From Historical Fixed Exchange Rate Regimes

Abstract

While the European Monetary Union (EMU) differs from fixed exchange regimes of the past, historical fixed regimes help to frame the benefits and costs of EMU exit. Using a panel of 141 countries since 1980, I draw lessons about typical trends of macroeconomic variables at entry and exit, place recent economic shocks in Europe in context of history, and identify the scale of possible exit costs based on historical trends. I find no evidence that recent export and credit shocks to Greece, Ireland, Italy, Portugal, and Spain (GIIPS) are severe enough to justify exit, based on the severity of historical shocks. I support the use of capital controls in the event of an exit, finding that capital openness is associated with higher costs of exit, particularly banking crises. Finally, I find that Greece and Ireland are particularly at risk for negative balance sheet effects of exit.