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Euro zone will shrink, warns economist

Greece, Portugal, Spain, Italy and Ireland will probably leave the euro zone, says Arnab Das of Roubini Global Economics

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Greece, Portugal, Spain, Italy and Ireland will probably leave the euro zone because it cannot continue in its current state, a leading economist told chief financial officers on Thursday.

Arnab Das, managing director of market research at Roubini Global Economics, told delegates at the Economist's CFO Summit that he expected all five euro zone countries to find a way out of the euro area.

A straw poll of around 100 delegates present also revealed a unanimous belief that Greece would fall out of the euro zone, while roughly two-thirds of the audience agreed Portugal would leave the currency bloc as well.

Greece's second bailout agreed this week was "not worth the paper it was written on", Das said.

"An immediate catastrophic credit crunch and a currency crisis of unimaginable proportions have been staved off, but nothing structural has been solved. Most of the long-term problems are not being discussed due to politics," he said.

Das outlined three major problems for the eurozone - the ability to bail out countries in financial straits, movement of labour and of capital. Although the European Union has a degree of mobility of capital, there is little ability to carry out "fiscal transfer" and labour mobility was weak, he said.

"It could look very different and much more sustainable if there was an exit of countries that couldn't hack it and we had a rump euro of countries that were much more homogenous and had a fiscal identikit.

"If countries are homogenous and had the same cycle, probably they could get away without having to make fiscal transfers or exchange labour or capital. Those countries in the south need to have a much cheaper currency," he added.

"We are being asked to believe implicitly that countries help each other in a crisis. I would suggest this is faintly ridiculous. In a crisis, people turn inward. Think about cross-border debt crises, where one country owes a lot to another. How many have not become a currency crisis. There isn't one in history," he said.


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