Could You Exit The Euro?

Joining the Euro is supposed to be an irreversible decision. But, individual countries could always pass individual acts of parliament to leave the Euro. However, leaving aside all the political issues, there are many economic stumbling blocks.

One problem is that countries generally would only consider leaving when there was a real economic crisis – but, it is during  an economic crisis, when it would precisely be most difficult to leave.

I have covered this question in more detail at: Leaving the Euro.

But, essentially the problems of leaving the Euro include:

  • Transaction costs of converting cash and machines.
  • Difficulty of deciding exchange rate to leave at
  • Difficulty of converting all contracts, mortgages, bank accounts from Euro to native currency.
  • Possibility of capital flight in anticipation of Euro exit and subsequent devaluation
  • Issues of loss of confidence in economy.

The greatest difficult of leaving the Euro, would come for those economies which are uncompetitive, trade deficits, large budget deficits and who need to devalue. (i.e. the likes of Greece, Spain, Italy).

The problem is that if Greece announced it was going to leave the Euro, investors and savers would withdraw from Greek banks to protect against devaluation.

A strong economy like Germany would find it easier to leave. A new D-Mark would appreciate so there would be no capital flight, in fact they would benefit from capital inflows.

This would enable the Euro to devalue and help it’s neighbours regain competitiveness.

Although the idea of Germany leaving the Euro sounds pure fantasy. The Euro economy is unbalanced.

Germany’s trade surplus is by far the largest in Europe, reaching 135.8 billion euros ($184.9 billion) in 2009, – Eurostat, the European Union’s statistics office.

The countries with the biggest trade deficits are also the ones with biggest economic problems: Britain, Spain, Greece and Portugal.

By on March 2nd, 2010

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