3 thoughts on “Euro break-up – not so simple”

  1. Posted 20/01/2012 at 13:36 | Permalink

    These parallels are pretty meaningless – one could on that basis raise the break-up of various Empires (British, Austro-Hungarian) or the attempted secession of the Confederacy from the USA!
    However, even the last option will still, as you say, leave the debt problem which is surely the central issue that the EU faces and the issue (if any) that would drive it apart. Exit by one or more countries will ultimately surely happen when the perceived pain of staying in is greater than the perceived pain of leaving (or if the benefits of having that state in the union outweigh the downsides). Legal and practical barriers make the pain higher but not insurmountable – if states retain their sovereign authority they can’t ultimately be prevented. However, as such thresholds can only be estimated this will never be a ‘rational’ choice.
    The precedent for possible Scottish exit of the Union might also be interesting…

  2. Posted 20/01/2012 at 14:31 | Permalink

    There seem to be two essential matters for several countries in the eurozone to deal with:

    First, to default on part of their government debts. Second, to restore competitiveness with other eurozone countries.

    We can already see that recognising the need to default is not easy, even for an obvious basket case like Greece. It may be just as big a pill to swallow for Portugal, Ireland, Cyprus, Spain, Italy and so on. The ECB is desperate not to have to accept losses on its holding of eurozone member-states’ government bonds, but I believe this is unavoidable.

    As for restoring competitiveness, I believe the only practical way to do this is to devalue (as a part of the process of introducing supply-side reforms, especially in labour markets). Although in theory, one could envisage a number of Club Med countries staying together in some sort of currency union, and devaluing collectively, it is hard to think this could happen in reality. So restoring national currencies, which might not be too unpopular with voters, seems much the most likely way to achieve necessary devaluations.

    As Philip says, there don’t seem to be any painless alternatives. And while sanguine observers might hope for an organised departure from the euro, the level of incompetence that has so far been evident in the euro’s short life leads me to expect a disorderly disintegration of the single currency experiment, with several countries leaving the euro (if not the EU).

    The financial chaos that will ensue will badly affect the UK too.

  3. Posted 08/02/2012 at 14:19 | Permalink

    I agree with many of the sentiments expressed here; however, even one country leaving [and in my view it is now a virtual certainty that Greece must leave] will immediately plunge the entire Euro-zone into chaos. All holdings which are now denominated in Euros, across more than one country will need to be re-assessed; along with the relative split of assets and liabilites and their location. I would not want to be left with liabilities in Germany and assets in, say, Greece and Portugal as the Euro falls apart: the currency exhcange gap between them would widen rapidly and to obiviate any losses all assets will be moved into safe’ havens. I regard the break-up as the inevitable consequence of politics pushing economics, ignoring uncomfortable realities such as the need for complete fiscal unity to make currency unions a success. In addition the incompetence shown by European leaders so far t certain that it will be very messy. The only thing to do is to plan for the worst – eg euro-gotterdammerung – and make sure you are as well protected as possible.

Comments are closed.