The more we learn about this one, the better. No one knows the likelihood of, say, Greece, to pull an example out of the air, pulling out of the Eurozone and reverting to the drachma. I'd guess not, but the potential is obviously real and growing.
What would happen if a country broke away? Well, the problem is all in the transition. Contracts between creditors (lenders) and debtors (borrowers), including everything from bonds to cheese deliveries, have to be renegotiated, and done so at the value the world decides to assign to the new currency, e.g., the ND ("new drachma"). And one can imagine that assignment will not be flattering to the dropout country.
Bank runs are a worry -- those holding euros in Greek banks will be assigned the new value in "NDs," and account holders will want to avoid that devaluation.
As weaker economies dropout, their currencies will fall relative to those of stronger ones, like the US dollar or the euro, as currency markets once again can vote on an individual country's currency, as opposed to that of a currency block. This could help them adjust through exports, but we're probably not talking about gentle devaluation here; we're talking systemic shock.
Basically, the transition is by definition a huge devaluation event. You leave the currency union because you can't achieve solvency within it, and once you're free, the world casts judgment by revaluing your currency in ways that reflect the conditions of your exit. Any support you enjoyed from being a weaker player of a stronger team vanishes.
These realities are why I suspect the Eurozone remains intact. But I wouldn't bet more than an ND or two on it.
This post originally appeared at Jared Bernstein's On The Economy blog.
Sir Christopher Meyer: Europe and the Nation State
Stick a thumb into the banker's eyes.
Then Greece could initiate an investigation into who manipulated the markets to bring about such a condition -- and be sure of it, despite Greece's own mistakes in the matter, there were people manipulating the system to cause Greece to make more mistakes, with the financial failure of Greece in mind. That would mean Greece would give up its National Assets for pennies on the Euro, bankers would reap huge profits, and the people would suffer terribly.
And after such investigation, the indictments and the warrants -- international warrants for crimes against the Greek state, financial espionage and sabotage, fraud and conspiracy.
Oh yes, the financial markets would revolt. Greece would not get another loan. But they would be out from under this burden, and they would have their own tax base to work with. They could rewrite the rules to play in their country. They would have their national sovereignty back.
This could work. It would be hard, but no harder than the onerous demands being made on it right now. Right now the demands are almost like the demands made on Germany with the Treaty of Versailles after World War I, demands so harsh and vindictive that the result, years later, was World War II.
Greece needs its sovereignty back. The bankers need to go to h*ll.
They created their version of a perfect society and couldn't afford the massive waste. As a result, what happens next is under the control of Merkel.
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This been said, unless the leaving government is able to control the debt and spending... leaving the Euro will not do them any good.
http://answers.yahoo.com/question/index?qid=20090124015155AAP6mg7
http://www.truth-out.org/why-iceland-should-be-news-not/1322327303?mid=53
As far as I know, they have not joined the Eurozone yet.