The Eurozone is in crisis, with several member states which have adopted the euro as their currency, facing a mountain of debt. At some point if financial restructuring is seen as being detrimental to their economies, they may decide to opt of the Eurozone.
Why Quit Using the Euro?
Austerity and loans are two key influences on the worlds second largest economy- Europe. According to statistics by the World Bank, the European Union still remains a major economic power, but some member states produce less than they owe to international creditors. These member states are Belgium, Denmark, Greece, Ireland, Italy, Portugal, Spain and the UK.
This has resulted in countries like Greece and Ireland to already accept loans from the European central bank (ECB) and the IMF, in order to be able to pay off creditors, and supply more money through their banks into their economies.
Deep austerity measures are a result of this mountain of debt, but also unlike the United States, members of the eurozone cannot print money to relieve any shortage of money in their economies, neither can these countries, devalue their currencies to attract investment or encourage export growth.
One reason at some point one or all of these countries could opt out of the European monetary union and decide to use their old currencies again.
How easy is it to opt out of the Eurozone?
When these nations changed their national currency into the euro, it was rather like a traditional marriage. divorce was never considered, and they would be married to the fate of the euro for life.
However there is a “get out” strategy, which could work, especially if the effects of austerity measures result in financial misery for their citizens, and the prospect of returning to their old currencies could stimulate growth.
1. A Fast Changeover
The Government and their national Banks would have to quickly change over from the Euro to their national currency almost overnight. This means setting the exchange rate, and paying out depositors in the “new” currency. Prices would have to be re-adjusted at the same time to accommodate this change. “New” money and coins would have to be made.
2. Caps Imposed on Deposit Withdrawals
Before any changeover in currencies, deposit withdrawals would most likely be capped, ensuing that any mistrust in the new currency would result in avoiding any run on the bank, if depositors mistrust the new currency.
3. Cutting itself off from overseas credit
Initially once a nation resorts to its original currency, it would have to stop using any foreign credit until its new monetary unit stabilizes. Once any evidence that a change has benefited and freed the country from the financial restraints of the euro credit could then flow again. Exchange controls may have to be temporarily imposed.
A nation could face law suits from international creditors who initially only approved of any loan because the countries currency was the euro. This may affect how the nation trades internationally, creditors may cut off any future assistance to the country because they may insist on renegotiating any existing loans based on their own perceived value of the new monetary unit.
5. Quantitative Easing
During 2008 to 2011, most European countries tried to stimulate their economies by issuing bonds at a fixed interest rate, and used the sale of these bonds to print more money to put into their economies. If a nation pulls out of the Eurozone, bonds would be in their own currency, and there would be little change of attracting new buyers in the short term.
How a country could benefit from leaving the Eurozone?
Germany is in effect the moneylender of Europe, and compared to its Southern European partners, remains more competitive because a lower cost of living, and the peddling of its “Made in Germany,” label to producers of goods, outside Europe and in Central Europe.
Greece, Ireland, Italy and Portugal and Spain remain tied to the financial restraints of the euro, and the fact they remain disadvantaged compared to their northern European partner, because of higher living costs and bank interest rates.
Greece would benefit immensely from leaving the eurozone as steep austerity measures have restricted trade, resulted in high long term unemployment, and stopped a future government from making trade agreements with China, which could of helped stimulate their economy.
Ireland and Portugal face debt mountains which cannot be eased through the sale of bonds, and the austerity measures they continue to impose may cause their citizens to resist further membership of the euro zone.
Germany could also face a change in government, as the average German is showing resentment towards having to bail out countries like Greece, as they themselves face higher taxes and more economic restrictions because of paying for these loans. Recent opinion polls show that the ‘average’ German still prefers the Deutschmark, and mistrusts any more credit to the aptly name PIGS..
Greece, Ireland, Italy, Portugal, Spain and the UK are all facing a tough future. In 2011, these countries are faced with a mountain of debt, and the result is financial restructuring, and steep cuts in public services. How the general public react to these cuts, may determine the very future of the euro.