....There is, though, a critical problem. For an exit from the euro by a single member country, or the split of the euro into two or more parts, not to be extremely messy, you need planning and careful forethought, requiring discussion and the exploration of possibilities.
Yet, to avoid precipitating a banking collapse, never mind other sorts of economic dislocation, you need absolute secrecy and surprise. After all, if people thought that such a change was coming they would try to withdraw money from vulnerable countries' banks and this could prompt a banking collapse and a serious economic crisis.
How are the requirements for secrecy and forethought to be reconciled? Economists working for the vulnerable countries' governments and/or central banks would have to beaver away in secret, preparing Plan B, which would have to be kept in the metaphorical equivalent of a locked drawer, until the moment came. But the chances of keeping such work secret are pretty slim.
Even so, the notion that such difficulties will prevent a country from leaving or the euro from breaking up is absurd. What has to happen will happen. If a country decided to leave, its government would announce that domestic contracts expressed in euros would now be converted to the new domestic currency.
It would probably also announce some sort of default. The idea that a government can only do this when it is no longer in primary deficit, so that is does not have to rely on the markets for finance, is wide of the mark. That constraint does apply to countries within a monetary union, because they cannot print their own money. But once a country is out of a monetary union its own central bank can buy government debt financed by issuing its own money.
I presume that the authorities would announce some official conversion rate for all contracts and initially this would be the basis for the re-denomination of prices – and wages. The result would be a legal and contractual nightmare. But the new currency would almost certainly fall below the conversion rate on the exchanges and that's where so much of the advantage would lie. At a stroke, it would be possible to lower the country's price level compared with the rest of the eurozone and to the outside world.
Admittedly, this could still lead to disaster. If the exiting country's wages and prices rose fully to compensate then nothing would have been gained. And in fact the position would be worse, because now the country would be saddled with a higher inflation rate, with all the costs and distortions that this normally brings – including much higher nominal interest rates.
But if prices went up by much less than the devaluation then this result could be avoided, opening up the possibility of escape through economic growth driven by net exports. That is was what happened in the UK after the major falls in sterling in 1931 and 1992, and in umpteen other examples around the world.
In practice, because euro break-up seems so politically unpalatable, I doubt that much, if any, pre-planning is going on across the eurozone. The European policy elites are still in denial. If the euro splits, it will probably happen in a panic, when a decision is forced within a narrow time frame, just as happened with the pound's departure from the Gold Standard in 1931, its exit from the ERM in 1992 and the collapse of Lehmans in 2008. ....
www.telegraph.co.uk/finance/comment/...ics-will-trump-law.html
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