How to Leave the Euro?
The European economy is crumbling. Every day we hear about one of the member countries contemplating the exit from the Euro. Greece, England, and Italy have all at some point of time, or another contemplated a departure from the Eurozone. However, is it really that easy? Can countries just walk into or walk out of the Eurozone as they feel?
The answer is obviously not. Leaving a monetary union like the Eurozone is likely to be an extremely messy affair. However, the finances of European countries are so messed up already that leaving the Eurozone does not seem like a far-fetched thought for anybody.
In this article, we will have a closer look at what exiting the Euro would look like.
Firstly, it is important to understand that Britain and Denmark are the only two countries who have an opt-out clause in their agreement when they joined the Euro. As far as the rest of the countries like Greece and Italy are concerned, leaving the Eurozone is a legal impossibility. This is because their contracts do not have any explicit exit clauses. Once these countries came in, there is no way that they can exit the Euro currency while still staying in the European Union. Hence, in order to abandon the Euro, these countries would have to give up their membership of the European Union. This would lead to significant losses in terms of trade. European Union countries do not levy tariffs on the imports of each other. However, taxes are levied on the imports from other countries. Therefore, if Greece or Italy were to exit the Eurozone, they would face tariffs from other countries and the competitiveness of the goods will be immediately reduced.
Indefinite Bank Holiday
Leaving the Euro has to be sudden. It cannot be done in a phased out manner after following the parliamentary process. This is because as soon as the proceedings start, people will start moving their money in and out of the country as they may seem fit. This will lead to a run on the banks and the insolvency of many institutions. As a result, leaving the Euro would also require temporary suspension of democracy.
The leader of the exiting country will have to close down all communication systems between banks and also financial markets. Armed forces may have to be deployed as panicking citizens may try to undertake transactions in the black market.
Suddenly and unilaterally exiting the Euro may bring the economy of the nation to a grinding halt since the banks will have to be shut down indefinitely till the situation stabilizes.
The exiting country would have to quickly print new currency overnight. Then, they would be entrusted with the humungous tasks of exchanging the old currency for a new one. Exchanging the money present in the bank accounts may be an easy task. This is because only electronic entries have to be passed to change the currencies at a pre-determined exchange rate. However, the cash conversion is likely to be a logistical problem. Recently, the Indian government had introduced demonetization wherein one type of currency had to be exchanged for another. This led to chaos all over the country, and over 50 people were killed in the process of exchanging their currency notes.
Default On Foreign Debt
Countries like Greece and Italy want to exit the Eurozone because they have too much debt. Therefore paying off the debt, once they have left the Eurozone is not likely. This means that any country which exits the Eurozone is likely to default on external debt as well. If this is done unilaterally, this may be an invitation to destruction and war.
European economies hold a significant stake in the national debt of one another. Hence, if Italy decides to default on its debt, the economies of other countries like Germany and France will also be rattled. Writing off large amounts of Italian debt may put the banks and economy of other member nations in crisis. This is likely to lead to an escalation of tensions in the Euro region. If unchecked, this problem could even culminate into a full-blown war.
Raising Domestic Taxes
If a country defaults on its debt, foreign investors start fleeing the country. As a result, no investments are made into the country during that period of time. Also, the requirement of money is very high at this time, given the crisis economic situation that engulfs the country.
As a result, the government is left with no option but to implement a horrific tax regime. All the money which is required by the government is raised by increasing the tax rates. As a result, the tax rates rise making the production of goods expensive. This causes many employers to lay off their workers. The end result is that a condition of high prices and low employment prevails simultaneously.
To sum it up, exiting the Eurozone will not be an easy process. It may or may not be legal. Also, one exit will be like a domino causing exits of some member nations and collapse of other member nations. This is the reason why it is best that nations are able to amicably resolve their differences. An exit from the Eurozone would be tantalizingly painful.
Authorship/Referencing - About the Author(s)
The article is Written By Prachi Juneja and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.