Nations would count the cost of leaving the euro

By December 14, 2010Uncategorized

As Ireland becomes the most recent nation to accept a euro bail out, the European Union has maintained its position that the failure and collapse of the single currency is not an option. The question however increasingly being raised in some sectors is whether the euro can survive the assaults it now faces.

History is littered with similar events which turned the unthinkable into reality. One only has to look at Britain leaving the gold standard in 1931 and Argentina abandoned its dollar peg in January 2002. But a collapse of the euro would bring with it unprecedented technical, economic and political costs.

For those who see leaving the eurozone as an easy option, be it weaker countries such as Portugal, Ireland or Greece, or those such as Germany exasperated over supporting the bail outs, the costs are enormous. There are the obvious difficulties and associated costs of reintroducing a national currency, which many felt had been consigned to the dustbin of history. The suspicion that a weak country was about to leave would lead to runs on deposits, further weakening troubled banks. That would result in capital controls and perhaps limits on bank withdrawals, which in turn would strangle commerce. Leavers would be cut off from foreign finance, perhaps for years, further starving their economies of funds.

The economic benefits of leaving the euro therefore are highly dubious and would in fact be deeply damaging.  And if a country left, risking not just European banks but also the currency, it would become a pariah exporting its pain to its neighbours. The introduction of capital controls would leave Europe’s financial markets in the mire, leading to the collapse of the single market and threatening the purpose of the EU itself. 

If the euro is to survive, creditor countries need to give more aid to deficit countries. In turn, the crisis should also have brought home to weak deficit countries the high cost of their failure to make the reforms to labour and product markets, and to welfare systems, necessary to restore their lost competitiveness. Even if they left the euro they would have to take such steps to thrive. Within it, reform would not just revive moribund economies, but also create the chance of future growth to safeguard the single currency. 

The break-up of the euro is unlikely, and should it occur would prove very costly, but the EU’s leaders must recognise that it is a possibility, and turning a blind eye to this is leading them to fail to take the necessary steps to prevent this happening.

 

Alex Orr is Public Affairs Director at Indigo and a board member of the European Movement.