Abstract
In this paper we describe the genesis of a doomsday scenario and discuss potential causes and motivations for a breakup of the euro area. For this purpose, we differentiate between the departure of weak and strong countries, and examine the impact of the reintroduction of a national currency on domestic debt, the domestic banking sector, EU membership and the freedom of trade. We also briefly analyze the social and political costs of the accompanying social disorder.
Highlights
In this paper we describe the genesis of a doomsday scenario and discuss potential causes and motivations for a breakup of the euro area
Using the breakdowns of Argentina or Uruguay a decade ago as a guide rather than the relatively mild European Exchange Rate Mechanism (ERM) I disruptions [5], it is reasonable to assume that the external value of the currency of a weak country seceding from the euro zone might fall by up to 60 percent vis-à-vis the “rump euro” bloc
UBS [1], for instance, argues convincingly that if a new national currency were to depreciate by 60 percent against the euro, it seems highly plausible that the euro area in turn would impose a 60 percent tariff against the exports of the departing country
Summary
It is time to admit that under the prevailing structure and membership, the euro area does not work successfully. Either the current institutional setting or the composition of its membership will have to undergo changes This has led many observers to describe potential doomsday scenarios, including the conclusion by [1] that “the euro should not exist (like this).”. Countries belonging to the Economic and Monetary Union (EMU) cannot be expelled from the common currency, but sovereign nations could secede. This breakup option is associated with substantial risk, is extraordinarily costly and is assessed as being a very improbable event. If the lack of growth continues, the option of seceding from the monetary union could become a dominant end-game strategy for some current euro area members. Rather than systematically assessing the most widely discussed options for keeping the euro together, this paper investigates likely channels for the transmission of economic impacts, as well as the overall consequences of breaking up the euro—the variants of doomsday for the euro area [1]
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
