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Friday, January 23, 2009

Quitting The Euro Can Reduce Sovereign Debt

Of all the arguments ranged to deter countries from leaving the Euro, the primary one is that all the sovereign debt of these countries is denominated in Euros, and as they quit the currency their renewed national currencies would be perceived as weak. The result would be that their sovereign debt would balloon in value. This however might not be the case.

While the Euro was tracking ever higher against the US Dollar going from 1.20 to as high a 0.60 at its peak, the idea of the Euro ever being weak was impossible to conceive. But now with the Euro at 0.78 and with it moving each week closer to parity with the US Dollar, other options are becoming possible or ways of seeing a road back to monetary independence for individual eurozone members.

With the currency heading South, countries leaving the Euro have other alternative ways of securing their financial futures, other than slavishly following the Euro valuation to its next floor. They for example only have to seek a US $ peg, as many Asian countries have done. Or a Sterling peg if they preferred. Sterling has done the majority of its fall from bed, and will soon find a level to retrace from. The Euro has only started its tumble.

With the Euro falling ever lower weighed down by huge deficits, a move out of the Euro could actually more rapidly reduce the sovereign debt of the countries getting out of it. Now there's a thought - the fastest way of reducing your national debt is to quit the Euro, and see it lose value against your newly launched indendent currency pegged to the US$.

The ECB are always full of talk of the costs for countries quitting the Euro, as in this piece from Open Europe.

The WSJ carried out an interview with ECB Executive Board Member Lorenzo Bini-Smaghi, who said the ECB had not contemplated the eventuality of default of a member state, but that if a country did want to exit the eurozone, "The cost would surely be higher than staying. It would not only be a huge economic cost because, for instance, the [sovereign] debt is in euro, so it would [likely] increase in value. It would also imply exiting from the European Union. So it is also a huge political issue. And in the end no country would be willing to face this."

But as the Euro becomes a basket case that no one wants, that assumed cost will evaporate, as will your Euro debts as the currency itself approaches disestablishment. A country leaving the Euro could in fact be seen as finally getting its act together, and could demand respect and valuation form international markets, if it handled the move well.

Ireland could for example see its Punt, linked to the Dollar, rise against the Euro, and its soveriegn debt start to be eliminated faster than it imagined. Now that really would be worth quitting the Euro for.

Other talk on the street today reported by Open Europe is all about quitting the currency or not, as follows -

In the Irish Times, Jim O'Leary writes, "A decision to leave the euro zone would be a repudiation of such a core element of the European project it would run the risk of expulsion from the EU."In analysis in the Telegraph, Diplomatic Editor David Blair argues that for some eurozone members, the ECB's interest rate is still too high and, "The most logical option would be for Greece and Spain to leave the euro".

.....and anybody else who wants to get their economic house in order.

4 comments:

Anonymous said...

"A decision to leave the euro zone would be a repudiation of such a core element of the European project it would run the risk of expulsion from the EU."

That is the first good argument I've heard for actually entering the euro. By subsequently leaving the euro you would be chucked out of the EU. Hurrah!!

/Mikgen

Anonymous said...

Lorenzo Bini-Smaghi, “, the [sovereign] debt is in euro”. But, presumably, it would get redenominated into the re-established national currency ?

tapestry said...

Not necessarily. There would be a choice. It could be left in Euros, especially if the Euro were to crash to worthlessness, it would provide a route out from national debt. Once the Euro is seen as not viable, it will plummet in value. leaving your debts in euros would provide the get-out ireland etc need

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