The following should be of interest to my blog readers in view of present developments in Greece, Ireland, Portugal, Spain and Italy. The entire report is here
. (My thanks to Anne Palmer for this, and all the other, recent research
§§§§§ A break-up?
47. While the success or otherwise of these proposals will determine whether the euro area is able to survive in the longer term, some commentators have questioned whether it will be able to survive intact the immediate challenges of the financial crisis. Mr Cliffe informed us that while "the political will to sustain monetary union is still very strong",[65
] "the markets now put a significantly higher probability on at least some exits from monetary union over the next few years".[66
48. We heard two scenarios where a Member State in financial difficulties might leave. On the one hand a state could feel it would be to its economic advantage to leave, regaining the ability to set its own interest and exchange rates. Alternatively, it might be asked to impose "potentially politically intolerable fiscal austerity measures" to remain in the euro.[67
49. Witnesses suggested that a voluntary exit by a country in difficulties was highly unlikely since countries were better off in the euro than out.[68
] They noted, however, that the fiscally strong countries in the euro area might leave, splitting the euro area in two. Professor Buiter put this view: "The only real risk for the euro area falling apart is not the fiscally weak and uncompetitive countries leaving; they'd be mad. It is the fiscally strong and competitive countries leaving".[69
] Mr Cliffe and Mr Persson told us that it had been suggested that the Germans, perhaps along with some other core euro area members, might wish to leave at some point.[70
] This view, however, was dismissed by Ms Barysch: "when the initial debate [in Germany] has calmed down a bit, you will find a nation that remains very much committed to the European project because it doesn't see an alternative".[71
50. Sir Martin Jacomb, Chairman of the Canary Wharf Group, argued that the euro area would survive simply because "the political imperatives to keep it going are too great".[72
] Professor Buiter concluded that he was "optimistic about the survival of the enterprise [the euro]", albeit "not about the elegance with which that survival will be achieved".[73
51. It is important to recognise that withdrawal from the euro area would not be an easy exercise. It should not be confused with leaving the exchange rate mechanism (as the UK and others did in the early 1990s), because of both practical difficulties involved in recreating a national currency and legal constraints. Professor Louis stressed to us that "the monetary union has been conceived as irreversible": there is no formal, legal process for a country to either leave the euro, or to be expelled from the euro.[74
] According to Phoebus Athanassiou, Legal Counsel of the European Central Bank, "a Member State's exit from EMU, without a parallel withdrawal from the EU, would be legally inconceivable".[75
52. The Minister refused to speculate on whether the euro area would survive in its current form, simply noting that "there is no mechanism for countries to leave the euro", and adding that "it would be quite a big step for that to happen".[76
53. Professor Goodhart stated that "the costs, political as well as economic, to a country voluntarily leaving the euro are huge".[77
] Mr Cliffe told us that any benefits for a country leaving the euro "would come along with considerable costs" and "there would be severe transitional costs for any members leaving the monetary union".[78
] In a paper for the ING Group, EMU Break-up: Quantifying the Unthinkable
he concludes that "the numbers are debatable, but the impact would undoubtedly be traumatic". The trauma would be most severe for those countries leaving the Euro, but other countries in the euro area and the wider EU would also suffer, and the report finishes with a warning that "this is perhaps something that policy-makers may care to reflect upon when they blithely talk of exit from EMU as being a policy option".[79
] It is perhaps worth noting that those countries currently in difficulties make up only a small proportion of the euro area's combined gross domestic product (see Appendix 6).
54. We believe that the political imperatives holding the euro area together are strong, and we do not think it is likely that any country, whether fiscally weak or strong, will try to leave voluntarily. We do, however, recognise that it is now conceivable that a country could be forced to leave the euro, or that the euro area could separate into two parts.
55. Any break-up of the euro area would not only be economically and politically costly for those Member States leaving the euro, but would have a damaging impact on all members of the euro area and the wider EU, not least the UK.
Labels: Euro collapse