Friday, January 23, 2009

So why would anybody actually want to join the Euro?

From today's Telegraph,

Even the cleverest economist would find it impossible to come up with the right interest rate for Austria, where unemployment is only three per cent, and Spain, where it exceeds 12 per cent. How can Greece, where the recession is especially severe put up with the same interest rate as Holland, where the economy is far stronger?

The most logical option would be for Greece and Spain to leave the euro. If the situation continues to worsen, their electorates may ultimately demand nothing less.
The possibility of the euro breaking up under the strain of the present recession is taken seriously by the financial markets. The Maastricht treaty, which established the single currency in 1999, contains no legal route for a country to leave the euro. In practice, however, there would be no way of stopping a government from choosing this course.

But the costs imposed on any country leaving the euro would be overwhelming. The
markets would take fright and demand a far higher premium for holding the
government's debts.

Yet if the recession deepens, some European leaders could face this terrible conundrum. They can expect no sympathy from their electorates. By joining the euro, they chose to bind themselves in a straitjacket of their own design.


Grahnlaw said...

Charming logic. The "straitjacket" of belonging to the Eurozone is less costly than leaving it (and the EU), since markets would take fright.

Is this a convincing argument for staying out?

Budgie said...

I see no reason for enormous costs to leave. The new peseta would be set = 1 euro initially, and allowed to float on foreign exchanges. It would of course drop below the value of the euro. Internally the euro notes and coins would be replaced by new peseta coinage. Foreign holdings of Spanish numbered euros would have to be exchanged for the residual euro.

However there is no reason why the disparity of the new peseta and the residual euro would differ that much because the withdrawal of Spain (& possibly Italy, Greece and Portugal) would hit the value of the euro itself.

Anonymous said...

I am Portuguese.

And this here is in very bad situation, but it would be worse if we don't be in the eurozone.

The euro is a Bless, the problem is the corrupt politicians.

I have friends in england and I hope that you will be fine also... and that this storm pass fast.