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
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.
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