to euro or not to euro…

There is now a strong chance the euro-zone as it is will break up . Things are moving rather quickly. Some of the most pragmatic scenarios are well summarized by Gavyn Davies of FT. There are also a lot of legal problems of immediate breakup.

Assuming a political decision in place, something along the Route 1 lines of Mr. Davies’s scenarios seems more likely, i.e. Germany + France + smaller euro (add Belgium + Netherlands, perhaps?).

But comparison to the Soviet break up as suggested in some comments is not accurate for many reasons. Just to name a few that come to mind:

  1. Different foundations: euro-zone is comprised of politically and economically independent – sovereign states; each with own ambitions (politics aside!) — former Soviet republics in addition to being in the rouble zone were united by the common political blueprint. Collapse of the common Soviet framework in the early 1990s, under rapid deconstruction similar to some of the current prescriptions for the euro end, did not go easy to say the very least. EU’s political diversity may help sustain some of the economic hits, but binding EU-system might draw all into political quagmire in the absence of a clear break up plan.
  2. Debt restructuring: as the socialist system came to an end, Russia (with lesser degree Ukraine & Kazakhstan) took on responsibility for the Soviet debt obligations. In the immediate shock therapy aftermath, this helped alleviate the burden for the smaller, less advanced post-socialist republics, with later individual concessions. It’s doubtful either Germany or France or ECB for that matter would be willing to take on the financial burden for the rest of the EU, even as a temporary measure: what serves as collateral?
  3. EUZ clearing agency: which brings to the third point of euro-priced assets. EU lacks a unified entity capable of consolidating the multitude of currently existing euro-priced financial assets. USSR unlike EU had clearly centralized monetary and fiscal activity (+ non existent capital market of current proportions). Now, if the euro-deconstruction is in fact pursued to the end, as per one of the scenarios or one mentioned above, it seems highly probable that a clearing entity facilitating alternative reevaluation of the euro-priced assets must be brought into existence. Note this assumes alternative currencies (or return to national pre-euro systems). Not much on exchange rates for now.
  4. Political issue: the problem is that none of this could happen overnight and the question is initially more political than economic; but with long-term (and for many smaller EU and Eastern European countries may be more detrimental than positive) social and economic impacts.

This requires EU’s transparent announcements of a clear cut restructuring strategy to the public to avoid panic in financial markets (& limiting stampede into USD for lack of better diversification) and triggering severe recession.

Doable?

Some, like in the case of the post-socialist transformation, may see this as no more than a technical aspect, but the implications are far more complex and systemic for the larger group of countries.

Just some thoughts , of course.

More on the shock therapy reforms of 1990s in Eastern Europe and Former Soviet Union.

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