By: Dr. Mike Campbell
Rumours continue to persist that suggest that the Eurozone may be forced into some form of break-up. However, rather like mixing yellow and red paint to get an orange colour, the reality is it would be almost impossible to undo this integration.
Apart from the logistics of a nation having to re-create its own currency (printing, distribution, minting new coinage, etc), the goal would be to covert Euro debt into “new national currency” denominated debt and let the new currency devalue.
Effectively, this would represent a debt default (since creditors would only get a fraction of the Euro worth of their original investment) and would make future borrowing prohibitively expensive. Imagine, for a moment, how Ireland would fare in the bond markets if trying to meet its current obligations outside of the Euro – yields would be astronomical.
Furthermore, citizens of the exiting nation would know that the value represented by their Euro savings was about to be slashed and there would be a flight of capital before the transition could take place. In short, the Euro and the Eurozone membership is set to stay.
Angela Merkel has stated that she wants to see a permanent EU bailout facility established which would remain in place once the existing provisions expire in 2013. The position is endorsed by French President, Nikolas Sarkozy, and would be designed to reassure investors that the Eurozone block is committed to ensuring a strong and stable Euro over the longer term.
It is clear that regulation and monitoring of compliance with the EU convergence criteria will be strengthened going forward once the immediate consequences of the global financial crisis have settled. All Eurozone members and other nations in the wider EU will need to ensure that public sector borrowing remains in control.