On leaving the euro zone

March 30, 2009

The strains on various outlying European economies have triggered talk about a break up of the euro zone (usually swiftly followed by denials that any such thing could happen). Now comes an interesting report from the London-based Centre for European Reform, looking at what would happen practically if a country were to leave the currency union. For an insight, the think tank turned to Jan Mathes, a former Slovak National Bank board member who was around when Czechoslovakia split.

As most euro zone countries don’t have a stock of national currencies in reserve, a leaver would have to create one, he says. But this takes ages. Coins alone require months and bank notes these days have to be high-tech to be secure. A leaving country could still use euros for a while but with a national stamp on (as happened with the old Czechoslovak crown). But it would be easy to remove a stamp and the underlying currency would be a euro — too tempting.

The biggest problem, or course, would be in keeping a new currency above water, which would be difficult because it was leaving the euro zone because of bad fundamentals in the first place. So IMF-style reforms would be needed. “But the same reforms, if introduced early, would also reduce the chances of a country dropping out of the euro in the first place,” Tomas Valasek, author of the CER note, writes.

So, QED, don’t leave. Fix it now.

(Reuters photo: Vasily Fedosenko)

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