Economic cost of leaving euro zone and the global impact

Euro is not an economic currency but a political currency fighting for its survival. Visiting economic history, the possibility of the break up of the euro area was already being mooted even before the single currency existed in Jan-1999. Different countries can abandon the euro for various reasons. One can imagine a country like Portugal, suffering from high labour costs and chronic decline in GDP growth, reintroducing the escudo in the effort to engineer a sharp internal devaluation — reducing prices and wages to boost competitiveness.
I have analysed, that there are at least 77 examples of countries leaving currency unions and establishing their own money since 1945. In most cases establishing an independent currency allowed the country concerned to set more sensible interest rates and exchange rates to help them grow. In every case it gave them more independence, strengthening their ability to make their own decisions free of foreign interference. Depreciating currencies can help them with exports and increase the overall GDP size.
The Euro remains under huge pressure. Decision makers are not willing to print money to buy back bonds. ECB is not willing to budge under pressure. The strategic role of central bank is to act as the lender of last resort. That means it acts as the lender who supplies cash to commercial banks in its jurisdiction if they are solvent but in need of temporary loans. They are lent money at a penalty rate to see them through. It is not the job of a Central Bank to act as lender of last resort to countries that have run out of credit and whose solvency is in doubt like Greece, Italy, Ireland, Spain and Portugal.
Saving the Euro is ultimately a political decision for the leading countries in it. Saving it means finding a way of relieving pressure on the bond markets for the weaker countries. That in turn means the richer countries being prepared to send money to the poorer parts as transfer payments and grants. Alternatively the richer countries need to agree to use their more favourable credit ratings to borrow and lend the money on to the weaker countries at subsidised rates.
ECONOMIC HISTORY OF LEAVING CURRENCIES: There is a pervading feeling to allow Greece an exit from the eurozone since economically speaking it’s a weak country in Europe. They fudged figures to get into Euro single currency. Within Western Europe the Latin currency union led by France and the Scandinavian currency union both broke up without great calamity at the time of the First World War. Between 1945 and 2007 according to my research and talking to various key people at IMF/ World Bank, 69 countries have left currency unions. This figure leaves out a good number, including the break up of the rouble currency in the early 1990s. It also excludes the split of Czech and Slovak currencies in 1993. It includes the ones which left the sterling area, like New Zealand in 1967 and Ireland in 1979. It happened by agreement with a relatively smooth transition. Some like Bangladesh left the Pakistan currency union. Others left former colonial unions: Mozambique for example left the Portuguese union in 1977 and Algeria left the French franc area in 1969. Again these changes caused so little disruption that most have forgotten they ever happened.
LATVIA SUCCESS STORY: It was with more sense of turmoil and crisis that the rouble broke up in the period 1992-5. Global economy thought, it would be a real mess for Central Asian republic. 16 members of the Rouble union broke away forming their own new currencies. This includes Russia that established a new differently valued Rouble for herself. Latvia, for example, did it in two stages. First she created a Latvian Rouble, which started at a one to one exchange with the old common Rouble. Then she launched a new currency, the lat, to replace the Latvian Rouble. It worked and allowed her economy to develop well for the ensuing few years.
BREAKING NEWS:
GERMANY AND FRANCE WANT PIIGS [PORTUGAL, IRELAND, ITALY, GREECE AND SPAIN] TO LEAVE EURO SINGLE CURRENCY
Inside news is that Germans and French political players are in no mood to finance these PIIGS economies. The question is why the German tax payers should bail out Greece and Italian government for their economic mess. Rationale is very solid. The German and the French want these sick countries to go bust, to start all over again, to mend their economic ways and to stand politically on their feet.
The decision rests with Germany and France to decide the fate of sick children of Europe who are becoming parasites for them. Good news is that if the Germans along with the French make the strategic decision to change the membership, history shows it can be done and it need not be too disruptive. It is surprisingly common for countries to leave common currencies and continue economically. Best or worst case scenario: What if Germany and France decide to leave euro zone? Is anybody prepared for that.

Shan Saeed is a financial market economist and commodity expert. A graduate from University of Chicago and IBA, he has 12 years of financial market experience. For comments and queries: For Blogs, visit www.economistshan.blogspot.com