Plenty of political and economic considerations keep the Eurozone intact, though it’s wracked with trouble. I want to consider one reason why no one wants to leave: it would cause confusion, disruption, and chaos. Even if every theoretical consideration ran in favor of leaving the euro and if politicians had the courage to act, switching to a different currency would involve “a series of very tricky issues” according to prize-winning advice from Capital Economics (link at the end of this entry).
Here’s the basic problem: If Spain re-issued the peseta, or Greece the drachma, or Portugal the escudo, what would that re-issued currency be worth compared to the euro? (Or the dollar, for that matter?) In a word, less. In three words, a lot less. Probably 30% to 50% less, plus some steep inflation — but this is only a guess. The government could declare a rate, but the market would soon find a different one.
Logically, if I knew that Spain were going to change back to the peseta any time soon, I’d withdraw all the money from my Spanish bank account, currently in euros, so I wouldn’t lose a big chunk of my life savings. That’s why any government that’s going to switch currencies must make its plans in absolute secret — or face a massive run on its banks.
To prevent that, probably on a weekend, the government would suddenly announce the switch to a new currency. The government would also have to place tight limits on the amount of money individuals and businesses could take from their bank accounts, perhaps the equivalent of €500 a week, so there would be no run on the banks. Transfers of funds to other countries would also be limited. Those limits would have to be in place until the new currency reached a stable exchange rate. No one knows how long that would take.
This would be tough on me as a housewife, but what if I were a business? How could I pay my suppliers and employees? Or sell to customers? Especially suppliers and customers outside the country.
Meanwhile, all wages, debts, investment bonds, and contracts would be immediately recalculated by law into the new currency. Some of these recalculations would be tricky. For example, Spain buys a lot of natural gas from Algeria. What currency would Algerian gas companies accept?
Government debt would need to be renegotiated; expect some lawsuits over perceived defaults. Additionally, a series of economic reforms and new labor market rules would be needed to keep inflation under control. All this would work only with close cooperation from other European Union members, who might not be eager to cooperate.
So far, so bad. But on Sunday morning after Saturday night’s surprise announcement, I might need to go out and buy a loaf of bread. How? Some analysts have suggested electronic currency, and this might work, but not for small transactions. Perhaps I could still use euro coins and bills for a while, maybe using bills with a sort of special stamp or mark so they couldn’t be spent in another country that still uses the euro. Or maybe we could use script. Or barter.
I would try to hoard my unmarked euro bills to use in another country. I don’t have a lot, but people running under-the-table operations, from tax evaders to drug dealers, always keep lots of cash on hand. They would be less hurt by the currency change than the average retiree. Crime sometimes pays. Anyone tipped off, of course, would have already withdrawn their funds from the banks. If the Argentinian experience is of use, watch out for truckloads of cash leaving the country.
The new currency would have to be printed as fast as humanly possible. But I remember that it took years to introduce the euro. Every coin-operated machine had to be updated. Cash registers had to be recalibrated. We all had to relearn how to count change, which some elderly people never managed to do. And despite all the preparation, we didn’t have enough euro-coins for a long time, so checkout clerks were exceedingly grateful for exact change.
As I studied the analyses of leaving the euro, I saw the word “chaos” repeatedly. That chaos would probably last at least a year, maybe two — but again, this is a guess. Eventually, however, the country that left the euro would shake off the problems that the euro caused, create order out of chaos, and enjoy a stronger and more competitive economic footing, although individuals and businesses would have suffered enormously.
I sincerely think Spain would be better off if it left the euro, but if I were prime minister, I’m not sure I would dare to go through with it. Confusion, disruption, suffering, and chaos: that’s not what politicians normally want to initiate.
For more detailed considerations, consult Leaving the euro: A practical guide by Roger Bootle and his collegues at London’s Capital Economics. The 189-page paper that won the 2012 Wolfson Economics Prize.
Gonzalo Lira offers his own practical guide with a hard look at what happened in Argentina.
A D&B special report details the risks for businesses.
Speigel International warns of a devastating impact if southern nations left the euro.
— Sue Burke