The Euro: Unscrambling the Omelet

Informative column by Eduardo Porter in NY Times Business section on the motivation behind the creation of the Euro, why it has failed to do what was intended, and in fact is doing the opposite, and what the prospects are today:

Despite its flaws, there is one powerful reason to stick to the euro that even some of the most skeptical economists accept: the prospect of breaking away from the euro is very scary. It’s difficult to forecast how such a dissolution would unfold. There is, in fact, no legal way to leave. And it would be searingly painful for many countries.

Greece probably couldn’t be surgically excised. Once investors realized that countries could leave the euro, interest rates would soar on the next most likely candidates. There would be a huge capital flight out of peripheral countries into Germany, as savers tried to protect their euros from potential devaluation.

Even with a well-coordinated separation, households and firms with debts across borders could go bankrupt if their wages and savings were devalued but their debt remained the same. Banks in a number of countries might collapse. Companies could abruptly lose access to funds. It would probably require long bank holidays to prevent capital flight and allow for new currencies to be minted. A messy divorce could reverberate through the streets and political systems.

Still, the risks of unscrambling the monetary union omelet must be evaluated alongside the risks of leaving it scrambled.

And, later in the day, Greece, unable to forge a government, has set a date for new elections, almost certain to add to the strength of the insurgent, anti-austerity, Syriza party.  Its leaders claim that it can lead to both less austerity, as demanded by Germany and international lenders, and stay with the Euro.  [That of course is not entirely their choice.]

An average of 4 billion euros, or $5.1 billion, has flowed out of Greece every month since 2009, when the European debt crisis first broke open.

President Karolos Papoulias seemed to stoke fears further on Tuesday when he revealed that 700 million euros had been taken out of Greek banks since the election. While several senior Greek banking executives said Wednesday that the money flow should not be characterized as a full-blown run on Greek banks, analysts said that the steady drawdown on deposits by consumers and companies could be expected to continue at least until new elections are held June 17, and possibly beyond.

Greece Announces New Elections




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