BLOOMBERG: ….Departing a currency zone under pressure is not the same as being forced off a currency peg — which, though painful, can be better than the alternative. Contracts would have to be redenominated and euro banknotes would have to be over-stamped before a new currency could be printed and circulated. That takes time, and since a huge devaluation is part of the formula, rigorous capital controls would have to be imposed on a country fully integrated into the wider EU economy. Bankruptcies would cascade through the system and the Greek economy, at least for a time, would shut down…
This means, among other things, faster capital flight from distressed peripheral countries to the core — compounding their difficulties and making their exit that much more likely. Investors have already started discussing how much smaller the euro system might need to be.
Here we come to the great irony in all this. The EU will surely strive to prevent the breakup of the wider euro system. Its leaders know that if the euro falls apart, the unraveling of the EU — again unthinkable, until now — becomes distinctly possible. So far, the EU’s political momentum has always pushed it toward closer union. A splintering of the euro system would be the first time the EU had responded to a crisis by undoing earlier commitments rather than building on them. That’s a bad habit to get into… (more)
