The Trouble With Europe by Roger Bootle

Author:Roger Bootle
Language: eng
Format: epub
Publisher: Nicholas Brealey Publishing
Published: 2015-03-20T16:00:00+00:00

North–south splits

Perhaps the most appealing form of euro break-up is a split of the eurozone into two, euro-north and euro-south. What is particularly intriguing about this idea is the scope it gives for different outcomes for the euro as a currency, and what it implies about the problems of managing a new currency, depending on which countries leave the existing euro.

Suppose that the southern countries, Italy, Spain, Portugal and Greece, leave the euro and set up their own new currency. That currency would certainly be weak and these countries would still be saddled with enormous debts denominated in euros. They would have to default on a very large scale, thereby probably triggering a banking crisis across Europe, if not worldwide.

By contrast, if Germany and the other northern core countries departed, leaving the southern members to continue with the euro, the position would be much more comfortable. In this case, the euro would be a weak currency and the new northern one would be a strong currency. The group of strong countries would have to grapple with the problems of establishing a new currency. Meanwhile, in the south default would not be automatic, because their currency would continue to be the one in which their debt was denominated, the euro.

While this is an appealing solution to the problem of the euro, as things stand it is not very likely, not least because of the difficulty of effective coordination between the northern countries. Perhaps a more probable scenario is one in which Germany leaves and then the other northern countries leave later to join it. Even that, though, looks to be a long way off.

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