How to Leave the Euro: A Guide (Part I)
Senior Editor, CNBC.com
Well, it’s finally come to this. You are one of the most troubled member states of the European Monetary Union. Your financial institutions are in shambles.
Your economy is depressed, too many of your people unemployed. The costs for your government to borrow are unsustainable.
Officially, you are trying to get things working or at least to the muddle through stage. Germans insist that you can have growth plus austerity — somehow everyone will earn more by spending less. It’s not happening. Every cut in spending just slows the economy down further, raising deficits and sending your borrowing costs soaring.
So you’re going to have to leave the euro.
In a four part series, we’ll explain how to get out of the monetary union, how to launch your own currency, and what obstacles you’re likely to encounter along the way.
For the purposes of this piece, we’re going to follow the lead of Roger Bootle of London’s Capital Economics, whose paper “Leaving the euro: A Practical Guide” informs nearly every step of my analysis here.
Bootle’s paper, which was written as a submission for the Wolfson Economics Prize, refers the the exiting country as “Greece” and the new currency as the “Drachma.” But, really, Greece is just a stand in for any of the so-called peripheral countries that might leave the euro zone because of the current crisis.
Step 1: Understand That You Have A Problem
If denial were a river, it would be the most traveled waterway in europe. Almost every political leader in power in europe still insists the monetary union can be maintained. Even the radical in Greece claim that they can engineer a way around austerity and out of debt without breaking up the currency.
We’re assuming here that you’ve finally decided to pull ashore and admit that there’s a problem — and that problem is deeply rooted in the single currency.
Perhaps your country has too much public debt. Perhaps the cost of labor in your country has made your products and services uncompetitive in global markets. Perhaps your banking system is carrying too many bad loans. Maybe household debt is at unsustainable levels.
Here’s how Bootle puts it:
"As a result of poor competitiveness and/or the burden of excessive debt, several members of the euro-zone suffer from a chronic shortage of aggregate demand, which results in high levels of unemployment. This worsens the debt position of both the private and public sectors, thereby weakening the position of the banks."
In short, under the current system, you are spiraling downward. Your economy needs a dramatic readjustment. You need to find a way to both reduce the burden of debt — by making it easier for both private and public debtors to pay their debts — and restore competitiveness to your economy. Defaulting on debts plus issuing a new, devalued currency may be your only practical choice.