The costs to a country of leaving the eurozone would be so high that many analysts think the bloc will do everything in its power to prevent an exit, even if that requires the richest members to keep bailing out weak states.
German magazine Spiegel reported on Friday that the Greek government had raised the possibility of breaking away from the 12-year-old eurozone and reintroducing its own currency in talks with the European Commission and other member states in recent days.
The report was vigorously denied by the Greek finance ministry and officials from other member states.
Leaving the currency union would carry huge economic, social, reputational and strategic costs for Greece or any other country. Greece would have to hive off its bank deposits from the rest of the eurozone banking system as it introduced a new currency, risking a run on its banks and huge disruption for its companies.
Banks across Europe would face losses on their Greek debt.
For the bloc as a whole, it would represent a humiliating setback because the common currency is broadly viewed as the culmination of half a century of European integration.
“To me the eurozone is a one-way street,” said Gilles Moec, senior European economist at Deutsche Bank. “A breakup would have catastrophic consequences for the country that left. It would precipitate a run on the banks. I can’t see how you do it in an orderly way.”
Speculation about a possible eurozone breakup reached fever pitch last November, but predictions that the bloc will fracture have come mainly from Anglo-Saxon skeptics.
Last summer, British economist Christopher Smallwood of consultants Capital Economics produced a 20-page paper entitled Why the euro zone needs to break up and US economist Nouriel Roubini, nicknamed Dr Doom, has said eurozone members will be forced to abandon the shared currency.
Greece has struggled to meet the fiscal targets set out for it as part of its 110 billion euro (US$160 billion) bailout from the EU and IMF.
Over the past month, markets have priced in the sort of default risk that was once unthinkable for a eurozone state and expectations have risen that Greece will have to restructure its 327 billion euro debt load while other countries will have to provide more aid.
Political opposition in northern Europe to giving Greece more money and rising anger within the country at the tough austerity measures the government has put in place have created a dangerous new dynamic that has convinced more experts an exit may conceivably happen, although probably not for years.
By reintroducing the drachma, the argument goes, Greece could sharply devalue its currency against the euro and keep official interest rates ultra-low, regain competitiveness and tackle its debt problem without the political and social upheaval associated with years of austerity-fueled recession.
“I’m not suggesting that these stories are right, but we have said that we think it’s quite likely that there will be some change to the membership of the eurozone over the next four to five years and that one possible form will be the exit of a small economy like Greece,” said Jonathan Loynes, chief European economist at Capital Economics. “I don’t think the idea is implausible at all.”
However, US economist Barry Eichengreen, who authored a 2007 paper arguing that the single currency could not be undone, reaffirmed that belief last year as the Greek crisis deepened.
“Adopting the euro is effectively irreversible,” he wrote in an article on the economics Web site Vox.
“Leaving would require lengthy preparations, which, given the anticipated devaluation, would trigger the mother of all financial crises,” said Eichengreen, a professor at the University of California, Berkeley.
There is no legal procedure for leaving the eurozone and some economists said treaty changes would have to take place before an exit could happen.
“You would have to make it legal in order to leave,” Moec said. “You would probably have years of litigation on all the debt held outside the country.”
Trade flows would probably be severely disrupted. Business costs would become unpredictable, inhibiting investment. Labor unrest and social strife would likely result as citizens faced mass unemployment, inflation and brutal public spending cuts.
That would far outweigh any potential boost to exports or tourism revenues from a devaluation.
“But what if the bank runs and financial crisis happen anyway?” Nobel prize-winning economist Paul Krugman wrote on his blog last November.
An exit that is neither planned nor chosen, but imposed by irresistible market forces would dramatically reduce the marginal cost of leaving the euro, Krugman said.
However, that economic logic may underestimate the political will that has driven European monetary union since its inception.
ADDITIONAL REPORTING BY EMELIA SITHOLE
With its passing of Hong Kong’s new National Security Law, the People’s Republic of China (PRC) continues to tighten its noose on Hong Kong. Gone is the broken 1997 promise that Hong Kong would have free, democratic elections by 2017. Gone also is any semblance that the Chinese Communist Party (CCP) plays the long game. All the CCP had to do was hold the fort until 2047, when the “one country, two systems” framework would end and Hong Kong would rejoin the “motherland.” It would be a “demonstration-free” event. Instead, with the seemingly benevolent velvet glove off, the CCP has revealed its true iron
At the end of last month, Paraguayan Ambassador to Taiwan Marcial Bobadilla Guillen told a group of Chinese Nationalist Party (KMT) legislators that his president had decided to maintain diplomatic ties with Taiwan, despite pressure from the Chinese government and local businesses who would like to see a switch to Beijing. This followed the Paraguayan Senate earlier this year voting against a proposal to establish ties with China in exchange for medical supplies. This constituted a double rebuke of the Chinese Communist Party’s (CCP) diplomatic agenda in a six-month span from Taiwan’s only diplomatic ally in South America. Last year, Tuvalu rejected an
South China Sea exercises in July by two United States Navy nuclear-powered aircraft carriers reminds that Taiwan’s history since mid-1950, and as a free nation, is intertwined with that of the aircraft carrier. Eventually Taiwan will host aircraft carriers, either those built under its democratic government or those imposed on its territory by the Chinese Communist Party (CCP) and its People’s Liberation Army Navy (PLAN). By September 1944, a lack of sufficient carrier airpower and land-based airpower persuaded US Army and Navy leaders to forgo an invasion to wrest Taiwan from Japanese control, thereby sparing Taiwanese considerable wartime destruction. But two
As Taiwan is engulfed in worries about Chinese infiltration, news reports have revealed that power inverters made by China’s Huawei Technologies Co are used in the solar panels on the top of the Legislative Yuan’s Zhenjiang House (鎮江會館) on Zhenjiang Street in Taipei. However, what is even more worrying is that Taiwan’s new national electronic identification card (eID) has been subcontracted to the French security firm and eID maker Idemia, which has not only cooperated with the Chinese Public Security Bureau to manufacture eIDs in China, but also makes the new identification cards being issued in Hong Kong. There might be more