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Guide Breaking Up the Euro: The End of a Common Currency

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Then, on 3 May , at the European Council in Brussels, the 11 initial countries that would participate in the third stage from 1 January were selected. Greece failed to meet the criteria and was excluded from participating on 1 January However, it did not take on its full powers until the euro was created on 1 January The rates were determined by the Council of the European Union, based on a recommendation from the European Commission based on the market rates on 31 December , so that one ECU would equal one euro.

They could not be set earlier, because the ECU depended on the closing exchange rate of the non-euro currencies principally the pound sterling that day. Due to differences in national conventions for rounding and significant digits, all conversion between the national currencies had to be carried out using the process of triangulation via the euro. The currency was introduced in non-physical form traveller's cheques , electronic transfers, banking, etc. The notes and coins for the old currencies, however, continued to be used as legal tender until new notes and coins were introduced on 1 January having been distributed in small amounts in the previous December.

Beginning on 1 January , all bonds and other forms of government debt by eurozone nations were denominated in euros. The value of the euro, which started at USD 1. Trading in the Deutsche Mark was expected to continue in parallel but vanished as soon as the markets opened. Later in , Denmark held a referendum on whether to abandon their opt-out from the euro. The referendum resulted in a decision to retain the krone , and also set back plans for a referendum in the UK as a result. The designs for the new coins and notes were announced between and , and production began at the various mints and printers on 11 May In all, 7.

In Belgium , Finland, France, the Netherlands , and Spain, the new coins would bear the date of striking, so those five countries would be the only ones to strike euro coins dated , , and These immediately became popular collector's items, commanding premiums well above face value. New issues continue to do so to this day.

Meanwhile, a parallel task was to educate the European public about the new coins. Posters were issued showing the designs, which were used on items ranging from playing cards to T-shirts. They would not be usable in commerce until 1 January, when notes would be made available as well. Larger starter kits, containing a roll of each denomination, were available as well in some nations. Retailers and government agencies had a considerable task as well. For items to be sold to the public, dual pricing was commonly utilised.

Postage stamps for governments as well as stamps issued by the United Nations Postal Administration for the UN offices in Vienna often bore denominations both in the legacy currency and euros, assuring continued utility beyond Banks bore a huge task, not only in preparation for the change of the notes and coins, but also in the back office.

Beginning in , all deposits and loans were technically in euros, but deposits and withdrawals continued in the legacy currency. Statements would bear balances in both currencies beginning no later than 1 July , and earlier if required by the customer's needs.

Beginning on 1 December , coins and notes were distributed from secure storage, first to large retailers, and then to smaller ones. It was widely expected that there would be massive problems on and after 1 January. Such a changeover, across twelve populous countries, had never been attempted before. In Finland, the Central Bank had opened for an hour at midnight to allow citizens to exchange currency, while a huge euro pyramid had decorated Syntagma Square in Athens.

Other countries noted the coming of the euro as well—Paris's Pont Neuf was decorated in EU colours, while in the northern German town of Gifhorn a sombre, symbolic funeral for the Deutsche Mark took place. Except for Germany, the plan for introduction of the new currency was basically the same.


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Banks would accept the exchange of legacy currencies, begin to dispense euros from ATMs , and only euros would be available as withdrawals were made, beginning on 1 January. Merchants would accept legacy currency, but give change only in euros. In Germany, the Deutsche Mark would no longer be a legal tender on 1 January, but would have to be exchanged at the banks. Despite the massive amounts of euros available, chaos was feared. In France, these fears were accentuated by a threatened postal workers' strike.

Similarly, workers at the French bank BNP Paribas threatened to disrupt the introduction of euro currency with a strike. That was also settled. In practice, the roll-out was smooth, with few problems. Some businesses did take advantage of the currency exchange to raise prices. According to a study by the Deutsche Bundesbank , there was a price rise, but consumers refused to buy as much.

What next for the Euro?

A coffee bar in Italy that took advantage of the transition to raise coffee prices by a third was ordered to pay compensation to customers. Nations were allowed to keep legacy currency in circulation as legal tender for two months, until 28 February The official date on which the national currencies ceased to be legal tender varied from member state to member state. The earliest date was in Germany; the Mark officially ceased to be legal tender after 31 December Most member states, though, permitted their legacy currency to remain in circulation the full two months.

The legacy currency was exchangeable at commercial banks in the currency's nation for a further period, generally until 30 June However, even after the official dates, they continued to be accepted for exchange by national central banks for varying periods—and indefinitely in Austria , Germany, Ireland, and Spain. Coins from those four countries, Italy, and Finland remain exchangeable. The earliest coins to become non-convertible were the Portuguese escudos , which ceased to have monetary value after 31 December , although banknotes remain exchangeable until All banknotes current on 1 January would remain valid until at least In Germany, Deutsche Telekom modified 50, pay phones to take Deutsche Mark coins in , at least on a temporary basis.

In France, receipts still indicate the value of products in the legacy currency along with the euro value. In other eurozone countries this has long been considered unnecessary. Public support for the euro in each state between to [38]. In , the Lisbon Treaty formalised the Eurogroup , the meeting of euro finance ministers, with an official president. Jean-Claude Juncker served as president before and after formalisation and has been an advocate of strengthening the group, economic co-operation and common representation.

Appetite for stronger economic co-operation grew due to the recession and the potential failure of some weaker eurozone members. Jean-Claude Trichet , who succeeded Duisenberg as ECB president in , fended off numerous attacks from Sarkozy at the start of the recession. Before that formalisation of the Eurogroup, eurozone leaders held an extraordinary summit in reaction to the financial crisis on 11 October in Paris. Rather than the Eurogroup meeting as finance ministers, they met as head of states or government similar to the European Council to define a joint action plan for the eurozone and the European Central Bank to stabilise the European economy.

These such meetings would be where many euro governance reforms would be agreed. The leaders hammered out a plan to confront the financial crisis which will involve hundreds of billions of euros of new initiatives to head off a feared meltdown. They agreed a bank rescue plan: governments would buy into banks to boost their finances and guarantee interbank lending. Coordination against the crisis is considered vital to prevent the actions of one country harming another and exacerbating the bank solvency and credit shortage problems.

Despite initial fears by speculators in early that the stress of such a large recession could lead to the break-up of the eurozone, the euro's position actually strengthened as the year progressed. Far from the poorer performing economies moving further away and becoming a default risk, bond yield spreads between Germany and the weakest economies decreased easing the strain on these economies. Iceland subsequently applied to the EU to get the benefit of using a larger currency with the support of the ECB.

The Sheer Diversity of Economic Models Causing the Lack of Convergence

However, with the risk of a default in Greece and other members in late —10 , eurozone leaders agreed to agree provisions for bailing out member states who could not raise funds triggered for Greece in April Yet with Greece struggling to restore its finances, other member states also at risk and the repercussions this would have on the rest of the eurozone economy; a temporary bail out mechanism was agreed and devised in the form of a special purpose vehicle SPV named " European Financial Stability Facility " complemented by the European Financial Stabilisation Mechanism and funds form the International Monetary Fund , aiming at preserving financial stability in Europe by providing financial assistance to eurozone states in difficulty.

The crisis also spurred consensus for further economic integration and a range of proposals such as a "European Monetary Fund" or federal treasury. However, in June , broad agreement was finally reached on a controversial proposal for member states to peer review each other's budgets prior to their presentation to national parliaments. Although showing the entire budget to each other was opposed by Germany, Sweden and the UK, each government would present to their peers and the Commission their estimates for growth, inflation, revenue and expenditure levels six months before they go to national parliaments.

Poland has criticised the idea of withholding regional funding for those who break the deficit limits, as that would only impact the poorer states. The ESM required a treaty amendment to allow it and a separate treaty to establish it but, if ratified successfully, would be established in time to take over when the old facilities expire in Meanwhile, to support Italy and prevent it having to ask for a bail-out later, the ECB controversially started buying Italian bonds, as it had done with Greece.

In March was initiated a new reform of the Stability and Growth Pact aiming at straightening the rules by adopting an automatic procedure for imposing of penalties in case of breaches of either the deficit or the debt rules. The European Fiscal Union is a proposal for a treaty about fiscal integration described in a decision adopted on 9 December by the European Council.

The participants are the eurozone member states and all other EU members without the United Kingdom and the Czech Republic. The treaty entered into force on 1 January for the 16 states which completed ratification prior of this date [54] and on 1 April entered into force for all 25 signatories. Despite speculation that the crisis in Greece could spread and that the euro might fail, some newer EU states from the enlargement joined the currency during the recession.

Slovenia, Malta and Cyprus all acceded within the first two years of the recession, closely followed by Slovakia in The three Baltic states of Estonia, Latvia and Lithuania joined in , and respectively. Slovenia was the first country to join the eurozone after the launch of the coins and banknotes. The exchange rate between the euro and tolar had been set on 11 July at Cyprus replaced the Cypriot pound with the euro on 1 January A formal letter of application to join the eurozone was submitted on 13 February The campaign to inform the citizens of Cyprus about the euro officially began in Cypriot media on 9 March On 15 March , the Cypriot House of Representatives passed the necessary laws for the introduction of the euro on 1 January The final decision was taken by the EU finance ministers Ecofin on 10 July and the conversion rate was fixed at 0.

On 1 January , the euro replaced the Cypriot pound as the official currency. Malta replaced the Maltese lira with the euro on 1 January On the same day, dual displaying became mandatory and the first Maltese euro coins were struck at Monnaie de Paris. Maltese citizens could obtain euro information directly from their town or village between December and January People trained specifically on matters related to the changeover to the euro were available to provide council at euro centres along with information materials.

In December , as part of the euro changeover celebrations, streets of Valletta were covered with carpets depicting euro coins. Celebrations reached climax on New Year's Eve with a firework display near the Grand Harbour area, several other activities had to be moved indoors because of the stormy weather that struck the island on that night. Slovakia adopted the euro on 1 January The rate of To assist the process of conversion to the euro, on 1 April , the National Bank of Slovakia NBS announced their plan for withdrawal of the Slovak koruna notes and coins.

Slovakia fulfilled the euro convergence criteria. However, for March annual inflation was 3. Fiscal deficit was 2. Finally, the government debt ratio was Publicity for the transition from the koruna to the euro on 1 January included an "euromobile", with a professional actor driving around the countryside holding impromptu quiz shows about the euro. Winners received euro T-shirts, euro conversion calculators, and chocolate euro coins. The coins therein, however, were not valid as legal tender in the eurozone until 1 January , with koruna exchanged through 17 January , though redeemable at the central bank in Bratislava until a date to be determined.

Anyone using Slovakian euro coins before 1 January could have been fined. Businesses using the transition to raise prices also were subject to penalty. In , Estonia gained the support of the European Commission, European Central Bank and European Parliament for accession on 1 January , with Estonia adopting the currency on that date. The chart below provides a full summary of all applying exchange-rate regimes for EU members , since the European Monetary System with its Exchange Rate Mechanism and the related new common currency ECU was born on 13 March The euro replaced the ECU at the exchange rate markets, on 1 January During , the D-Mark functioned as a de facto anchor for the ECU, meaning there was only a minor difference between pegging a currency against ECU and pegging it against the D-mark.

The eurozone was born with its first 11 Member States on 1 January The first enlargement of the eurozone , to Greece, took place on 1 January , one year before the euro had physically entered into circulation. The next enlargements were to states which joined the EU in , and then joined the eurozone on 1 January in the mentioned year: Slovenia , Cyprus , Malta , Slovakia , Estonia , Latvia , and Lithuania All new EU members having joined the bloc after the signing of the Maastricht treaty in , are obliged to adopt the euro under the terms of their accession treaties.

However, the last of the five economic convergence criteria which needs first to be complied with in order to qualify for euro adoption, is the exchange rate stability criterion, which requires having been an ERM-member for a minimum of two years without the presence of "severe tensions" for the currency exchange rate. In September , a diplomatic source close to the euro adoption preparation talks between the seven remaining new Member States from Eastern Europe who had yet to adopt the euro Bulgaria, Czech Republic, Hungary, Latvia, Lithuania, Poland and Romania , claimed that the monetary union eurozone they had thought they were going to join upon their signing of the accession treaty may very well end up being a very different union entailing much closer fiscal, economic and political convergence.

This changed legal status of the eurozone could potentially cause them to conclude that the conditions for their promise to join were no longer valid, which "could force them to stage new referendums" on euro adoption. The following lists the percentage of respondents supporting the euro in each country, according to the Standard Eurobarometer.

The date reflects the month the field work was conducted in. From Wikipedia, the free encyclopedia. Part of a series on the. Pre ideas — — — — —present. History of Europe History of the euro History of defence integration History of enlargement. Labour unions and work regulations were in their infancy, and therefore wages were relatively flexible and deflation policy was successful in decreasing them Eichengreen, , p.

The situation was quite different in the interwar period. All social strata had the right to vote, labour unions grew stronger, unemployment gained importance as an economic category and political problem and the link with central bank policy became clearer. The activity of labour unions and regulations governing work limited wage flexibility.

Therefore, to achieve a given amount of demand slack in the economy, unemployment had to rise more than in the case of more flexible wages. A conflict started to be commonly perceived between keeping the economy externally balanced and sustaining domestic business activity. After being suspended after the outbreak of WWI, convertibility of the pound sterling into gold was restored in Prewar parity was restored, but by that time prices in Great Britain were higher than before the war. According to later estimates quoted by Eichengreen , p.

The decision to restore the overvalued parity is commonly perceived as a major reason for the low economic growth and high unemployment in the second half of the s. At that time, as noted by Ahamed , p. For six years, the British economy and society suffered enormous costs in the defence of an overvalued currency. To protect the trade balance and limit the outflow of gold from the country, the Bank of England had to suppress the supply of credit, while the government had to implement increasing fiscal austerity. While the deflation policy was damaging the economy, the problem of the overvalued currency remained unresolved.

Two conclusions, highly relevant for the current eurozone crisis, may be drawn from the British experience of the s.

Could Italy break up the European Union?

First off all, this example shows that deflation policy as a tool aimed at restoring competitiveness under a fixed rate regime is hardly effective despite its substantial economic and social costs. Second, this example illustrates the magnitude of the economic, social and political costs caused by the dogmatic economic thinking of economic and political leaders. Until the last moment, high British Treasury officials reacted with indignation to suggestions that Great Britain might abandon the current pound sterling gold parity Ahamed, , pp.

In the spring of , Montagu Norman, the then Governor of the Bank of England, sought a loan from the Great Depression-ridden USA that would prolong the convertibility of the pound sterling at the defended parity. Identifying the fate of the world with the gold standard was a mistake. According to Eichengreen , clinging to the gold standard was the key factor in the deepening and spreading of the Great Depression internationally that almost led to a collapse of democratic order in the world.

The abandonment of the gold standard by Great Britain and the United States marks the beginning of the period in which various countries used currency depreciation for boosting competitiveness. According to Eichengreen , p. The experience of Argentina is also instructive. Argentina introduced a currency board in , legally and permanently binding the peso to the US dollar. This policy was initially successful in reducing inflation and fuelling economic growth. However, at the end of the s, some serious problems with competitiveness emerged that can be linked to a mix of external and internal factors.

They caused a recession and an increase of public debt. At first, abandoning the currency board was not an option for political leaders.

Four scenarios for Europe: the economic effects - RaboResearch

Rather, they decided to use deflation policy based on fiscal restraint to combat declining competitiveness and mounting debt. However, such a policy did not bring about the expected results. After three years of recession, bloody riots forced the president and the government to step down. Argentina defaulted on its debt and abandoned the currency board. The economy and the banking system underwent serious turbulence, but the economy soon began to grow again and the gap in the trade balance closed.

The Argentinian example illustrates three truths. First, a country that enjoys a favourable macroeconomic situation and creates a seemingly sound institutional framework may, for unexpected reasons, fall into problems with competitiveness. Second, in a fixed exchange rate regime, restoring competitiveness via deflation has little effect and can lead to social unrest.

Third, it is currency depreciation that constitutes a strong adjustment instrument. And even if it takes place in circumstances of political and economic depression, it may allow a country to swiftly enter a growth path. The effectiveness of currency depreciation has also been confirmed by South Korea, Thailand and Indonesia in the aftermath of the crisis, and also by Russia after the crisis of In all cases, currency depreciated in an environment of a deep economic and banking crisis.

It seemed that these economies would be unable to escape their predicament given the banking crisis and massive business bankruptcies. However, after currency devaluation, they were quickly able to embark on a growth path. Currency depreciation also of course entails serious problems. While it is a cheap and effective socially and politically instrument for restoring competitiveness in the short run, it does not directly affect the physical process of production of goods and services, which is decisive for competitiveness in the long term.

On the contrary, the availability of currency devaluation often tempts politicians to accept easy fiscal policy and to avoid tougher, more socially and politically complicated reforms aimed at long-term improvements in competitiveness. There are numerous examples of countries, especially from South America and southern Europe, which in the second half of the twentieth century kept on using currency devaluation as an instrument for improving competitiveness, which was being systematically undermined by inflation.

However, if accompanied by an adequately restrictive macroeconomic framework, currency depreciation may bring more durable improvement in competitiveness and at the same time, provide a progrowth stimulus which can serve to counterbalance, to some extent, the recessionary effects of fiscal and monetary tightening. According to Blejer and Ortiz , all successful adjustment programmes in Latin America included a deep currency devaluation at the start that lowered unit labour costs.

Although not a miraculous solution that can substitute for sound macroeconomic policy, there are emergencies in which getting the economy back on track without a currency devaluation is very difficult or even impossible. Many observers claim that the primary mistake made at the time of introducing the euro was the creation of a monetary union without first having a fiscal union.

They then often advise correcting this flaw by creating institutions at the EU or eurozone level, which would be allowed to tax and issue debt, and establishing enforcement mechanisms for a common fiscal policy at the country member level. The followers of this line of thinking seem to expect that creating a fiscal union would eliminate the major problems connected with the functioning of the euro area. Doubts about the success of such an experiment usually focus on the question of whether a fully fledged fiscal union in the EU is politically feasible.

Setting aside for a moment the feasibility of creating a fiscal union, it is worth noting that a fiscal union may limit the risk of irresponsible budget policy, but will not prevent problems with competitiveness from other sources. Competitiveness problems caused by, among others, overly expansive credit creation for the private sector, the inflow of foreign capital including in the form of EU transfers financing investment in non-export sectors, temporarily high proceeds from the exploration of natural resources, faster improvements in competitiveness in trading partners and by technological or demographic changes will certainly emerge in the future in some countries.

The doubtful efficiency of structural and fiscal policies in boosting competitiveness in underdeveloped regions within the common currency area is confirmed by the examples of East Germany and southern Italy. Since unification, East Germany has enjoyed fiscal transfers which amounted to a cumulative EUR 2, billion by As pointed out by Seitz , young and educated people migrate from East Germany because of unemployment, which for several years has been twice as high as that of West Germany, and the overall lack of prospects. Some closing of the development gap took place in the s.

The southern unemployment rate is twice as high as that in the north Franco, , p. These examples show that structural policies within a common currency area are so ineffective and expensive that they cannot contribute significantly to boosting competitiveness in problem eurozone countries. The first one happened in Latvia, a country with a population of 2. Before the world financial crisis, Latvia enjoyed high economic growth, propelled by a credit boom originating from loans that Scandinavian parent banks granted their Latvian subsidiaries Purfield and Rosenberg, In consequence of high wage growth that exceeded labour productivity growth in the tradable goods sectors, competitiveness eroded rapidly.

In , the flow of foreign financing suddenly stopped and the real estate market collapsed. Latvia was forced to regain competitiveness quickly and to close the current account gap. In —10, Latvia implemented deep cuts in public sector wages, pensions and other government expenditures, and also increased some fiscal revenues. Despite implementing such a harsh economic programme, Prime Minister Valdis Dubrovskis enjoyed re-election in general elections in October and also kept his office in the subsequent snap elections in September It is useful to compare the Latvian experience with the case of Iceland.

Before , Iceland population , enjoyed, similar to Latvia, a rapid growth of bank assets financed by the inflow of foreign capital, and an expansion of the construction sector. At the outbreak of the financial crisis, both countries lost access to the capital that financed their growth, underwent a deep contraction in the construction sector and suffered a financial shock; the scale of the latter in Iceland was far greater than in Latvia. Both countries recorded GDP growth in after the breakdown in — However, adjustment costs in Iceland were far lower than in Latvia.

Its GDP contraction in —10 was half as severe. A further fall was averted in part by implementing capital controls. In effect, wages denominated in foreign currency fell, which increased the competitiveness of Icelandic goods. The situation was different in Latvia. Current account adjustment in Latvia was accomplished, not by improved competitiveness, but by a deep fall in employment and GDP.

Examples of a possible expansionary effect of fiscal tightening, i. In the cases analysed by Perotti , expansionary effects of fiscal tightening occur when the demand contraction caused by fiscal tightening is accompanied by strong progrowth factors, such as currency depreciation or a fall in inflation and interest rates. Substantial currency depreciation, which boosted competitiveness and exports was a stimulus for economic expansion after fiscal tightening in Ireland in —89, Finland in —98 and Sweden in — In Ireland, currency depreciation occurred immediately prior to fiscal tightening, in Finland and Sweden it came about during the tightening.

In Denmark —86 , it was a fall in inflation from high levels that accompanied fiscal tightening and a reduction in interest rates also from substantial levels that stimulated growth. In the case of the eurozone economies in crisis, the aforementioned factors are unlikely to emerge as those countries do not have their own currencies and room for a fall in inflation and a reduction in interest rates is limited the former is at a moderate level at the moment and the latter are very low.

Supporters of the single currency area in Europe often point to the United States of America. The United States is similar to the EU in terms of total area, population and level of economic development, but the single currency area in the United States functions without disruptions. Therefore, it has been concluded that a single currency can also circulate successfully in Europe, provided the scope of fiscal integration is strengthened and any obstacles to capital and labour force mobility are removed.

It is worth remembering that a crucial step of building the aforementioned identity and transforming the union of independent states into a homogenous country was the ruinous American Civil War of — A common language also facilitates labour mobility. The competitiveness problems of some states are to a considerable extent mitigated by emigration to more competitive ones.

Interstate migration does not threaten the cohesion of the American people, but rather strengthens it. Unlike the United States, Europe consists of countries with different languages characterized by different historical and cultural traditions. The nation states constitutes the major source of citizen identity; they also serve as sources of government legitimacy. Competitiveness problems have totally different dimensions depending on whether they concern regions within countries or whole countries.

There are regions in many countries that have been non-competitive for prolonged periods. Young people from that region who think of a professional career leave for metropolises such as Gdansk or Warsaw located in other provinces. According to long-term forecasts, the province will experience continuous outward migration to other parts of the country. Is it reasonable to assume that the competitiveness problems of Greece, Spain and Italy could be resolved via mass emigration to other European countries?

This is unlikely for economic and social reasons. Migration of a large number of people of productive age from, for example, Greece would leave behind a substantial population of the unemployed and the retired. That would deepen the deficit of the social insurance sector. But it is hard to expect that European countries as a whole would be willing to permanently finance the deficit of the social insurance sector in another European country. This can also easily happen in the future in other eurozone countries that, for reasons unforeseeable today, may run into competitiveness problems.

It is worth remembering that the European Union is the result of an integration process that was assumed to be an antidote against the national conflicts that led to two disastrous World Wars. The EU and its institutions were created by member countries to increase their wealth and security. Integration up until now has been based on respecting the needs of all members and on the philosophy of only accepting solutions that served everyone and threatened nobody. Introducing the common currency paradoxically threatens the previous philosophy of European integration.

Member countries were deprived of a very effective and mostly irreplaceable adjustment tool that can be used in emergency situations — namely, the exchange rate. In effect, member countries that for some reason lose competitiveness or are forced to close the current account gap in a short time can be condemned to economic, social and civilizational degradation, without the possibility of changing this situation. Some observers claim that this situation may accelerate the creation of a cosmopolitan European society. We think that the current lack of conflicts between major nations within the EU does not stem from the fact that national identity was lost somewhere, but from the premise that the framework for cooperation between member states was regarded by them as useful.

It is worth noting that economic stagnation, high unemployment, lack of prospects and a sense of injustice at being treated as inferior by the ruling powers has, in the past, nourished the growth of radical movements that undermined democratic order and peace in Europe. As exchange rate adjustment is an effective and basically irreplaceable adjustment mechanism that in emergencies improves the competitiveness of a given currency area, it is rational that the power to use this instrument should be located at a level of the community at which citizens identify most, and to which they are prepared to delegate responsibility for their fate.


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In the case of the European Union, the optimal community level is the member state. Depriving member countries of their currencies may — contrary to intentions — menace the future of the EU instead of fostering further European integration. Many observers agree that the creation of the eurozone may have been a mistake but — at the same time — they think it was a path of no return.

Dissolving a currency union in a stable environment where member countries are at comparable levels of competitiveness is not hazardous. One example is the Czech Republic and Slovakia in , after which Czechoslovakian crown was replaced by Czech and Slovak crowns respectively. The process took place without any significant perturbations. Things look different when the competitive positions of member countries differ significantly.

A non-competitive country leaving the eurozone would face bank runs. Citizens would rush to withdraw bank deposits to avoid their conversion into the new national currency and subsequent devaluation. It would entail the collapse of the banking sector. Any attempts to prevent such a scenario by temporary bank holidays or limits on deposit withdrawals would be very difficult and enormously risky.

It has to be taken into consideration that planning such an operation and the introduction of a new currency takes time and keeping it secret in a democratic country is nearly impossible. Moreover, freezing deposits for some weeks or months also does not seem possible. In addition, freezing deposits with the prospect of their devaluation along with currency depreciation creates a high risk of social disorder. The situation looks different if a country like Germany, enjoying a stable competitive position, leaves the eurozone and introduces a new currency. We assume that all domestic contracts are converted into a new currency while all contracts with foreign parties including bank deposits by non-residents and loans to non-residents remain in euro.

Domestic depositors in German banks would not be afraid that they would lose through devaluation when the euro was replaced by the German mark. They would rather expect their deposited wealth to move with the new currency, which is likely to appreciate towards the euro.

Therefore, it is possible to dismantle the eurozone in a controlled manner via the gradual and jointly agreed exit of its most competitive countries. The euro may then remain — for some time — the common currency of the least competitive countries. The value of the foreign debt of the countries in crisis would not jump up, while the ability to service that debt, both private and public, would increase significantly.

However, that does not mean that all the countries suffering from insolvency now would quickly become solvent again.

Help change the rules to make the economy work for everyone.

At least in some of these countries, debt reduction a haircut would be necessary. The scale of reduction and the cost to creditors would be smaller, although, than in a situation where these countries stayed in the current eurozone and their economies suffered below-potential growth and high unemployment. Along with the dismantlement of the eurozone, it will be necessary to create a new mechanism for currency coordination in Europe.

A non-orthodox floating rate regime 5 with monetary policy targeting inflation, and with synchronized fiscal and monetary policy within the EU, seems a natural candidate for the new exchange rate mechanism. The perception of floating rate regimes has gone through different phases in the literature.