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What happens if a country leaves the Eurozone?

It’s a funny old world.

One minute we’re all talking about the great European plan, the Lisbon agenda, the Directives are rolled out, SEPA and MTFs are spawned, the level playing field of the Eurozone is harmonised and so on and so forth.

The next is OMG, it’s all doom and gloom.

What about Greece? Ireland? Portugal? Spain? Italy?

This is a disaster!

Meanwhile, the Eurocrats continue to focus upon euro enlargement with Serbia, Macedonia, Montenegro, Albania and Bosnia all in the frame, as well as Turkey of course. In fact, Turkey’s chief negotiator on EU accession believes that: “the European Union needs Turkey more than Turkey needs the European Union”.

Very diplomatic … and possibly true as Turkey represents the point where West meets East for many.

So what’s the reality?

I was thinking about this the other day, as someone asked me about Ireland’s future.

To be honest, I don’t think there’s a problem if a country has to leave the European Union or the Eurozone.

Think about it.

So far, the reason why we balk at such an idea is because no-one’s ever done it before.

No country has left the European Union so far.

Some have changed and adapted, as in Germany is different today than twenty years ago thanks the Berlin Wall coming down.

The UK is different to what it was twenty years ago, as we now have a Welsh and Scottish Assembly and a more stable Northern Ireland Assembly.

Belgium is breaking apart into Franco-Belgique Wallonia and Dutch-Belgique Flanders (correction).

Yugoslavia exploded into the Serbian-Bosnian war, but it hasn’t stopped Serbia and Bosnia seeking to join the Union.

So what of the future?

Could Portugal leave the euro, as recently implied by their foreign minister, even though just nine months ago there was an emphatic view this could never happen.

And what does it mean if a country leaves?

For the UK, it was a good thing.

The UK left the Eurozone plan in 1992 thanks to George Soros and, ever since, we’ve thanked our lucky stars we did.

UK sterling looks like a good bet in the short-term against the euro, and we have been able to fully engage in actions to halt the slide into depression by printing money through the Quantitative Easing (QE) program and rapidly reducing interest rates to zero.

All of the latter actions are impossible for Eurozone countries to engage in, as they are dependent on the policy across 16 countries controlled by the European Central Bank (ECB).

And there’s the issue.

The UK can issue bonds, t-bills, print money and create more debt because we are a strong country with strong investment yield and credit rating.

Portugal, Ireland, Greece and Spain don’t have any of these capabilities.

First, they are not strong countries with good credit ratings, as demonstrated by the downgrade of Greece in April by Standard & Poors that kicked off this crisis of confidence.

Second, they cannot control any fiscal policy effectively as all interest rates are controlled by Frankfurt, which handcuffs these economies to centralised control.

Even more of an issue for these countries is that they cannot ease their debt burden by priniting money through QE as the UK and USA has done. This is because it would have to be issued through the ECB again, and they have been loath to delve into such areas.

Even if Portugal, Ireland, Greece and Spain could print money, it would need to be substantiated by bonds and government treasury bills that had value to support such an increase in debt … and these countries do not have the ability to sell such debt due to the downgrade of their credit status.

This is the real issue as Portugal, Ireland, Greece or Spain could leave the Eurozone and EMU … but to go to what?

If Ireland went back to the punt and Greece the drachma, what does this give them?

It gives them the ability to control interest policies, print more money through QE and issue further debt … but does anyone believe in or want such burdens from countries already teetering towards junk status?

Maybe … Argentina survived such a crisis for example.

Others would say that, for the European Union, it’s a good thing to get rid of basket case countries that weaken the Union.

A small few might say that any country leaving the European Union or even the Eurozone is no issue. It may not have been done before, but that’s no reason why it shouldn’t happen and, if it did, it does not signal the end of the Union or the euro.

However, the bottom line is really that any country forced to leave the Eurozone would be an embarrassment to the Grand Plan.

That’s the main raison d’être for bailing out Greece and Ireland, and why Portugal would be bailed out too.

However, with over €1 trillion exposure in Spain, the big question is what happens if their economy tanks?

Mmmm … we’ll deal with that when it happens I guess.

 

Postscript: the BBC studies the practicalities of a country leaving the euro today.

 

 

About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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  • Level

    “Belgium is breaking apart into Franco-Belgique Flanders and Dutch-Belgique Wallonia.”
    It’s the contrary: French speaking part is Wallonia and Flesmish (Dutch) speaking part is Flanders !

  • Steve Taros

    “Belgium is breaking apart into Franco-Belgique Flanders and Dutch-Belgique Wallonia.”
    This is actually the reverse: Franco-Belgique Wallonia and Dutch-Belgique Flanders

  • David GH

    I am sure Chris apologises to our Flemish friends! But a very good synopsis Chris.
    I would still advocate the N-Euro and the softer S-Euro, have been doing so since the idiotic Euro mess was mooted.
    Here we are with Potugal, Spain, Greece nad OK Ireland, and let’s pop in Southern Italy for luck. They can then have a softer Euro type thing, and the Northerners can have their hard N-Euro and maybe then we should join it.

  • Pete B

    Any thoughts on what would happen to Euro denominated mortgages on a Spanish property if Spain was forced to exit the Euro?

  • Chris Skinner

    @Francois @Steve
    Apologies for brain synapse malfunction on Belgium guys … but was a great way to wind you up!
    @David
    Are you sure we can use the terms ‘hard’ and ‘soft’ in public?
    @Pete
    Spain unlikely to leave Euro, but if they did then your mortgage could still be Euro-denominated. Just transfer to a non-Spanish mortgage provider in the Eurozone.

  • Fritz Thomas Klein

    Actually, the discussion for Belgium is about three parts: French-speaking Wallonia, Flemish-speaking Flanders and the Brussels region. That makes things much more complicated.
    On another note:
    – It is important to clearly distinguis EU membership and Euro membership. The two are very different.
    – The question should always have been asked in two directions, unfortuantely the debate has from the beginning of creating the Euro been asked only from one side: What if a country wants to leave Euro membership? The other qustion is: What if the other Euro countries no longer want a country to be part of the Euro area?
    – And last but not least: Why have we created another ‘too big to fail’ problem? Why should a Euro country not fail? Creditors who consciously provide credit to bad debtors must take a risk! If this basic rule is neglected, things must be going wrong.

  • Leonard H. Schrank

    Chris, you forgot to analyse the impact of Northern Europe bank loans to these weak countries. For example, if Greece is allowed to collapse (and I agree, they deserve to), then don’t the German and French banks go under as well. So you have a systemic issue–not so easy to analyse. On the other hand, if a CEO acted like previous Greek pols, they would have been put in prison for fraud.
    Best regards, Lenny Schrank
    former CEO, SWIFT and former President, AmCham Belgium