What's the danger for a country leaving the Eurozone?
The more we learn about this one, the better.聽 No one knows the likelihood of say, Greece, to pull an example out of the air, pulling out of the Eurozone and reverting to the drachma.聽 I鈥檇 guess not, but the potential is obviously real and growing.
What would happen if a country broke away?聽 Well, the problem is all in the transition.聽 Contracts between creditors (lenders) and debtors (borrowers), including everything from bonds to cheese deliveries, have to be renegotiated, and done so at the value the world decides to assign to the new currency, e.g., the ND (鈥渘ew drachma鈥�).聽 And one can imagine that assignment will not be flattering to the dropout country.
Bank runs are a worry鈥攖hose holding euros in Greek banks will be assigned the new value in 鈥淣Ds,鈥� and account holders will want to avoid that devaluation.
As weaker economies dropout, their currencies will fall relative to those of stronger ones, like the US dollar or the euro, as currency markets once again can vote on an individual country鈥檚 currency, as opposed to that of a currency block.聽 This could help them adjust through exports, but we鈥檙e probably not talking about gentle devaluation here; we鈥檙e talking systemic shock.
Basically, the transition is by definition a huge devaluation event.聽 You leave the currency union because you can鈥檛 achieve solvency within it, and once you鈥檙e free, the world casts judgment by revaluing your currency in ways that reflect the conditions of your exit.聽 Any support you enjoyed from being a weaker player of a stronger team vanishes.
These realities are why I suspect the Eurozone remains intact.聽 But I wouldn鈥檛 bet more than an ND or two on it.
