How to Break Up a Currency Union
Jonathan Tepper of Variant Perception has written an excellent report on the break-up of the euro. The report includes an overview of past break-ups of currency unions (the euro is not the first one that has failed), and a detailed 'how to' manual as to how to handle the likely coming break-up of the euro, this is to say, the exit of those current member nations that are clearly not able to live with the euro.
Also included is an assessment of what would likely happen to the economies concerned after they break away, default and devalue, illustrated by fairly recent historical examples.
A break-up would certainly be a traumatic event, but it wouldn't be the end of the world. On the contrary, since this would force the insolvent states to deal with their debt and competitiveness problems once and for all, it would pave the way for a successful new beginning.
As we always point out, the economic losses can not be wished away. They are a product of the boom, not of the bust – the bust merely revealed their existence. Instead of dragging the process of adjustment out with programs that are clearly failing and are creating social upheaval on such a grand scale that the situation seems more and more like a powder-keg waiting for a spark, it would be far better to opt for a radical new approach and admit that the currency union such as it is now constituted has failed.
Jonathan has graciously allowed us to post the report on Acting Man for interested readers. The report can be downloaded here (pdf).
We highly recommend it.