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When the Euro Falls Apart


  • Hal S. Scott


This paper recounts some well‐known problems confronting European monetary union (EMU), such as withstanding asymmetric shocks and maintaining domestic political support. It then examines how a speculative attack could damage a target country's banking system, and how the basic structure of EMU could facilitate its break‐up. On the basis of this analysis, one might reasonably conclude that there is a significant chance – over one in ten – that EMU may break up in whole or in part. The paper then focuses primarily on two significant problems related to a break‐up. First, a country seeking to leave EMU, particularly after the transition period, may have difficulty re‐establishing its national currency unilaterally, as its economy is likely to have become thoroughly ‘euroized’. Second, any break‐up accompanied by re‐denomination of existing euro obligations, including government bonds, will create great legal uncertainty and costly litigation. There are no continuity of contract rules for exiting EMU equivalent to those for entering. Both problems require cooperative and deliberative solutions and will be difficult and costly to solve. If such problems are properly taken into account, which has not previously been the case, a euro break‐up in the foreseeable future, particularly after transition, is considerably less likely than the above estimate of one in ten.

Suggested Citation

  • Hal S. Scott, 1998. "When the Euro Falls Apart," International Finance, Wiley Blackwell, vol. 1(2), pages 207-228, December.
  • Handle: RePEc:bla:intfin:v:1:y:1998:i:2:p:207-228
    DOI: 10.1111/1468-2362.00010

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    Cited by:

    1. Siekmann, Helmut, 2015. "The legal framework for the European System of Central Banks," SAFE White Paper Series 26, Leibniz Institute for Financial Research SAFE.
    2. Eichler, Stefan, 2012. "Financial crisis risk, ECB “non-standard” measures, and the external value of the euro," The Quarterly Review of Economics and Finance, Elsevier, vol. 52(3), pages 257-265.
    3. Oleg V. Petrenko & Federico Aime & Tessa Recendes & Jeffrey A. Chandler, 2019. "The case for humble expectations: CEO humility and market performance," Strategic Management Journal, Wiley Blackwell, vol. 40(12), pages 1938-1964, December.
    4. Willem H. Buiter, 1999. "Alice in Euroland," Journal of Common Market Studies, Wiley Blackwell, vol. 37(2), pages 181-209, June.
    5. Anke Mönnig, 2012. "Balancing the European Monetary Union - an Impact Analysis on the Return of National Currencies," GWS Discussion Paper Series 12-8, GWS - Institute of Economic Structures Research.
    6. Anke Mönnig, 2016. "The European Monetary Union break-up: an economic experiment on the return of the deutsche mark," Economic Systems Research, Taylor & Francis Journals, vol. 28(4), pages 497-517, October.
    7. John C. Soper, 2004. "European Labor Markets and Structural Reform : Does the Euro Have a Future?," Journal of Private Enterprise, The Association of Private Enterprise Education, vol. 20(Fall 2004), pages 112-124.
    8. Siekmann, Helmut, 2016. "Replacing or supplementing the euro in member states whose currency is the euro," IMFS Working Paper Series 109, Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS).
    9. Nikolay Nenovsky & Kalin Hristov, 2001. "Official Eurozation of Bulgaria: Pluses and Minuses," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 1, pages 64-80.
    10. Dirk Meyer, 2012. "Ein Fahrplan zum Euroaustritt – technische Vorbereitung und Durchführung im Austrittsland," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 65(06), pages 22-27, March.
    11. Lars Jonung & Eoin Drea, 2010. "It Can't Happen, It's a Bad Idea, It Won't Last: U.S. Economists on the EMU and the Euro, 1989–2002," Econ Journal Watch, Econ Journal Watch, vol. 7(1), pages 1-4–52, January.
    12. Kibritçioğlu, Aykut, 2011. "Avro Bölgesi Ülkelerindeki Güncel Borç Krizi [Current Sovereign Debt Crisis in Eurozone Countries]," MPRA Paper 33528, University Library of Munich, Germany, revised 22 Aug 2011.
    13. Siekmann, Helmut, 2018. "Legal tender in the euro area," IMFS Working Paper Series 122, Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS).
    14. Barry Eichengreen, 2010. "The Breakup of the Euro Area," NBER Chapters, in: Europe and the Euro, pages 11-51, National Bureau of Economic Research, Inc.
    15. Siekmann, Helmut, 2015. "Exit, exclusion, and parallel currencies in the euro area," IMFS Working Paper Series 99, Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS).
    16. Cornelius, Peter K. & Trimbur, Thomas, 2000. "Heterogeneous policy responses and the risk of monetary disintegration in Europe," Research Notes 00-1, Deutsche Bank Research.
    17. Anke Mönnig, 2012. "Balancing the European Currency Union - an Impact Analysis on the Return of National Currencies," EcoMod2012 3831, EcoMod.
    18. Russell COOPER, 2012. "Exit from a Monetary Union through Euroization: Discipline without chaos," Economics Working Papers ECO2012/09, European University Institute.
    19. Tholl, Johannes & Schwarzbach, Christoph & Pittalis, Sandro & von Mettenheim, Hans-Jörg, 2020. "Bank funding and the recent political development in Italy: What about redenomination risk?," International Review of Law and Economics, Elsevier, vol. 64(C).
    20. Eichler, Stefan & Hielscher, Kai, 2012. "Does the ECB act as a lender of last resort during the subprime lending crisis?: Evidence from monetary policy reaction models," Journal of International Money and Finance, Elsevier, vol. 31(3), pages 552-568.

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