Why a Breakup of the Euro Area Must Be Avoided: Lessons from Previous Breakups
One of the big questions of our time is whether the Economic and Monetary Union (EMU) will survive. Too often, analysts discuss a possible departure of one or several countries from the euro area as little more than a devaluation, but Åslund argues that any country’s exit from the euro area would be a far greater event with potentially odious consequences. A Greek exit would not be merely a devaluation for Greece but would unleash a domino effect of international bank runs and disrupt the EMU payments mechanism, which would lead to a serious, presumably mortal, disintegration of the EMU. It would inflict immense harm not only on Greece but also on other countries in the European Union and the world at large. When a monetary union with huge uncleared balances is broken up, the international payments mechanism within the union breaks up, impeding all economic interaction. Åslund’s critical argument for a domino effect is that the EMU already has large uncleared interbank balances in its so-called Target2 system. Exit of any country is likely to break this centralized EMU payments mechanism. These rising uncleared balances are a serious concern because nobody can know how they will be treated if the EMU broke up. Any attempt to cap them would risk disruption of the EMU. These balances need to be resolved but in a fashion that safeguards the integrity of the EMU. However, this can hardly be done by anything less than fully securing the sustainability of the EMU. If the euro area does break up, Åslund says, the damage will vary greatly depending on the policies pursued. On the basis of prior dissolutions of currency zones, such as the ruble zone in 1992/1993, he suggests that an amicable, fast, and coordinated end of the EMU would minimize the harm.
|Date of creation:||Aug 2012|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.piie.com
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Olivier Blanchard & Kenneth Froot & Jeffrey Sachs, 1994. "The Transition in Eastern Europe, Volume 2: Restructuring," NBER Books, National Bureau of Economic Research, Inc, number blan94-3, October.
- Issing,Otmar, 2008. "The Birth of the Euro," Cambridge Books, Cambridge University Press, number 9780521516730.
- Hans-Werner Sinn & Timo Wollmershäuser, 2011.
"Target Loans, Current Account Balances and Capital Flows: The ECB’s Rescue Facility,"
CESifo Working Paper Series
3500, CESifo Group Munich.
- Hans-Werner Sinn & Timo Wollmershäuser, 2012. "Target loans, current account balances and capital flows: the ECB’s rescue facility," International Tax and Public Finance, Springer, vol. 19(4), pages 468-508, August.
- Hans-Werner Sinn & Timo Wollmershaeuser, 2011. "Target Loans, Current Account Balances and Capital Flows: The ECB's Rescue Facility," NBER Working Papers 17626, National Bureau of Economic Research, Inc.
- Sinn, Hans-Werner & Wollmershäuser, Timo, 2012. "Target loans, current account balances and capital flows: The ECB’s rescue facility," Munich Reprints in Economics 19556, University of Munich, Department of Economics.
- Olivier Jean Blanchard & Kenneth A. Froot & Jeffrey D. Sachs, 1994. "The Transition in Eastern Europe, Volume 1," NBER Books, National Bureau of Economic Research, Inc, number blan94-2, October.
- Olivier Jean Blanchard & Kenneth A. Froot & Jeffrey D. Sachs, 1994. "Introduction to "The Transition in Eastern Europe, Volume 1"," NBER Chapters, in: The Transition in Eastern Europe, Volume 1, pages 1-18 National Bureau of Economic Research, Inc.
- Domenico Mario Nuti, 1996. "Inflation, interest and exchange rates in the transition 1," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 4(1), pages 137-158, 05.
- Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, volume 1, number 8973.
- Rudiger Dornbusch, 1992. "Monetary problems of post-communism: Lessons from the end of the Austro-Hungarian empire," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 128(3), pages 391-424, September.
- Issing,Otmar, 2008. "The Birth of the Euro," Cambridge Books, Cambridge University Press, number 9780521731867.
- Marek Dabrowski, 2012. "The need for contingency planning: potential scenarios of Eurozone disintegration," CASE Network E-briefs 11, CASE-Center for Social and Economic Research.
- Anders Aslund & Valdis Dombrovskis, 2011. "How Latvia Came through the Financial Crisis," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 6024.
- C. Fred Bergsten & Jacob Funk Kirkegaard, 2012. "The Coming Resolution of the European Crisis," Policy Briefs PB12-1, Peterson Institute for International Economics.
When requesting a correction, please mention this item's handle: RePEc:iie:pbrief:pb12-20. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Peterson Institute webmaster)
If references are entirely missing, you can add them using this form.