The euro is now perceived by a growing number of observers and economists as the problem rather than the solution to Europe’s poor economic performance. So much so that the idea of a country leaving the euro is now accepted and regarded as a real possibility, even by the markets.
After all, Greece was about to leave the euro two years ago, in 2015, and several political movements threaten to do the same if they come to power. Even the community of economists and intellectuals in favour of the project of a monetary union, such as the Nobel Prize-winning economist Joseph Stiglitz and the German sociologist Wolfgang Streeck, has begun to call for a radical change of approach and strategy on the part of the European authorities.
The first question to ask on a purely economic level is what the consequences of a return to the national currency would be, as it would depreciate, fuelling inflation and reducing households’ purchasing power. In the short term the impact would be extremely negative, but in the long term there could be considerable benefits for some countries. The most controversial issue concerns private and public debts denominated in the new currency.
Would national agents and entities with euro-denominated debts be able to repay the liability with the lira or the French franc? If the answer is no, would they be able to prevent their finances from collapsing despite the increase in debt? And what would be the consequences, instead, for countries that have accumulated foreign assets and for those governments that enjoy surplus positions?
Well, with the return to the lira, which would appreciate by 1%, Italy would be the euro-area country with the fewest economic problems and the lowest public-debt risk. This is the surprising result of a study by a renowned French institute. After a significant depreciation, in the long term the lira would end up stabilising and would even have the potential to appreciate by 1% against the euro.
Not only that, the analysis by the French Economic Observatory (OFCE), a distinguished institute for economic and political research, leads to a conclusion that the team of scholars itself describes as “unexpected”: the costs of leaving the eurozone are probably not as high as one is led to think for deficit countries such as Italy and Spain, while they are higher than expected for surplus countries, which could suffer capital losses as a consequence of defaults or devaluations.
Indeed, if one considers the risks to the balance sheets of individual countries in the event of a return to the lira (the balance sheets of the public sector and the central bank, of private companies and households, and of banks), Italy is the only country that would face no danger for the balance sheets mentioned, and the Netherlands and France too show low risks, limited to non-financial companies and households.
These conclusions should serve as a bargaining lever for Italy and France in the negotiations on the future of the region being held with the more virtuous countries of the euro area.
Two scenarios: one country leaves, and the end of the euro
The two scenarios examined by Cédric Durand (professor at the Sorbonne University of Paris) and the economist Sébastien Villemot are the exit of a single country from the single-currency area and the break-up of the entire eurozone. The analysis is based on the concept of “relevant” assets and liabilities, that is, those assets that for legal or economic reasons will not be redenominated into the new currency after leaving the euro area.
In fact, the most important factor in determining which debt or asset is relevant is the law in force: if, for example, a financial contract is governed by national law, it is likely that the government of the country leaving the euro will be able to redenominate it into the new currency by passing a new law in parliament.
By contrast, contracts governed by foreign law will remain in euro or will be denominated in another currency if the euro disappears. In the first case it is the institution or entity that granted the loan that bears the economic loss; in the second case – that of the end of the euro – the risk falls instead on the debtor. The beneficiary of a loan whose debt has increased could always prefer the path of default and impose the losses on those who granted the loan.
Source here:
http://www.wallstreetitalia.com/italia-paese-meno-a-rischio-in-caso-di-addio-alleuro/
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