If disaster strikes, how exactly does a eurozone nation hit the emergency escape button on the euro?
Once considered an outlandish scenario, it is no longer taboo among economists.
Whether it is the entire euro project collapsing or just one country jettisoning the single currency, analysts agree on rule number one: Prevent panic.
If the currency itself implodes, eurozone authorities could no longer recognise the euro as a common currency, said Paulo Reis Mourao of the University of Minho in Braga, Portugal.
“This would trigger a series of procedures that would require national central banks to issue currencies again,” he said.
The old currencies have been destroyed, even if Europeans are estimated to have kept a fair bit of the old money in their drawers: the equivalent of 6.8 billion euros in German marks, 1.7 billion euros in pesetas, 1.3 billion euros in lira and 600 million euros in French francs.
It would take months for national mints to produce new currencies, and some countries would have to abandon producing the euro during that period. Spain, for example, now prints five- and 20-euro notes.
According to a Wall Street Journal report Thursday, some European central banks are considering how to reprint their national currencies. Irish officials quoted in the story denied they were doing so, however.
If the weaker eurozone members’ currencies such as the Greek drachma, Spanish peseta and Portuguese escudo were revived, their values would likely plunge while the German mark would gain strength, analysts said.
Prices of imported products such as oil would soar.
“Our purchasing power would slump,” Mourao said. “We would need 10 to 15 years to stabilise the situation.”
The consequences — including people’s savings losing half their value, according to some studies — would be sufficiently drastic to panic entire populations and create a run on the banks.
That would lead to “a collapse of the financial system,” predicted Federico Steinberg, economist at Spain’s Real Instituto Elcano.
“The introduction of the euro was a very delicate process, planned over a period of more than two years, and so, ideally, those who want to abandon the euro would take the same time to undo it,” Steinberg said.
“The problem is that if there is an exit from the euro it will probably be abrupt and disorderly.”
One solution, analysts said, is to take people by surprise.
“Everything would have to be decided secretly in a single night and the next morning the markets, the banks would be closed for at least 12 hours to prevent anyone moving their money,” said Franco Bruni, professor at Italy’s Bocconi University in Milan.
The next step, Bruni said, would be a race between countries to devalue their currencies so as to boost exports.
“One way to do it would be to announce it one day without anyone knowing in advance: we are freezing your accounts because we are going back to the old currency,” said Gayle Allard of Madrid’s IE Business School.
But “how do you make enough notes in secret?” Allard asked.
Once a country had exited the euro, though, she predicted a “wonderful” impact on exports as it regained power over the currency and allow its value to fall.
Eduardo Martinez-Abascal, professor at IESE Business School in Madrid, said the authorities would need to mount a “spectacular” publicity campaign to explain what they had decided to do and what the advantages were.
A weaker currency had its benefits, Martinez-Abasca agreed.
“Greece would be able to sell overseas at half price,” he said, and as a cheap destination it would haul in tourists.
Then there are the legal complications to consider.
“Imagine a Spanish bank that owes money to the Netherlands. How do you calculate its debt if you abandon the euro: in florins or in pesetas?” asked Thomas Cool, former economist at the Netherlands’ Central Statistics Office.
And, he asked, would the public debt remain denominated in euros, forcing the state to default, or would it be converted into the old currency, infuriating the financial markets?