My correspondences with my European co-authors during the last two months have concentrated on whether Greece, Portugal and/or Spain should stay within the euro-zone or should overthrow the euro regime for good. My European correspondents have underscored the major change that has taken place in Europeans’ preferences towards shifting away from the euro to the national currency. They have witnessed the benefits in the euro-zone moving away from their national economies towards the German economy. They affirm that pipeline that channels the benefits to Germany is the euro. Therefore, hostility towards the euro is rising in the southern European economies. Many now wish to exit the euro zone.
In my correspondences, I highlighted that the withdrawal from the euro-zone can have catastrophic consequences and certain rules should be followed to minimize those consequences. The following rules must be taken seriously before the exit takes place.
1. If there will be an exit, it must be very secretive and should happen very quickly. Any disclose, leak or lingering will lead to the exodus of enormous euro-denominated funds to a euro territory that would cause bankruptcies, recession and may be a depression in the exiting country.
2. Just to account for a possible leak or insight information happening before the withdrawal, the exiting country should stop temporarily all money transfers with the rest of the world, particularly with those fellow countries in the euro-zone when it is ready to exit. This may require shutting off all electronic communications including funds wires, Internet, fax, etc with the outside world for few days.
3. The exiting country should find a quick way to transform the euro currency into the national currency such as the drachma to keep its function as a medium of change working during the exiting period. History tells us of examples where the splitting country in a currency union in the twentieth century stamped the common currency into a national currency temporarily before it was replaced by a true national currency. In the successor countries of the Austro-Hungarian Empire the kronen was stamped with a national mark
after the empire, which lasted for 51 years, was defeated at the end of WW1. Austria, for example, stamped the kronen with "DEUTSCHSTERREICH" and then few years later the kronen was replaced by a silver coin called schilling at the rate of 10,000 kronens per one silver coin.
Following those rules will not keep the exiting country immune to the grave consequences, but it should help in the long and hard transformation out of the currency union. The hardest task the exiting country should deal with is the denomination and valuation of the national debt that includes retail, commercial and sovereign loans. If the agreement stipulates that the debt must be denominated in the national currency, then the exiting country’s risk exposure is reduced and the risk exposure is shared with the lender. However, if the debt is stipulated to be in the union currency, whether signed in exiting country or another country, both the executive and legislative branches must deal with it simultaneously and discretely. The legislative body in coordination with the executive branch should have parallel sessions during the euro stoppage period to rectify what the executive branch sealed according to the rules above.
Failure to follow those rules will mean runs on banks, bankruptcies and recessions in the very short-run. The sovereign debt burden (as a percentage of GDP) will jump sharply in the medium term. There will be internal and international devaluations that will eventually lead to inflation. At best, the exiting country would have to go through a period of severe stagflation at best over the years. No one knows how long this period will last but it should take several years, maybe as long as one to ten years. Having said all that, one should not end without underscoring the dangerous contagion that is likely to follow the withdrawal which should also carry a second round negative effect on the exiting country.
 For more information on stamping the common currency by the successor countries of the Austro-Hungarian Empire, see the link:
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