From Matthew Lynn @ Bloomberg – Losing Euro in Defaults Brings No Threat to EU:
The European Union and the euro are not the same thing. Three of the long-standing members of the EU — Britain, Denmark and Sweden — have remained outside the euro since the currency was launched. It’s very hard to argue that they have suffered as a result. Likewise, the majority of the new members from eastern Europe have yet to join the single currency. It hasn’t stopped them from being full EU members.
Breaking up the euro will not break up the EU. It will change its character, but it needn’t be the end of the EU — just a particular version of it.
Unsustainable and Unbalanced
By any reasonable measure, the single currency has been a failure. It hasn’t made the economies of Europe converge: If anything, they have moved further apart over the past decade. It hasn’t promoted growth, except of the most unsustainable and unbalanced kind: crazy credit booms in Spain and Ireland, reckless public spending in Greece and massive, pointless trade surpluses in Germany.
Nor has it shielded its members from financial instability: In fact, the euro has created instability, visiting a wholly self-made crisis on the European continent. It is a cause of instability, not a cure for it.
Looking forward, there are years of terrible austerity for the high-deficit countries, accompanied by big cuts in living standards and rates of unemployment that will make it virtually impossible for an entire generation of Greeks, Irish or Spanish to build careers for themselves…
Save the EU
It’s ridiculous to claim that saving the euro is about saving the European Union. Precisely the reverse is true: To save the EU, the euro needs to be dismantled.
But what would be the best way of unraveling the currency? Neither Greece leaving nor Germany leaving makes much sense. In either scenario, what remained would be just as unbalanced and dysfunctional as before.
Creating two or three different euro zones would make more sense. The lower-deficit countries in the north would form one bloc, while the high-deficit countries, all in the south apart from Ireland, would form another. Morgan Stanley has already given that southern currency a provisional name: the medi.
There’s a chance that the groupings that emerged would work better. They would be optimal currency areas, to use economist Robert Mundell’s phrase, which the euro zone as it was created in 1999 never was. But it would still be a hugely complicated undertaking, with little guarantee of success.
New Deutsche Marks
In reality, the most rational option would be competing currencies. Return to the national currencies, re-creating the deutsche mark, the franc, the lira and so on.
The EU would be preserved in the same form in which it exists today. There would be the same free movement of goods, money and people around the member states. There would be the same cooperation on security, policing, trade, agricultural and environmental issues. There would just be no more euro.
True, there would be a period of intense disruption. But once the re-created currencies settled down, there would be a burst of prosperity. The deflationary shadow that the euro is casting over Europe would have been lifted. The Greeks, the Spanish and the Irish could set about rebuilding their economies with new, lower exchange rates. The Germans would be importing a lot more, lifting their neighboring economies.
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