Tags: Leaving The Euro

Slovak Remark Renews Eurozone Breakup Talk

Wednesday, 15 Dec 2010 08:27 AM

Last in, first out, when it comes to the euro?

That's the question getting attention in Slovakia, the newest member of Europe's common currency, after the speaker of its parliament said that the country should be ready to abandon the euro if the continent's widening debt crisis keeps spreading.

The comments marked a turn from recent speculation centering on the possibility that one of the eurozone's larger economies might get fed up with the euro. But while a smaller member might see reasons to leave amid the threat of a debt meltdown, any departure would be extremely disruptive — first and foremost to the country heading for the exit, as well as the currency bloc.

"The market perception now is euro zone not going to break up," said Nicolas Veron, an economist with the Brussels-based think tank Bruegel. However, he said: "We can safely say that if a country left the euro, it would be economically disruptive" — no matter what the member's size.

The temptation to leave are clear for smaller eurozone members. A country that left the euro would no longer be locked into the common currency's exchange-rate straightjacket and could let its restored currency devalue, immediately boosting its trade competitiveness — rather than suffer the years of spending cuts and difficult economic reforms that now face uncompetitive eurozone economies.

But not so fast. Amid a departure, weaker remaining countries would face immediate financial instability. Yields on government bonds would rise, making debt more expensive, worsening the turmoil that the currency union is trying to overcome.

And once investors perceived the likelihood that a country would leave, they would rush for the exits to avoid seeing their euro-denominated assets converted and devalued, an outflow of capital that would likely cause a financial collapse.

And a defector could also face political retaliation from other angry EU members, who interact on everything from traffic fines to

Talk about a eurozone breakup gained momentum in April, in the run-up to Greece's near default and subsequent financial rescue by its eurozone partners and the IMF. In the end, Greece was able to pay thanks to a bailout from the European Union and the International Monetary Fund, and economists highlighted huge costs that Greece, Ireland or another of Europe's cash-strapped economies would incur by pulling out.

Stronger euro-zone countries like Germany protested over the possibility of stumping up for ever-larger bailouts for their more-profligate partners, and Chancellor Angela Merkel has darkly hinted that overspending governments should be tossed out of the euro. Investors and pundits generally concluded that those outcomes were unlikely, but not unthinkable.

Slovakia's parliamentary speaker, Richard Sulik, said Monday his country needs "to prepare a Plan B. That is the reintroduction of the Slovak koruna."

Sulik's comments, in an opinion piece for business daily Hospodarske Noviny, broke with European leaders' orthodoxy by even admitting the possibility of a eurozone split.

The comments were quickly rejected by the Slovak finance ministry, but are a sign of the opposition to expensive bailouts among some policy makers and citizens of some of the euro area's more fiscally stable countries.

Slovakia, one of the eurozone's smallest members, joined the euro in January 2009, but has already indicated its discomfort with the crisis by refusing to contribute money to a euro110 billion ($148 billion) bailout for Greece by the other euro members and the International Monetary Fund.

Slovak Prime Minister Iveta Radicova also was quick to try to tamp down speculation raised by Sulik's comments.

"I consider them very risky — more than risky," she said. "There's no such alternative for the government ... I have to stress that I consider such thoughts very dangerous for Slovakia."

Some economists say Slovakia, if it were to pull out, would do better to do so sooner rather than later.

"Slovakia is an interesting case," said Simon Tilford, chief economist at the London-based Centre for European Reform. As a small economy that is not yet massively integrated with the rest of the eurozone, Slovakia could envision bringing back its koruna without massive disruption to the rest of the eurozone, he said.

"If Spain was forced out, the eurozone would have a huge problem," Tilford said, referring to the far-larger Spanish economy. "If Slovakia left, it wouldn't have a dramatic impact on the eurozone."

But he didn't rule continued speculation about a breakup of the currency zone.

"The longer the crisis goes on, the bigger the bailouts, the greater the chance of a fiscal union, the more we will hear these kinds of things," Tilford said.

Slovak analyst Maria Valachyova said breaking up would be hard for her country to do.

"It would be very costly for Slovakia to leave the eurozone at the moment," said Valachyova, a senior analyst at Slovenska Sporitelna in Bratislava. "I consider the option unrealistic for the time being."

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Last in, first out, when it comes to the euro?That's the question getting attention in Slovakia, the newest member of Europe's common currency, after the speaker of its parliament said that the country should be ready to abandon the euro if the continent's widening debt...
Leaving The Euro
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2010-27-15
Wednesday, 15 Dec 2010 08:27 AM
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