The euro is irrevocable. It was designed as Hotel California: “you can check out any time you like, but you can never leave!” However, we know that it would be wrong to take it for granted. Italexit could still happen as the unwilling and messy result of an unbearable deterioration in public finances and economic performance, combined with misguided political will and financial market turmoil. It would be a huge mistake. Much better, and less costly, would be to address the underlying problems, allowing Italy to survive and thrive within the euro by enhancing potential growth and economic resilience. 

It would be wrong to conclude that Italexit, or exit from the monetary union by any other Member State, is going to be an easy process that can be evaluated with a straight cost-benefit analysis and smoothly managed in an orderly way. While Roger Bootle, one of the advocates of the return to national currencies, came to somewhat different conclusions, he acknowledged that the exit merely being the reverse of the construction process does not make it easy: “it would be the equivalent of unscrambling an omelette”.

In the case of Italexit, redenomination and default would become very likely and would cause a number of side effects and negative spillovers into the economy. Exit without redenomination would lead the debt-to-GDP ratio to reach 190%, assuming 30% devaluation, making default even more likely. Hence, Italexit would not address the issues its proponents claim it would address, while producing significant financial instability. Just mentioning it as a viable solution as part of a political platform would imply risks of making it a self-fulfilling prophecy. The economic, social, and political consequences would be enormous and last for a number of years.

Eoin Treacy's view

Here is a link to the full report.

It has been my view for some time that the sustainability of the Eurozone is predicated on the assumption previously sovereign populations will accept any set of policies imposed by the European Commission. 

The Eurozone’s sovereign debt crisis arose because private sector loans made by banks in ‘creditor’ countries were at risk of being defaulted upon which would have caused a financial catastrophe for their home nations. The solution was to insist private sector debts be absorbed by the governments of the countries in which they were taken, with the result that sovereign debt-to-GDP ratios exploded. Massive fiscal austerity was imposed on the populations of peripheral countries which contributed to lower standards of living and deflation. 

That decision was the root cause of so much negative sentiment towards the EU today. Even though mechanisms are in place to create a European deposit insurance scheme similar to the USA’s FDIC, it will not be active for at least another few years and certainly will not work retroactively. 

Ireland is a small country with a large export base and attractive tax structure which accepted deep cuts to living standards and massive debt write downs to recapitalise its banking sector. It has been rewarded with outsized economic growth as exports improved. For other countries with larger, older populations and an inability to nationalise almost the entire financial sector the path to sustainable expansion has been unachievable. Fiscal austerity means prolonged sacrifice and it really is better to make the reform decisions early. Italy and France missed the opportunity to make the decisions early and their populations have suffered through a decade of austerity with little to show for it. 

The problem with making rational arguments, such as that proposed in the above article or in this report, kindly supplied by the same subscriber, is that crowds are emotional. That increases the potential for people to make reactionary decisions and means the potential dissolution of the Euro cannot be ruled out regardless of how much pain it would cause in the form of high inflation, surging interest rates and devaluing currencies for many countries. 

The clear answer to many of the Eurozone’s problems would be to abandon the fiscal strait jacket. Unfortunately, the German election cycle suggests that option is off the table until at least October.