- freely available
Int. J. Financ. Stud. 2013, 1(1), 1-15; https://doi.org/10.3390/ijfs1010001
1. Euro Area Breakup–Some Basic Foundations
1.2. The Problem with the Euro and the Anti-Euro Bet
1.3. The Disaster Scenario–Characterizing Breakup and Its Consequences
2. Breakup and Doomsday–the Scenarios
2.1. The Probable Case: A Weak Country Leaves the Euro Area
2.1.1. The Basic Mechanics of Doomsday with a Weak Country Leaving
2.1.2. Default on Domestic Debt and Breakdown of the Domestic Banking Sector
2.1.3. EU Membership at Stake
2.1.4. Protectionism Back again
2.1.5. Quantifying Economic Costs–Referencing the UBS and HSBC Studies
2.2. The “Populist” Case: A Strong Country Leaves the Euro Area
2.2.1. The Basic Mechanics of Doomsday Given a Strong Country Departure
2.2.2. Default on Domestic Debt and Breakdown of the Domestic Banking System
2.2.3. EU Membership at Stake as Well
2.2.4. Protectionism Mark II
2.2.5. Quantifying Economic Costs-Referencing the UBS and HSBC Studies
- 1. A quite similar mixture of channels was observed when Argentina “pesified” its dollar debt in the course of its recent crisis. See .
- 2. This view is supported by the situation in Greece where the formation of a government after the election in May 2012 failed with the consequence of a re-election in June.
- 3. As their base case, analysts such as UBS  assume that the EMU will ultimately survive, but with institutional changes that draw on the recovery of the U.S. monetary union in the 1930s, as well as to the United Kingdom and Germany, with a fiscal confederation made up of automatic stabilizers rather than direct transfers.
- 4. Early in September, Der Spiegel reported that a group of government lawmakers sought the power to expel member countries from the euro zone. Hans-Olaf Henkel, challenging the constitutionality of the Greek rescue package in the German courts, has proposed that Austria, Finland, Germany, and the Netherlands should secede, arguing that this alternative would have net benefits both for exiting countries and the remaining euro area.
- 5. HSBC  correspondingly asks: “…Why else would people “choose” to accept a currency likely to be devalued?”
- 6. Exiting the gold standard had little effect on cross-border capital flows for the simple reason that, during the interwar years, cross-border capital holdings were so low. The benefits of monetary independence were therefore large relative to the costs of disentanglement. See . Today, the reverse is likely to be true ; HSBC argues that the doomsday scenario should ideally be treated as similar to the breakdown of the U.S. banking system in the wake of the Great Depression.
- 8. See, for instance, . This would of course be futile in the long run, since the long-term interest rate would increase to the same extent as inflation expectations. This is exactly the problem confronted by the U.S. Federal Reserve while conducting its quantitative easing policies. However, the United States has the exorbitant privilege of being able to shift the damaging effect of its inflationary policies to the rest of the world. This is certainly not the case for a “small” weak country exiting from the euro area. Hence, it should be compared with the many former Soviet republics that created domestic inflation in new currencies following the break-up of the ruble area in 1992 and 1993 [11,20].
- 9. Cruces and Trebesch  show empirically that in cases in which no structural change process is credibly implemented, bond investors actually punish sovereign defaulters for a significant duration. For emerging countries and transition economies, the general picture is different, as in these cases, financial markets tend to forget about sovereign default events after a couple of years. See .
- 10. On such an occasion “the wise depositor anticipating the creation of a NNC would withdraw their money in physical euro form, pack it into a suitcase and head over the nearest international border-unless the government seals their borders to the movement of people. In that event, the sensible depositor would withdraw their money in physical euro form, pack it into a suitcase and bury it in their garden” .
- 11. Indeed, Greek citizens have already begun to withdrawn considerable amounts of money from Greek banks since the unsuccessful formation of a new government in mid May 2012.
- 12. The J-curve effect describes the immediate decline in a country’s current account immediately after a real currency depreciation, followed by improved only some months later, as most import and export orders are placed several months in advance. These initial-period decisions are made based on the “old” exchange rate. The primary effect of the home currency depreciation is to raise the value of the pre-contracted level of imports in terms of domestic products (i.e., the so-called price effect). Prices in the euro area are automatically affected by a euro depreciation as soon as import prices increase. In the short term, there is nothing monetary policy can contribute to offset this effect. See .
- 13. Ironically, the absence of intra-European exchange rate volatility, to which countries tended to react with tariffs in pre-EMU times, has been seen as one of the main advantages of EMU. See .
- 14. For further tentative figures see http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100017148/appetiser-cost-of-greek-exit-is-e155bn-for-germany-france-trillions-for-meat-course/.
- 15. See, for instance, the intense debate over the motivations of Axel Weber and Juergen Stark in leaving the ESCB.
- 16. In the past, Germany profited from moderate appreciation of the Deutschmark, in much the same way as the Czech Republic does today with its crown, as this allows imported inflation to be avoided.
- 17. However, these estimates are put into perspective by the Belke and Goecke  threshold model, which shows that German trade is impacted heavily only by appreciations that exceed a certain “pain threshold.”
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