Debt and failure

"If the euro fails it's not just the currency that fails, but Europe and the idea of European unification," German Chancellor Angela Merkel told dignitaries when the Charlemagne Prize was awarded to Polish Prime Minister Donald Tusk in Aachen last month.

Just days later, Merkel distilled those words into an even more potent message when she told German parliamentarians: "If the euro fails, Europe fails."

Merkel's catchy phrase certainly got lawmakers' and journalists' attention, but from an economic point of view her statement was nonsense. According to Juergen Matthes, a senior economist at the Cologne Institute for Economic Research, a currency cannot fail as long as someone accepts it as a form of payment.

"From the perspective of foreign investors, a devaluation of the euro would cause them to lose money - that's certainly relevant," Matthes said. "But to say that would mean the euro had failed is difficult to justify."

Voluntary exit

Perhaps Chancellor Merkel meant to say the monetary union was in danger of falling apart if one or more member states decided they wanted to leave the eurozone. Matthes argued this is theoretically possible given that there are no legal provisions for kicking a nation out of the common currency group.

"The Lisbon Treaty, which came into force in December, grants member states the right of withdrawal. But that right applies to EU membership as a whole - not just the monetary union," Matthes explained.

Theoretically, a eurozone nation could shed its eurozone membership by dropping out of the European Union and rejoining straight away.

It's a notion that Michael Huether, the director of the Cologne Institute for Economic Research, is reluctant to entertain.

"What would such a deal look like? It would need to be negotiated," Huether said, adding that it could only work if the weak euro nations were willing to leave the eurozone in the hope that they could devalue their currencies.

"It would trigger a massive reaction among private investors. There'd be a run on the banks as everyone tries to have their euro-denominated accounts paid out in cash."

"In the case of Greece, 95 percent of public debt would still be denominated in euros, and that would still need servicing. The situation would lead to an enormous rise in the price of imports, especially raw materials."

Huether said all these factors would make the process "unmanageable."

Covert withdrawal

But what if the exit was planned in secret and set into motion so quickly that the population had no opportunity to storm the banks?

"A surprise withdrawal could, perhaps, be technically feasible," Matthes said, explaining that the real - almost impossible - challenge would be keeping such a spectacular decision under wraps. .

Recent weeks have given rise to rumors that Athens has already started preparing for its exit by covertly printing drachma banknotes and coins.

Greek Finance Minister Giorgos Papakonstantinou was quick to dismiss such speculation as "laughable". He even invited a television crew into high-security areas of the national mint to prove its machines were indeed still manufacturing euros.

The reintroduction of a national currency remains an attractive proposition for struggling eurozone members. Governments could order a devaluation to increase the competitiveness of the national economy and spur growth - as long as trade union leaders agree to do their part to prevent a wage-price spiral.

"That strategy worked in Asia," Matthes said. "But if you look at the historical facts and take into account how strong the trade unions still are in southern Europe, then you can see why there are doubts about such prospects in Europe."

Author: Rolf Wenkel (sje)
Editor: Michael Lawton