What Happens If The Eurozone Breaks Up?
After The Euro, The Crash   
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Dec. 7 2011 12:13 PM

What Happens If The Eurozone Breaks Up?


If the Eurozone were to bust up, how would the new national currencies be valued? It seems clear enough that a lot of the net importing southern European countries would see the New Lira (and so forth) plummet in value compared to the dollar as a way of depressing real wages. But according to Nomura's estimates (via FT Alphaville) all the non-German northern countries would also see currency declines. Euroland as a whole, in other words, is seen as greater than the sum of its parts. Jens Nordvig, who's the bank's lead FX analyst, stressed that we should take these guesstimates with a grain of salt. The main takeaway I would have is simply that the divergences are extremely large. Even if you completely ignore the PIGS, the strong implication here is that even a Eurozone Rump wouldn't be anything close to an optimal currency area unless you ditched France and Belgium too.

This is a point that Joschka Fischer emphasized in a discussion last week. If you were to break up the Eurozone even a little bit, you'd end up with France needing to leave. And there's no point in a Eurozone that doesn't include France. There's no practical economic or political problem solved by a formal currency union between Germany, Austria, and the Netherlands and probably nobody cares enough about Finland's political motives for being in the Euro to keep it around.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.