Friday, June 10, 2005

Abandoning the Euro

Brendan Keenan makes a good case for why Italy won't be getting the lira back anytime soon.
Despite much talk to the contrary, the departure of some countries from the euro would not necessarily be bad for the currency itself. By reducing the gap between member states, it might even make the euro more credible. But it would have dreadful consequences for the country which left if - as would almost certainly be the case - it was heavily indebted.

The debt is in euro. This would become foreign debt for a departing country, which would be crippling. Almost certainly, it would be converted into the new national currency at a lower exchange rate, thereby depriving the citizens of a goodly chunk of their savings. Future borrowing by government and business would be a lot more expensive.