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The Breakup of the Euro Area

The Breakup of the Euro Area

(p.11) 1 The Breakup of the Euro Area
Europe and the Euro
Barry Eichengreen
University of Chicago Press

The possibility of the breakup of the euro area was already being mooted, even before the single currency existed. It is unlikely that one or more members of the euro area will leave in the next ten years and the total disintegration of the euro area is more unlikely still. While it is widely argued that the technical and legal obstacles to a country unilaterally reintroducing its national currency are surmountable, it is argued here that the associated difficulties could be quite serious. There are multiple historical examples of members of monetary unions introducing a national currency. The chapter also suggests that the legal problems associated with the redenomination of contracts can be overcome. The economic obstacles revolve around the question of how debt servicing costs, interest rate spreads, and interest rate-sensitive forms of economic activity would respond to a country's departure from the euro area. A widespread presumption is that departure from the euro area would be associated with a significant rise in spreads and debt-servicing costs.

Keywords:   euro area, breakup, economic obstacles, monetary unions, debt-servicing costs

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