The Corner

Quitting the Euro

As it becomes clear that the euro is a recessionary device, its supporters are playing their last card: leaving, they say, would be impractical. No longer do they try to claim that staying in is beneficial: everyone can see that it isn’t. Instead, they are giving us the old cure-would-be-worse-than-the-disease shtick. A return to national currencies, they tell us, would be so complicated and expensive as to be unfeasible.

Oh yeah? While certain practical consequences flow from switching currencies, none represents an insurmountable obstacle. By definition, all the countries we’re talking about have recently managed precisely such a changeover: that’s how they came to be in the euro in the first place. Oddly, I don’t remember any Eurocrats at that time droning on about the huge costs and complexities of having to replace your banknotes. And, indeed, the switch would be easier now than it was a decade ago, because more money is digitized, and banknotes represent a smaller proportion of the currency in circulation.

I asked a Slovakian economist the other day how his country had managed the monetary transition when it divorced the Czech Republic. “Very easily,”  he replied. “One Friday, after the markets had closed, the head of our central bank phoned round all the banks and told them that, over the weekend, someone from his office would come round with a stamp to put on all their banknotes, and that, until the new notes and coins came into production, those stamped notes would be Slovakia’s legal tender. On the Monday morning, we had a new currency.” Yup, and they’re now wishing they’d kept it, but that’s another story.

What about the euro-denominated debts? How would a country with a newly devalued currency meet its foreign obligations? It wouldn’t. Devaluation and default are — for once the cliche seems apposite — two sides of the same coin. No one seriously denies that Greece is going to repudiate its debts. Taking the hit of a default without the compensating boost of leaving the euro represents the worst of all possible options.

That’s not to say it won’t happen. On the contrary, it remains the single likeliest outcome. Still, to British ears, the whole debate sounds eerily familiar. When it became clear that the Exchange Rate Mechanism, the euro’s baleful predecessor, was wrecking our economy, the entire Establishment started to argue that, whatever the flaws in the system, we now had no option but to stick with it. Pulling out, declared John Major, would be “the inflationary option, the devaluer’s option, a betrayal of the future of our country” — which is almost exactly what Greece’s Europhile politicians are saying today. In the event, of course, Britain’s recovery began the day we left the ERM, and continued for the better part of two decades before Gordon Brown decided to blow it away.

It’s worth remembering, though, that this happy consequence was forced on us by the markets. Almost every politician, economist, newspaper, academic, business organization, and commentator took John Major’s line. Those of us who opposed going in to the ERM in the first place were lonely and sparse. Nor did being proved right earn us a sympathetic hearing the next time round. It never does.

— Daniel Hannan is author of The New Road to Serfdom: A Letter of Warning to America.