How could a country transition smoothly out of the euro?

[His Divine Shadow]

Most scenarios I've read for a eurozone exit seem pretty.... apocalyptic. The scenarios are usually adversarial though, a country is booted out, or exits in a huff and has to face the music on it's own. But it makes me wonder if there can't be a better way to do it?

Like what if we assume a future scenario in which both the country that is leaving (greece, finland perhaps) and the rest of the eurozone have both agreed it'd be better for both if it left the eurozone and the proper framework for exiting is made. Would such a thing be possible?

I am thinking perhaps having a transitional period where both currencies are in use, perhaps pegging the new currency against the euro for a while and the ECB supporting new currency initial support to keep it stable until it gets it footing and the euro is phased out. Perhaps this could be done in a 5-10 year transitional period? Is anything like that remotely possible to achieve if we overlook how very unlikely the scenario is that a country could be aided in leaving the euro by the rest of the member countries?

Anyone have any other ideas?

I mean eventually somethings gonna give in the eurozone, so better lets start thinking of how we can save what we can, while we have time.

[K. A. Pital]

It is possible to devise such a mechanism and drop poorer nations from the Eurozone, but this will not happen. Reason one is that it will be seen as political weakness and so Eurocrats will not agree to this ever. Reason two - this is not in the interests of richer nations as their currencies will shoot through the roof and become expensive like the damn Swiss franc, immensely complicating the economic outlook and reducing prospects for industrial exports. Neither France nor Germany wants this to happen.

[Tribble]

It is possible to devise such a mechanism and drop poorer nations from the Eurozone, but this will not happen. Reason one is that it will be seen as political weakness and so Eurocrats will not agree to this ever. Reason two - this is not in the interests of richer nations as their currencies will shoot through the roof and become expensive like the damn Swiss franc, immensely complicating the economic outlook and reducing prospects for industrial exports. Neither France nor Germany wants this to happen.

And that's precisely why quite a few people predicted that the Euro was headed for a crisis long before it actually did. Hell, even Nigel Farage was able to predict years in advance which EU countries were going to need bailouts (with it increasingly looking likely that Italy will be next). Having a currency union between countries like Greece and Germany doesn't work, yet the EU still insists that everyone is fine even as Europe implodes around them.

[His Divine Shadow]

I know Schäuble offered it to Greece, at least a temporary exit. So it seems plausible things will change over time, having countries exist voluntarily and smoothly might be preferrable to the alternative if it's clear it cannot hold. I mean things nobody thought could ever happen just a few years ago, like Brexit, happened. Or Trump for that matter. Times are a changing.

[Tribble]

Well I'm still not sure about Brexit actually happening, but I'm not surprised about the referendum and its results. The moment the government broke its pledge on holding a referendum on the Lisbon Treaty and went ahead and signed up it was obvious there'd inevitably be a big backlash, the only real question was when.

It'll be interesting to see how the major players in the EU will react if Italy falls.

[Thanas]

The Euro was imposed upon Germany as a requirement for unification by the French. Germany was quite willing and able to keep their DM. The irony that this extortion has now come back to bite them is not lost on many Germans.

That being said, if a country wants to transition out of the Euro it needs to have a clear plan on what it wants to do. Mark Blyth (who I disagree with on many issues but who is correct on that one) says that this is Number 1. A country needs to have a clear plan on what its main products are, if it can live without Euro subsidies and if it has trading partners outside the Eurozone who will cover the losses and are willing to bail it out in case that plan fails. Greece failed to exit precisely because it had neither. In fact, Tsipras even went on to say that he had tried everything but nobody would bite.

Second, a country needs to have the physical and structural tools ready to issue currency. Greece, for example, had no working printing presses that were able to handle currency printing. You also need a strong central bank like the German Bundesbank which would be ready to work as a national central bank at the rop of a hat again. Many smaller nations don't have this anymore and cut their central bank positions due to the ECB.

Third, you need a lot of political backing and capital controls as investory will try to flee your currency. You will need to be able to convince the populace that two or three years of suffering will be doable. If a lot of industry relocates then you need to be able to retrain people in huge numbers.

Fourth, you must be able to have an economy that is based on real goods or real services that provide a direct benefit.

[K. A. Pital]

Well I'm still not sure about Brexit actually happening, but I'm not surprised about the referendum and its results. The moment the government broke its pledge on holding a referendum on the Lisbon Treaty and went ahead and signed up it was obvious there'd inevitably be a big backlash, the only real question was when.

It'll be interesting to see how the major players in the EU will react if Italy falls.

Come on. May said she will trigger article 50 and there are no competitors. Brexit is a reality. Even Merkel said there's no way back, choo choo...

Actually, a lack of a referendum was not necessarily predicting something like Brexit. But the rise of UKIP and their like certainly was.

[BabelHuber]

I am thinking perhaps having a transitional period where both currencies are in use, perhaps pegging the new currency against the euro for a while and the ECB supporting new currency initial support to keep it stable until it gets it footing and the euro is phased out.

With the full backing of the ECB and da fixed exchange rate, you basically still would have the Euro. Your banknotes would have another currency printed onto them, but this would not matter at all.

IIRC this is what we had from 1997 to 2002: The later Euro-currencies already had a fixed exchange rate backed up by the ECB, so the Euro already was established. In 2002, just the banknotes were changed.

If you'd establish such a system when leaving the Euro, you'd better prepare for the day where the exchange rate isn't backed up by the ECB anymore - if you have any weakness on this day, you surely will be attacked by hedgefonds and whatnot.

Also note that futures and options for the day X can be traded in advance, so this period probably isn't fun for the leaving country, of course depending on the kind of speculation going on and on the 'fitness' of the new currency.

Two extreme examples:

- If Greece would leave the Euro, the new currency would fall. You could have a huge inflation and the costs for imports could skyrocket. Not only would such a scenario be bad for the average citizen (no mobile phones anymore, probably a lot of people couldn't afford gas for their car anymore or oil to heat their houses), you also could still buy anything with $$$ or €€€.

- If Germany would leave, the new currency could skyrocket. On the one hand, this would make any German visiting most neighboring countries rich compared to the locals and would lead to sinking prices for all imports. On the other hand, unemployment would rise.
So the people keeping their job would basically be more wealthy than now, but the ones losing their jobs would be poorer.

So I think that once a country has joined the Euro-zone, it is quite difficult to leave.