Sunday, January 18, 2009

Leaving the Euro

Currency markets have got it into their mindset that one of the PIIGS will leave the Euro. A question that should be asked, but isn't, is what would happen if the ECB were to expel a country for willful non-compliance?

The political impetus to retain the Euro is strong in countries like Spain and Italy where expulsion from the common currency would be seen as an emasculation of their European credentials. They would fall into that strange second tier of peripheral states like the UK , in the EU but not of it. The leverage that can be applied by the ECB on countries and their governing political elites that fail to make the structural adjustments required is enormous. It would seem most unlikely that any of the major states could face the domestic and international political and economic consequences of going it alone.

Much more at risk of expulsion are economies like Ireland. There are those in the EU who might take a less supportive view of helping Dublin's economy if the Lisbon Treaty is rejected out of hand by their voters a second time. Some ECB sabre rattling pour encourager les autres can be expected - it would also do wonders for the strength of the Euro and inflation targeting.

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