When the Euro Falls Apart - A Sequel

59 Pages Posted: 4 Feb 2012 Last revised: 27 Jun 2012

Hal S. Scott

Harvard Law School

Date Written: January 31, 2012

Abstract

This paper examines the case for Member States withdrawing from the euro area (using Greece and Italy as examples), focusing on the economic benefits to exit and the operational and legal obstacles to doing so. It concludes that withdrawal is preferable to solely restructuring debt that remains denominated in euros. While both techniques can decrease debt burden, only withdrawal and establishment of a new currency allows for devaluation that can restore the competitiveness of economies. While some commentators fear the losses that devaluation might impose, particularly on European banks, the paper proposes using the European Union’s existing Exchange Rate Mechanism (ERM) to ensure that losses could be held to levels comparable to the debt haircut achieved through restructuring. This plan should be adopted now whether or not Greece uses it so it is in place for possible future withdrawals.

Suggested Citation

Scott, Hal S., When the Euro Falls Apart - A Sequel (January 31, 2012). Harvard Public Law Working Paper No. 12-16. Available at SSRN: https://ssrn.com/abstract=1998356 or http://dx.doi.org/10.2139/ssrn.1998356

Hal S. Scott (Contact Author)

Harvard Law School ( email )

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