I have argued that the exit of one or more countries from the Euro is only likely in the event of an intensification of the crisis. This means that any exit has to be planned and executed rapidly against fast moving markets and political problems. Over the next couple of days I am going to set out how the EU might have to proceed if the crisis does become intense.
If the EU decision takers take too long about making the decision to let a country leave the Euro, or if they leak their decision making process in advance, they will make it all much more difficult. It is best done at a single meeting of Heads of government over a week-end, with everything in place for when the markets open on the Monday morning following the decision.
The EU does not have a good record with such matters. Its attempts to talk its way out of the banking difficulties have forced them to revisit banking cash and capital on several occasions. Still they have failed to get ahead of the markets, and have been forced in cases like Dexia to stitch together solutions at the last minute. The stress tests or solvency checks were not sufficiently rigorous and the weaknesses were not followed and cured in an energetic way, leaving certain banks vulnerable to market moves.
Similarly, the EU has watched as three countries have lost their ability to borrow in the markets in the usual way to finance state deficits. Three countries are now on life support from the EU and IMF. Part of the reason was the way embarrassing conversations about their financial condition were leaked or briefed as Euro area members argued over what to do to stave off the mini crises country by country. Loose tongues followed by too little action make the problems worse.
If the EU allows the exit of one or more country to become a common talking point whilst they debate action, it will make the situation worse. More people and companies will withdraw their Euros from the country concerned, to bank them more securely in a strong Euro country or outside the zone altogether. No-one wants to wait for a devaluation of their savings and deposits. It will remain impossible to borrow money for the state if a devaluation is feared, or in the case of a country not yet into the IMF it could be the tipping point which makes the rate too penal for them to carry on borrowing in the market. It will also start to disrupt normal commerce and contracts. Contracting parties from outside the country will want protection clauses against devaluation.
For all these reasons it is important to move swiftly, and to move stealthily. If the discussions are confined to Heads of Government, and the papers released to them at the week-end meeting the chances of embarrassing leaks within trading hours are reduced. The Heads of Government could take this business at one of their regular meetings, so no-one needs speculate on why they are meeting. If the crisis is more immediate and they have to summon a meeting rapidly to deal with Euro problems, the meeting can be described as a meeting like all those before it to resolve the crisis of the Euro without suggesting that it is the meeting to break the Euro area down to a more manageable size.
The meeting of the Heads of government needs to consider the following papers:
1. The general case for allowing or requiring the exit of a country from the Euro. This informs the discussion in principle, leading preferably to the conclusion that the exit of one or more country is needed for their sakes and for the stability of the wider zone.
2. The legal and administrative steps that need to be taken to allow the exit and the establishment of new currencies. The aim should be to switch all relevant deposits and electronic money before the markets open the following Monday, and to phase in new notes and coin as rapidly as practical.
3. The press statement, summarising the case for the action taken. This should also state clearly the resolutions carried at the Heads of Government meeting, and the necessary legal cover to allow the exit countries to move to the status of having derogations from belonging to the Euro under the Treaties.