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- guardian.co.uk, Thursday 29 April 2010 21.22 BST
A protest outside the Greek parliament triggered by fears that new austerity measures will be introduced to clinch a bailout from the European Union and International Monetary Fund. Photograph: Louisa Gouliamaki/AFP/Getty Images
The crisis threatening to spread out from Greece to the other vulnerable members of the single currency has exposed a problem. Europe has copious and precise rules for countries wishing to join the monetary union. There are no contingencies for a country that wants to leave.
Yet the recent stand-off between German taxpayers reluctant to bankroll a rescue package and Greek voters unwilling to stomach the even tougher austerity conditions being demanded by Berlin has meant that this is an issue no longer being ignored.
The short answer to the question of how a country would leave the euro is: with extreme difficulty, at considerable cost and only as a last resort. It would first have to consider the three Ds – devaluation, debt and default.
In theory, this could happen smoothly enough. A country would announce its decision to leave and would go back to issuing its former currency. The value of that currency – shorn of the protection from the euro's safety blanket – would fall sharply. The weaker currency would provide a boost to competitiveness but would add to the domestic value of the country's debts. Interest rates on that debt would also rise, making it harder for the country to meet its obligations. It would then seek to restructure its debt, asking its creditors to "take a haircut" – accept a loss.
But in the chaos of a financial crisis, it might not be possible to operate in such a textbook fashion. The member state might default on its debts first, triggering exit from the euro and a run on its currency. Or it might be asked to leave.
Jonathan Loynes, chief European economist at Capital Economics, said: "[Leaving the euro] would be extremely difficult for all sorts of logistical reasons." But if countries could overcome technical issues to give up their national currencies in the first place, then there would be a way of putting the process into reverse.
Mats Persson, director of the Open Europe thinktank, said: "There is no mechanism on the table [for leaving the euro] at all. They haven't thought about it."
That's not quite true. Last December, the European Central Bank (ECB) published a working paper called Withdrawal and Expulsion from the EU and Emu, but it concluded that a "member state's exit from Emu [economic and monetary union] without a parallel withdrawal from the EU would be legally inconceivable". Nor would it would be much easier for a country to be kicked out by the other members. "A member state's expulsion from the EU or Emu would be legally next to impossible."
The reason nobody at the ECB in Frankfurt or at the European commission in Brussels has drawn up a blueprint for exit from the single currency is that the assumption has always been that once a nation joins the "project" it does so for good. "Until recently, to talk of secession from the EU would have been next to absurd," the ECB paper noted. "The same could be said of voluntary exit from Emu."
Persson said he suspected political motives behind the ECB paper: "They wanted to put pressure on the Greeks to get their act together."
The Greeks have not done so, or at least not well enough to satisfy Angela Merkel, Germany's chancellor, who has won strong popular support for her uncompromising stance.
Stephen Lewis, chief economist at Monument Securities, said that the proposal from Merkel's Christian Democratic Union party that Greek sovereign debt should take a haircut offered a "plausible" way of ejecting weaker members from the eurozone. He points out: "If 'haircuts', and the associated capital losses for holders, are to be a standard feature of bailouts for eurozone member states, investors will be nervous of holding the sovereign debt of any member that could conceivably run into debt difficulties.
"The flight of capital from these sovereign debtors might precipitate their break with the euro. It is not surprising, therefore, that the EU commission and the ECB, institutions whose authority rests on a broadly extended eurozone, are resisting the 'haircut' idea."
For the time being, the odds are on the Germans finally agreeing to a bailout. But Persson said that an alternative would be for the eurozone to split into a German-led inner core and an outer core made of a weaker group of countries, which would not include Greece.
The problem, says David Owen, chief European financial economist at Jefferies Fixed Income, is that the world has moved since monetary union was founded: "When it was put together nobody wanted to think about a break-up, because as soon as you tell people they have a get-out-of-jail card the more likely it is that the system would bust apart. But after the Lehman Brothers collapse everybody is very much aware that everything is interconnected."
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