A Plan for a Country to Exit the Euro Zone

Abstract

20 years after the Maastricht Treaty, the Euro Zone (EZ) is on the brick of disaster because some of the EZ countries higher inflation originated the accumulation of massive external deficits. Now the Euro has been converted in a straitjacket that compels those highly indebted countries (HIC) to decrease nominal prices and wages to control the external deficit that is an impossible mission. Then HIC must exit the EZ. At the first glance, when a country exits the EZ it will initiate a complex, catastrophic and cascading process that will terminate the EZ. In this paper I intend to prove that this catastrophic prevision can be averted. I propose a very simple roadmap concentrated on those vital macroeconomic variables: the current account balance and the unemployment rate. I imagine a preannounced process that will a) introduce as Local Currency (LCU) the pre-Euro current currency on a crawling peg exchange regime to the Euro and that it will b) introduce a “risk country” interest rate spread in those local credit contracts indexed to the EURIBOR. All bank accounts will continue denominated in Euro and just local prices and wages will be redenominated to the new LCU. The measure a) will decrease prices and wages (in terms of the Euro) increasing exports and decreasing imports and the measure b) will avoid the suspension of the free movement of capital. After the transition phase the exiting country will reenter the European Exchange Rate Mechanism (ERM II).

Keywords: Optimal currency area, Fixed exchange rate regime, Euro Zone, Exiting a currency area

JEL Classification: E24, E31, E42, E58, F32, H63