Sunday, November 20, 2011

Curse of Debt (4) - Leaving the Euro

Many commentators assume that Greece will have to leave the Euro. They do not understand how costly such a move would be. Here are some of the problems they would face.

  • The Greeks will lose the benefits of free cross border trade. Being able to buy and sell in other parts of Europe is a huge advantage for most businesses.

  • An alternative currency would have to be established. If this could not be done quickly, a massive disruption of economic life would occur.

  • The powerful people would get their wealth out of the country, before the new currency devalues. This flight of capital would cause huge shortfalls of capital.

  • The new currency would rapidly depreciate in value, which would destroy all wealth.

  • People living off their savings would be plunged into poverty.

  • The price of imported goods would rise dramatically.

  • The local banks would collapse, as their capital disappeared. A new banking system would have to be established.

  • Businesses would have difficulty getting loans to funds the on-going operation of their businesses.

  • The economy would be weakened significantly.

The political powers understand these costs, so they will do whatever they can to prevent this from happening. They may eventually fail, but they will not give up in a hurry.

The long-term trend is towards decentralisation, so the Euro will eventually collapse, but the politicians will hold it back for a long time.

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