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I think it's time for this now.

A thread on leaving of the euro.

Over the years, I have turned to a full-blown euro-skeptic. If one figure could be used to describe my transformation, it would be this. 👇

Simply put, euro has been an economic menace. 1/24
#Eurozone
But, how to leave from it?

As everything starts with the legal/political arguments, for the euro-exit, there are three:

1. National emergency
2. Other force majeure
3. A change or violation of the Acts of the Treaties and/or principles of the Eurozone.

2/
In the case of a national emergency (wars, epidemics, econ crises), a country may temporarily bypass all treaties and pursue actions needed to overcome the emergency.

Other force majeure refer to events that are abnormal, unforeseeable and beyond the control... 3/
... of the country concerned.

The most credible and legally viable path out of the euro for any member is based on the transition of the currency union into something different than the one that member states originally joined.

This is exactly what the #coronafund entails. 4/
As the legal argument has been decided, the government begins SECRET preparations.

There cannot be any referendum, except under the cover of capital controls, because it would most likely lead to possible drastic capital outflows.

In the preparations, the government needs...5/
...concentrate on four issues.

First, the economic and political consequences of exit need to be evaluated, creating a base for later public communications as well as negotiations.

Second, initial assessments of ways to immediately replace the financial functions... 6/
... that exit will make unavailable, concentrating on the payments and clearing system as well as means to ensure the liquidity of domestic banks.

Third, a preliminary draft of legal changes needed as well as drafting initial measures to be taken including... 7/
capital controls, cash provision and possible bilateral currency swap arrangements with amenable countries.

Fourth, a list of issues to preferably agree with various Eurozone authorities in order to achieve as amenable an exit as possible. These would include... 8/
...the handling of the TARGET2 surplus, foreign exchange swap-lines and the use of euro-nominated payment systems during the transition.

In the practical implementation, the country needs to find answers to the following three questions: 9/
1. How to guarantee the functioning of the payment system during the transition and re-establish an independent central bank?
2. Is economic and political retaliation on the part of the remaining MU countries and/or authorities likely?
10/
3. Can banks (financial sector), companies and government entities in the exiting country remain liquid and solvent during the adjustment period?

The first one is the biggest question, as building a new payment system takes time. However, the option is to operate...
...with the pan-European payment systems under capital controls. In this option, the exiting country will still use (domestic) euros, which are transformed into "international" euros at the border.

It's likely that the exiting country would be allowed to continued to use...12/
... the European payment systems, as cutting a country from them is technically difficult and can even be seen as a declaration of war.

However, if this would to happen, the exiting country would need to operate with alternative means of payment for around a year. 13/
These would include issuing script, IOUs, companies (stores and banks) issuing their own cards, etc.

During the planning of Grexit in the spring/summer of 2015, stores and banks were ready to start to issue their own debit/credit cards in a matter of weeks. 14/
This would increase the costs of the exit somewhat, but it would still be completely doable.

In the current situ, retaliation against a country leaving the euro is unlikely, or at least it would be highly ill-advised, because in then the country could also leave the EU. 15/
It should be emphasized that exiting the euro does NOT imply that the country should also leave the EU. A sovereign nation can always decide the currency it uses.

There is no clause in European treaties allowing the expulsion of a country from the EU or the EMU. 16/
All the deposits and loans that are governed by the national law would instantly be redenominated to the new currency under Lex Monetae.

This also applies to all sovereign debt that does not hold the Collective Action Clause (CAC). All debt under the CAC would need to... 17/
...be settled between the debtors and the issuing government.

The lex monetae would also be used to redenominate all corporate debt that falls under national jurisdiction to the new domestic currency.

The central bank of the exiting country would instantly start to... 18/
...issue new national currency to ensure the liquidity of the banking sector.

To ensure convertibility of the new currency, the CB would need to establish and retain a foreign exchange reserve backed by a system of swap agreements with other friendly central banks. 19/
Right after the exit, the government would order new currency notes and start to build a new national payment system.

Banks would be legally forced to redenominate, with immediate effect, at least part of their balance sheet into the new national currency. 20/
Optimally, the redenomination would take place at a rate of one to one, i.e., one MU currency unit for one new national currency unit or 1:1. This would revalue bank balance sheet items and create a new currency within the banking system of the exiting country. 21/
However, transferring the accounting systems of banks to recognize the new currency may take time, possible months. Also this favors the usage of the European payment systems at least in the transitional phase.
/22
So, to recap, exiting the euro requires:

1) Deciding the legal argument for the exit.
2) Secret planning
3) Guaranteeing the functioning of the payment and banking systems.
4) Establishing a domestic authority (CB) to ensure the liquidity of the banks.
23/
These are naturally just rough guidelines. Learn more on our article below.

But, the point is that an euro-exit is completely POSSIBLE, and its costs can be mitigated.

And, returning to national currency brings all kinds of benefits. /End
#Eurozone
degruyter.com/view/journals/…
Freely downloadable, older version: papers.ssrn.com/sol3/papers.cf…
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