Leaving the euro would be a coup d’état!
Let us not forget the convulsive shocks brought on by Italy and Great Britain who were forced to leave the EMS in 1992. Since it was then merely a matter of abandoning a monetary regime, it goes without saying that one of the member-states leaving the euro would have an otherwise much more immediate and dramatic dimension to it. Let’s say France wants to leave the euro, in a world where the yield on its 10 year Bond is at 2%, meaning that France finances itself over 10 years at a rate of 2%. As the prospect of leaving the euro would make its rekindled currency (the franc) fall immediately in the order of 50%, its borrowing rate would have to adjust proportionately, in order to continue attracting foreign investors wishing to invest in France’s national debt. Consequently, France would be reduced to and forced to having to borrow for 10 years at a rate nearing 4%, almost overnight! No one would expect a referendum possibly being called to shell out francs or euros that are “Made in France”. Because financial markets function according purely to a principle of anticipation, the take-off of French borrowing rates would be directly proportionate to the extent of the estimated devaluation of the franc. The objective would be, for investors, to compensate the franc’s collapse by demanding higher profitability on their investments in French debt. On the eve of the election – or the referendum –, the country’s banks and financial system would be in a vegetative state, with no hope of support from the European Central Bank which wouldn’t be able to – and wouldn’t want to either – extinguish the fire which would be lit by deliberately leaving the single currency.
While a member-state leaving the euro is of course intellectually possible, it requires meticulous planning and a perfect understanding of the mechanisms and psychology of financial markets. Whatever the case, a decision of this stature would make an indelible, eternal mark on the mandate of the Head of State in question, who would certainly do nothing throughout their Presidency other than deal with the consequences of this major event. A French exit, or an Italian one, from the euro would therefore obviously have an otherwise more profound effect than Brexit, which is already keeping the British government busy full-time! It would constitute the biggest payment default in human history, would send a giant seismic shockwave throughout the entire European banking sector, would threaten the very survival of the single currency and would challenge the very existence of the Union. With leaving the euro being as complicated as preparing for war, it would naturally have to be accompanied by intensive control on the borders with the aim of channelling the outflow of euros, re-establishing control of capital in order to stem any bleeding and announcing a state of emergency in order to calm possible panic-stricken movements.
This choice to abandon the euro would therefore have to be made with the relevant authorities knowing full-well what they were doing, and who would have to be aware that such an exit would never in any circumstance be led with calm. Because leaving the euro would be a coup d’état!