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Why a Break-Up of the Euro May Be a Good Thing
CNBC.com | April 04, 2012 | 10:47 AM EDT

Most economists expect catastrophic consequences if any country exits the euro. Like most conventional wisdom, such a view will be contradicted not by opposing ideas but by the march of events.

If the euro broke up, it would not be the first currency union ever to come apart. Within the past 100 years, there have been sixty-nine currency breakups. Astonishingly, almost all of the exits from a currency union have been associated with low macroeconomic volatility. In almost all cases, the transition was smooth and relatively straightforward. Previous examples include the Austro-Hungarian Empire in 1919, India and Pakistan in 1947, Pakistan and Bangladesh in 1971, Czechoslovakia in 1992-93, and the USSR in 1992.

Why would the breakup of the euro be a crisis, then? Greece , Portugal, Ireland, Italy and Spain have built up very large unsustainable net external debts in a currency they cannot print or devalue. Peripherallevels of net external debt exceed almost all cases of emerging market debt crises that led to default and devaluation. Any exit from the euro would inevitably re-introduce devalued drachmas, pesetas, escudos, punts or lire, because of extremely overvalued real effective exchange rates and very high net external debt levels.

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