Abstract (September 2014)
Eurozone financial markets have stabilized since 2012. But the European monetary union continues to face significant challenges. Widespread political opposition to further European integration implies that the risk of a breakup has not been eliminated. To analyze the costs and benefit of single country exit from the Eurozone as well as full-°©‐blown breakup of the euro it is necessary to take into account both real and financial effects. Importantly, legal parameters that will guide currency redenomination at the micro/contract level also turn out to be key determinants of the balance sheet effects at the macro level. I present a comprehensive framework -°©‐ based on legal analysis -°©‐ for redenomination of contracts, ranging from cash instruments to derivatives. I then aggregate the key insights to the macro level. To quantify the balance sheet effects involved in exit from the Eurozone, I create a database of the relevant external exposures for each Eurozone country. One specific implication of the analysis is that the negative balance sheet effect associated with exit from the Eurozone is much larger for Spain than for Italy, even if Italy’s headline public debt level is higher than Spain’s.
Full file here: CostBenefitsBreakup