Seeking Alpha
May 9, 2011
A cursory look at the trade in the euro on Friday tells a predictable headline theme: The euro sinking on fears of a European breakup. But a headline rarely tells the whole story, and while it might be easy to jump to conclusions about Greece fears and the coincidental euro weakness, the idea that the euro is going to plummet if Greece abandons the common currency doesn’t make much theoretical sense ... unless you believe it would result in an overall collapse of the EMU. In fact, even if Portugal and Ireland were to follow Greece out the door, there is good theoretical reason to believe the euro might emerge a stronger and ultimately more valuable currency.
To be sure, Greece leaving the euro zone is going to spur fear-mongering over a collapse of the European Monetary Union in the short term. But Greece, Portugal, and Ireland have always been peripheral members of the EMU. They are not historically important to the creation of the EMU, and by size, they are relatively unimportant to the economic strength of the EU. Together, the "PIG" countries comprise roughly 8% of the population of the 17 euro zone countries and made up 6.2% of euro zone GDP in 2009. The loss of any one of these countries, or indeed all three, is not likely to cause a meaningful reduction in the amount of trade being conducted in euros, and it seems unlikely that Germany and France would abandon their commitment to the euro on the basis the currency being abandoned at the periphery.
Instead, a post-crisis euro might in fact look stronger for several reasons. First, the quantitative easing by another name being pursued under the European Financial Stability Fund would likely be replaced by debt restructuring, limiting expected future increases in the European money supply. Additionally, with the ECB freed from the constraint of having to promote employment and growth in the weak peripheral economies, there would be significantly more room for interest rate increases to fight inflation.
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