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Death in the eurozone

Even the whiff of a country’s likely exit from eurozone membership could cause a run on that country’s banks and become a self-fulfilling prophecy. That is the logical conclusion of an exercise that few within the eurozone, or even outside it, dare to rehearse. It could destroy the euroland banking system. But the European Commission’s own president, Romano Prodi, has twice raised the taboo subject of a euro exit. The intellectual challenge of predicting how things would work out won’t go away. Brian Kettell takes us through a hypothetical French exit.

Author: Brian Kettel

"Losing one percentage point of competitiveness a year, if it goes on in time for a number of years, would become a condemnation for Italy and it would be difficult for us to stay in the single currency." That's the view of Romano Prodi, president-designate of the European Commission, speaking about Italy's ability to remain within the unified currency regime, June 1999. "If there were exceptional circumstances and provided it was not done in a way which was hostile to the European Union." That's Romano Prodi, president of the European Commission, replying to the question whether existing members of the euro might choose to opt out of the euro, in The Spectator, May 2000.

Under the 1992 Maastricht Treaty, monetary union was intended to be an irreversible and irrevocable process. No mechanism exists in the treaty to allow a participating member state to withdraw. Romano Prodi is clearly not correct to assume that a member state could withdraw from the euro but assuming that legislation was introduced to permit this it is instructive to examine what the implications for the fnancial markets would be should a member state withdraw .

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