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  • Chaoxiang Lee
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What if Europe Ditches the Euro?

2016-10-10 09:03:46

Here is a hypothetical question: what will happen if the European Union abruptly decides to abandon the euro, the common currency of the region?



The EU had a rough first six months of 2016. The European Central Bank is heavily criticized for failure to spur economic growth. The United Kingdom voted to exit the bloc and will begin the Brexit talks by March next year, and it won’t be completed until 2018 at the very least. Greece is still grappling with economic downfall and attempting to secure a bailout deal. Looking at the smaller picture, Deutsche Bank AG is embroiled in a massive scandal, eroding the company itself and the global financial system. The euro is distressed and the eurozone economy may reach deadlock in the not-so-distant future.



The most popular and powerful European nations will be at risk. After the historical EU referendum in June, various countries are planning to follow suit. Referring to its present situation, if Greece moves to leave the union, its international lenders may experience setback if Prime Minister Alexis Tsipras’ administration use depreciated drachmas to repay its debts.



Presuming most nations leave the EU for good, naturally they will undergo redenomination. This process is not that complex; however, investors should expect ambivalence at some point. At least two major changes will transpire. Countries will officially adopt a new currency within one country’s jurisdiction. And the international value of the currency has to be integrated into foreign exchange markets. Not to mention other factors which will impact its movement such as the productive capability of a government.



Abandoning the currency would entail revamping the monetary policy in the long stretch, resulting in disorganized authority, banks cashing in on their own currencies anew, differing rates would affect the relative value of certain assets held abroad, and employees in less competitive and profitable labor markets would witness an almost income gain relative to its counterparts. But there is no assurance the move would be the same if the euro dwindles.



If the European Union abandons the euro, no one can gauge what will happen.