Jonathan Tepper of Variant Perception and co-author of Endgame (with John Mauldin) offers us an excellent, detailed and wonderfully readable paper on how and why currency break-ups have been common, important solutions throughout economic history. His conclusion: far from the end of the world, Greece and Portugal should leave the Euro as soon as possible.
“Many economists expect catastrophic consequences if any country exits the euro. However, during the past century sixty-nine countries have exited currency areas with little downward economic volatility. The mechanics of currency breakups are complicated but feasible, and historical examples provide a roadmap for exit. The real problem in Europe is that EU peripheral countries face severe, unsustainable imbalances in real effective exchange rates and external debt levels that are higher than most previous emerging market crises. Orderly defaults and debt rescheduling coupled with devaluations are inevitable and even desirable. Exiting from the euro and devaluation would accelerate insolvencies, but would provide a powerful policy tool via flexible exchange rates. The European periphery could then grow again quickly with deleveraged balance sheets and more competitive exchange rates, much like many emerging markets after recent defaults and devaluations (Asia 1997, Russia 1998, and Argentina 2002).”
See the whole excellent report: A Primer on the Euro Break-up: Default, Exit and Devaluation as the optimal solution