What Would it Cost a Country to Leave the Euro?

FIVE European countries may seek to follow Britain’s lead in leaving the EU in a Brexit
domino effect : France, the Netherlands, Austria, Finland and Hungary could leave. We take
France as an example.

Front National leader Marine Le Pen has pledged to hold a French referendum if she
emerges victorious in next year's presidential elections. She wants France out of Euro and re-
denominate entire €2.4 trillion Euros pile of French government debt into new Franc.

Could France really quit?

In an interview, ECB President Draghi said that “The Euro is irrevocable and this is the
treaty.” He also said that “If the country wants to leave the Eurosystem, then its National
Central Bank claims on liabilities to ECB needs to be settled in full.”

Therefore, it was noticed that there is a possible exit from Euro though nothing is mentioned
in the treaty about leaving the Euro.

Technically, it can quit and reinvent the franc and start paying for things.

What would it cost to leave the Euro?

1) Like Britain, France would probably find its currency devalued against the euro. That
helps cut its debt because it would be valued in the new currency, which is suddenly
worth less. But import costs would go up; and, much more importantly, without
German protection, financial markets would get nervous and the cost of interest
payments on its debt would rise.

2) The country will devalue its new currency and it must re-denominate existing
government debt in new currency.

Naturally, contracts in foreign currencies (e.g. US dollars or pounds sterling) would be

unaffected by the whole process. Regarding euro-denominated contracts, we assume
that the ones under French law would be paid in the ‘new’ French franc (i.e. would
be redenominated), while the ones under foreign law would still have to be paid in
euros. the amount of debt securities unlikely to be redenominated would be close to
70%.

In the case where 70% or more of the assets would also not be redenominated, an
exit would be financially neutral or even beneficial.

3) If France denominates French debt into new Francs then it would constitute a
soverign default.
4) Bondholders who bought the bonds in ultra low yields do not like the idea of not
getting their money back as the purchasing power of their principal gets watered
away.

5) But the 16-member eurozone would struggle to survive if one of its two main
economies pulled out. Germany alone would have to underpin the finances of Italy,
Ireland, Spain, Portugal and Austria, which have all borrowed heavily from lenders
who are nervous they might not get their money back.

Source : World Economic Forum