Citibank: “leaving the euro is not a nice scenario, but neither are the alternatives"

By Julia Pastor, in Madrid | The German Chancellor Angela Merkel, defended the euro enthusiastically during the federal congress of her Christian Democratic Party held on Monday in Leipzig, where she pointed to a possible mechanism that would allow any state member to leave the eurozone voluntarily.

Indeed, Merkel’s party passed a motion according to which, a country that in the long term is not able or refuses to fulfill the conditions imposed by the European currency could leave the euro zone. Following the Lisbon Treaty’s rules, it would be still considered as a member of the European Union.

Citibank’s experts in Spain remark that joining the euro was an irrevocable decision and that countries are sovereign.

“Countries could probably walk out of the euro by means of a referendum and a change in their Constitutions, but the easiest way would be leaving the European Union following the article 50 of the Lisbon Treaty. Thus, countries would stop participating in the euro but not in the European Union,” explain the analysts.

What would be the consequences of a going back to a national currency? José Luis M. Campuzano, Citibanks’s head strategist in Spain, responds that

“residents’ financial assets would have to be depreciated and redenominated, including those of central banks. Obviously, this could not be done with non-residents, except in the case of haircut.  The process would need a strict control of capital. The effects for an undetermined time would comprise the suspension of foreign financing, the deterioration of commercial relationships, as well as a dramatic increase of national inflation. This is not a nice scenario, but the truth is that the other options aren’t either.”

While Merkel and her party opened the door to the mechanism to quit the euro, she supported firmly the European currency:

“ The euro is much more than a currency, is the symbol for the European Union, for half a century of freedom, peace and welfare which took several decades of efforts to achieve.

“If the euro fails, Europe fails, but we are going to avoid it because this is a historic project”.