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Brexit Flash Cards_Page 2


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What is the main stumbling block for countries if they give up the Euro?
The countries need to get their national debt into their new national currency, when it is in Euro now. Leaving it in Euro – a foreign currency going forward and probably a strong one – would be a colossal risk.

So Eurozone countries should just convert their national debt out of Euro, what is wrong with that?
Firstly they agreed by EU treaty not to convert back, and secondly they need to control the exchange rate at which the national debt is converted back: if the rate is an adverse one, they emerge with a national debt in their new national currency but magnified in size.

Who dictates the exchange rate for conversion out of the Euro?
Ultimately the European Court of Justice if the country is in the EU, or the country itself if it has left the EU. The European Court of Justice would uphold the terms of EU treaties, possibly try to block the reconversion completely but certainly to endorse the right of the EU authorities to dictate the exchange rate – a rate that will then serve to protect the Euro and be adverse to the country.

So a country really does have to leave the EU to leave the Euro?
Yes, to avoid the jurisdiction of the European Court of Justice over the rate against the Euro at which the new national currency is established, and at which the national debt will be redenominated: in essence the country must set the exchange rate itself if it does not want to emerge with a colossal national debt in its new currency.

What are the penalties for weaker Eurozone economies of staying in the Euro?
The Euro is a strong currency on world markets and so a country’s exports become more expensive. The barriers to entry for foreign companies to come into their home market and compete have been lowered, so domestic companies become progressively less competitive. The economy de- industrialises.

How does the Euro affect the public finances of the weaker Eurozone economies?
The profits made by domestic companies decline, and corporation tax declines. Unemployment rises: less payroll taxes are gathered from those in employment and the social welfare costs increase for those out of employment. National debt increases as tax revenues undershoot public spending.

Don’t weaker Eurozone economies have to cut their national debt under the EU Fiscal Stability Treaty?
Yes they do, but how do they do it when they have no policy tools in their hands and the economy is stagnant? All they can do is impose ever greater austerity on themselves, failing which the EU authorities will step in and impose it for them. This is what has happened in Greece

Surely Greece is a one-off ?
No, Italy and Spain are in the same basic condition, with very high unemployment and unsustainable levels of debt. They just haven’t formally defaulted yet, and mainly because so much money is being lent in there by the EU mechanisms, and using the UK’s guarantee

After Bob Lyddon

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