If the Eurozone were to bust up, how would the new national currencies be valued? It seems clear enough that a lot of the net importing southern European countries would see the New Lira (and so forth) plummet in value compared to the dollar as a way of depressing real wages. But according to Nomura’s estimates (via FT Alphaville) all the non-German northern countries would also see currency declines. Euroland as a whole, in other words, is seen as greater than the sum of its parts. Jens Nordvig, who’s the bank’s lead FX analyst, stressed that we should take these guesstimates with a grain of salt. The main takeaway I would have is simply that the divergences are extremely large. Even if you completely ignore the PIGS, the strong implication here is that even a Eurozone Rump wouldn’t be anything close to an optimal currency area unless you ditched France and Belgium too.
This is a point that Joschka Fischer emphasized in a discussion last week. If you were to break up the Eurozone even a little bit, you’d end up with France needing to leave. And there’s no point in a Eurozone that doesn’t include France. There’s no practical economic or political problem solved by a formal currency union between Germany, Austria, and the Netherlands and probably nobody cares enough about Finland’s political motives for being in the Euro to keep it around.